Auditing Problems Roque 2023-2024

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AUDIT OF CASH & CASH

EQUIVALENTS
(Audit Program for Cash)
Audit Objectives:
To determine that:
1. Cash balances at the end of the reporting period represent cash and cash items on hand, in
transit to, or in depository banks.
2. Cash transactions have been properly recorded.
3. Cash balances are properly described and classified, and adequate disclosures with
respect to amounts restricted as to withdrawal are made in the financial statements.
Audit Procedures:
1. Conduct a cash count of undeposited collections, petty cash, and other funds.
● Obtain custodian’s signature to acknowledge return of items counted.
● Reconcile items counted with general ledger balances.
● Trace undeposited collections counted to bank reconciliation.
● Follow up dispositions of items in cash counted:
⮚ Undeposited collections should be traced to bank deposits.
⮚ Check accommodated in petty cash should be deposited after the count to
establish their validity.
⮚ IOUs in the petty cash should be confirmed and traced to collections in the next
payroll period.
⮚ Expense vouchers should be traced to the succeeding replenishment voucher.
● Coordinate cash count with count of marketable securities and other negotiable assets
of the client.
● Obtain confirmation of year-end fund balances of cash not counted in branches or
other offices.
2. Confirm bank balances by direct correspondence with all banks in which the client has
had deposits and loans during the year.
3. Obtain bank reconciliation.
● Check arithmetical accuracy of reconciliation.
● Trace balance per book to the general ledger balance of cash account.
● Trace balance per bank-to-bank statement and compare with amount confirmed by
bank.
● Establish authenticity of reconciling items by reference to their respective sources,
like:
⮚ Bank debit or credit advices.
⮚ Duly approved journal vouchers.
● Investigate checks outstanding for a long period of time.
⮚ Consider adjustment, especially if the check is already stale.
⮚ Consider the possibility of an erroneous preparation of the check.
● Investigate any unusual reconciling items.
● Where internal control over cash is weak, consider preparing a proof of cash
reconciliation.
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4. Obtain cutoff bank statement showing the client’s transactions with the bank at least one
week after the reporting date, and:
● Trace year-end reconciling items, like:
⮚ Deposit of the year-end undeposited collections.
⮚ Completeness of year-end outstanding checks.
⮚ Corrections of bank errors.
● Examine supporting documents of year-end outstanding checks that did not clear in
the cutoff bank statement.
PROBLEM 1 – 1 – Cash and Cash Equivalents

In connection with your annual audit of VICKAY Company’s financial statements for the
year ended December 31, 2023, you have extracted the following information from your
client’s accounting records.
Cash on hand (Note 1) P 1,200,000
Petty cash fund (Note 2) 10,000
Balanghay Bank current account (Note 3) 980,000
Solid Bank current account No.1 460,000
Solid Bank current account No.2 (100,000)
Lagaslas Bank savings account (Note 4) 1,500,000
Time Deposit (90 days) - BDO 2,000,000
Note 1 – Cash on hand included the following:

a. PHLPOST money orders from various customers, P300,000.
b. A customer check for P50,000 was returned by the bank on December 29, 2023, due
to insufficient fund but was subsequently redeposited and cleared by the bank on
January 6, 2024.
c. The Cash Receipts Journal was held open until January 10, 2024, during which time
P300,000 was collected and recorded on December 31, 2023.
d. A customer check for P30,000 dated January 30, 2024, received on December 27,
2023.
Note 2 – The Petty Cash Fund consisted of the following items on December 31, 2023.
a. Bills and coins P 3,000
b. Unreplenished petty cash disbursements 1,000
c. Employees’ IOUs 500
c. Currency in an envelope marked “employees’ contributions 1,500
for charity”
d. Check drawn by Vickay Company, payable to the petty 4,000
cash custodian.
P 10,000
Note 3 – Included among the checks drawn by Vickay Company against the Balanghay Bank
current account are the following:
a. A check written and dated December 23, 2023, and delivered to payee on January 29,
2024, P30,000.
b. A check written on December 28, 2023, dated January 3, 2024, delivered to payee on
December 29, 2023, P75,000.
Note 4 – Vickay’s savings account deposit in Lagaslas Bank has been earmarked for the
acquisition of a state-of-the-art manufacturing equipment within the next couple of months.
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Based on the proceeding information, compute for the adjusted balances of the following:
1. Cash on hand
A. P1,170,000 C. P870,000
B. P823,000 D. P820,000
2. Petty cash fund

A. P8,500 C. P8,000
B. P7,000 D. P10,000
3. Balanghay Bank current account

A. P1,085,000 C. P1,055,000
B. P1,010,000 D. P980,000
4. Cash and cash equivalents

A. P4,272,000 C. P4,273,500
B. P4,372,000 D. P4,322,000
SOLUTION 1 – 1
1. Cash on hand per books P 1,200,000
Customer NSF check (50,000)
January 2024 collections recorded in December 2023 (300,000)
Customer PDC check (30,000)
Cash on hand, as adjusted P 820,000
Answer: D
2. Bills and coins P 3,000

Replenishment check 4,000
Adjusted petty cash P 7,000
Answer: B
3. Balanghay Bank Current Account

Balance per books P 980,000
Undelivered/Unreleased disbursement check 30,000
Post-dated check delivered 75,000
Adjusted balance P 1,085,000
Answer: A
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4. Cash on hand (see no.1) P 820,000

Petty cash fund (see no.2) 7,000
Balanghay Bank current account (see no.3) 1,085,000
Solid Bank current account no. 1 460,000
Solid Bank current account no. 2 (100,000)
Time deposit – BDO 2,000,000
Total cash and cash equivalents P 4,272,000
Answer: A

Your audit of the December 31, 2023, financial statement of DIONISIO CORP. reveals the
following:
Current account at Prime Bank P (30,000)
Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity date is Dec. 31, 2024) 1,500,000
Payroll account 390,000
Foreign bank account – restricted (translated using the
December 31, 2023, exchange rate) 2,000,000
Postage stamps 1,250
Employee’s postdated check 4,500
IOU from the vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveler’s check 21,000
Money order 12,900
Petty cash fund (P3,000 in currency and expense receipts for P12,000) 15,000
What amount would be reported as cash and cash equivalents in the statement of financial
position on December 31, 2023?
A. P840,050 C. P849,400
B. P873,900 D. P861,900
SOLUTION 1 – 2
Current account at Prudent bank P 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Payroll account 390,000
Traveler’s check 21,000
Money order 12,900
Petty cash fund 3,000
Total cash and cash equivalents P 861,900
Answer: D
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PROBLEM 1 – 3
The accountants of SANTIAGO COMPANY is in the process of preparing the company’s
financial statements for the year ended December 31, 2023. He is trying to determine the
correct balance of cash and cash equivalents to be reported as a current asset in the statement
of financial position. The following items are being considered:
● Balances in the company’s accounts at the Metropolitan Bank:
⮚ Current account P 81,000
⮚ Savings account P 132,600
● Undeposited customer checks of P22,200 (including a customer check dated

January 2, 2024, for P3,000).
● Currency and coins on hand of P3,480.
● Savings account at the Northern Philippines Bank with a balance of P2,400,000.

This account is being used to accumulate cash for future plant expansion (in 2024).
● Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers for P2,800).
● P120,000 in a current account at the Northern Philippines Bank. This represents a

20% compensating balance for P600,000 loan with the bank. Santiago Company is
legally restricted to withdraw the funds until the loan is due in 2026.
● Treasury bills:
Two-month maturity bills P 90,000
Seven-month bills 120,000
● Time deposit (placement term is 2 months) P 100,000
● Commercial papers (maturities range from 30-90 days at the time

of purchase) P 500,000
● Postal money orders received from customers P 200,000
What total amount of cash and cash equivalents should be reported under current assets?
A. P1,047,480 C. P1,127,480
D. P1,027,480
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B. P627,480
SOLUTION 1 – 3
Savings and current accounts – Metropolitan Bank (P132,600 + P81,000) P 213,600
Undeposited customer checks (P22,200 – P3,000) 19,200
Currency and coins on hand 3,480
Petty cash 1,200
Two-month treasury bills 90,000
Time deposit 100,000
Commercial papers 500,000
Postal money orders 200,000
Answer: C
Notes:
1. The P3,000 postdated customer check will not be accepted by the bank when presented
either for encashment or deposit. This should be reverted to accounts receivable.
2. The P2,400,000 cash balance at Northern Philippines Bank is being maintained for future
plant expansion. Thus, it is unavailable for use in current operations or payment of current
liabilities. The amount should be shown as part of investments in the noncurrent assets
section of the statement of financial position.
3. The P120,000 in a current account at the Northern Philippines Bank which represents a
compensating balance is legally restricted and is being held against a long-term
borrowing. Hence, this should be classified as investment or other asset in the noncurrent
assets section of the statement of financial position.
4. The 7-month treasury bills are not cash equivalents and should be shown as part of
short-term investments in the current assets section of the statement of financial position.
PAS 7 defines “cash equivalents” as short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of
changes in value. These normally include short-term investments with maturities of three
months or less from the date of acquisition.

