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CPA Review Batch 43 May 2022 CPA Licensure Examination Preweek Lectures
QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities (d) PFRS for Small Entities or Income Tax Basis - for each of the following scenarios:
1. ABC Financing, a trust and banking company with total assets of 2.99M and total liabilities at 2.99M
2. ABC Co., a manufacturing company with total assets of 2.99M and total liabilities at 2.99M
3. XYZ Trading, a publicly traded company with total assets of 3M and total liabilities of 100M
4. XYZ Co., a merchandising company with total assts of 3M and total liabilities of 100M
5. DEF Co., a manufacturing company with total assets of 2.99M and total liabilities at 3M
6. GHI Co., a property leasing company with total assets of 100M and total liabilities at 251M
7. JKL Co., a pharmaceutical company with total assets of 350M and total liabilities at 250M
QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities - for each of the following scenarios:
1. An entity whose complete set of financial statements included a Statement of Income and Retained
Earnings (which included gain on the remeasurement of PPE at the BS date under FMV Method
reported in the profit/loss), a Statement of Financial Position, a Statement of Cash Flows and Notes
to Financial Statements.
2. An entity whose complete set of financial statements included a Statement of Comprehensive
Income (which included an unrealized holding gain on FA at FMV and Revaluation Surplus on PPE,
both reported as components of Other Comprehensive Income/Losses), Statement of Changes in
Equity a Statement of Financial Position, a Statement of Cash Flows and Notes to Financial
Statements.
3.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK LECTURES: Summary Lecture Notes
3. An entity whose complete set of financial statements included a Statement of Comprehensive
Income (which included Unrealized Holding Gain on all FA at FMV reported in the profit or loss as
it is only allowed to report such in the profit or loss and Revaluation Surplus reported as a
component of Other Comprehensive Income/Losses), Statement of Changes in Equity a
Statement of Financial Position, a Statement of Cash Flows and Notes to Financial Statements.
2. CORRECTION OF ERRORS
- Where the requirement is the EFFECT OF ERRORS TO NET INCOME:
1. Consider all Current Period Errors (Counter Balancing* or Non-counter balancing**)
2. Consider all Immediate Prior Year Counter Balancing Errors
3. Ignore all Prior Years’ Non-counter balancing errors
* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and the year following the
year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued income, Inventory, DIRECT INDIRECT
end, AR/Sales, Advances to suppliers)
Counter Balancing Error in a LIABILITY
(e.g. Unearned income, Accrued expense, INDIRECT DIRECT
AP/Purchases, Advances from customers)
** The effect of a NON-COUNTERBALANCING ERROR in net income of the year of incurrence and the year
following the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Non-Counter Balancing Error in an ASSET DIRECT NO EFFECT
Non-Counter Balancing Error in a LIABILITY INDIRECT NO EFFECT
- Where the requirement is the EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’ net income)
- Where the requirement is the EFFECT OF ERRORS TO WORKING CAPITAL (CURRENT ASSETS – CURRENT LIAB)
1. Consider all errors affecting current assets and current liab. as of the end of the current period only.
2. The error in the current asset is DIRECTLY related to the WC (overstated current asset means overstated
WC, and vice versa)
3. The error in the current liability is INVERSELY related to the WC (overstated current liability means
understated WC, and vice versa)
For CASH – ACCRUAL PROBLEMS related to item of INCOME and EXPENSES (e.g. rental income and expense,
royalty income and expense and other similar items)
Accrued Income/Unearned Income Prepaid Expense/Accrued Expense
Beg bal. (Acc Inc.) XX XX Beg bal. (Unear. Inc.) Beg bal. (Prep.) XX XX Beg bal (Acc. Exp)
Recog. Income Collection of cash Payment of cash Recogn. of Exp.
(Accrual basis) XX XX (Cash basis) (Cash basis) XX XX (Accrual basis)
End bal. (Acc Inc.) XX XX End bal. (Unear. Inc.) End bal. (Prep.) XX XX End bal. (Acc. Exp)
Note: if the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning and
ending balances, simply place in the beginning balance if it is net decrease (since this indicates that the beginning is high er
than ending balance) or place in the ending balance if it is net increase (since this indicates that ending balance is higher
than the beginning balance).
4. CASH
FOR CASH COUNT PROBLEMS:
1. Identify the accountability:
a. If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger
b. If Undeposited Collections, the accountability is total undeposited collections per books/records adjusted
5. RECEIVABLES
FOR AGING OF ACCOUNTS RECEIVABLE PROBLEMS:
- The aging schedule should be based on and should agree with the subsidiary ledger
- The aging schedule should be adjusted first with all possible adjustments before a required allowance is
computed. Possible adjustments include:
a. Adjustment to both the GL and SL (thus to Aging)
- additional write-off of accounts
- unrecorded sale/over recorded sale; unrecorded collections
- credit balance in accounts receivable (adjusted to advances from customers)
b. Adjustment to SL only (no adjusting entry required, but Aging schedule may be adjusted)
- sales/collections already recorded in the GL but not yet in the SL
- posting errors
c. Adjustments to GL only - will not affect the aging schedule anymore (e.g. sales/collections not yet
recorded by the GL but already posted to the SL)
- The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted balance of the accounts
receivable gross of the required allowance.
- If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an additional adjustment
should be in place to correct the general ledger to equal the Adjusted Balance of the subsidiary ledger. The
adjustment is either debited or credited to SALES account
- To compute for the Bad Debt Expense for the period, the adjusted balance per computation is compared to the
unadjusted balance. (Do not forget to consider write-off of accounts receivable, recoveries of previously written-off
accounts and interim bad debt provisions, if there are any):
Allowance for Bad Debt Expense
Beginning Balance
Dr: Write-off of Receivables (including Cr: Recovery of Previous Write-off
additional write-off per audit) Cr:Bad Debt Expense (Squeeze)
Required Ending Balance
*IMPAIRMENT RECOVERY
PV of remaining future cash flows as revised
as a result of impairment recovery, if any XX
Less: Amortized cost based on the remaining
future cash flows at original effective interest (XX)
Gain on recovery – IS* XX
Where maximum impairment recovery shall be to the extent of the Amortized cost of the
investment had there been no impairment.
BALANCE SHEET MEASUREMENT UNDER THE EXPECTED CREDIT LOSS (ECL MODEL)
Credit loss arises when a debtor fails to pay some or all of the contractual payments, including instances of late payment.
IFRS 9 adopts an expected loss model for the recognition of impairment losses on financial assets that are measured at
amortized cost and financial assets with contractual cash flows measured at fair value through other comprehensive income.
The general approach, the entity recognizes the expected loss for a financial asset in accordance with the requirements for:
6. INVENTORY
FOR CUT-OFF PROBLEMS:
1. Determine validity of the Sales or Purchase Transaction*
2. Determine whether Sales/AR or Purchases/AP has been recorded in the Sales or Purchases Journals.
(Based on the recording of the related sales/purchase invoice)
3. Determine whether inventories were Excluded or Included in the year-end physical count**
If it is a Valid Sale, the Receivable should be recorded, the Inventory should be excluded.
If it is not a Valid Sale, the Receivable should not be recorded, the Inventory should be included.
If it is a Valid Purchase, the Payable should be recorded, the Inventory should be included.
If it is not a Valid Purchase, the Payable should not be recorded, the Inventory should be excluded.
SALES CUT-OFF
Deliveries on/before the count date: EXCLUDED
Deliveries after the count date: INCLUDED
COUNT DATE
Receipts on/before the count date: INCLUDED Receipts after the count date: EXCLUDED
PURCHASES CUT-OFF
1. All deliveries (on sale) made on or before the count date are excluded from the count, all deliveries made after the
count date are included in the count, unless otherwise stated by the problem.
2. All receipt (on purchases) of goods on or before the count date shall be included in the count, all receipts after the
count date are excluded from the count, unless otherwise stated by the problem.
2. Retail Method
Cost of Goods Available for Sale (at Retail) (a) XX
Less: Cost of Sales (at Retail)=Gross Sales (b) (XX)
Estimated ending inventory (at Retail) XX
Multiply by: Cost rate (LCA or Ave) (c) x%
Estimated ending inventory (at Cost) XX
Cost Retail
Beginning Inventory XX XX
Add: Purchases XX XX
Freight-in XX
Less: Purchase allowance (XX)
Purchase discount (XX)
Purchase returns (XX) (XX)
Add: Departmental transfer-in or Debit XX XX
Less: Departmental transfer-out or Credit (XX) (XX)
Less: Abnormal spoilage/breakage/shrinkage (XX) (XX)
Add: Mark-ups, net of cancellations XX
(c)
COGAS under CONSERVATIVE/LCA XX / XX x% Cost rate under Lower of Cost
or Average (Conservative)
Less: Mark-downs, net of cancellations (XX)
(c)
COGAS under AVERAGE APPROACH XX / XX(a) x% Cost rate under Average
Retail
Gross Sales XX
Less: Sales Return (XX)
Add: Special Discounts (Employee Disc) XX
Normal Spoilage/Breakages/Shoplifting losses XX
Sales/ Cost of Sales at Retail XX(b)
* For FIFO Average, simply disregard in the computation the cost % the beginning inventories:
Cost% = COGAS @ Cost – Beg inventory at Cost or Net Purchases @ Cost
COGAS @ Retail – Beg inventory at Retail Net Purchases @ Retail
FOR INVENTORY VALUATION PROBLEMS:
Inventories shall be valued at lower of COST or NRV:
a. COST shall be measured through
1. SPECIFIC IDENTIFICATION/Perpetual
2. FIFO/Periodic - the cost shall be computed as: (# Inventory on hand * Cost of latest purchases)
3. FIFO/Perpetual – the computation of cost shall be the same as FIFO/Periodic
4. AVE/Periodic (aka WEIGHTED AVERAGE): (# of Inventory on hand * WA unit Cost)
WA unit Cost = COGAS / # of GAS
5. AVE/Perpetual (aka MOVING AVERAGE): (# of Inventory on hand * MA unit Cost)
The average cost is recomputed after every purchase transaction. The last Moving average unit cost shall
be used for the computation of the inventory cost at year end.
b. Net realizable value shall be:
1. Finished goods/Merchandise Inventory = Est. Selling Price – Est. cost to sell
2. Work-in-process inventory = Est. Selling Price – Est. cost to complete – Est. cost to sell
3. Raw materials and Supplies – The NRV is the Current Replacement Cost (Current Purchase Price).
Written down only if the finished goods to which they are related to are also written down.
