PROBLEM 1:

In the course of your first time audit of Force Inc.’s stockholder’s equity accounts for the audit year 2021, the following
schedule of the company’s stockholder’s equity accounts as of December 31, 2020 were presented by the client:
Ordinary share capital, P100 par; 200,000 shares authorized; 50,000 shares issued and
outstanding; options to purchase 10,000 shares at P100 per share are held by employees,
no value having been assigned to these options
P5,000,000
Share premium from ordinary shares 1,000,000
Accumulated profits 3,000,000

Further investigation and inquiry revealed the following information:

a. The options referred to above were granted to each of its 100 employees on January 1, 2019 which shall vest
three years thereafter provided employees remain in the company’s employ and provided further that sales
increase at least by an average of 5% per year. If the sales increase by an average of at least 5% per year,
each year, employees shall receive 100 share options. If the sales increase by an average of at least 10% per
year, each employee shall receive 200 share options. If the sales increase by an average of at least 15% per
year, each employee shall receive 300 options.

The fair value of each share option on the grant date was P25 per share. No employee left the company
during the said vesting period. Records show that average sales increase over the inclusive vesting period
are: 2019, 8%; 2020, 10%, and 2021, 13%.

b. On February 2, 2021, the company reacquired 2,000 ordinary shares on December 30 at P120 per share and
placed them in the treasury.

c. On June 30, 2021, the company issued bonds of P5,000,000 at 120 giving each P1,000 bond a warrant
enabling the holder to purchase 4 shares at P120 per share for a one year period. 10% interest on the bonds is
payable every December 31. Shares were selling for P140 at this time. The market value of bond ex-warrant
(excluding accrued interest) is 105.

d. On July 15, 2021, half of the warrants issued with bonds were exercised.

e. On August 1, the company issued rights to shareholders, permitting holders to acquire for a 60-day period, 1
share at P130 with every 5 rights submitted. Shares were selling for P150 at this time. All but 8,000 of these
rights were exercised and additional shares were issued.

f. The company declared a P5 per share cash dividends on December 15, 2021 payable to stockholders as of
December 31, 2021 on January 31, 2022.

g. Net income after audit adjustments amounted to P2,500,000 in 2021.

Required:
1. What is the retroactive adjustment to the beginning accumulated profits account related to the options granted in
2019?
a. P400,000 c. P200,000
b. P600,000 d. P333,333

2. What is the amount to be credited to share premium as a result of the issuance of the shares form the exercise of
warrants on July 15, 2021?
a. P575,000 c. 450,000
b. P750,000 d. 375,000

3. What is the correct credit to the share premium account as a result of the exercise of rights referred to in item d?
a. 330,000 c. 300,000
b. 270,000 d. 250,000

4. What is the correct debit to the Accumulated Profits as a result of the cash dividends declared on December 15?
a. 355,000 c. 405,000
b. 340,000 d. 400,000

5. Which of the following is least likely to be included in an auditor’s audit program to audit a client’s retained
earnings account?
a. Trace authorization of a 20% share dividend declaration through the Board of Directors minutes of
meetings.
b. Refer to market valuation in the active market for the valuation of the 10% share dividend
declaration.
c. Examination of debt agreement/contract for the appropriation for debt repayment.
d. Refer to market valuation in the active market for the year-end appropriation for treasury share
balance.

PROBLEM 2:
The following schedule of liabilities were provided to you by the accountant of Nadjah Inc. in line with your audit of its
various liabilities as of and for the period ended December 31, 2021:
Current Liabilities
 Accounts payable (note a) P534,000
Unearned Income from Premiums (note b) ? ?
Noncurrent Liabilities
Lease Liability (note c) 3,000,000
Total Liabilities ?