The following information has been extracted from the accounting records of the URSULA
COMPANY at December 31, 2023:
a. Cash on hand (see note below) P 230,000
b. Impukan Bank savings account 9,500
c. 364-day Treasury bills purchased March 1, 2023 400,000
d. Petty cash fund (see note below) 20,000
e. Tipid Bank current account (see note below) 160,000
f. Time deposit placements:
Date Time
Dec. 15, 2023 30 days 30,000
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Oct. 31, 2023 90 days 40,000

Nov. 30, 2023 180 days 25,000
g. Employee travel advances 7,000
h. Cash in bond sinking fund 500,000
i. Customer’s note receivable 45,000
j. Postage stamps 2,400
k. Commercial papers issued to retire short-term
obligations to mature in 2024 800,000
The following are included in cash on hand:

● A customer check for P43,000 returned by the bank on December 28, 2023, due to
insufficient fund. It was redeposited and cleared the bank on January 2, 2024
● A customer check for P75,000 dated January 3, 2024, received December 27, 2023.
● PHLPost money orders received from customers, P30,000.
The petty cash fund consists of the following:
Currency and coins P 13,500
IOUs from officers and employees 3,000
Unreplenished petty cash disbursements 1,500
Currency in envelope marked donations for calamity victims 1,500
The following information pertains to Tipid Bank current account:

● A check for P13,000 was dated and recorded on December 29, 2023, but was
delivered to payee on January 5, 2024.
● A check for P5,000 dated January 10, 2024, payable to a supplier was recorded and
released to payee on December 19, 2023.
What total amount should be recorded as cash and cash equivalents on December 31, 2023?
A. P1,191,000 C. P378,000
B. P1,181,500 D. P391,000
SOLUTION 1 – 4
Cash on hand:
Per books P 230,000
NSF customer check (40,000)
Postdated customer check (70,000) P 120,000
Impukan Bank savings account 9,500
Petty cash fund (currency and coins) 13,500
Tipid Bank current account:
Per books P 160,000
Undelivered disbursement check 13,000
Postdated disbursement check delivered 5,000 178,000
Time deposits:
30 days 30,000
90 days 40,000
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Answer: D

The controller of the LYRIC CO. is trying to determine the amount of cash and cash
equivalents to be reported on its December 31, 2023, statement of financial position. The
following information is provided:
1. Balances in the company’s accounts at the Monte Bank:
● Checking account – P540,000
● Saving account – P884,000
2. Undeposited customer checks of P208,000.
3. Currency and coins on hand of P23,200.
4. Savings account at the Naic Bank with a balance of P350,000. This account is being
used to accumulate cash for future plant expansion (in 2025).
5. P800,000 balance in a checking account at the Naic Bank.
6. Treasury bills: 30-day maturity bills totaling P600,000, and 180-day bills totaling
P800,000.
On December 31, 2023, what amount should be reported as cash and cash equivalents?
A. P3,055,200 C. P2,955,200
B. P2,455,200 D. P2,355,200
SOLUTION 1 – 5
Balance in Monte Bank checking account P 540,000
Balance in Monte Bank savings account 884,000
Undeposited customer checks 208,000
Checking account in Naic Bank 800,000
Treasury bills with 30-day maturity 600,000
Answer: A

The following facts apply to OTO COMPANY during 2023:
1. Savings account of P900,000 and a check account balance of P1,200,000 are held at
Manila Bank.
2. Money market placement with maturity of 3 months, P7,500,000.
3. Currency and coins on hand amounted to P11,550.
4. Travel advances of P270,000 for the first quarter of next year (employee
reimbursement will be through salary-deduction).
5. Oto Company has purchased P3,150,000 of commercial paper of Mendez Corp. which
is due in 60 days.
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6. A separate cash fund amounting to P2,250,000 is restricted for the retirement of

long-term debt.
7. Petty cash fund of P1,500.
8. An IOU from an employee of Oto Company in the amount of P2,000.
9. Two certificates of deposit, each totaling P500,000. These CDs have a maturity of 120
days.
10. Oto Company has received a check from a customer in the amount of P187,500 dated
January 15, 2024.
11. On January 1, 2023, Oto Company purchased marketable equity securities to be held
as “trading” for P3,000,000. On December 31, 2023, its market value is P4,300,000.
What amount should be reported as cash and cash equivalents on December 31, 2023?
A. P13,763,050 C. P12,751,500
B. P12,575,550 D. P12,763,050
SOLUTION 1 – 6
Savings account – Manila Bank P 900,000
Checking account – Manila Bank 1,200,000
Money market placement 7,500,000
Petty cash 1,500
Commercial paper 3,150,000
Answer: D
PROBLEM 1 – 7 – Computation of Correct Cash Balance

On deposit in current account with the Bank of PI P 900,000
Cash collection not yet deposited in bank 350,000
A customer’s check returned by the bank for insufficient fund 150,000
A check drawn by the Vice-President of the company dated
January 15, 2024 70,000
A check drawn by a supplier dated December 28, 2023, for goods
returned by the company 60,000
A check dated May 31, 2023, drawn by the company against the Bank
of Manila in payment of custom duties. Since the important did
not materialize, the check was an outstanding check in the
reconciliation of the Bank of Manila 410,000
Petty cash fund of which P10,000 is in currency; P7,200 in
form of employees’ IOUs; and P2,800 is supported by approved
petty cash vouchers for expenses all dated prior to closing of the
books on December 31, 2023 20,000
Total P 1,960,000
Less: Overdraft with the Bank of Manila secured by a chattel mortgage on
the inventories 300,000
Cash balance per ledger P 1,660,000
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What is the amount of cash to be reported on December 31, 2023, statement of financial
position of Bea Company?
SOLUTION 1 – 7
Current account – Bank of PI P 900,000
Undeposited collection 350,000
Supplier’s check for goods returned by the company 60,000
Bank of Manila (P410,000 – P300,000) 110,000
Correct cash balance P 1,430,000

In connection with your audit of the financial statements of ONOR COMPANY for the year
ended December 31, 2023, you gathered the following information.
1. The company maintains it current account with TLC Bank. The bank statement on
December 31, 2023, showed a balance a P638,340.
Your audit of the company’s account with TLC Bank disclosed the following:
● A check for P22,500 received from a customer whose account is current had been
deposited and then returned by the bank on December 28, 2023. No entry was made
for the return of this check. The customer replaced the check on January 15, 2024.
● A check for P5,720 was cleared by the bank as P7,520. The bank made the correction
on January 2, 2024.
● A check for P3,500 representing payment of an employee advance was received and
deposited on December 27, 2023, but was not recorded until January 3, 2024.
● Postdated checks totaling P67,300 was included in the deposits in transit. These
represent collections of current accounts receivable from customers. The checks were
deposited on January 5, 2024.
● Various debit memos for drafts purchased for payment of importation of equipment of
totaling P230,000 were not yet recorded. These purchases were previously set up as
accounts payable. Said equipment arrived in December 2023.
● Interest earned on the bank balance for the 4th quarter of 2023, amounting to P1,950
was not recorded.
● Bank service charges totaling P1,260 were not recorded.
● Deposit in transit and outstanding checks at December 31, 2023, totaled P136,250 and
P276,380, respectively.
2. Various expenses from the company’s imprest petty cash fund dated December 2023,
totaled P16,250, while those dated January 2024, amounted to P5,903. Another
disbursement from the fund dated December 2023 was a cash advance to an employee
amounting to P3,500. A replenishment of the petty cash fund was made on January 8,
2024.
3. The company’s trial balance on December 31, 2023, includes the following accounts:
Cash in bank – TCL Bank P 748,320
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Cash in bank – ER Bank (restricted account for plant expansion,

expected to be disbursed in 2024) 700,000
Time deposit, placed December 20, 2023, and due March 20, 2024 1,000,000
Money market placement – Prudential Bank 4,000,000
1. What is the adjusted petty cash fund balance on December 31, 2023?
A. P4,347 C. P30,000
B. P10,250 D. P24,097
2. What is the adjusted Cash in bank—TLC Bank balance on December 31, 2023?
A. P500,010 C. P432,710
B. P748,320 D. P429,110
3. The entry to adjust the Cash in bank – TLC Bank account should include a debit to
A. Accounts receivable for P89,800.
B. Accounts receivable for P86,300.
C. Accounts payable for P228,200.
D. Interest expense for P1,950.
4. The December 31, 2023, statement of financial position should show “Cash and cash
equivalents” at
A. P6,142,960 C. P4,442,960
B. P5,439,360 D. P5,442,960
SOLUTION 1 – 8
1. Petty cash fund per trial balance P 30,000
Various expenses dated December 2023 (16,250)
Employee cash advance (3,500)
Adjusted petty cash fund balance P 10,250
Answer: B
2. Book Bank
Unadjusted balances P 748,320 P 638,340
NSF check (22,500)
Bank error (P7,520 – P5,720) 1,800
Unrecorded cash receipt 3,500
Postdated checks (67,300)
Deposits in transit (P136,250 – P67,300) 68,950
Bank debit memos (230,000)
Interest earned 1,950
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Bank service charges (1,260)