Notes:
1. The DIRECT WRITE-OFF METHOD is used in instances where the company holds inventories that are not relatively the
same from year-end to year-end. Thus, there shall be no chances to recover any loss on write-down from one year over
the next. If NRV is lower than the cost, the difference is automatically the loss on write-down for the year. (which is either
added to cost of sale or recognized as a separate loss in the statement of comprehensive income)
2. The ALLOWANCE METHOD is used in instances where the company holds inventories that are relatively the same from one
year-end to another. Thus, there shall be a possibility of recovery from inventory write-down from one year, unto the next
year. The difference between cost and NRV, where NRV is lower becomes the required allowance for inventory write-down
(similar to allowance for bad debts), to determine how much is the loss during the period, the increment from the
unadjusted balance of the account shall be determined. Thus, if cost is lower the NRV, required balance is zero/nil,
any unadjusted credit balance of the account shall be recognized as gain from recovery in the income
statement (or deducted from cost of sale)
FOR SMALL ENTITIES (PFRS for Small Entities, Section 21 Impairment of Assets):
Generally the same as full PFRS with the following exceptions:
- Balance sheet measurement: Lower of Cost or Market Value, where the difference if market value is lower recognized
in the profit or loss.
QUICK TEST:
1. ABC Corporation, a Merchandising Co. reported the following inventory items as of December 31, 2021:
Item A – Cost P900,000; Estimated Selling Price P1,200,000; Cost to Sell 20% of Selling Price.
Item B – Cost P600,000; Estimated Selling Price P800,000; Cost to Sell 30% of Selling Price.
Item C – Cost P400,000; Estimated Selling Price P380,000; Cost to Sell 10% of Selling Price.
Assuming ABC Corporation is a Medium Entity which uses PFRS for SMEs, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000
2. Assuming ABC Corporation is a Small Entity which uses PFRS for Small Entities, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000
7. INVESTMENTS
FOR INVESTMENT IN EQUITY SECURITIES (SHARES):
a) Control Exists (>50% equity in voting shares, that is ordinary shares) – Investment in Subsidiary
b) Significant Influence exists (20% - 50% in voting shares, that is ordinary shares)
– Investment in Associate (Equity Method)
c) No Ctrl nor Sign. Infl. - Financial Asset at Fair Value (PFRS 9, effective 1/1/2018):
c.1) FA at Fair value through profit or loss (PFRS 9) (aka Trading Securities)
c.2) FA at Fair value through OCI/L (PFRS 9) (aka Available for Sale Security)
CESSATION (Disposal of shares to the extent that the company losses significant influence)
Realized Unrealized Total
Gain(Loss) Gain(Loss) Gain(Loss)
Proceeds from the portion disposed (net of trans. cost) XX XX
Add: FMV of the remaining portion not sold and reclassified XX XX
Total XX
Less: CV of the investment in associate prior to cessation (XX)* (XX)** (XX)
Gain/(loss) on cessation, before recycling of OCI/OCL X(X) X(X) X(X)
Recycling of Other Comp Income/(Loss) X(X)* X(X)** X(X)
Gain/(loss) on Cessation (Recognized in the Profit or Loss) X(X) X(X) X(X)
DEEMED SALE/DILUTION (Happens when the company’s interest in associate decreases because of the issuance of
the associate of additional shares to other parties, with the company not participating on such new issuance)
Deemed share from the increase in the associates
net assets as a result of the issuance of shares
(Proceeds from issue of new shares*% of interest, after dilution) XX
CV of the investment deemed sold:
CV*(% decrease in interest/% original interest) (XX)
Gain/(loss) on deemed sale, before recycling of OCI/L X(X)
Recycling of Other Comp Income/(Loss) X(X)
Gain/(loss) on deemed sale/ Dilution gain(loss) X(X)
FOR MEDIUM ENTITIES (PFRS for SMEs, Sec. 14: Investment in Associate)
SMEs have an option in accounting for investment in Associate between and among the following methods:
a. Equity method (almost similar to full PFRS with specific distinctions:
- Goodwill identified under equity method is treated separately and is amortized (if indefinite, use 10 years)
- Under equity method, accounting policies of the associate are adjusted to that of the investor (thus there will be no
recognition of the share from unrealized holding gains/losses from financial assets to other comprehensive
income/loss)
b. At cost less impairment, provided there is no published price quotations for the investment.
c. At fair value with changes in fair value being recognized in the profit or loss, provided that the determination of the
investment’s fair value will not cause undue cost or effort.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 9: Investment in Associate)
A small entity shall account for all its investment in associate using one of the following:
a. At cost less impairment. Where the asset is impaired once its recoverable amount (higher between fair value less cost
to sell and value in use) becomes lower than cost.
b. Equity method (similar to equity method applied under PFRS for SMEs)
QUICK TEST:
Tomi Corp’s 20% investment in ordinary shares of ABC Corp. (with 100,000 shares outstanding) was acquired on
January 1, 2021 at P50 per share which included P2 per share transaction cost. The book value of ABC Corp.’s Net
assets which approximated their fair value was at P6M. ABC Corp. declared a total comprehensive income of
P800,000 which included a P500,000 net income for the year, a P400,000 Revaluation Surplus on PPE and a
P100,000 Unrealized Holding Loss on FA at FMV. ABC Corp. also declared and distributed P250,000 cash
dividends in 2021. ABC Corp. shares had a fair market value of P59 per share as of December 31, 2021. Estimated
transaction cost to sell the shares remained P2 per share.
1. Assuming Tomi Corp. is applying Full PFRS, what is the carrying value of the investment as of December
31, 2021?
a) P1,110,000 b) P1,090,000 c) P1,180,000 d) P1,140,000
2. Assuming Tomi Corp. is applying PFRS for SMEs as a medium entity, all of the following are allowed to be
the investments’ carrying value as of December 31, 2021, EXCEPT:
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000
3. Assuming Tomi Corp. is applying PFRS for Small Entities, all of the following are allowed to be the
investments’ carrying value as of December 31, 2021, EXCEPT (2 possible answers)
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000
2. Assuming Tomi Corp. is applying PFRS for SMEs as a medium entity, all of the following are allowed to be
Financial Asset at Fair Value (Through P/L or OCI/L) PFRS 9 WHERE RECYCLING IS NOT ALLOWED for
the investments’ carrying value as of December 31, 2021, EXCEPT:
equity securities categorized as FA at FMV through OCI/L:
a) P1,090,000 Investment
b) P1,000,000at Fairc) P1,180,000
Value d) P1,140,000
through Profit Investment at Fair Value through other
3. Assuming Tomi Corp. is applying PFRS
or Losses for Small
(Trading Entities, all of the
security) following areincome
Comprehensive allowed to be the
(Available for sale)
investments’
a) Initial carryingAt
recognition value
Fair as of December
value (fair value 31,
of 2021, EXCEPT (2 At possible
Fair valueanswers)
(fair value of consideration
a) P1,090,000 consideration
b) P1,000,000 givenc)up),
P1,180,000 d) P1,140,000 given up) plus any transaction costs
- Transactions costs shall be expensed incurred.
(Note 1)
as incurred - Exclude accrued dividends
- Exclude accrued dividends(Note 1)
b) Balance sheet Fair Value Balance Sheet Date Fair Value Balance Sheet Date
valuation (temporary Less: Carrying Value Less: Original Cost
changes in value) Unrealized gain/loss – I/S Unrealized gain/loss – SHE of SFP
Financial Asset at Fair Value Through P/L and at Amortized Cost: PFRS 9 where recycling IS ALLOWED
for debt security investments categorized as FA@FMV through OCI/L:
At FMV Through Profit or Loss At FMV Through OCI/L Investment at Amortized Cost
(Trading security) (Available for sale security) (Held to maturity security)
a) Initial At Fair value (fair value of At Fair value (fair value of At fair value which is assumed
recognition consideration given up), consideration given up) plus any to be equal to the fair value of
- Transactions costs shall be transaction costs incurred, bonds plus any transaction cost,
expensed as incurred excluding any accrued interest. (a) excluding any accrued interest.
- Exclude accrued interest(a) (a)
b) Balance Fair Value Balance Sheet Date Fair Value @ Balance Sheet Date At Amortized Cost(b)
sheet Less: Carrying Value Less: Amortized Cost(b)
measurement Unrealized gain/loss – I/S Cumm. Unrealized gain/loss –
SHE in SFP
FOR MEDUIM ENTITIES (PFRS for SMEs, Sec. 11: Financial Instruments)
Financial instruments in bonds shall be categorized as:
(a) Debt instrument at amortized cost
(b) Debt instrument classified as current, measured at undiscounted value (Cost) (unless from a financing transaction)
(c) If financing transaction, current debt instrument shall be measured at the present value of future cash flows at
market rate of interest for similar debt instrument (at Fair Value)
Financial instrument in shares shall be measured at:
(a) Fair value (if publicly traded or fair value can otherwise be measured reliably with changes in fair value recognized in
the profit or losses).
(b) All other investment shall be measured at cost less impairment.
FOR SMALL ENTITIES (PFRS for Small Entites, Sec. 6: Basic Financial Instruments)
Initial Measurement:
Financial instrument in bonds and in shares shall be initial recognized at transaction price (including transaction cost),
unless arrangement constitute financing in which case the debt security shall be initially measured at present value of
future cash flows at market rate.
Balance Sheet Measurement:
Financial Instruments in bonds – at amortized cost
Financial Instrument in shares – at cost less impairment, unless shares are traded in an active market, which shall be
measured a lower of cost or fair value, with changes in fair value recognized in the profit or loss.
QUICK TEST:
An investment in 10,000 shares of ABC Corporation were acquired originally at P50 per share. At the balance sheet date, the shares
had a fair market value of P52 per share with cost to sell estimated at P4 per share.
1. Assuming the reporting entity is applying Full PFRS, what is the carrying value of the investment in equity securities as at
the balance sheet date?
a) P500,000 b) P520,000 c) P480,000 d) None of these
2. Assuming the reporting entity is applying PFRS for SMEs, being a medium entity, what is the carrying value of the
investment in equity securities as at the balance sheet date?
a) P500,000 b) P520,000 c) P480,000 d) None of these
3. Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the investment in equity
securities as of the balance sheet date, assuming further that the shares are not traded in the active market?
a) P500,000 b) P520,000 c) P480,000 d) None of these
4. Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the investment in equity
securities as of the balance sheet date, assuming further that the shares are traded in the active market?
a) P500,000 b) P520,000 c) P480,000 d) None of these
QUICK TEST:
An investment in 10,000 shares of ABC Corporation were acquired originally at P50 per share. At the balance sheet date, the shares
had a fair market value of P52 per share with cost to sell estimated at P4 per share.
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK LECTURES: Summary Lecture Notes
8. PROPERTY, PLANT AND EQUIPMENT
INITIAL MEASUREMENT at Cost. Cost of PPE shall include:
a. Cost of acquisition*
b. Incidental cost in bringing the asset to its present location and condition necessary for use.
c. Present value of the initial estimate of dismantling, removal or site restoration cost (credit goes to a provision
account – asset retirement obligation)
IMPAIRMENT LOSS
An asset is impaired if only if the Carrying value is > that the Net recoverable value
* Net recoverable value is the higher between the Fair Value less Cost to Sell or the Value in use
Where: Fair Value less Cost to Sell = Estimated Selling Price – Estimated Cost to Sell
Value in use = PV of the future net cash flows from the continued use of the asset
and from its ultimate disposal using a pre-tax discount rate.