Audit notes:
a. The purchases journal included the following transactions several days before and after December 31, 2021
(Hint: Assume invoice date is supplier’s shipment date)

December Purchase Journal:

Purchase Receiving Amount Terms
Invoice Date Report Number/Date
December 26, 2021 1012/Dec. 30, 2021 P50,000 FOB Destination
December 28, 1014/Jan. 2, 2022 40,000 FOB Shipping Point
December 30, 1015/Jan. 2, 35,000 FOB Destination
December 30, 1017/Jan. 4, 25,000 FOB Shipping Point

January Purchase Journal:

Purchase Receiving Amount Terms
Invoice Date Report Date
December 29, 2021 1013/Dec. 30, 2021 P65,000 FOB Destination
December 30, 1016/Jan. 3, 2022 40,000 FOB Shipping Point
January 2, 2022 1018/Jan. 5, 30,000 FOB Shipping Point

b. For every 5 product labels surrendered, the customer receives a specially designed wall clock which the
company purchases at a cost P160/unit. Additional information relevant for your analysis are as follows:
Sales in units 60,000
Unit selling price P1,000
Premiums purchased in units 7,000
Inventory of premiums at the end of each year 2,100
Each wall clock can be sold separately in the market at P200 each. The company estimates that from the
labels issued with products sold, only 60% shall be presented for premiums redemption.

c. The lease liability is for a five-year lease agreement for an equipment of Jynx Corp. on January 1, 2021. The
equipment which had a useful life of 10 years had a fair market value on January 1, 2021 at P2,400,000.
There is no provision to transfer ownership to Nadjah Inc. nor is there an agreement for a bargain purchase
option at the end of the lease term. The lease agreement requires Nadjah Inc. to pay P600,000 annually
starting December 31, 2021. The implicit lease rate known to both parties was at 8% while the incremental
borrowing rate was at 10%. The lease was recorded by the company as a debit to equipment and a credit to
lease liability at P3,000,000 (the total payments to be made for the lease). The company is yet to record the
first lease payment made on December 31, 2021. Depreciation is yet to be provided on the capitalized leased
asset.

Requirements:
6. What is the correct accounts payable as of December 31, 2021?
a. 604,000 c. 594,000
b. 564,000 d. 539,000

7. What is the correct unearned income from premiums as of December 31, 2021?
a. 361,068 c. 304,000
b. 209,000 d. 449,219

8. What is the correct carrying value of the lease liability as of December 31, 2021?
a. 1,546,258 c. 1,987,276
b. 2,395,626 d. 1,901,919

9. What is the correct depreciation expense on the leased equipment to be recognized in 2021?
a. 454,894 c. 347,125
b. 239,562 d. 479,125

10. Which of the following is least likely included in an auditor’s audit program in auditing trade payables of a
manufacturing entity client?
a. Examination of the cash disbursements after the reporting period to ascertain whether cash
disbursements for expenses incurred as of the reporting date were in fact recognized as liabilities as
of the reporting date.
b. Examination of the cash disbursements after the reporting period to ascertain whether cash
disbursement for expenses incurred in the subsequent period were in fact recognized as liabilities as
of the reporting date.
c. Examination of the entries in the purchases journal before and after the reporting date to ascertain
whether purchases recorded as of the reporting date were in fact valid purchase as of the current
period.
d. Examination of the entries in the purchases journal before and after the reporting date to ascertain
whether there might be additional valid purchases as of the current reporting period which were
recorded only in the subsequent period.
PROBLEM 3:
You were engaged by Bakdar Corporation for the audit of the company’s financial statements for the year ended
December 31, 2021. The company is engaged in the wholesale business and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES
Date Ref. Amount
Balance forwarded P5,200,000
Dec. 27 SI No. 965 40,000
Dec. 28 SI No. 966 150,000
Dec. 28 SI No. 967 10,000
Dec. 31 SI No. 969 46,000
Dec. 31 SI No. 970 68,000
Dec. 31 SI No. 971 16,000
Dec. 31 Closing entry (5,530,000)
SI = Sales Invoice

PURCHASES
Date Ref. Amount
Balance forwarded P2,700,000
Dec. 27 RR No. 1057 35,000
Dec. 28 RR No. 1058 65,000
Dec. 29 RR No. 1059 24,000
Dec. 30 RR No. 1061 70,000
Dec. 31 RR No. 1062 42,000
Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (3,000,000)
RR = Receiving Report

An excerpt of the trial balance revealed the following balances:

Inventory P600,000
Accounts receivable 500,000
Accounts payable 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly
taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which
had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than
No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and received
on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was
P18,000.

b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No.
1063. The freight was paid by the vendor.
 Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January 2.
This order was sold for P100,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading
Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the
next day.