Outstanding checks (276,380)
Adjusted balances P 432,410 P 432,710
Answer: C
3. Accounts receivable (P22,500 + P67,300) P 89,800

Accounts payable 230,000
Bank service charges 1,260
Cash in bank – TLC Bank P 315,610
Advances to employees 3,500
Interest income 1,950
Answer: A
4. Cash in bank – TLC Bank P 432,710

Time deposit 1,000,000
Money market placement 4,000,000
Cash and cash equivalents P 5,442,960
Answer: D
PROBLEM 1 – 9 – Cash in Bank and Petty Cash Fund

BARTOLOME COMPANY was incorporated 3 years ago as a trading company engaged in
the sale and distribution of hardware and electrical supplies.
The company maintains its bank account with Secured Bank. Your review of the bank of
reconciliation statement disclosed the following information:
1. On December 31, 2023, the bank erroneously credited the account of Bartolome
Company for P195,000 representing deposit for the account of another company.
2. Postdated checks totaling P37,900 were included in the deposits in transit. These
represent collections of accounts receivable from customers. The checks were actually
3. On December 28, 2023, the company issued checks to creditors totaling P115,000. These
checks were released on January 5, 2024.
4. A check dated December 12, 2023, in payment of accounts payable was recorded as
P12,000. Upon examination of the checks returned by the bank, the actual amount was
P21,000.
5. A check for P4,750 in payment of a minor repair of office equipment was not recorded on
the company books.
6. Transfer of fund of P59,300 to Secured Bank current account of DBS Securities was not
recorded. This pertains to purchase of 5,000 shares of William Lines to be held as trading
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securities. Based on quoted price as of December 31, 2023, the market value per share is
P8.20.
7. Interest earned amounting to P5,720 was not recorded.
8. Deposits in transit and outstanding checks at December 31, 2023, amounted to P89,200
and P132,000, respectively.
9. The cash in bank balance per book on December 31, 2023, is P681,200.
10. Your review of the accounts receivable schedule disclosed that various collections
totaling P17,350 were not recorded in the books but already reflected in the subsidiary
ledgers.
The Petty cash fund of P35,000 maintained on an imprest basis was counted on January 2,
2024. Unreplenished expenses include petty cash vouchers for various expenses totaling
P19,300 and employees’ advances for P5,800 all dated December 2023.
1. The cash balance per bank statement on December 31, 2023, is

A. P946,120 C. P984,020
B. P988,770 D. P993,020
2. The adjusted Cash in bank balance at December 31, 2023, is

A. P708,320 C. P726,320
B. P746,220 D. P702,600
3. The adjusted Petty cash fund balance at December 31, 2023, is

A. P15,700 C. P35,000
B. P29,200 D. P9,900
SOLUTION 1 – 9
1. C Cash balance per P 984,020
2. A Adjusted Cash in bank balance P 708,320
Book Bank
Erroneous bank credit (195,000)
Postdated checks (37,900)
Unreleased checks 115,000
Understatement of book disbursement
(P21,000 – P12,000) (9,000)
Unrecorded disbursement check (4,750)
Unrecorded transfer of fund (59,300)
Interest earned 5,720
Deposit in transit (P89,200 – P37,900) 51,300
Unrecorded collections 17,350
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3. D Petty cash fund per ledger P 35,000

Unreplenished disbursements:
Various expenses (19,300)
Employees’ advances (5,800)
Adjusted petty cash fund P 9,900
PROBLEM 1 – 10 – Petty Cash Fund

You are assigned to the petty cash count for the Jervick Trading at December 31, 2023. The
contents of the fund are listed below. The custodian of the fund is Annie Bartolome, (Office
Secretary). The balance of the petty cash fund per the company’s general ledger is P30,000.
Such fund is being maintained on an imprest basis.
Bills
Five hundred-peso bills; 13
One hundred-peso bills; 20
Fifty-peso bills; 44
Twenty-peso bills; 30
Coins
One-peso coins; 12 rolls of 20 and 10 loose.
An IOU signed by the company treasurer for P3,750.
Postage stamps of various denominations – P750.
(The voucher is also for P750.)
A receipted bill from NCR Bulletin newspaper for advertising – P420.
A receipted bill from NB Store for copy paper – P660.
A receipted bill from Refill Gas Stations for gas and oil for the company’s delivery truck –
P6,540.
A check signed by Melvin Cruz, an employee, dated December 28, 2023 – P1,050.
A check signed by Celine Dilon, sales manager, dated January 20, 2024 – P990.
A notation on a sheet of paper as follows: Proceeds of employees’ contributions for office
party – P3,630.
A receipted bill from Bona Restaurant for refreshment served employees’ party, December
24, 2023 – P2,010.
What amount should be reported as cash shortage or cash overage?
SOLUTION 1 – 10
Bills
P500 x 13 P 6,500
P100 x 20 2,000
P50 x 44 2,200
P20 x 30 600
Coins
P1 x 250 250 P 11,550
IOU 3,750
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Postage stamps 750

NCR Bulletin for advertising 420
NB Store for copy paper 660
Refill gas station for gas and oil 6,540
Accommodated checks;
Melvin Cruz, employee P 1,050
Celine Dilon 990 2,040
Total account P 25,710
Accountability
Petty cash fund P30,000
Unexpected employees’ contributions
(P3,630 – P2,010) 1,620 31,620
Cash shortage P 5,910

The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the close
of business, July 31, 2023, the end of the company’s natural business year. The petty cash
custodian presented the following during the count:
Currency P 1,650
Petty cash vouches:
Postage 420
Office supplies expense 900
Transportation expense 340
Computer repairs 800
Advances to office staff 1,500
A check drawn by Samantha, Inc., payable to the petty cash custodian 7,200
Postage stamps 300
An employee’s check, returned by bank, marked NSF 1,000
An envelope containing currency of P1,890 for a gift for a
retiring employee 1,890
P 16,000
The general ledger shows an imprest petty cash fund balance of P16,000.
1. How much is the petty cash shortage or overage?

A. P2,190 overage C. P1,890 shortage
B. P2,190 shortage D. P1,890 overage
2. What is the adjusted balance of the petty cash fund at July 31, 2023?
A. P10,740 C. P7,200
B. P3,540 D. P8,850
SOLUTION 1 – 11
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1. Currency P 1,650
Petty cash vouchers (P420 + P900 + P 340 + P800 + P1,500) 3,960
Employee’s NSF check 1,000
Petty cash accounted for 13,810
Petty cash fund per ledger (custodian’s accountability) 16,000
Petty cash shortage P 2,190
Answer: B
2. Currency P 1,650
Adjusted petty cash balance P 8,850
Answer: D

On January 1, TANYA CO. establishes a petty cash account and designates Orly Reyes as
petty cash custodian. The original amount included in the petty cash fund is P10,000. The
following disbursements are made from the fund:
Office supplies P 3,460
Postage 2,240
Entertainment 840
The balance in the petty cash box is P3,200.

1. The person responsible, at all times, for the amount of the petty cash fund is the
A. Chairman of the Board of Directors
B. President of the company
C. Petty cash custodian
D. General cashier
2. The following are appropriate procedures for controlling the petty cash fund, except
A. To monitor variations in different types of expenditures, the petty cash custodian
files petty cash vouchers by category of expenditure after replenishing the fund.
B. To replenish the fund, the general cashier issues a company check to the petty cash
custodian, rather than cash.
C. To determine that the fund is being accounted for satisfactorily, surprise counts of
the fund are made from time to time by the internal auditor or other responsible
official.
D. Each individual to whom petty cash is paid is required to present signed receipts to
petty cash custodian.
3. The entry to replenish the fund is

A. Office supplies expense 3,460
Page | 17
Postage expense 2,240

Entertainment expense 840
Cash 6,540
3,460
B. Office supplies expense 2,240
Postage expense 840
Cash over and short 6,800
Petty cash
3,460
C. Office supplies expense 2,240
Postage expense 840
Cash over and short 6,800
Cash
3,460
2,240
D. Office supplies expense 840
Entertainment expense
Petty cash
4. The objective of establishing a petty cash fund is to

A. Cash checks for employees
B. Account for all cash receipts and disbursements
C. Account for cash sales
D. Facilitate payment fo small, miscellaneous items
5. What is the effect of not replenishing the petty cash at year-end and not making the
appropriate adjusting entry?
A. A detailed audit is essential
B. The petty cash custodian should turn over the petty cash to general cashier
C. Cash will be overstated and expenses understated
D. Expenses will be overstated and cash will be understated
SOLUTION 1 – 12
1. One individual, the petty cash custodian, should be responsible for the petty cash fund.
Answer: C
2. The petty cashier should not have custody of paid petty cash vouchers to prevent their
reuse.
Answer: A
Page | 18
3. Office supplies expense 3,460

Cash over and short 260
Cash 6,800
Computation of cash shortage:

Petty cash vouchers (P3,460 + P2,240 + P840) 6,540
Petty cash accounted 9,740
Petty cash fund per ledger 10,000
Shortage P 260
Answer: C
4. Facilitate payment of small, miscellaneous items.