REVALUATION/APPRAISAL
A. If asset have an active market, thus FMV is readily determinable:
Fair value of Asset – Carrying Value = Revaluation Surplus (OCI)
B. If asset have no active market, thus appraisal is determined through the current replacement cost:
Replacement Cost XX - XX Original Cost
Replacement AD (XX) - (XX) Accum. Depr. on Cost
Fair Value/Sound Value XX - XX Carrying Value
Fair Value/Sound Value = Replacement cost*Condition Percent
Condition Percent = (remaining life/total life, original estimate) or
(carrying value/depreciable cost, original estimate)
FOR SMALL ENTITES (PFRS for Small Entities, Sec. 12: PPE)
Generally the same provisions with that of full PFRS except for the following:
- Balance sheet measurement - a small entity is allowed to choose between:
Cost Model – Cost less Accumulated Depreciation and Impairment (same as full PFRS)
Fair Market Value Mode – an entity shall measure the PPE at fair value at each reporting date with change in fair value
recognized in the profit or loss.
- under Sec. 19: Borrowing Cost, all borrowing cost are to be expensed as incurred
SUBSEQUENT MEASUREMENT
COST METHOD
- For Intangibles without definite useful life (including Goodwill): Cost net of Impairment Loss
- For Intangibles with definite useful life: Cost net of Amortization and Impairment Loss
REVALUATION METHOD (similar to PPE, except that intangibles shall only be revalued if it has an active market)
FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 19: Business Combination and Goodwill)
- require to measure goodwill at each balance sheet date at cost less accumulated amortization and impairment losses. If
an entity cannot determine the period which the economic benefits are expected, goodwill shall be amortized over a
period not to exceed 10 years.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 14, Business Combination and Goodwill)
- Essentially the same with PFRS for SMESs
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 13, Intangible Assets Other than Goodwill)
- Essentially the same with PFRS for SMESs
QUICK TEST:
A reporting entity incurred the following costs at the beginning of the reporting year: Research costs aimed at the
discovery of a new knowledge, P20,000; Development costs incurred before establishment of technical feasibility,
P30,000; Development cost incurred after technical feasibility, P40,000; Cost of separately acquiring an intangible
asset, P60,000; Goodwill recognized through a business combination, P50,000. Assuming the following useful lives:
Internally developed intangible – Indefinite; Separately acquired intangible – 15 years; Goodwill – Indefinite.
1. Assuming the reporting entity uses Full PFRS, what is the total carrying values of the intangibles and
goodwill as at the end of the reporting period?
a) P150,000 b) P146,000 c) P137,000 d) 135,000
2. Assuming the reporting entity uses PFRS for SMEs, being a medium entity, what is the total carrying values
of the intangibles and goodwill as at the end of the reporting period?
a) P110,000 b) P106,000 c) P137,000 d) 101,000
3. Assuming the reporting entity uses PFRS for Small Entities, what is the total carrying values of the
intangibles and goodwill as at the end of the reporting period?
a) P110,000 b) P106,000 c) P137,000 d) 101,000
10. LIABILITIES
REFINANCING AND BREACH OF CONTRACTS (PAS 1)
Refinancing: Generally, a currently maturing obligation must be presented as current liability. A currently maturing
obligation may be presented as a long term liability under refinancing agreement, only if:
1. The company (as of the BS date) has the option/right to refinance the liability on a long-term basis OR
2. If there is no right but the long-term refinancing agreement was completed before or at the BS date.
Note: Long-term refinancing may be thru: a) extension of maturity date for another 12 months,
b) issuance of bonds the proceeds of which is used to settle the currently maturing obligation.
Breach of Contract: Generally, if the company breaches a covenant the long-term obligation becomes
due and demandable, thus is presented as short term liability.
The obligation may still be presented as long-term only under the following conditions:
1. If the creditor agreed to give the debtor a grace period for at least 12 months after the balance sheet date AND
2. The said grace period should have been provided on or before the balance sheet date.
- REIMBURSEMENTS OF PROBABLE LOSSES UNDER PAS 37 – these are amounts expected to be received as
reimbursements if entity settles the provision. Reimbursements shall be accounted for as follows:
CONTINGENT LIABILITIES
1. Possible obligation whose existence is to be determined in the future contingent upon the happening of a future
event; or
2. Present obligation, but is not accrued because it is either remotely possible that economic benefits will be
required to settle the obligation and/or the amount of the obligation is not capable of being reliably measured.
Bonds issued at a Premium (Proceeds > Face Value; Effective Interest < Nominal Interest)
- premium is a transaction gain (amount received/proceed is higher than the amount to be paid/face value) to be
amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is deducted from the related expense – INTEREST EXPENSE
Dr: Premium on Bonds Payable XX
Cr: Interest Expense XX
- as a result of the amortization, the interest expense recognized in the income statement is lower than the interest
paid/accrued. The difference is the amount of amortization.
Bond Issue Costs – are deducted from net cash proceeds, thus in the process are deducted from premium or added to
discount on bonds payable (after which a new effective interest rate shall be computed)
Retirement of Bonds – if bonds are retired prior to their maturity dates, gain or loss shall be recognized in the profit or
loss (difference between the retirement price and updated amortized cost of the bonds plus accrued interest, where
applicable)
Accrued Interest – in accounting for bond issuance and retirement, consider inclusion of accrued interest specifically if
bonds were issued or retired in between interest payment dates.
CONVERTIBLE BONDS
1. ISSUANCE – Proceeds from the issuance of Convertible Bonds should be allocated between the debt component
(bonds payable) and the equity component (Share Premium form Bond Conversion Privilege) using the RESIDUAL
APPROACH. To wit, the pro-forma entry to record issuance is:
Dr: Cash XX
Dr: Discount on Bonds Payable XX (or)
Cr: Premium on Bonds Payable XX
Cr: Bonds Payable XX
Cr: Share Premium from Bonds Conv. Priv. XX
2. CONVERSION – If Convertible bonds are converted into ordinary shares, the carrying value of the bonds (updated
amortized bonds payable) shall be cancelled out. The difference between the carrying value of the bonds and the
aggregate par value of the converted shares shall be credited to share premium account. An allowed alternative is
the cancel out the equity component originally credited to share premium account upon issuance of the bonds. The
same shall be added to the amount credited to the share premium account upon conversion. To wit, the pro-forma
entry to record the conversion is:
Alternative 1 Alternative 2
Dr: Bonds Payable XX Dr: Bonds Payable XX
Dr: Premium on Bonds Payable XX (or) Dr: Sh Prem from Bond Conv. Priv. XX
Cr: Discount on Bonds Payable XX Dr: Premium on Bonds Payable XX (or)
Cr: Ordinary Shares XX Cr: Discount on Bonds Payable XX
Cr: Share Premium XX Cr: Ordinary Shares XX Cr:
Share Premium XX
3. EARLY RETIREMENT – If Convertible bonds are retired prior to maturity date, the retirement price shall
be allocated between the Bonds and the equity component, consistent with how the original issue price was
allocated (Residual Approach). The difference between the retirement price of the allocated to the debt component
and the carrying value of the bonds payable shall be recognized in the income statement, while the difference
between the retirement price allocated to the equity component and the original share premium from bond
conversion privilege shall be credited to share premium account.
*LEASES ARE FINANCE LEASE ON THE POINT OF VIEW OF THE LESSEE. PFRS 16 HOWEVER PERMITS THE LESSEE TO MAKE
AN ACCOUNTING POLICY ELECTION TO APPLY OPERATING LEASE UNDER THE FOLLOWING OPTIONAL EXCEPTIONS:
1. SHORT TERM LEASE – lease term is for a period of 12 months or less. Election to be made on a per class of
underlying asset basis (similar asset of nature and use)
2. LOW VALUE LEASE – low value asset based on professional judgment and based on the value of the asset
when it was brand new regardless of its age on the lease date. Typically low value underlying assets include
computers, office furniture and equipment. Election for low value lease is made on a lease by lease basis.
OPERATING LEASE
1. Periodic Payments – recognized as rent expense over the lease term on a straight-line uniform basis unless a more
systematic method is warranted.
2. Lease Inducements – effect of lease inducement is a reduction from the periodic rent expense on a straight-line
uniform basis, unless a more systematic method is warranted
3. Lease Bonus – recognized as additional rent expense over the lease term on a uniform or straight-line basis, unless
a more systematic method is warranted
4. Contingent Rentals – recognized as additional rent expense when incurred, that is when the condition or the
contingent event occurs.
FINANCE LEASE
1. INITIAL RECOGNITION/ACQUISITION OF RIGHT OF USE ASSET ON INSTALLMENT BASIS
ENTRY: Right of Use Asset (at COST) XX
Lease Liability (1) XX
Cash (2 and 3) XX
Asset Retirement Obligation (4) XX
Where the COST of the asset shall include:
1. Present value of the Minimum Lease Payments (MLP) – Credited to LEASE LIABILITY
1.1. Periodic Payments (Fixed and Variable)
1.2. Certain Purchase Option or Guaranteed Residual Value
1.3. Additional periodic payments upon extension (if with certain extension option)
1.4. Termination penalties (if with certain termination option)
*The PV of MLP shall be based on the IMPLICIT LEASE RATE if known to both parties, otherwise, the
INCREMENTAL BORROWING RATE
2. Lease payment before or at commencement date such as LEASE BONUS less any LEASE INCENTIVES (reimbursable
expenses incurred by the lessee in relation to the lease agreement) – Credited to Cash
3. Initial direct cost incurred by the lessee – Credited to Cash (when paid in Cash)
4. PV of Estimated Retirement Cost – Cr. to Prov. on Asset Retirement / Asset Retirement Obligation (PAS 37)
2. PERIODIC PAYMENTS
ENTRY: Interest expense (CV of Liab*%) XX
Lease Liability (balance) XX
Cash XX
3. Depreciation
Entry: Depreciation Expense XX
Accumulated Depreciation XX
Where: 1. If there is transfer of ownership (whether as directly agreed upon or as a result of a certain purchase option):
(Cost minus Estimated Residual Value / Useful Life)
2. If there is no transfer of ownership (whether as agreed upon or as a result of a certain termination option):
(Depreciable Cost / Term)
Where: Depreciable Cost is:
Cost Minus the Lower between the Guaranteed Residual Value or the Estimated Residual Value
Or, if payments are made in advance (at the beginning of each lease period)
DR: CASH XX
DR: FINANCE LEASE RECEIVABLE (balance) XX
CR: SALES XX
PERMANENT DIFFERENCES
a. Non-deductible expenses
o Fines, penalties, surcharges and compromise penalties for non-payment or late payment of taxes
o life insurance expense
o a portion of interest expense (33% of interest income gross of applicable final tax)
o a portion of charitable contributions expense (excess of 5% of taxable income)
o a portion of entertainment, amusement and representation expense (excess of 0.5% of net sales for
merchandising and manufacturing entities or excess of 1% of net revenue for service entities
o goodwill impairment
b. Non-taxable income
o dividend income by a domestic or resident foreign corporation from another domestic corporation
o life insurance policy settlement
o interest income subject to final tax
o royalty income subject to final tax
o gifts, bequests and devises
o gains from sale, exchange, or retirement of bonds
TEMPORARY DIFFERENCES
FUTURE DEDUCTIBLE AMOUNTS (FDAAB)
- Amounts that are deductible for tax purposes in the future. These items are not yet deductible from current
income, thus are being added back to financial income to determine taxable income.