d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the
freight was deducted from the purchase price of P800,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

11. Purchases for the year ended December 31, 2021

a. P3,000,000 c. P3,018,000
b. P3,754,000 d. P3,818,000

12. Inventory as of December 31, 2021

a. P864,000 c. P968,000
b. P800,000 d. P814,000

13. Accounts receivable as of December 31, 2021

 a. P350,000 c. P370,000
b. P220,000 d. P120,000

14. Accounts payable as of December 31, 2021

a. P418,000 c. P400,000
b. P354,000 d. P1,218,000

15. Which of the following would be the best source of evidence for an auditor attempting to test the reasonableness
of a merchandising client’s estimate of inventories’ net realizable value?
a. Review of subsequent events.
b. Testing mathematical accuracy of perpetual records.
c. Vouching entries in the purchases journal to vendors invoices.
d. Tracing receiving reports to vendor’s invoices to the entries in the perpetual inventory records.

16. The auditor wanted to gain assurance that all inventory items in a client’s inventory listing schedule are valid.
Which of the following substantive test should the auditor undertake and which financial statement assertion on
inventories is the auditor gathering evidence about.
a. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count
sheet to support the existence assertion on inventories.
b. Trace inventory tags noted during the auditor’s observation to items listed in the inventory listing
schedule to support the completeness assertion on inventories.
c. Inventory tags noted during the auditor’s observation to items listed in the receiving reports and
vendor invoices to support the completeness assertion on inventories.
d. Items listed in the receiving reports and vendors’ invoices to the inventory listing schedule to
support the existence assertion on inventories.

PROBLEM 4:
In the audit of the books of Snack Corporation for the year 2021, the following items and information appeared in the
Production Machine account of the client:

Date Particulars Debit Credit

01/01 Balance–Machine 1, 2, 3, and 4 at P180,000
each P 720,000
02/28 Machine 5 396,000
Machine 1 P 6,000
09/01 Machine 6 192,000
12/01 Machine 7 432,000

The Accumulated Depreciation account contained no entries for the year 2021. The balance on January 1, 2021 per
your audit, was as follows:
Machine 1 P168,750
Machine 2 78,750
Machine 3 67,500
Machine 4 45,000

Based on your further inquiry and verification, you noted the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P6,000.

2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2021. Machine
7 was to replace Machine 2.

3. Machine 3 was traded in for Machine 6 at an allowance of P24,000; the difference was paid in cash and charged to
Production Machine account.

4. Depreciation rate is recognized at 25% per annum.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

17. The adjusting entry to correct the entry made on the sale of Machine 1 will include a
a. Debit to Accumulated Depreciation P176,250
b. Debit to Cash P6,000
c. Credit to Production Machine P180,000
d. Credit to Gain on Sale of Machine P5,250

18. The adjusting entry to correct the entry made on the destruction of Machine 2 will include a
a. Debit to Accumulated Depreciation P120,000
b. Debit to Loss on Destruction of Machine P101,250
c. Credit to Production Machine P101,250
d. Credit to Cash P432,000

19. The adjusting entry to correct the entry made on trade-in of Machine 3 will include a
a. Debit to Accumulated Depreciation P67,500
 b. Debit to Loss on Exchange P58,500
c. Credit to Production Machine P67,500
d. Credit to Cash P192,000

20. The total depreciation for the year ended December 31, 2021 is
a. P237,000 c. P233,250
b. P232,500 d. P236,250

PROBLEM 5:
In line with your audit of Cheetos Corp.’s investment accounts as of December 31, 2021, you ascertained the following
information:
Investment type CV Per books
Investment in bonds P4,000,000
Investment in stocks 6,200,000

Audit notes:
a. The investment in bonds which shall mature on December 31, 2023 were acquired in January 1, 2020 when
the prevailing market rate of interest was at 10%. Interest at 12% is collectible from the bonds every
December 31. The acquisition was recorded by the client as a debit to Investment in bonds at face value with
the difference between the face value and the total consideration given up to interest income. Interest
collected in 2020 and 2021 were appropriately recorded. No other entry relating to the investment was made
by the client. Further investigation revealed that the company business model with regard debt security
investment has an objective of collecting contractual cash flows. The company however elects to use the fair
market value option to eliminate accounting mismatch. The prevailing market rate of interest was at 11% and
9% at the end of 2020 and 2021, respectively.

b. The investment in stocks is for 40,000 shares of Telecom Corp.’s ordinary shares acquired in September 30,
2020. The shares were originally acquired at P145 per share. The book value of the net assets of Telecom
Corp. on this date was at P25M and its total outstanding shares was at 200,000. Telecom’s depreciable assets
with average remaining life of 10 years were understated on this date.