Answer: D
5. Cash will be overstated, and expenses understated.

Answer: C
PROBLEM 1 – 13 – Count of Petty Cash Fund and Undeposited Collections

In connection with your audit of the financial statements of BENJAMIN CORP. for the year
ended December 31, 2023, you conducted a surprise count of the company’s petty cash fund
and undeposited collections at 8:20 a.m. on January 3, 2024. Your count disclosed the
following:
Bills and coins

Bills Coins
P100.00 5 pieces 5.00 18 pieces
50.00 40 pieces 1.00 214 pieces
20.000 48 pieces
Postage stamps (unused) – P365

Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Benjamin Corp. SLV, Inc. 14,000
Dec. 31 Benjamin Corp. Mario Lansang, sales manager 1,680
Dec. 31 Benjamin Corp. MSU Corp. 17,800
Dec. 31 Benjamin Corp. Ateneo, Inc. 8,300
Dec. 31 Taiwan Corp. Benjamin Corp. 27,000
Unreimbursed vouchers
Date Payee Description Amount
Page | 19
Dec. 23 Mario Lansang, sales manager Advance for trip to Tagaytay City P 20,000
28 Central Post Office Postage stamps 1,620
29 Messengers Transportation 150
29 Byte, Inc. Computer repair 800
Other items found inside the cash box:

1. Unclaimed pay envelope of Juan MacDonut. Indicated on the pay slip is his net salary
of P7,500. Your inquiry revealed that Juan’s salary is mingled with the petty cash fund.
2. The sales manager’s liquidation report for his Tagaytay City trip.
Cash advance received on Dec. 23 P 20,000
Less: Hotel accommodation, meals, etc. P16,000
Bus fare for two 1,200
Cash given to Pablo, salesman 1,000 18,200
Balance P 1,800
Accounted for as follows:
Cash returned by Pablo to the sales manager P 120
Personal check of the sales manager 1,680
Total P 1,800
Additional information:
1. The custodian is not authorized to cash checks.
2. The last official receipt included in the deposit on December 30 is No. 4351 and the last
official receipt issued for the current year is No. 4355. The following official receipts are
all dated December 31, 2022.
OR No. Amount Form of Payment
4352 P 13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check
3. The petty cash balance per general ledger is P25,000. The last replenishment of the fund
was made on December 22, 2023.
1. What is the amount of shortage due from the sales manager?

A. P240 C. P120
B. P1,800 D. P0
2. What is the amount of undeposited collections on December 31, 2023?

A. P44,300 C. P57,300
B. P84,300 D. P41,000
3. The adjusting entries on December 31, 2023, should include a net debit to Travel
expenses of
A. P17,320 C. P18,200
D. P18,080
Page | 20
B. P18,320
4. The cash count should include total checks of

A. P69,980 C. P41,780
B. P42,980 D. P41,300
5. What is the total cash shortage?

A. P22,166 C. P22,406
B. P8,166 D. P20,486
SOLUTION 1 – 13
1. Cash advance P 20,000
Less: Actual cash disbursed
Hotel, meals, etc. P 16,000
Bus fare 1,200
Pablo (P1,000 – P120) 880 18,080
Cash that should be returned 1,920
Cash actually returned 1,680
Shortage due from the sales manager P 240
Answer: A
2. Collections per OR nos. 4352 – 4355 P 43,300

Unreceipted collections 14,000
Total undeposited collections P 57,300
Answer: C
3. Travel expenses (P16,000 + P1,200 + P880) P 18,080

Answer: D
4. Total checks P 42,980

Answer: B
5. Total cash shortage P 22,166

Answer: C
Benjamin Corp.
CASH COUNT SHEET
January 3, 2024 – 8:20 a.m.
Bills and coins:
Denomination Quantity Amount Total
P100.00 5 P 500
Page | 21
50.00 40 2,000
20.00 48 960
5.00 18 90
1.00 214 214 P 3,764
Checks:
Date Maker Amount
Dec. 30 Custodian P 1,200
Dec. 30 SLV, Inc. 14,000
Dec. 31 Mario Lansang 1,680
Dec. 31 MSU Corp. 17,800
Dec. 31 Ateneo, Inc. 8,300 42,980
Unreimbursed vouchers:
Date Maker Amount
Dec. 23 Advances P 20,000
Dec. 28 Postage 1,620
Dec. 29 Transportation 150
Dec. 29 Repairs 800 22,570
Total cash accounted for P 69,314

Less: Accountabilities
Petty cash P 25,000
Collections (per official receipts) 43,300
Unclaimed salary 7,500
Excess travel advance 1,680
Unreceipted collection from SLV, Inc. 14,000 91,480
CASH SHORTAGE (P 22,166)
Benjamin Corp.
ADJUSTING JOURNAL ENTRIES
December 31, 2023
1. Cash 14,000
Accounts receivable 14,000
2. Advances to officers and employees 20,000

Transportation expense 150
Repairs expense 800
365
3. Unused postage 365
Postage expense
27,000
4. Cash 27,000
Accounts payable
7,500
5. Cash 7,500
Salaries payable
Page | 22
22,166
6. Receivable from custodian 22,166
Cash
18,080
7. Travel expense (P16,000 + P1,200 + P880) 1,680
Advances to officers and employees
PROBLEM 1 – 14 – Petty Cash Fund Bank Reconciliation

Anying Velasco is reviewing the cash accounting for ABX, Inc. Anying’s review will focus
on the petty cash fund account and the bank reconciliation for the month ended May 31,
2023. She has collected the following information from ABX’s bookkeeper for this task.
Petty Cash Fund

1. The petty cash fund was established on May 2, 2023, in the amount of P10,000.
2. Expenditures from the fund by the custodian as of May 31, 2023, were evidenced by
approved petty cash vouchers for the following:
Various office supplies P 3,920
IOU from employees 1,200
Shipping charges 2,298
Miscellaneous expense 1,526
On May 31, 2023, the petty cash fund was replenished and increased to P12,000; currency
and coins in the fund at that time totaled P756.
Bank Reconciliation
Shore Bank
Bank Statement
Disbursements Receipts Balance

Balance, May 1, 2023 P 350,760
Deposits P 1,120,000
Note payment direct from customer
(interest of P1,200) 37,200
Checks cleared during May P 1,246,000
Bank service charges 1,080
Balance, May 31, 2023 260,880
ABX, Inc.’s Cash Account

Balance, May 1, 2023 P 354,000
Deposits during May 2023 1,240,000
Checks written during May 2023 1,273,400
Deposits in transit are determined to be P120,000, and checks outstanding at May 31 total
P34,000. Cash on hand (besides petty cash) at May 31, 2023, is P9,840.
1. What is the amount of petty cash shortage?

A. P2,300 C. P300
Page | 23
B. P11,244 D. P0
2. The journal entry to record the replenishment of, and increase in the petty cash fund
includes a credit to
A. Cash of P10,944
B. Cash of P11,244
C. Petty cash fund of P10,944
D. Petty cash fund of P11,244
3. What amount of cash should be reported in the May 31, 2023, statement of financial
position?
A. P368,720 C. P368,420
B. P356,720 D. P358,880
SOLUTION 1 – 14
1. Coins and currency P 756
Fund disbursements (P3,920 + P1,200 + P2,298 + P1,526) 8,944
Petty cash accounted 9,700
Custodian’s accountability 10,000
Petty cash shortage P 300
Answer: C
2. Petty cash fund 2,000

Office supplies 3,920
Accounts receivable-employees 1,200
Shipping expense 2,298
Miscellaneous expense 1,526
Cash short/over 300
Cash 11,244
Answer: B
Book Bank
3. Unadjusted balances P 320,600 P 260,880
Deposit in transit 120,000
Cash on hand 9,840
Note collected by bank 37,200
Page | 24
Adjusted cash balance (P356,720 + P12,000) P 368,720
Answer: A
PROBLEM 1 – 15 - Bank Reconciliation; Computation of Bank Balance

Presented below are a series of unrelated situations. Answer the question at the end of each
situation.
1. The accountant of NARCISA CO. provided the following data in reconciling the April 30
cash in bank balance:
Balance per bank, April 30 P 130,350
Balance per books, April 30 85,000
Bank service charge 2,000
Deposits in transit 49,000
Outstanding checks 17,650
Note collected by bank including P11,200 interest
(Narcisa Co. not yet informed) 136,000
Check drawn by XYZ Co. erroneously charged by
bank to Narcisa’s account 54,600
A transposition error was made in recording a sale and deposit in the sales journal and
cash receipts journal in April.
Correct amount P 13,658
Recorded as P 16,358
2. The following information is included in EMIL CORPORATION’s bank statement for the
month of March:
A customer’s check has been marked “NSF” by the bank and returned P 13,000
Bank service charge for March 1,200
In comparing the bank statement to the company’s cash records,

you found:
Outstanding checks on March 31 P 184,000
Deposits made but are not yet shown in the April bank statement 14,000
The deposits in transit and outstanding checks have been correctly taken up in
the company’s books. You also found a customer’s check for P17,400 that had not
yet been deposited and had not been recorded in Emil’s books. Your client’s
books show a cash balance of P36,420.
What is Emil Corporation’s correct cash balance at March 31?
3. The following information pertains to a checking account of a company at June 31, 2023.
Balance per bank statement P 200,000
Interest earned for the second quarter 500
Page | 25