- Future deductible amounts create deferred tax asset (in the balance sheet) and deferred tax benefit (deducted
from current tax expense in determining the total tax expense in the income statement)
- Generally includes the following:
o Accrued expenses – deducted only upon payment in the future.
o Unearned income – taxed upon collection, thus are taxable in the current period but are not yet
recognized as income for financial accounting purposes. (no longer taxable in the future, thus are
deductible in the future)
o Excess financial depreciation over tax depreciation.
o Excess taxable income over financial income
o Bad debts (under allowance method) – deductible upon write-off in the future.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK LECTURES: Summary Lecture Notes
o Impairment losses (other than on goodwill)
FUTURE TAXABLE AMOUNTS (FTALE)
- Amounts that are taxable for tax purposes in the future. These items are not yet taxable in the current period,
thus are being deducted from financial income to determine taxable income.
- Future taxable amounts create deferred tax liabilities (in the balance sheet) and deferred tax expense (added to
the current tax expense in determining the total tax expense in the income statement)
- Generally includes the following:
o Accrued income – taxed only upon collection in the future.
o Prepaid expenses – deductible upon payment, thus are already deductible in the current period for tax
purposes. (no longer deductible in the future, thus are taxable in the future)
o Excess tax depreciation over financial depreciation
o Excess financial income over taxable income
B. DEFINED BENEFIT – under a defined benefit plan, what is defined, that is what has been agreed upon with the
employees, shall be the final amount the employee will be able to receive in the future upon their retirement. The
amount is usually based on a certain percentage of the final salary of the employee on their retirement date multiplied
by the number of years the employee has been in service. (%*Final Salary*#of years in service). The future amount
to be settled upon retirement, where funded, shall be paid through the employees retirement fund (plan asset) which
the company funds through the periodic contribution.
In a defined benefit plan, contribution to the employees retirement fund is separately accounted for in a separate
memorandum account, PLAN ASSET (PA), to account for any income that it may earn (reduction from pension
expense, since it will accrue to the benefit of the company). The accumulated benefit obligation is also maintained in
a separate memorandum account, ACCUMULATED BENEFIT OBLIGATION (ABO), to monitor the balance of the
benefits earned by the employees (incurred by the company). The difference between these two memorandum
accounts will actually be the year-end Accrued Pension Expense (ABO>PA) or Prepaid Pension (PA>ABO).
If, Contribution < Required Expense* If, Contribution < Required Expense**
DR: Pension Expense XX DR: Pension Expense XX
CR: Accrued Pension Expense XX CR: Accrued Pension Expense XX
If, Contribution > Required Expense* If, Contribution > Required Expense**
DR: Prepaid Pension Expense XX DR: Prepaid Pension Expense XX
CR: Pension Expense XX CR: Pension Expense XX
- the prepaid pension is subjected to an asset
Where *Required Expense = Defined contribution or ceiling test first (see discussion below) before the
the periodic contribution to the plan as per entry to set it up.
agreement with employees.
Where **Required Expense shall be computed as
follows:
Service Cost XX
Net Interest Expense/(Income) X(X)
Net Remeasurement Loss(Gain) X(X)
Total XX
SERVICE COST
Service cost shall comprise the (1) current service cost, (2) past service cost, (3) settlement gain or loss. Service cost is a
component of pension expense recognized in the profit or loss.
CURRENT SERVICE COST - This is the increase in accumulated benefits obligation (ABO) for the current period due
to the services of employees for the current year.
PAST SERVICE COST - This is the increase in the accumulated benefits obligation (ABO) in the current period due
to the services of employees in the past years. This results from introduction of significant changes in the defined
contribution plan during the year. As for instance the, increase in the agreed percentage of final salary (e.g. from 10% to
20%) as a basis for the computation of the defined benefit will result to substantial increase in the obligation for the current
period, not only due to services of the current year but also for the services in the previous years. Whether vested
SETTLEMENT GAIN OR LOSS - This result from the difference between an obligation’s settlement price (retirement
benefits actually paid to retiring employees) against the carrying value of the accumulated benefit obligation being settled.
One possible reason for such difference would be when the company offers early retirement plans to employees. To
encourage employees to take advantage of early retirement offers, the company usually offers to settle retirement plans at
amounts which are significantly higher that that earned by the employee (thus leading to a possible loss on the said
settlement).
Like any liabilities, the accumulated benefit obligation increases periodically due to interest incurred. Interest incurred on
the ABO shall be recognized as a component of pension expense in the profit or loss.
The expected return on the plan asset on the other hand, shall be the interest income on the plan asset. The interest
income rate shall be assumed to be equal to the settlement or discount rate used to determine the interest expense on the
ABO. The interest income on the plan asset shall be recognized as a reduction from pension expense in the profit or loss.
The net interest expense (income) is also effectively, the interest expense (income) on the beginning balance of the accrued
pension expense (ABO>PA) or the prepaid pension expense (PA>ABO).
REMEASUREMENT LOSS (GAIN) ON PLAN ASSET - At year end, the employees retirement fund (plan asset) shall be
remeasured at fair market value. As a result any difference between the plan asset’s current fair market value and carrying
value shall be recognized as actuarial loss (gain).
PLAN ASSET
Beginning Balance XX
Contribution to the plan XX XX Settlement price to retirees
Interest income on the plan asset XX
Actuarial gain (squeeze) or XX XX Actuarial loss (squeeze)
Ending Balance (at Fair Value) XX
The actuarial gain/loss is actually the difference between the actual return on the plan asset and the
expected return on the plan asset (interest income on the plan asset).
REMEASUREMENT LOSS (GAIN) ON ACCUMULATED BENEFIT OBLIGATION - At year end, the accumulated benefit
obligation is determined by computing the present value of the projected benefits earned by employees using an
appropriate assumed settlement rate. The difference between the computed present vale of projected benefits and the
accumulated benefit obligations’ carrying value shall be the actuarial loss (gain).
EFFECT OF THE ASSET CEILING - If the fair market value of the plan asset at year-end is higher than the present
value of the projected benefits (PA>ABO), the prepaid pension expense is tested for asset ceiling (tested for possible
impairment), before the same is set-up as prepayment at year end. The ASSET CEILING shall be the sum of the present
value of any expected future benefits from over-funding the benefit obligation (usually in the form of reduction in future
contribution or future refunds). If the asset ceiling is higher than the prepaid pension (PA – ABO) there is no loss. If the
asset ceiling however is lower that the prepaid pension (PA – ABO) the prepaid pension is written-down to the ceiling and
additional loss shall be recognized as a component of pension expense as other comprehensive income/loss.
FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 28, Employee Benefits)
Generally the same provisions with that full PFRS except:
- A medium entity may elect to report the remeasurement/actuarial gain or loss from plan asset and accumulated
benefit obligation either in the profit or loss or in other comprehensive income or losses.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 22, Employee Benefits)
- An entity should account for the post-employment benefit plan using the accrual approach by calculating the expected
liability as of reporting date using the current salary rate of the employees and the employee’s years of service, without
consideration of future changes in salary rates and service periods. The entity shall recognize the liability for such post-
employment benefit plan at the net total of (1) the accrued amount of the retirement benefits at the reporting date; less
(2) the fair value of plan asset (if any) at the reporting date out of which the obligations are to be settled directly.
QUICK TEST:
A reporting entity has 5 employees all employed 5 years ago as at the beginning of the current reporting period.
Each employee has an average current salary rate at P20,000 per month as of the current reporting period. The
agreement
Page with the labor union (under a defined benefit
21 of 24 obligation plan) included an agreement
0915-2303213/0908-6567516 to pay each
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employee 50% of their final monthly salary for each year of service upon retirement. The company estimates a 20%
annual increase in salaries. The employees are expected to retire in 4 years as at the end of the current reporting
period. The settlement rate is assumed at 10%. The fair market value of the Plan Asset as at the end of the year is
P250,000.
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK LECTURES: Summary Lecture Notes
QUICK TEST:
A reporting entity has 5 employees all employed 5 years ago as at the beginning of the current reporting period.
Each employee has an average current salary rate at P20,000 per month as of the current reporting period. The
agreement with the labor union (under a defined benefit obligation plan) included an agreement to pay each
employee 50% of their final monthly salary for each year of service upon retirement. The company estimates a 20%
annual increase in salaries. The employees are expected to retire in 4 years as at the end of the current reporting
period. The settlement rate is assumed at 10%. The fair market value of the Plan Asset as at the end of the year is
P250,000.
4. Assuming the entity uses the Full PFRS, what is the accrued pension as to be reported in the SFP as at the
end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000
5. Assuming the entity uses PFRS for SMEs, being a medium entity, what is the accrued pension to be
reported in the SFP as at the end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000
6. Assuming the entity uses PFRS for Small Entities, what is the accrued pension to be reported in the SFP as
at the end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000
TREASURY SHARES
- Acquisition of Treasury Shares, use cost model
Treasury Stock at cost XX
Cash XX
- Sale of Treasury Shares – When treasury shares are reissued, the journal entry is:
a. Sold at a price higher than the cost, resulting in a “capital gain”
Cash XX
Treasury shares (at cost) XX
APIC from TSTransactions XX
If Original Issue Price (carrying value) < Cost of TS: “capital loss”
Ordinary shares (at par) XX
Paid in Capital in Excess of Par (from orig. issue/pro-rata) XX
Cash Dividend
Number of shares outstanding and subscribed * (% of cash dividend*PAR per share)
Property Dividend (IFRIC 17)
• An entity should measure the dividend payable at Fair value of the assets to be distributed.
• At the end of each reporting period and at the date of settlement, the entity shall review and adjust the carrying
amount of the dividend payable (restate at fair value), with any changes in the amount of the dividend payable
recognized in equity (retained earnings) as adjustments to the amount of the distribution.
• Upon distribution, an entity should recognize the difference between the dividend payable and the carrying amount
of the asset distributed in the profit or loss.