The fair value of Telecom Corp.’s shares were at P155 per share at the end of 2020. The company recorded
the remeasurement (from the acquisition cost to fair value) of the investment at the end of 2020 and
recognized the same as unrealized holding gain in the 2021 profit/loss. The only other entry made by the
client related to the investment was the receipt of P2 per share dividend by the end of 2020 and P4 per share
dividend in 2021 as dividend income.

Further investigation revealed the following relevant information:

Telecom Corp. 2020 2021
Net income for the year P3,800,000 P5,200,000
Foreign exchange loss – OCL - 400,000
Unrealized holding gain – OCI 300,000
Fair value 155 per share 169 per share

Required:
21. What is the correct initial cost of the investment in bonds?
a. 4,138,843 c. 4,253,589.
b. 4,198,948 d. 4,211,093

22. What is the correct carrying value of the investment in bonds as of December 31, 2021?
a. 4,198,948 c. 4,068,501.
b. 4,138,843 d. 4,211,093

23. What is the correct carrying value of the investment in stocks as of December 31, 2021?
a. 6,770,000 c. 7,180,000
b. 6,760,000 d. 6,670,000

24. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of the investment in
stocks?
a. 310,000 c. 490,000
b. 400,000 d. 90,000

PROBLEM 6:
You are auditing the Accounts Receivable of Oreo Inc. as of December 31, 2021. The general journal reported
Accounts receivable balance of P1,585,000 which was net of the unadjusted allowance for bad debts expense
amounting to P46,720.

The accounts receivable subsidiary ledger had the following details:

Customer Invoice date Amount
Ace Inc. 9/12/2021 P102,200
5/13/2021 37,000
Ruth Corp. 12/12/2021 113,600
 12/02/2021 99,200
9/6/2021 71,200
Gusto Co. 11/17/2021 185,120
10/08/2021 176,000
Nation Co. 12/08/2021 160,000
10/25/2021 144,800
8/20/2021 40,000
Nano Inc. 11/12/2021 96,000
9/27/2021 52,500
5/22/2021 31,900
Bruce Inc. 2/20/2021 71,360
Privacy Corp. 12/06/2021 112,000
11/29/2021 169,440
Total P1,662,320

Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus
your suggested that the amount receivable from the same shall be written off.

b. Based on an accounts receivable confirmation reply from Nation Co., you discovered that sales invoice
dated 10/25/2021 was erroneously invoiced at P72.40 per unit of the merchandise sold to the company,
the correct invoice price should have been P74.20 per unit.

c. You also discovered that the invoice dated 9/6/2021 has already been settled by Ruth Corp. per OR
number 34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger
as a settlement for an invoice dated 11/05/2021 for the same amount.

d. The confirmation reply from Nano Inc. suggested that the invoice dated 5/22/2021 would have been
offset by Nano Inc. return of merchandise. Upon further investigation you discovered the credit memo
for the said return dated 6/2/2021 was appropriately recorded in the general ledger but was overlooked
in the posting to the subsidiary ledger.

e. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of Collectibility
0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
25. What is the correct allowance for bad debt expense for the year ended December 31, 2021?
a. 141,224 c. 137,304
b. 130,320 d. 137,664

26. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt
expense for the year?
a. 151,960 c. 154,960
b. 162,304 d. 148,984

27. What it the carrying value of the company’s accounts receivable as of December 31, 2021?
a. 1,424,996 c. 1,426,296
b. 1,445,040 d. 1,415,040
28. What is the necessary adjusting entry to adjust any unlocated difference between the SL and GL?
a. Bad debt expense 1,300
Accounts receivable 1,300
b. Sales 1,300
Accounts receivable 1,300
c. Accounts receivable 20,000
Other income 20,000
d. No necessary entry

29. To satisfy the audit objective of determining whether the recorded sales transactions actually occurred and as a
result, the corresponding accounts receivable actually exists, the auditor would most likely:
a. Trace the shipping documents and sales invoices to the entry in the sales journal.
b. Vouch the approved customer orders to the shipping documents and the sales invoices.
c. Vouch journal entries from the sales journal to the sales invoice and shipping documents.
d. Vouch the sales invoice to the daily sales summary.