Customers’ checks returned for insufficient funds 5,000
What is the cash balance per books at June 30, 2023?
4. A company is reconciling its bank statement with internal records. The cash balance per
the company’s books is P45,000. There are P5,000 of bank charges not yet recorded,
P7,500 of outstanding checks, P12,500 of deposits in transit, and P15,000 of bank credits
and collections not yet taken up in the company’s books.
What is the cash balance per bank?
5. A company shows a cash balance of P175,000 on its bank statement dated June 30. As of
June 30, there are P55,000 of outstanding checks and P37,500 of deposits in transit.
What is the adjusted cash balance on June 30?
6. The Cash account shows a balance of P225,000 before reconciliation. The bank statement
does not include a deposit of P11,500 made on the last day of the month. The bank
statement shows a collection by the bank of P4,700 and a customer’s check for P1,600
was returned because it was NSF. A customer’s check for P2,250 was recorded on the
books as P2,700, and a check written for P395 was recorded as P485.
What should be the correct cash balance?
7. On July 5, 2022, EMILIA CORP. received its bank statement for the month ending June
30. The statement showed a P209,500 balance while the cash account balance on June 30
was P35,000. In reconciling the balances, the auditor discovered that:
1. The June 30 collections of P176,000 were recorded on the books but were not
deposited until July.
2. The bank service charges for the month of June totaled P3,000.
3. A paid check for P24,300 was entered incorrectly in the cash payments journal as
P34,200.
What is the total outstanding checks at June 30, 2023?
SOLUTION 1 – 15
Book Bank
1. Unadjusted balances P 85,000 P 130,350
Bank service charge (2,000)
Collection of note 136,000
Erroneous bank debit 54,600
Transposition error (P16,358 – P13,658) (2,700)
Page | 26
2. Balance per books P 36,420

Unrecorded and undeposited customer’s check 17,400
NSF check (13,000)
Adjusted cash balance P 39,620
3. Balance per bank statement P 200,000

Interest earned (500)
NSF checks 5,000
Balance per books at June 30, 2023 P 214,500

Bank charges (5,000)
Deposits in transit (12,500)
Bank credits and collections 15,000
Balance per bank P 50,000


Bank collection 4,700
Customer’s NSF check (1,600)
Overstatement of cash receipt (P2,700 – P2,250) (450)
Overstatement of cash disbursement (P485 – P395) 90
7. Balance per books, June 30, 2023 P 35,000

Overstatement of disbursement (P34,200 – P24,300) 9,900
Balance per bank, June 30, 2023 P 209,500

Page | 27
Add: Undeposited collections 176,000

Total 385,500
Less: Adjusted cash balance 41,900
Outstanding checks, June 30, 2023 P 343,600
PROBLEM 1 – 16 – Bank Reconciliation

The bank statement for the current account of IAN Co. showed a December 31, 2023, balance
of P585,284. Information that might be useful in preparing a bank reconciliation is as
follows:
a) Outstanding checks were P52,810.
b) The December 31, 2023, cash receipts of P23,000 were not deposited in the bank until
January 2, 2024.
c) One check written in payment of rent P8,940 was correctly recorded by Ian Co. as a
P9,840 disbursement.
d) In accordance with prior authorization, the bank withdrew P18,000 directly from the
current account as payment on a mortgage note payable. The interest portion of that
payment was P14,000. Ian Co. has made no entry to record the automatic payment.
e) Bank service charges of P740 were listed on the bank statement.
f) A deposit of P35,000 was recorded by the bank on December 12, but it did not belong to
Ian Co.
g) The bank statement included a charge of P3,400 for a not-sufficient-fund-check. The
company will seek payment from the customer.
h) Ian Co. maintains an P8,000 petty cash fund that was appropriately reimbursed at the end
of December.
i) According to instructions from Ian Co. on December 30, the bank withdrew P40,000 from
the account and purchased treasury bills for Ian Co. The company recorded the
transaction in its books on December 31 when it received notice from the bank. Half of
the treasury bills mature in three months and other half in six months.
1. What is the cash in bank balance per books on December 31.

A. P549,714 C. P534,914
B. P543,514 D. P541,714
2. What is the adjusted cash in bank balance on December 31, 2023?

A. P520,474 C. P518,674
B. P527,274 D. P520,154
3. What amount of cash and cash equivalents should be shown under current assets on
December 31, 2023?
A. P928,474 C. P720,474
B. P728,474 D. P735,274
Page | 28
SOLUTION 1 – 16
Undeposited collections 23,000
Error in recording rent check (P9,840 – P8,940) (900)
Automatic mortgage payment 18,000
Bank service charges 740
Bank error – deposit incorrectly credited to Ian Co. (35,000)
NSF Check 3,400
Balance per books P 541,714
Answer: D
2. Book Bank
Error in recording rent check 900
Automatic mortgage payment (18,000)
Bank service charges (740)
Bank error – deposit incorrectly credited
to Ian Co. account (35,000)
NSF Check (3,400)
Answer: A
3. Current account balance P 520,474

Petty cash 8,000
Treasury bills (P400,000 x ½) 200,000
Answer: B
Page | 29
PROBLEM 1-17 - BANK RECONCILIATION: UNADJUSTED TO ADJUSTED

BALANCE FORMAT
The following data were taken from GARAY’s check register for the month of April. Garay’s
bank reconciliation for March showed one outstanding check, check No. 178 for P2,150
(written on March 20), and one deposit in transit for P4,350 (made on March 31).
DATE ITEM CHECKS DEPOSITS BALANCE

2023
APRIL 1 Beginning Balance 6,150
1 Deposit 26,167 32,317
1 Check No. 179 250 32,567
4 Check No. 180 10,673 21,898
27 Deposit 11,774 33,672
29 Check No. 181 13,217 20,490
The following is from Garay’s bank statement for April;

DATE ITEM CHECKS DEPOSITS BALANCE
2023
APRIL 1 Beginning Balance 3,950
3 Check No. 179 250 3,700
3 Deposit 4,350 8,050
5 Check No. 180 10,673 (2,623)
5 Automatic loan 8,150 5,527
5 Deposit 26,417 31,944
20 NSF check 1,000 30,944
20 Service charge 600 30,344
30 Interest 82 30,426
Assume that any errors or discrepancies you find are Garay’s not the bank’s.
What is the adjusted cash balance as of April 30?

A. P26,833 C. P30,426
B. P26,838 D. P26,872
SOLUTION 1-17
Page | 30
Book Bank
Unadjusted balances P20,490 P30,426
Outstanding checks:
Check no. 178 P 2,150
Check no. 181 13,217 (15,367)
Error in recording deposit (P26,417 – P26,167) 250
Automatic loan 8,150
Interest 82
NSF check (1,000)
Bank service charge (600)
Arithmetic error for:
Check no. 179 (P32,567 – P32,067) (500)
Check no. 180 (P21,898 – P21,894) (4)
Check no. 181 (P20,490 – P20,455) (35) ______
Adjusted balances P26,833 P26,833
Answer: A

BALANCES FORMAT
The following information pertains to FLINT CORP:

Flint Corp.
BANK RECONCILIATION
November 30, 2023
Balance per bank statement P435,000

Less: Outstanding checks
No. 4321 P 6,000
No. 4329 15,000
4340 1,700
4341 4,675 27,375
P407,625
Add: Deposit in transit 16,200
Balance per books P423,825
CHECK REGISTER
December 2023
DATE PAYEE NO. VOUCHERS DISCOUNT CASH

PAYABLE
Page | 31
Dec 1 San Beda, Inc. 4342 P 10,000 P 500 P 9,500

3 Miriam Corp. 4343 4,200 - 4,200
7 UE Enterprises 4344 3,755 - 3,755
12 PSBA Corp. 4345 12,000 120 11,880
15 Payroll 4346 96,000 - 96,000
16 BU, Inc. 4347 6,300 - 6,300
18 New Era Co. 4348 14,200 142 14,058
21 UST, Inc. 4349 7,000 - 7,000
22 Petty cash fund 4350 10,000 - 10,000
28 Payroll 4351 98,000 - 98,000
P261,455 P762 P260,693
BANK STATEMENT
BANKABLE BANK
PERIOD: NOVEMBER 30,2023 – DECEMBER 31, 2023
No.: 001-43-44
DATE Description Check Debit Credit Balance
Number
Balance last P435,000
statement
Dec. 1 Cash deposit P16,200 451,200
1 Check issued 4329 P 15,000 436,200
4 Check issued 4342 9,500 426,700
4 Check issued 4341 4,675 422,025
5 Check deposit 49,000 471,025
6 Check issued 4343 4,200 466,825
8 Check deposit 14,000 480,825
10 Check issued 4344 3,755 477,070
15 Encashment 4346 96,000 381,070
22 Encashment 4350 10,000 371,070
28 Encashment 4351 98,000 273,070
29 Debit memo-service
charge 1,000 272,070
29 Credit memo - interest 1,550 273,620
Deposits in transit at December 31 totaled P49,000.