Stock Dividends or Capitalization or Bonus Issue
An ordinary stock dividend is a stock dividend of the same class; i.e., ordinary shares to ordinary shareholders. A special
stock dividend is a stock dividend of a different class; i.e., preference shares to ordinary shareholders.
a) less than 20% of the shares previously outstanding and subscribed, the stock dividend is termed small, in which
case the amount to be charged to retained earnings is equal to its current market value.
b) at least 20% of the shares previously outstanding and subscribed, the stock dividend is termed large in which case
the amount charged against Retained Earnings is equal to par value.
Scrip Dividends
A corporation may declare a scrip dividend by issuing promissory notes called scrip. This arises when the corporation
may have adequate retained earnings to meet the legal dividend requirements but has insufficient funds to disburse. If the
promissory note bears interest, this is charged to Interest Expense.
a. The sales account and the accounts receivable account are free of errors
D
b. The sales account and the accounts receivable account are free of materials errors
c. The sales account and the accounts receivable account are presented fairly in accordance with financial
reporting standards
d. The accounts balances affected by the cycle are fairly presented in accordance with financial reporting
standards.
2. For the most part, the audit of the sales and collection cycle
a. Cannot be performed until the audit of cash is completed
B
b. Can be performed independently of the audit of the other cycles
c. Must be performed simultaneously with the audit of the purchases and disbursement cycle
d. Must be performed first so that the audit of the other cycles can rely on the data
3. For the most part, the evidence gathered during the audit of the sales and collection cycle can be subjectively
combined with the other parts of the audit
A a. As the evidence accumulation process proceeds
b. Only when all fieldwork processes of the engagement are completed
c. Only after the audit of the sales and collections cycle is concluded
d. After the conclusion of both the cash cycle and the sales and collection cycle.
4. Which of the following is not typically included in the sales and collection cycle?
D a. Sales returns and allowances
b. Bad debt expense
c. Allowance for uncollectible accounts
d. Cash credits from the cash disbursement journal
5. The customer’s request for merchandise, the customer order, would be in the form of
a. An oral request
b. A written request on customer’s letterhead
c. A written request on pre-printed form
d. Any of the above three formats
6. A document for recording the description, quantity and related information for goods ordered by a customer is the
a. Customer order
b. Sales order
c. Shipping document
d. Remittance advice
7. The document used to indicate to the customer the amount of a sale and due date of the payment is the
a. Sales order
b. Shipping document
c. Bill of lading
d. Sales invoice
8. The document used as the basis for recording sales transactions and updating the accounts receivable master file is
the
a. Sales order
b. Bill of lading
c. Sales journal
d. Sales invoice
9. A document prepared to initiate shipment of goods sold is the
a. Sales order
b. Bill of lading
c. Sales invoice
d. Customer order
10. When posting the Sales Journal, details of the journal are posted to ____________; and journal totals are posted
to ____________.
a. The sales account; the general ledger
b. The accounts receivable master file; the general ledger
c. The sales account; the accounts receivable subsidiary ledger
d. The accounts receivable subsidiary account in the general ledger; the sales account in the general ledger.
11. The report which typically includes information analyzed by key components as sales person, product and territory
is the:
a. Remittance advice
b. Summary sales report
c. Accounts receivable master file
d. Monthly statement
12. The document which supports reductions in accounts receivable is
a. Remittance advice
b. Credit memo
c. Sales invoice
d. Monthly statement
13. The document which accompanies the customer’s payment and is used to permit the immediate deposit of cash to
improve the control over the custody of asset is the:
a. Credit memo
b. Remittance advice
c. Sales invoice
d. Monthly statement
14. The daily entry in the cash receipt journal are supported by the
a. Sales invoice
b. Shipping document
c. Remittance advice
d. Credit memo
15. A file for recording individual sales, cash receipt and sales returns and allowances for each customer is the:
a. Sales journal
b. Cash receipt journal
c. General ledger
d. Accounts receivable subsidiary ledger
16. A document sent to each customer showing their beginning accounts receivable balance and the amount and date
of each sale, cash payment received, credit memo issued, and the ending accounts receivable balance is the:
a. Accounts receivable subsidiary ledger
b. Monthly statement
c. Remittance advice
d. Sales invoice
17. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice
C
b. Approve the journal entry
c. Approve credit
d. Verify the unit price is accurate
18. For the most firms, the function of indicating credit approval is recorded on the
a. Customer order
B b. Sales order
c. Remittance advice
d. Sale invoice
19. Most companies recognize sales when
a. A customer order is received
B b. The merchandise is shipped
c. The merchandise is received by the customer
d. Cash is received on account
20. Which of the following would an auditor be concerned with when examining the billing function of client?
a. All shipments made have been billed
D b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All three are of concern
21. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible
A b. Customer files for bankruptcy
c. A collection agency cannot inspire customer to pay the debt
d. The account is at least six month old.
22. In many audits of sales transactions, no substantive tests of transactions are made for the completeness objective
on the ground that
a. Overstatements of assets and income are greater concern than understatement
A b. Understatements of assets and income are greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the reduced revenue
and net income is correct
d. The reduced sales causes a reduction of the accounts receivable therefore the ratios of the two financial
statements will not be misleading.
23. Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
a. Restrictions placed on sales by laws and regulations
D b. Decline in sales due to economic declines
c. Decline in sales due to product obsolescence
d. Over-recorded sales due to a lack of control over the sales entry function
24. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping document
D b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
25. Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?
a. Inaccurate billing due to a lack of controls
D b. Lapping of accounts receivable
c. Misbilling a client due to a data input error
d. Recording sales when the customer is likely to return the goods
26. Which of the following is an example of misappropriation of assets relating to sales?
a. Accidentally recording cash that represents a liability as revenue
D b. Holding the sales journal open to recorded next year’s sales as having occurred in the current year
c. Intentionally recording cash received from a new debt agreement as revenue
d. Theft of cash register sales
27. There is a presumption that auditors will confirm accounts receivable unless the auditor’s assessment of the risk of
material misstatement is low
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective
A b. And accounts receivable are composed of large accounts
c. And the effectiveness of confirmations is absolutely determined
d. Or accounts receivable are from extremely reputable customers.
28. To determine that all valid sales have been recorded, the auditors would select sample of transactions from the
__________; This is necessary to support the __________ assertion over sales.
a. Shipping documents file; Completeness
A b. Sales journal; Existence
which a confirmation ws not received that he would add all amounts shown for that customer on each validated
deposit slip for the two months following the balance sheet date. The major fault in the auditor’s procedure is
that”:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for confirmation of
B accounts receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the receivable at
the balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.
40. When scheduling the audit work to be performed on an engagement, the auditor should consider confirming
accounts receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
B b. Internal control over receivables is good
c. Negative confirmations are to be used
d. There is a simultaneous examination of cash and accounts receivable.
41. The auditor working paper often include a client-prepared aged trial balance of accounts receivable as of the
balance sheet date. This aging is best used by the auditor to ___________, which is relevant to gather evidence
regarding ____________ assertion on receivables.
a. Evaluation internal control over credit sales; Valuation
C b. Test of accuracy of recorded charge sales; Existence
c. Estimate credit losses; Valuation
d. Verify the validity of recorded receivables; Existence
42. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts
receivable?
a. Tracing amounts in the subsidiary ledger to details on shipping documents.
D
b. Comparing receivable turnover ratios to industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
43. Confirmation is most likely to be a relevant from of evidence with regard to assertions about accounts receivable
when the auditor has concerns about the receivables’
C a. valuation.
b. classification.
c. existence.
d. completeness.
44. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
a. no reply to a positive confirmation request is received.
A b. no reply to a negative confirmation request is received.
c. collectability of the receivables is in doubt.
d. pledging of the receivables is probable.
TOC & ST: Expenditure/Purchasing, Payroll and Production Cycles (Audit of Inventories, Trade Liabilities and
Accrued Expenses
1. Which of the following is least likely to be among the auditors’ objective in the audit of inventories and cost of
goods sold?
a. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods
b. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold
c. Establish that the client includes only inventory on hand at year-end in inventory totals
d. Establish completeness of inventories
2. The receiving department is least likely to be responsible for the:
a. Determination of quantities of goods received
b. Detection of damaged or defective merchandise
c. Preparation of a shipping document
d. Transmittal of goods received to the store’s department
3. The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of
the transportation agreement is the:
a. Bill of lading
b. Job time shipping
c. Production order
d. Production schedule
4. An auditor usually examines receiving reports to support entries in the
a. voucher register and sales returns journal.
b. sales journal and sales returns journal.
c. voucher register and sales journal.
d. check register and sales journal.
5. When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:
a. Existence and Valuation
b. Existence and Completeness
c. Completeness and Valuation
d. Presentation and Valuation
6. Instead of taking a physical inventory count on the balance sheet date, the client may take physical count prior to
the year-end if internal control is adequate and:
a. Well kept records of perpetual inventory are maintained
A b. Inventory is slow-moving
c. Computer error reports are generated for missing prenumbered inventory tickets
d. Obsolete inventory items are segregated and excluded.
7. The auditor’s analytical procedures will be facilitated if the client:
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a. The preparation of the payroll must be clear under the control of the personnel department
C b. The confidentiality of employee payroll data should be carefully protected to prevent fraud
c. The duties of hiring, payroll computation, and payment to employees should be segregated
d. The payment of cash to employees should be replaced by payment through checks.
19. No individual with access to time cards, payroll records or checks should also be permitted access to
a. Personnel records
A b. The computer
c. The canceled check file
d. Job time tickets
20. Controls should prevent those responsible for the preparation of payroll checks from all but which one of the
following activities?
a. Signing paychecks
D b. Distributing paychecks
c. Access to time cards
d. Access to the payroll journal
21. Which of the following is an effective internal control used to prove that production department employees are
property validating payroll time cards at a time-recording station?
a. Time cards should be carefully inspected by those persons who distribute pay envelopes to employees
C b. One person should be responsible for maintaining records of employee time for which salary payment is
not to be made
c. Daily reports showing tie charged to jobs should be approved by the supervisor and compared to the total
hours worked on the employee time cards
d. Internal auditors should make observations of distribution of paychecks on a surprise basis.
22. The signing and distribution of the checks must be properly handled to prevent their theft. Which of the following is
not an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the preparation of the payroll
B b. A check signing machine should not be used to replace a manual signature
c. Distribution of paychecks should be performed by someone who is not involved in the other payroll
function
d. Unclaimed paychecks should be immediately returned for redeposit
23. To minimize the opportunity for fraud, unclaimed salary checks should be:
a. Deposited in a special bank account
A b. Kept in the payroll department
c. Left with the employee supervisor
d. Held for the employee in the personnel department
24. Effective internal accounting control over unclaimed payroll checks that are kept by the treasury department would
include accounting department procedures that require
a. Effective cancellation and stop payment orders for checks representing unclaimed wages
D b. Preparation of a list of unclaimed wages on a periodic basis
c. Accounting for all unclaimed wages in a current liability account
d. Periodic accounting for the actual checks representing unclaimed wages
25. The most important means of verifying account balances int eh payroll and personnel cycle are:
a. Analytical procedures
C b. Test of controls
c. Test of details transaction
d. Test of details of balances
26. Which of the following would not be a justification for an auditor spending very little time performing tests of
transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background that the former one
A b. Employees will detect any underpayments
c. Payroll transactions are uniform and uncomplicated
d. Payroll transactions are extensively audited by government agencies.