PROBLEM 7:
Based on your preliminary understanding of internal controls over Agar Corp.’s cash account, you have ascertained that
internal controls over cash is weak thus you have placed the control risk assessment at the maximum level.
Consequently, you planned to render an extensive substantive test procedure to audit its cash balance.
The November bank statement balance was at P1,245,900. The statement also revealed a P450,000 note payable of
Agar Corp. paid by the bank in November in behalf of the company. Interest paid on the same note was P45,000. Bank
loan proceeds amounting to P600,000 in November also appeared in the November bank statement. These were
recorded by the company in its cash records in December. A bank debit amounting to P91,000 was charged by the bank
to the company in error. This was immediately corrected by the bank in December. The November deposits in transit
was at P298,500 while P521,800 disbursement checks remained outstanding as at November 30.

Total bank credits for December amounted to P5,235,600 while total bank debits for December was at P4,865,300.
Total collections per books was at P6,130,500 while total disbursements was at P4,976,800. Cash balance per books as
of December 31, was at P2,162,300.

The December bank statement included bank debits for bank loan payment amounting to P120,000 and loan interest at
P12,500. A customer NSF check amounting to P122,000 also appeared as a December bank debit. The check was
cleared with the customer and was redeposited to the bank the following month.

A December disbursement check amounting to P152,000 was erroneously recorded by the company as P125,000. The
company has made no correction yet for this check. Another December disbursement check amounting to P159,000
was recorded by the company as P195,000. This was discovered and corrected immediately in December.

Requirements:
30. What is the correct cash in bank balance as of November 30?
a. 1,113,600 c. 1,022,600
b. 1,030,839 d. 1,245,900

31. What is the correct deposits in transit as of December 31?

a. 720,400 c. 648,400
b. 684,400 d. 675,400

32. What is the correct outstanding checks as of December 31?

a. 383,800 c. 455,800
b. 419,800 d. 329,800

33. What is the correct cash in bank balance as of December 31?

a. 1,907,800 c. 1,880,800
b. 1,934,800 d. 1,884,800

34. In auditing the client-prepared bank reconciliation statement, the auditor requested the client to request the bank to
furnish the auditor a cut-off bank statement of the following period. The purpose of the cut-off bank statement is
primarily to:
a. To ascertain whether all outstanding checks as of the balance sheet date, as presented in the client-
prepared bank reconciliation statement subsequently clears the bank the following period.
b. To ascertain whether deposits in transit and undeposited collections as of the balance sheet date, as
presented in the client-prepared bank reconciliation subsequently clears the bank the following
period.
c. To determine the validity of the unrecorded bank credits for the current month, such as note
collection by the bank in behalf of the company.
d. To determine the whether all deposits clearing the bank during the cut-off period covered by the
cut-off bank statement are presented as book reconciling item as of the balance sheet date.

PROBLEM 8:
In the course of your audit of the Loans receivable account of XYZ Financing Corp, a lending company, for the year
ended December 31, 2021, you discovered the balance per its general ledger of its Loans receivable from KLM was at
P4,000,000.

Audit notes:
a. The loan to KLM is a non interest bearing loan which shall mature on December 31, 2023.
b. The loan was originated on January 1, 2019.
c. The total amount disbursed on that date was based on the appropriate discount rate prevailing on
that date at 10%.
d. The transaction was recorded by the client as a debit to loans receivable at face value of the loan
charging interest income for its difference to the amount credited to cash.

35. What is the retroactive, adjustment to retained earnings, if any, as a result of your audit of loans receivable from
KLM?
a. 994,741 debit c. 521,574 debit
b. 1,267,946 debit d. no adjustment necessary