1. What is the total book receipts for December?
A. P113,550 C. P63,000
B. P80,750 D. P112,000
2. What is the cash balance per books on December 31, 2023?
A. P275,132 C. P291,332
B. P226,132 D. 274,370
3. What is the total outstanding checks on December 31, 2023?
A. P68,313 C. P46,938
B. P39,238 D. P40,938
4. What is the adjusted cash balance on November 30, 2023?
A. P446,375 C. P423,825
Page | 32
B. P417,825 D. P435,000
5. What is the adjusted cash balance on December 31, 2023?
A. P281,682 C. P226,682
B. P275,682 D. P274,920
SOLUTION 1-18
1. Dec. 5 deposit P 49,000

Dec. 8 deposit 14,000
Dec. 31 deposit in transit 49,000
Total collections/book receipts P 112,000
ANSWER: D
2. Cash balance, November 30 P423,825

Add: December receipts (see no.1) 112,000
Total 535,825
Less: Disbursements per check register 260,693
Cash balance. December 31 P 275,132
ANSWER: A
3. Outstanding checks, December 31:
Check no. 4321 P 6,000
4340 1,700
4345 11,880
4347 6,300
4348 14,058
4349 7,000
Total P 46,938
Answer: C
4. Adjusted cash balance, Nov. 30, 2023 P423,825
The balance per books as determined and as shown on the November 30 reconciliation
is also the adjusted cash balance on that date. Notice that there are no book reconciling
items in November.
Answer: C
5. Book Bank
Unadjusted balances P 275,132
P273,620
Deposits in transit
49,000
Outstanding checks
(46,938)
Service charge (1,000)
Interest 1,550_
______
Adjusted balances P 275,682
P275,682
ANSWER: B
Page | 33

BALANCES FORMAT
EDGARDO CO. was organized on January 2, 2023. The following items are from the
company’s trial balance on December 31, 2023.
Ordinary share capital P1,500,000
Share premium 150,000
Merchandise inventory 69,000
Land 1,000,000
Building 1,400,000
Furniture and Fixtures 367,000
Notes payable-bank 500,000
Sales 6,235,200
Operating expenses (including depreciation of P400,000) 1,005,150
Additional information is as follows:

1. Deposits in transit , December 31 P 384,660
2. Service charge for December 2,000
3. Outstanding checks, December 31 475,000
4. Bank balance, December 31 892,000
5. Edgardo Co.’s mark up sales is 30%
1. What is the total collections from sales?

A. P6,114,967 C. P6,235,200
B. P4,119,240 D. P6,069,800
2. What is the total payments for merchandise purchases?
A. P3,905,990 C. P4,043,990
B. P4,649,140 D. P5,914,550
3. What is the total cash disbursements per books?
A. P7,819,800 C. P8,219,800
B. P8,169,800 D. P8,069,800
4. What is the total cash disbursements per books?
A. P7,816,140 C. P8,021,290
B. P7,416,140 D. P7,278,140
5. What is the cash balance per books on December 31?
A. P653,660 C. P1,203,660
B. P803,660 D. P707,060
6. What is the adjusted cash balance on December 31?
A. P801,660 C. P1,201,660
B. P651,660 D. P803,660
SOLUTION -19
1. Sales P
6,235,200
Less: Accounts receivable
165,400
Page | 34
Collections from customers P

6,069,800
Answer: D
2. Cost of Sales (P 6,235,200 x 70%) P

4,364,640
Add: Merchandise inventory, December 31
69,000
Goods available for sale/Purchase (there is no beginning inventory)
4,433,640
Less: Accounts payable, December 31
389,650
Payments for purchases P
4,043,990
Answer: C
3. Issue price or ordinary shares (P1,500,000 + P150,000) P

1,650,000
Notes payable – bank
500,000
Collections
6,069,800
Total cash receipts per books P
8,219,800
Answer: C
4. Land P
1,000,000
Building
1,400,000
Furniture and fixtures
367,000
Operating expenses paid (P1,005,150 - 400,000)
605,150
Payments for purchases
4,043,990
Total cash Disbursements per books P
7,416,140
Answer: B
5. Cash receipts per books (see no. 3) P

8,219,800
Cash disbursements per books (see no. 4)
(7,416,140
Cash balance per books, December 31 P
803,660
Answer: B
Book Bank
6. Unadjusted balances 803,660 892,000
Page | 35

Outstanding checks ________ (475,000)
Adjusted balances 801,660 801,660
Answer: A
PROBLEM 1-20 - COMPUTATION OF CASH RECEIPTS AND DISBURSEMENTS

In connection with your audit of the cash account of ANNIE CORP., you gathered the
following information.
a. Balance per bank, December 1, 2023 P145,000
b. Total bank receipts (credits) in December 346,000
c. Balance per bank, December 31, 2023 114,500
d. Outstanding checks, Nov. 30, 2023 (including P12,000
paid by bank in December) 67,000
e. Outstanding checks, December 31, 2023 (including checks
issued in November) 94,162
f. Deposit in transit, November 30, 2023 39,458
g. A customer’s check received on December 4, 2023, was returned
by bank on December 7 marked “NSF”. It was redeposited on
December 8, 2023. The only entry made was to take up the collection
on December 4, 2023. 11,143
1.What is the total book receipt in December?

A. P295,399 C. P334,857
B. P306,542 D. P346,000
2.What is the total bank disbursement in December?
A. P315,550 C. P231,500
B. P376,500 D. P201,000
3.What is the book disbursements in December?
A. P447,519 C. P403,662
B. P331,519 D. P392,519
SOLUTION 1-20
1. Bank receipts (credits) in December P 346,000

Less: Deposit in transit, November 30 39,458
NSF check redeposited in December 11,143 50,601
Book receipts (debits) in December P 295,399
Answer: A
2. Bank balance, December 1, 2010 P 145,000

Add: Bank receipts in December 346,000
Total 491,000
Less: Bank balance, December 31, 2010 114,500
Bank disbursements in December P 376,500
Answer: B
Page | 36
3. Bank disbursements in December P 376,500

Add: Book disbursements in December
but not in December bank disbursements:
Checks issued in December, outstanding
At December 31: Outstanding checks, Dec. 31 94,162
Less: Checks issued in Nov., still outstanding
at Dec. 31 (P67,000–P12,000) 55,000 39,162
Total 415,662
Less: Bank disbursements in December but not in
book disbursements in December:
November outstanding checks
paid by bank in December 12,000
NSF check 11,143 23,143
Book disbursements (credits) in December P 392,519
Alternative computation:
Bank disbursements in December P376,500
Add: Outstanding checks, December 31 94,162
Total 470,662
Less: Outstanding checks, Nov. 30 P67,000
NSF Check 11,143 78,143
Book disbursements in December P 392,519
Answer: D
PROBLEM 1-21 - PETTY CASH FUND; BANK RECONCILIATION

Your audit of the cash account of JUNIE CORP. disclosed the following information:
1. Cash in bank balance per books, Dec. 31, 2023 P 35,000
2. Bank statement balance, Dec. 31, 2023 60,000
3. Note collected by bank in December (principal plus
Interest for P800, less collection fee of P200) 27,600
4. Debit memo for a checkbook ?
5. Deposits in transit, Dec. 31, 2023 15,200
6. Transposition error made by bank in recording
Deposit of December 28;
Correct amount P 45,000
Recorded as 54,000 9,000
7. Erroneous bank debit 26,700
8. Included in the Cash in bank account is petty cash fund
of P10,000. Your count on Dec. 31, 2023, revealed the following fund
items:
Supplies 2,400
Transportation 100
IOUs 4,000 9,500
9. Erroneous bank credit 11,000
10. Outstanding checks (including a certified check
of P10,000) 39,400
1. What is the principal amount of the note collected by bank in December?