27. Because of the lack of available evidence, it is usually difficult for an auditor to discover if an employee records
more time on his or her time card than actually worked. One procedure is
a. To reconcile the total hours paid this period with a previous period
B b. To reconcile the total hours paid according to the payroll records with an independent record of the total
hours worked, such as those maintained by production control
c. To reconcile the total hours worked this period with a previous period
d. To reconcile the total hours worked according to the summary payroll report with the total hours worked
as recorded on the time card for the period.
28. Control Objective 1: Recorded payroll payments are for work actually performed by non-fictitious employees.
Control Objective 2: Existing payroll transactions are recorded.
Control Objective 3: Recorded payroll transaction are for the amount of time actually worked and at the proper pay
rate; withholdings are properly calculated.
a. Completeness, Existence, Valuation
C b. Existence, Valuation, Completeness
c. Existence, Completeness, Valuation
d. Valuation, Completeness, Existence
29. Which of the following is test of controls in auditing payroll cycle?
a. Review the payroll journal, general ledger, an payroll earnings record for large or unusual amounts
B b. Examine time cards for indication of supervisor approval
c. Compare canceled check with payroll journal for name, amount and date
d. Examine canceled checks for proper endorsement.
30. Which of the following is substantive test of transaction in auditing payroll cycle?
a. Review personnel policies
43. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
a. This is a duplication of cutoff test
b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed
c. Correspondence with the audit client’s attorney will reveal all legal action by vendors for non-payment
d. There is likely to be other reliable external evidence available to support the balances.
44. When confirming accounts payable, the approach is most likely to be on of
a. Selecting the accounts with the larges balances at year-end, plus a sample of other accounts
b. Selecting accounts of companies with whom the client has previously done the most business, plus a
sample of other accounts
c. Selecting a random sample of accounts payable at year-end
d. Confirming all accounts.
45. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be
most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal
B b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts
c. Tracing totals from the purchases journal to the ledger accounts
d. Sending written quarterly confirmation to all vendors.
46. The least likely approach in auditing management’s estimate relating to accrued liability is to:
a. Independently develop an estimate of the amount to compare to management’s estimate
D b. Review and test management’s process of developing the estimate
c. Review subsequent events or transactions bearing on the estimate
d. Send confirmation relating to the estimate
ST: Investing Cycle (Audit of Investments, PPE, Intangibles and Other Non-current Assets)
1. In order to guard against the misappropriation of company-owned marketable securities, which of the following is
the best course of action that can be taken by a company with a large portfolio of securities?
a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping are
where securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in a log the exact
reason for their access
c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for
securities on a current basis
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a
custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of directors decided to
purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial
executive. The best person or persons to make periodic reviews of the investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representative be present in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank where the securities are held in a safe deposit box should be asked to
a. verify differences between the contents of the box and the balances in the client’s subsidiary
ledger.
b. provide a list of securities added and removed from the box between the balance-sheet date and
the security count date.
c. confirm that there has been no access to the box between the balance sheet date and the
security-count date.
d. count the securities in the box so the auditor will have an independent direct verification.
6. Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about
fixed asset additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirmation ownership and corroborating transactions through inquiries client personnel.
7. An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion
that all
a. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
b. Capitalizable costs for property and equipment have not been charged to expense.
c. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
d. Expenditures for property and equipment have been recorded in the proper period.
8. Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related
mortgage acquisition costs would be least likely to include an examination of the related.
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A a. deed.
b. cancelled checks.
c. closing statement.
d. interest expense.
9. When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not
available for inspection. The policy’s absence most likely indicates the possibility of a (an)
C a. insurance premium due but not recorded.
b. deficiency in the coinsurance provision.
c. lien on the plant equipment.
d. understatement of insurance expense.
10. To assure accountability for fixed asset retirements, management should implement an internal control that
includes:
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds form sale of the plant assets
C b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired
c. Utilization of serially numbered retirement work orders
d. Periodic observation of plant assets by the internal auditors.
11. Which of the following is an internal control weakness related to factory equipment
a. Checks issued in payment of purchases of equipment are not signed by the controller
B b. All purchases of factory equipment are required to be made by the department in need of the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as indicated in
depreciation schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
12. To strengthen internal control over custody of heavy mobile equipment, the client would most likely institute a
policy requiring a periodic:
a. Increase in insurance coverage
B b. Inspection of equipment and reconciliation with accounting records
c. Verification of liens, pledges and collateralizations
d. Accounting for work orders.
13. The auditors may conclude that depreciation charges are insufficient (understated) by noting:
a. Insured values greatly in excess of book values
b. Large amounts of fully depreciated assets
c. Continuous trade-ins of relatively new assets
d. Excessive recurring losses on assets retirements.
14. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to
property, plant and equipment are not understated?
a. Depreciation
b. Accounts payable
c. Cash
d. Repairs and maintenance
15. The auditors are most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts
b. Appropriateness of physical inventory observation
c. Existence of obsolete machinery
d. Deferral of procurement of certain necessary insurance coverage.
16. Which of the following statements is not typical of property, plant and equipment as compared to most current
asset accounts?
a. A property, plant and equipment cutoff near year-end has more significant effect on net income
b. Relatively few transactions occur in property, plant and equipment during the year
c. Auditors normally elect direct substantive testing rather than test of controls in auditing property, plant
and equipment accounts.
d. Property, plant and equipment accounts typically has higher peso value.
17. For the audit of a continuing non-public client, the emphasis for testing for property accounts is on:
a. All transactions resulting in the ending balance
C b. Test of controls over disposal
c. Transactions that occurred during the year
d. Performing analytical procedures on beginning balances of the accounts.
18. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of
equipment?
a. Accumulated depreciation
A b. Cost of goods sold
c. Purchase returns and allowances
d. Purchase discounts.
19. An effective procedure for identifying unrecorded retirements of equipment is to ________. This is consistent with
the audit objective of gathering evidence to support __________ assertion on PPE.
a. Foot related property; Existence
b. Recalculate depreciation on related equipment; Valuation
c. Select items of equipment in the accounting records and then locate then in the plant; Existence
d. Select items of equipment while conducting ocular inspections on plants and then locate them in the
accounting records; Completeness
20. If the auditor believes that there is a high likelihood of significant missing permanent assets that are still recorded
on the accounting records, an appropriate procedure is to select a sample from the assets master file and examine
a. The documents verifying the acquisition
b. The assets
c. All the related journal entries
d. The accumulated depreciation calculations
21. Because failure to record disposal of manufacturing equipment can significantly affect the financial statements, the
search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the disposal of assets.
C b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review the plant modifications and changes in product line, taxes or insurance coverage.
22. When an asset is sold or disposed of without having been traded in for a replacement asset, the valuation of the
transaction can be verified by examining the related
a. Purchase order and property master file
B b. Sales invoice and property master file
c. Sales invoice and merchandise inventory listing
d. Purchase order and merchandise inventory listing
23. Which of the following is not an overall test of the annual provision for depreciation expense?
a. Compare rates used in the current year with those used in the prior years.
C b. Test computation of depreciation provisions for a representative number of units
c. Test deductions from accumulated depreciation for assets purchased during the year
d. Perform analytical procedures
24. Which of the following is the least audit objective when auditing manufacturing equipment and the related
depreciation and accumulated depreciation?
a. To determine whether costs and related depreciation for all significant retirements, abandonments, and
C disposals of property have been properly recorded
b. To determine whether the balances in the property accounts, including the amounts carried forward from
the preceding year, are properly stated
c. To determine whether additions represent properties that are installed, constructed or rented
d. To determine whether the balances in accumulated depreciation accounts are reasonable, considering
expected useful lives of property units and possible net salvage values
25. The emphasis in auditing manufacturing equipment for a continuing audit is on the verification of
a. The balance carried forward in the account form previous period (beginning balance)
B b. Current period acquisitions and retirements
c. The balance in the account after the current year’s activities are considered (ending balance)
d. All of these.
26. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior periods because
a. It will not affect the current valuation
B b. They were verified in previous audits
c. The related depreciation calculations for the current period are more important
d. The emphasis of the audit is on the income statement items not he balance sheet items.
27. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects
the balance sheet
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
28. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects
the income statement
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
29. The test of details of balances procedure which “physically examine assets” is done to satisfy the audit objective of:
a. Classification
D b. Completeness
c. Cutoff
d. Validity
30. The test of details of balances procedures to “examine vendors’ invoices of closely related accounts such as repairs
and maintenance to uncover items that should be manufacturing equipment” is done to satisfy the audit objective
of:
a. Classification
A b. Valuation
c. Cutoff
d. Validity
31. The most common audit test to verify additions to manufacturing equipment is examination of vendor’s invoices
and receiving reports. The appropriate procedure is:
a. Verifying
D b. Tracing
c. Dual referencing
d. Vouching
32. It should ordinarily be unnecessary to examine supporting documentation for each addition to manufacturing
equipment, but it is normal to verify:
a. All large transactions
D b. All unusual transactions
c. A representative sample of typical additions
d. All of these
33. The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs
expense, lease expense or supplies is a common client error. The auditor should evaluate the likelihood of these
type of error/misclassifications in conjunction with:
The bank reconciliation prepared by the client’s cashier included the following items:
Cash per records, December 31, 2018 P726,600
Cash per bank statement, December 31, 2018 792,285
Note receivable collection by the bank in December, recorded in the books
in January 3 20,000
Bank service charge for December, recorded in books in January 3 5,000
Outstanding checks, including P11,900 disbursement check certified by 87,875
the bank
Check of Jude Corp., charged by the bank in error on December 28, 2018;
corrected by the bank on January 2, 2019 2,250
Deposit in transit, including P5,200 customer collection check marked NSF 15,700
From January 2, 2019, to January 15, 2019, the date of your cash count, total cash receipts appearing in the cash
records amounted to P180,500. During the same period, deposits clearing the bank amounted to P143,895. The
following cash and cash items were on hand at the close of business on January 15, 2019:
Currency P4,275
Customers’ checks 5,850
Expense vouchers 1,125
Audit notes:
a. Cash collections from accounts receivable were erroneously recorded by the company as follows:
Date
7/05/18 Allowance for bad debts 12,000
Accounts receivable 12,000
12/10/18 Inventory 9,000
Accounts receivable 9,000
12/15/18 Bad debt expense 10,500
Accounts receivable 10,500
b. Check deposit on January 5, 2019, amounting to P6,000 was not recorded in the books.
c. Undeposited collections on January 10, 2019 amounting to P13,500 was also not recorded in the books.
Requirements:
1. What is the correct cash in bank balance as of December 31, 2018?
a. 729,060 c. 778,110
b. 773,110 d. 726,810
2. What is the net adjustment to cash as of December 31, 2018?
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a. 46,500 c. 44,040
b. 2,460 d. 4,620
3. What is the cash shortage as of December 31, 2018?
a. 2,460 c. 44,040
b. 46,500 d. 4,620
4. What is the total cash shortage as of January 15, 2019?
a. 81,645 c. 44,040
b. 37,605 d. 4,620
Audit notes:
a. Bank reconciliation in June included the following information: Bank statement balance, June, P207,990;
Deposits in transit, P18,000; Outstanding checks, P52,260, and; Balance per general ledger, June, P138,330.
June bank service charge, P4,600 and June Note Collection by the bank in behalf of Rosas Inc. (recorded in
the books only in July), P40,000.
b. A check for P31,800 cleared the bank, but had not been recorded in the cash disbursement journal. It was for
a payment of an accounts payable.
c. A check for P11,880 was erroneously charged by the bank to Rosas Inc.
d. Deposits included P18,000 from June and P758,680 from July. From the July deposits, reconciliation revealed
that P25,000 has not been recorded per books yet as these were direct deposits by the customer taking
advantage of the company’s bank lockbox services.
e. The bank charged Rosas Inc.’s account for a non-sufficient-fund check totaling to P9,330. The credit manager
concluded that the customer intentionally closed its account and the owner left the city. The check was turned
over to a collection agency.
f. A note for P174,000, plus interest, was paid directly by the bank under an agreement signed four months ago.
Required: Based on your audit procedures and appreciation of the above data, answer the following:
1. How much is the deposit in transit as of July 31?
a. 20,940 c. 18,000
b. 30,000 d. 20,000
2. How much is the total outstanding checks as of July 31?
a. 31,820 c. 29,940
b. 41,820 d. 10,020
3. What is the correct cash in bank balance as of July 31?
a. 32,820 c. 20,940
b. 45,940 d. 9,060
Requirements:
1. What is the accrual basis gross sales?
a. 55,750,000 c. 56,170,000
b. 55,000,000 d. 56,580,000
2. What is the accrual basis gross purchases?
a. 31,520,000 c. 30,880,000
b. 30,008,000 d. 29,368,000
3. What is the accrual basis cost of sales?
a. 24,068,000 c. 23,428,000
b. 24,940,000 d. 25,580,000
4. What is the correct bad debt expense for the year?
a. 1,540,000 c. 1,960,000
b. 700,000 d. 140,000
5. What is the correct depreciation expense?
a. 2,400,000 c. 1,600,000
b. 2,000,000 d. 1,400,000
ACCOUNT DECREASES
Inventory 1,000,000
Notes receivable 600,000
Summary of cash transactions were as follows:
RECEIPTS:
Cash sales 3,000,000
Collections on accounts receivable 30,000,000
Collections on notes receivable 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 500,000
DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Additional information:
a. Total purchase returns and allowances amounted to P800,000
b. Total sales returns and allowances amounted to P1,200,000.
What is the accrual basis Net Sales?
a. 37,000,000 c. 36,600,000
b. 36,200,000 d. 35,800,000
What is the total amount extended to DEF on January 1, 2017 and the outstanding balance of the loan as of
December 31, 2018.
a. 4,826,745 and 4,952,830 c. 4,754,134 and 4,908,330
b. 4,789,382 and 4,866,349 d. 5,000,000 and 5,000,000
A count of all inventories within the premises was made on December 30, 2018. The total cost of the count was
recorded as inventories as of December 30, 2018. Half of the goods shipped to consignee on December 26 are still
unsold at December 31. The agreed commission on consignment sales is 20% of the sales price.
The unadjusted ledger balances show the following:
Accounts receivables P376,500
Inventories 525,000
Sales 1,520,000
Cost of sales 942,000
Purchases Cutoff:
DECEMBER 2021
Dates Mdse.
F.O.B. Terms Shipped Received Invoice No. Amount
1) Destination Dec. 23 Dec. 26 1401 P 250
2) Shipping point Dec. 24 Dec. 30 9176 310
3) Shipping point Dec. 24 Dec. 31 0010 180
4) Destination Dec. 24 Dec. 29 1307 550
5) Destination Dec. 26 Jan. 2 6609 690
6) Destination Dec. 26 Dec. 31 6610 420
JANUARY 2022
7) Destination Dec. 26 Jan. 2 7611 680
8) Shipping point Dec. 27 Dec. 28 7711 460
9) Destination Dec. 27 Dec. 29 9001 770
10) Shipping point Dec. 28 Jan. 2 8345 205
11) Shipping point Jan. 1 Jan. 3 4678 315
Requirements:
1. What is the net adjustment to accounts receivable?
a. (6,900) c. (14,000)
b. 12,000 d. (16,900)
2. What is the net adjustment to accounts payable?
a. (690) c. 540
b. 745 d. 1,060
3. What is the net adjustment to inventories?
a. (2,900) c. (465)
b. 2,435 d. 565
4. What is the net adjustment to net income?
a. (9,800) c. 1,690
b. 4,500 d. (8,110)
Requirements:
1. What is the estimated inventory as of December 31, 2018 at retail price as a result of the analytical
procedure?
a. 5,680,548 c. 4,645,950
b. 6,574,788 d. 7,170,948
2. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
conservative cost method?
a. 312,612 c. 369,417
b. 804,933 d. 539,832
3. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
average cost method?
a. 1,058,487 c. 596,637
b. 539,832 d. 312,612
4. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
FIFO retail cost method?
a. 426,222 c. 539,832
b. 483,027 d. 381,225
Work-in-process
Cost of raw materials to date P120,000 P88,000 P200,000
Cost of direct labor to date 70,000 60,000 80,000
Cost of factory overhead to date 50,000 40,000 40,000
Selling price upon completion 360,000 289,000 735,000
Estimated cost to complete 48,000 97,650 74,000
Replacement cost 208,000 168,000 375,000
Normal profit margin as % of selling price 25% 35% 40%
Requirements:
1. What is the correct balance of the Accounts Payable trade as of December 31, 2021?
a. 1,170,000 b. 1,120,000 c. 1,100,000 d. 1,220,000
2. What is the balance of the Estimated Warranties Liabilities as of December 31, 2020?
a. 810,000 b. 1,350,000 c. 3,700,000 d. 2,790,000
3. What is the correct Warranties Expense to be reported in 2021?
a. 3,348,000 b. 2,160,000 c. 990,000 d. 1,800,000
4. What is the correct Accrued Liability for Compensated Absences as of December 31, 2021?
a. 360,000 b. 445,500 c. 405,000 d. 396,000
5. What is the correct deferred tax liability as of December 31, 2021?
a. 44,000 b. 362,000 c. 388,000 d. 358,400
6. What is the correct Accrued Bonus to key officers as of December 31, 2021?
a. 271,901 b. 256,569 c. 244,330 d. 266,773
Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due
to the foundations being too close to a neighboring property. All the above costs are included in cost of sales.
The building was brought into immediate use upon completion and has an estimated useful life of 20 years
(straight-line depreciation).
(d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding
the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors
wish these values to be incorporated into the financial statements. The properties had an estimated remaining
life of 20 years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to
retained earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2018 has not yet been accounted for the in the draft financial statements.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the new warehouse as of December 31, 2018 is
a. 987,500 c. 1,000,000
b. 869,250 d. 950,000
2. The carrying amount of plant as of December 31, 2018 is
a. 1,710,000 c. 1,282,500
b. 1,375,310 d. 1,350,000
3. The total depreciation for the year ended December 31, 2018 is
a. 740,000 c. 380,000
b. 735,750 d. 736,250
4. The revaluation surplus as of December 31, 2018 is
a. 1,720,000 c. 1,800,000
b. 1,710,000 d. 960,000
Audit notes:
a. A four-year old automotive equipment with an original cost of P2,100,000 was traded in for a new
automotive equipment having a cash price of P1,600,000 at the beginning of 2016. The company paid
additional cash of P850,000. The new automotive equipment was recorded by the company at the cash
payment made.
b. A machinery which was acquired on January of 2012 was totally destroyed by a fire on June 30, 2016. The
machinery was originally acquired at a cost of P1,800,000.
c. A replacement machinery was acquired on September 1, 2016 on installment basis. The total installment
price is P3,837,054 and is payable five equal annual installments beginning September 1, 2016. The
company issued a non-interest bearing note in lieu of the machinery. There is no established price for the
machinery. The prevailing market rate of interest for similar securities on the transaction date was at 10%.
d. Major improvements on the building’s electrical wiring system was incurred at the beginning of the year. The
total cost amounting to P1,250,000 was recognized as outright repairs and maintenance expense.
e. The beginning balance of the automotive equipment would have been depreciated at total of P511,111 for
the year.
f. Salvage value of the assets are considered immaterial.
Requirements:
1. What is the gain or loss from the trade in transaction in item a?
a. 266,667 c. 125,000
b. 166,667 d. 1,016,667
2. What is the correct depreciation expense on the building for 2016?
a. 698,108 c. 687,691
b. 656,441 d. 531,441
3. What is the correct depreciation expense on machinery and equipment for 2016?
a. 572,550 c. 546,970
b. 577,902 d. 556,667
4. What is the correct depreciation expense on automotive equipment for 2016?
a. 455,555 c. 575,000
b. 633,333 d. 466,667
Required:
1. What is the recoverable value of the asset on December 31, 2015?
a. 213,397 b. 236,722 c. 220,000 d. 320,000
2. How much impairment loss should be recognized on December 31, 2015?
a. 133,278 b. 156,603 c. 150,000 d. 0
3. What is the asset’s carrying amount on December 31, 2017, before revaluation?
a. 160,050 b. 177,525 c. 190,042 d. 172,548
4. How much impairment recovery should be reported in the 2017 income statement?
a. 155,475 b. 99,958 c. 142,975 d. 117,450
5. What is the depreciation expense in 2019, under the cost method?
a. 41,625 b. 36,250 c. 37,875 d. 30,000
6. What is the depreciation expense in 2019, under the revaluation method?
a. 41,625 b. 36,250 c. 37,875 d. 30,000
7. What is the balance of any revaluation surplus at the end of 2019, under the piecemeal realization?
a. 47,250 b. 55,125 c. 52,500 d. 63,000
The following information relate to accounts that may yet require adjustment:
Item 1:
Patents for Sabrina’s manufacturing process were purchased January 2, 2018, at a cost of P68,000. An additional
P17,000 was spent in December 2018 to improve machinery covered by the patents and charged to the Patents
account. The patents had a remaining legal term of 17 years.