A. P27,600 C. P28,200
Page | 37
B. P26,800 D. P27,000
2.What is the adjusted cash in bank balance at December 31, 2023?
A. P52,500 C. P53,000
B. P52,700 D. P51,900
3. The cost of checkbook is
A. P600 C. P0
B. P300 D. P100
4. What is the amount of petty cash shortage at December 31, 2023
A. P400 C. P100
B. P500 D. P0
5. What is the adjusted petty cash balance?
A. P9,500 C. P3,000
B. P3,500 D. P10,000
SOLUTION 1-21
1. Principal (SQUEEZE) P27,000

Interest 800
Collection fee (200)
Proceeds credited by bank P27,600
Answer: D
2. Book Bank
Note collected by bank 27,600
Debit memo for a checkbook (SQUEEZE) (100)
Transposition error in recording deposit
(P54,000 – P45,000) (9,000)
Erroneous bank debit 26,700
Petty cash fund (10,000)
Erroneous bank credit (11,000)
Outstanding checks, net of certified check
(P39,400-P10,000) _________ (29,400)
Answer: A
3. Cost of checkbook (see no. 2)

P100
Answer: D
4. Petty cash fund per ledger P

10,000
Petty cash accounted
9,500
Petty cash shortage P
500
Answer: B
Page | 38
5. Adjusted petty cash balance – currency & coins P

3,000
Answer: C
PROBLEM 1-22 – BANK RECONCILIATION

The cash receipts and the cash payments of JERVS COMPANY for April 2023 follow:
CASH RECEIPTS (CR) CASH PAYMENT(CP)
DATE CASH DEBIT CHECK NO. CASH CREDIT
April 2 P208,700 4113 P44,550
8 20,350 4114 7,350
10 27,950 4115 96,500
16 109,350 4116 33,200
22 92,700 4117 73,600
29 53,000 4118 50,000
30 16,850 4119 31,600
TOTAL P528,900 4120 83,750
4121 5,000
4122 120,650
Total P546,200
The cash account of Jervs Company shows the following information at April 30, 2023
______________________________________CASH_______________________________
DATE ITEM REF. DEBIT CREDIT BALANCE
April 1 Balance 95,550
30 CR 6 528,900 624,450
30 CP 11 546,200 78,250
Jervs Company received the following bank statement on April 30, 2023
Bank Statement for April 2023
Beginning balance P 95,550
Deposits and other Credits
April 1 P 16,300 EFT
4 208,700
9 20,350
12 27,950
17 109,350
22 68,400 BC
23 92,700 543,750
Checks and other Debits:
April 7 P 44,550
13 69,500
14 45,150 US
15 7,350
18 33,200
21 10,950 EFT
Page | 39
26 73,600
30 50,000
30 1,000 SC (335,300)
Ending balance P 304,000
Explanation:
EFT --- electronic funds transfer
US --- unauthorized signature
BC --- bank collection
SC --- service charge
Additional data for the bank reconciliation include the following:
a. The EFT deposit was a receipt of the monthly rent. The EFT debit was a monthly
insurance payment.
b. The unauthorized signature check was received from Harold Mony.
c. The P 68,400 bank collection of a note receivable on April 22 included P 9,250 interest
revenue.
d. The correct amount of check number 4115, a payment on account, is P 69,500. (Jervs
Company’s accountant mistakenly recorded the check for P 96, 500).
1. What is the amount of deposits in transit on April 30?

A. P 53,000 C. P 45,150
B. P 69,850 D. P 115,000
2. What is the amount of outstanding checks on April 30?
A. P 241,000 C. P 286,150
B. P 337,500 D. P 310,500
3. What is the amount of bank receipts in April?
A. P 543,750 C. P 459,050
B. P 527,450 D. P 528,900
4. What is the amount of bank disbursements in April?
A. P 290,150 C. P 289,150
B. P 335,300 D. P 316,150
5. What is the correct cash balance as of April 30?
A. P 132,850 C. P 122,150
B. P 87,700 D. P 223,150
Solution 1-22
1. Deposits in transit, April 30:

April 29 collection per CR P 53,000
April 30 collection per CR 16,850
Total P 69,850
Answer: B
2. Outstanding checks, April 30:

Check no. 4119 P 31,600
Check no. 4120 83,750
Check no. 4121 5,000
Check no. 4122 120,650
Total P 241,000
Answer: A
Page | 40
3. Bank receipts in April

(Total Deposits and other credits) P 543,750
Answer: A
4. Bank disbursements in April

(Total checks and other debits) P 335,300
Answer: B
5. Book Bank
Unadjusted balances, April 30 P 78,250 P 304,000
Error in check no. 4115
(P 96,500-P 69,500) 27,000
EFT-rent 16,300
Bank collection 68,400
Unauthorized signature check (45,150)
EFT-insurance (10,950)
Service charge (1,000) ________
Adjusted balances, April 30 P 132,850 P 132,850
Answer: A
Problem 1-23 - Bank Reconciliation: Unadjusted to Adjusted Balances Format

FERMIN COMPANY's check register shows the following entries for the month of
December:
Date Checks Deposits Balance
2023
Dec. 1 Beginning Balance P 89,300
5 Deposit P 65,000 154,300
7 Check #14344 P 32,500 120,800
11 Check #14345 14,000 106,800
26 Deposit 49,000 155,800
29 Check #14346 8,600 147,200
Fermin's bank reconciliation for November revealed one outstanding check (No. 14343) for P
12,000 (written on November 28), and one deposit in transit for P 5,550 (made on November
29).
The following is from Fermin's bank statement for December 2023:
Date Checks Deposits Balance
2023
Dec. 1 Beginning Balance P 95,750
1 Deposit P 5,550 101,300
4 Check No. 14344 P 32,500 68,800
5 Deposit 56,000 124,800
14 Check No. 14345 14,000 110,800
15 Loan proceeds 500,000 610,800
20 NSF check 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800
Page | 41
Assume that all errors were committed by Fermin Company, not the bank.
1. Adjusted cash balance on November 30
A. P 89,300 C. P 102,200
B. P 95,750 D. P 101,300
2. Outstanding checks on December 31
A. P 46,500 C. P 8,600
B. P 45,500 D. P20,600
3. Deposit in transit on December 31
A. P 52,600 C. P 5,550
B. P 49,000 D. P 43,450
4. Total Bank receipts in December
A. P 114,000 C. P 565,150
B. P 119,550 D. P 61,550
5. Adjusted cash balance on December 31
A. P 663,800 C. P 748,200
B. P 634,200 D. P 597,200
Solution 1-23
1. Balance per bank, Nov. 30 P

95,750
Outstanding check (no. 14343)
(12,000)
Deposit in transit
5,550
Adjusted bank balance, Nov. 30 P
89,300
Answer: A
Since there are no book reconciling items in November, the adjusted bank balance agrees
with the cash in bank balance per ledger on November 30.
2. Outstanding checks on December 31:
Check no. 14343 P
12,000
Check no. 14346
8,600
Total P
20,600
Answer: D
3. Deposit in transit on December 31:

Dec. 26 collection P
49,000
Answer: B
4. Total Bank receipts in December P

565,150
Answer: C
The total bank receipt is the total amount credited by the bank during the period.
5.
Page | 42
Book
Bank
Unadjusted balances P 147,200 P
605,800
Deposit in transit
49,000
Outstanding checks (see no. 2)
(20,600)
Error in recording deposit
(P 65,000 - P 56,000) (9,000)
Error in arithmetic for Check No. 14344 1,000
Loan proceeds 500,000
NSF check (7,600)
Interest 3,600
________
Adjusted balances P 634,200
P634,200
ANSWER: B

BALANCES FORMAT
In connection with an audit, you are given the following bank reconciliatiom.
BANK RECONCILIATION
December 31, 2023
Balance per ledger, December 31, 2023 P34,350
Add: Collections Received on the last day of December
and charged to “Cash in Bank” on books but
not deposited 5,325
Debit memo for customer’s check returned unpaid
( check is on hand but no entry has been made on the books) 4,000
Debit memo for bank service charge for December 1,000
P46,675
Deduct:
Outstanding checks (see detailed list below) P18,625
Credit memo for proceeds of a note receivable
which had been left at the bank for collection but
which has not been recorded as collected 8,000
Check for an account payable entered on books a
P12,625 but drawn and paid by bank as P16,225 3,600 32,225
Computed balance P14,450
Unlocated difference 36,600
Balance per bank (checked to confirmation) P51,050
LIST OF OUTSTANDING CHECKS December 31, 2023

Check No. Amount
14344 P 5,820
14358 1,295
14367 3,543
Page | 43
14399 2,001
14401 4,892
14407 5,074
P18,625
1. What is the correct amount of outstanding checks on December 31?
A. P18,625 C. P17,625
B. P22,625 D. P21,625
2. The journal entry to correct the outstanding checks should include a
A. Debit to Cash in bank of P4,000 C. Debit to accounts payable of P4,000
B. Credit to Cash in bank of P4,000 D. No journal entry is necessary
3. The correct amount of “unlocated difference” is
A. P32,600 C. P36,600
B. P35,600 D. P0
4. The Cash in bank to be shown on the company’s December 31, 2012 statement of financial
position is
A. P34,750 C. P33,750
B. P37,350 D. P37,750
5. The journal entry to adjust the Cash in bank account of December 31 should be
A. Debit Cash in bank of P8,000 C. Net credit to Cash in bank of P600
B. Credit to Cash in bank of P8,600 D. Net debit to Cash in bank of P600
SOLUTION 1-24
1. Outstanding checks, Dec. 31 (correct total of the list)