Item 2:
On January 3, 2017, Sabrina purchased two licensing agreements; at that time they were believed to have unlimited
useful lives. The balance in the Licensing Agreement – A account included its purchase price of P48,000 and P2,000
in acquisition expenses. Licensing agreement – B also was purchased on January 3, 2017, for P50,000 but it has been
reduced by credit of P1,000 for the advance collection of revenue from the agreement.
Item 3:
In December 2017, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value
of Licensing Agreement – A, and in January 2019, a flood caused additional damage, which rendered the agreement
worthless.
Item 4:
A study of Licensing Agreement – B made by Sabrina in January 2018 revealed that its estimated remaining life
expectancy was only 10 years as of January 1, 2018.
Items 5:
The balance in the Goodwill account includes P24,000 paid December 30, 2017, for an advertising program, which it
is estimated will assist in increasing Sabrina’s sales over a period of four years following the disbursement.
Item 6:
The Leasehold Improvement account includes (a) the P15,000 cost of improvements with a total estimated useful life
of 12 years, which Sabrina, as tenant made to leased premises in January 2017; (b) movable assembly-line equipment
Questions:
1. Patents will have an audited balance as of December 31, 2018 of
a. 85,000 c. 66,000
b. 64,000 d. 46,000
2. The adjusted balance of Licensing Agreement – A as of December 31, 2018 is
a. 20,000 c. 10,000
b. 0 d. 50,000
3. The adjusted balance of Licensing Agreement – B as of December 31, 2018 is
a. 66,000 c. 45,000
b. 85,000 d. 64,000
4. Leasehold improvements, net of amortization, audited balance as of December 31, 2018 is
a. 12,000 c. 13,500
b. 15,000 d. 26,000
Requirements:
1. What is the amount to be capitalized as an asset for the lease of the machinery?
a. 2,759,130 b. 2,240,170 c. 2,293,450 d. 2,448,656
2. What is the carrying value of the leased asset as of December 31, 2018?
a. 2,040,547 b. 1,958,925 c. 2,448,656 d. 2,244,601
3. What is the correct total noncurrent liabilities to be presented in the 2018 Statement of Financial Position?
a. 5,842,069 b. 6,193,897 c. 7,336,271 d. 6,049,341
4. What is the correct total current portion of long-term debts to be presented in the 2018 Statement of
Financial Position?
a. 1,500,000 b. 1,896,148 c. 1,860,134 d. 2,005,457
5. What is the total interest expense to be reported in the 2018 income statement?
a. 1,026,097 b. 1,009,211 c. 1,062,111 d. 662,111
Required:
1. What is the correct debit to the accumulated profits as a result of the stock dividends declared in item a?
a. 6,800,000 c. 4,800,000
b. 1,000,000 d. 2,000,000
2. What is the total debit to the accumulated profits account as a result of the declaration and distribution of the
property dividends in item b?
a. 10,000,000 c. 8,000,000
b. 12,500,000 d. 12,000,000
3. What is the adjusted balance of the company’s Accumulated profit account at the end of year?
a. 21,600,000 c. 16,400,000
b. 18,400,000 d. 26,400,000
4. What is the balance of the ordinary shares account as of December 31, 2018?
a. 20,800,000 c. 18,000,000
b. 14,000,000 d. 16,000,000
Audit Notes
a. The 15% stock dividends were declared on November 1, 2018 distributable to stockholders as of December
1, 2018 distributable on January 15, 2019. Spur’s stocks were selling at P110 on November 1
b. The company’s Share premium from treasury stock transaction account amounted to P850,000.
c. The company’s management decided to change its inventory costing method from the weighted average to
the FIFO approach during the current year. The inventory balances under the two methods are as follows:
AVERAGE FIFO
Beginning 2,500,000 2,600,000
Ending 1,900,000 2,200,000
The company, however, is yet to effect the said change in its current financial statements.
3/1 Issued 3,000 ordinary shares for legal service performed. The value of the legal services was
P100,000. The shares are actively traded on a stock exchange and valued on 3/1 at P32 per
share.
12/30 Declared and paid a dividend of P0.20 per share on ordinary shares and a 6% dividend on the
preference shares.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total share premium as of December 31, 2018
a. 4,333,000 c. 4,337,000
b. 1,733,000 d. 4,348,000
2. Total retained earnings as of December 31, 2018
a. 501,000 c. 602,000
b. 516,000 d. 279,000
3. Total equity as of December 31, 2018
a. 5,535,000 c. 5,621,000
b. 5,539,000 d. 5,550,000
4. Basic earnings per share for the year 2018
a. 3.20 c. 2.69
b. 1.60 d. 2.11
5. Diluted earnings per share for the year 2018
a. 2.11 c. 2.25
b. 1.48 d. 1.90
PROBLEM 29: AUDIT OF EQUITY ACCOUNTS
Presented below is the statement of financial position of Diesel Corporation prepared by the chief accountant for the
current year, 2018.
Diesel Corporation
Statement of Financial Position
December 31, 2018
Current assets P 435,000
Investments 640,000
Property plant, and equipment 1,720,000
Intangible assets 305,000
P3,100,000
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following to be reported on the
company’s statement of financial position as of December 31, 2018:
1. Current assets
a. 588,000 c. 534,000
b. 574,000 d. 548,000
2. Noncurrent investments
a. 560,000 c. 830,000
b. 520,000 d. 790,000
3. Property, plant and equipment
a. 1,615,000 c. 1,450,000
b. 1,885,000 d. 1,720,000
4. Total assets
a. 3,079,000 c. 2,814,000
b. 2,979,000 d. 3,093,000
5. Current liabilities
a. 229,000 c. 210,000
b. 224,000 d. 215,000
PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC FINANCING CORP. (Ans. C)
DEF Corp, 10% - Trade receivable, Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2017:
Cash 4,754,134
Loans receivable 4,754,134
Fair value = Loan proceeds (PV of cash flows at 6% semi-annual eff. rate for 6 semi-annual pds)
Principal: (5,000,000*0.704961) 3,524,803
Interest: (250,000*4.917324) 1,229,331
Total 4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int. Nominal Int. Amort. Balance
January 1, 2017: 4,754,134
June 30, 2017: 285,248 250,000 35,248 4,789,382
December 31, 2017: 287,363 250,000 37,363 4,826,745
June 30, 2018: 289,605 250,000 39,605 4,866,349
December 31, 2018: 291,981 250,000 41,981 4,908,330
June 30, 2019: 294,500 250,000 44,500 4,952,830
December 31, 2019: 297,170 250,000 47,170 5,000,000
3. Ans. D.
Depreciation - Machinery and equipment
Beginning Balance (5.4M - 1.8M) 3,600,000
Divide by: useful life 10 360,000
Machinery destroyed by fire 1,800,000
Divide by: useful life 10
Multiply by: 6mos/12mos 6/12 90,000
Replacement machinery 3,200,000 *
Divide by: useful life 10
Multiply by: 4mos/12mos 4/12 106,667
Total depreciation expense 556,667
* PV of installment payments:
Installment price 3,837,054
Divide by: 5 years 5
Installment payment, in advance 767,411
Multiply by: PV of 1 at 10% for 5 periods in advance 4.169865 0.68301
Cash price equivalent/Initial cost of the new machine 3,200,000
4. Ans. B.
Depreciation - Automotive equipment
Beginning Balance 511,111
Less: Depreciation on old equipment traded out
P2,100,000*4/36 (233,333)
Add: Depreciation on new equipment traded in
P1,600,000*8/36 355,556
Total depreciation expense 633,333
2. Ans. C.
Impairment loss:
Copyright:
Carrying value 400,000
Recoverable value/Value in use (P8,000 / 5%) 160,000 240,000
Tradename
Carrying value 350,000
Recoverable value/Value in use (P15,000 / 5%) 300,000 50,000
3. Ans. D.
Goodwill before impairment loss 900,000
Impairment of the CGU entirely attributed to Goodwill (181,211)
Carrying value of Goodwill after impairment loss 718,789
4. Ans. B.
Patent, 12/31/18 (P200,000 - P20,000) 180,000
Computer software (P100,000 - P50,000) 50,000
Copyright 160,000
Tradename 300,000
Carrying Value of Intangibles as of 12/31/18 690,000
2. Ans. A.
CV, Franchise, 12/31/15: P252,000*6.5yrs/8yrs 204,750
3. Ans. C.
Amortization of franchise, 2017 (P252,000/8yrs)*6/12 15,750
Rent expense, 2017 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2017 96,000
Retroactive adjustment to RE,beg. 2018 132,750
4. Ans. C.
Amortization of franchise, 2018 (P252,000/8yrs) 31,500
Rent expense, 2018 (P168,000/2yrs) 84,000
Amortization of patent, 2018 (P444,000/10yrs) 44,400
Cost to develop a secret formula 450,000
Legal fees - successful defense 75,900
Research and development expense, 2018 960,000
Total expense in 2018 1,645,800
4. Ans. A.
Correct cost of Leasehold Improvement 1/1/17 15,000 *
Accumulated Depreciation: (15,000/10yrs)*2yrs (3,000) **
Carrying Value as of December 31, 2018 12,000
*The initial cost excluded the movable equipment which shall be recognized separately and the
real property taxes paid by Sabrina which shall be recognized as an advances to the lessor.
**Depreciation is over the lease term since it is shorter that the life
2. Ans. D.
Capitalized cost of the asset: 12/31/17 2,488,656
Accumulated depreciation (2018) (2,488,656/12) (over useful life) (408,109)
Carrying value (12/31/2018) 2,244,601
1. Ans. A.
2. Ans. A.
3. Ans. A.
Paid-in Capital
Ordinary shares 143,000
Preference shares 1,000,000 1,143,000
Additional paid-in capital/Share premium 4,333,000
Contributed Capital 5,476,000
Accumulated profits - appropriated for treasury 442,000
Accumulated profits - unappropriated 59,000 501,000
Treasury shares (442,000)
Total Stockholders' Equity 5,535,000
4. Ans. C.
Net income 380,000
Less: PS Dividends (60,000)
Net income to ordinary shares 320,000
Divide by: Weighted average ordinary shares outstanding* 118,750
Basic Earnings Per Share 2.69
1/1 Beginning balance (100,000*12/12) 100,000
3/1 OS issue for services (3,000 * 10/12) 2,500
7/1 OS Share issue for cash (40,000 * 6/12) 20,000
10/1 Reacquisition of TS (16,000 * 3/12) (4,000)
12/1 Reissue of Treasury shares (3,000 * 1/12) 250
Weighted average ordinary shares oustanding 118,750 *
5. Ans. C.
Net income 380,000
Divide by: Weighted average ordinary shares outstanding** 168,750
Diluted Earnings per Share 2.25
Weighted average ordinary shares oustanding 118,750
Additional OS from assumed PS conversion on 1/2 50,000
Weighted average ordinary shares oustanding 168,750 **
*note that the land held for future use was classified as LT investment instead of PPE. Had it been a land held as a future
plant site, it would have been appropriately included in PPE instead.