P22,625
ANSWER: B
2. No journal entry is necessary. There is no information in the problem that will indicate
that
those included in the list of the outstanding checks were not taken up properly on books.
ANSWER: D
3. A correct reconciliation (see no. 4) shows that there is actually no “unlocated

difference.”
ANSWER: D
4. Book Bank
Customer’s check returned (4,000)
Outstanding checks
(22,625)
Credit memo for note collected 8,000
Understatement of book disbursement (3,600)
Adjusted balances P 33,750 P
33,750
ANSWER: C
5. ADJUSTING JOURNAL ENTRIES

December 31, 2023
Page | 44
a. Accounts receivable 4,000

Cash in bank
4,000
b. Bank service charges 1,000
Cash in bank
1,000
c. Cash in bank 8,000
Notes receivable
8,000
d. Accounts payable 3,600
Cash in bank
3,600
Debit to cash in bank

P8,000
Credit to cash in bank (P4,000 + P1,000 + P3,600)
(8,600)
Net credit to cash in bank
(P600)
ANSWER: C
PROBLEM 1-25 - COMPUTATION OF BOOK DISBURSEMETS

In connection with your audit of the MARCELO COMPANY at December 31, 2023, the
following bank reconciliation was submitted to you by an employee of your client:
Balance per bank P30,534
P68,390
As part of your verification, you obtained the bank statement and canceled checks from the
bank on January 15, 2024. According to the records of the company, checks issued from
January 1 to January 15, 2024; amounted to P22,482. Checks returned by the bank on January
15, 2024, totaled P58,438. Of the checks outstanding on December 31, 2023, P9,600 were not
returned by the bank with the January 15, 2024, bank statement; and of those issued,
according to the records of the company, in January 2024, P7,200 were not returned by the
bank.
Based on the above data, calculate the disbursements per company records.
1. The difference between the disbursements per books as computed and as reported is
A. P61,912 C. P10,000
B. P2,800 D. P29,874
2. Suggest three possible explanations for the difference between the disbursements per
company as computed and as reported
SOLUTION 1-25
Page | 45
1. Outstanding checks, January 15:

From December or before P9,600
From January 7,200 P 16,800
Add: Disbursements per bank statement 58,438
Total 75,238
Less: Outstanding checks, December 31 42,756
Disbursements per books as computed P 32,482
Disbursements per books as computed P 32,482

Disbursements per books as reported 22,482
Difference in disbursements P 10,000
ANSWER: C
2. Three possible explanations for the above difference:

a. The bank disbursements (P58,438) may be overstated by P10,000. Another company
check for P10,000 may have been charged erroneously by the bank against the client's
account.
b. The December 31 outstanding checks may be understated by P10,000. Since the bank
reconciliation given in the problem was prepared by a company employee, there is no
assurance that it is correct.
c. The client's employee may have failed to record check/s issued in January, thus,
understating the book disbursements (P22,482).

BALANCES FORMAT
In auditing the HECTOR COMPANY, you obtained the bank statement, canceled checks, and
other memoranda which relate to the company’s bank account for December 2023. In
reconciling the bank balance with that shown on the company's books, you observed the facts
set forth below;
(1) Balance per bank statement, Dec. 31, 2023 P47,174
(2) Balance per books, Dec. 31, 2023 19,289
(3) Outstanding checks, Dec. 31, 2023 63,000
(4) Receipts of Dec. 31, 2023, deposited Jan. 2, 2024 6,260
(5) Service charge for November, per bank memo of Dec. 15, 2023 1,000
(6) Proceeds of bank loan, Dec, 15, 2023, discounted for 3 months
at 18% per annum, omitted from company books
47,750
(7) Deposit of Dec. 22,2023, omitted from Bank statement 9,170
(8) Check of Milano company, returned on Dec. 21, 2023,
for absence of counter-signature and redeposited with complete
signature on Jan. 3, 2024, no entry on the books having been
made for the return or redeposit 77,320
(9) Error on bank statement in entering deposit of Dec. 18, 2023:
Correct amount P1,600
Entered in statement 160 1,440
(10) Check No. 021261 of Yek Company, charged by bank in
error to company's account 13,600
(11) Proceeds of note of Harthur Co., collected by bank,
Dec. 10, 2023, not entered in cash book (principal amount of
Page | 46
P25,000 plus interest of P 1,125 less collection fee) 25,625

(12) Erroneous debit memo of Dec. 28, 2023 to charge
Company’s account with settlement of bank loan which was paid
by check no. 112170 on same date 5,000
(13) Error on bank statement in entering deposit of Dec. 4, 2023:
Entered as P14,200.62
Correct amount 12,400.62 1,800
(14) Deposit of Bunso Co. of Dec. 2, credited in error to this company 3,500
1. What is the principal amount of the loan obtained from bank in December?
A. P50,000 C. P48,125
B. P47,750 D. P49,625
2. What amount of prepaid interest should on Hectors December 31, 2018, statement
A. P2,250 C. P375
B. P0 D. P1,875
3. The amount of collection fee
A. P625 C. P500
B. P1,625 D. P0
4. What is the adjusted Cash in bank balance as of December 31, 2018?
A. P14,344 C. PI 7,944
B. P11,464 D. P9,344
5. The Cash in bank per ledger as of December 31, 2018, should be increased (decreased) by
A. P4,945 C. P(4,945)
B. P5,945 D. P(5,945)
SOLUTION 1-26
1. Proceeds = Principal -Interest
47,750=P - (Px180 % x 3/12)
47,750=P - 0.045P
47,750=0.955 P
P= 47,750 + 0.955
P= P50,000
Answer: A
2. Prepaid interest, Dec.31 (2/250 x 2.5/3) P 1,875

Answer: D
3. Principal P 25,000
Maturity value 26,125
Collection fee (SQUEEZE) (500)
Proceeds P 25,625
Answer: C
4. Book Bank
Receipts of 12/31/23, deposited 1/02/24 6,260
Service charge for November (1,000)
Proceeds of bank loan 47,750
Page | 47
Deposit of 12/22/23, omitted from bank Statement 9,170

Check of Milano Company, charged back (77,320)
Error in entering deposit of 12/18/23 1,440
Check of Yek Company charged in error to Hector Company 13,600
Proceeds of note of Harthur Co. 25,625
Erroneous debit memo of 12/28/18, charged by bank in settlement
of loan paid by check no. 112170 5,000
Error in entering deposit of 12/04/23 (1,800)
Deposit of Bunso Co., credited in error to Hector Company ________ 3,500
ADJUSTED BALANCES P14,344 P14,344
Answer: A
5. Adjusted Cash in bank balance (see no, 4) P 14,344

Cash in bank balance per ledger 19,289
Net credit adjustment – decrease P 4,945
ANSWER: C
PROBLEM 1-27 - BANK RECONCILIATION

You are auditing general cash for the DION COMPANY for the fiscal year ended July 31,
2023. The client has not prepared the July 31 bank reconciliation. After a brief discussion
with the owner you agree to prepare the reconciliation, with assistance from one of Dion
Company's clerks. You obtain the following information:
General Ledger Bank Statement
Beginning balance P 46,110 P 57,530
Deposits 250,560
Cash receipts journal 254,560
Checks cleared (236,150)
Cash disbursements journal (218,110)
July bank service charge (870)
Note paid directly (61,000)
NSF check _________ (3,110)
Ending balance P82,560 P6,960
June 30 Bank Reconciliation

Information in General Ledger and Bank Statement
Balance per bank P57,530
Balance per books 46,110
Additional information obtained is:

1. Checks clearing that were outstanding on June 30 totaled P 16,920.
2. Checks clearing that were recorded in the July disbursements journal totaled P204,670.
3. A check for P 10,600 cleared the bank, but had not been recorded in the cash
disbursements journal. It was for an acquisition of inventory. Dion uses the periodic
inventory method.
Page | 48
4. A check for P3,960 was charged to Dion Company but had been written on a different
company's bank account.
5. Deposits included P6,000 from June and P 244,560 for July.
6. The bank charged Dion Company's account for a not-sufficient fund check totaling P3,110.
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.
7. A note for P58,0000, plus interest, was paid directly to the bank under an agreement signed
four months ago. The note payable was recorded at P58,000 on Dion Company's books.
Based on facts given, answer the following:

1. The checks outstanding on June C. 30 P13,940 amount to
A. P9,980 C. P13,940
B.P10,830 D. P3,340
2. The deposits in transit on June 30 amount to
A. P6,890 C. P6,000
B. P10,000 D. P9,110
3. The adjusted cash balance on July 31 is
A. P6,980 C. 3,870
B. P10,940 D. P3,020
4. Which of the following audit procedures would be used to verify the payment of note in
July?
A. Check the arithmetical accuracy of the July 31 reconciliation.
B. Check for absence of note on July 31 bank confirmation.
C. Trace payment to duplicate deposit slip.
D. Obtain cutoff bank statement.
5. The auditor would perform the following procedures to verify the unrecorded check of
P10,600, except
A. Obtain cutoff bank statement.
B. Examine checks retürned with July bank statement.
C. Trace check number to absence in July cash disbursements journal and recording in
August. D. Examine supporting documentation.
SOLUTION 1-27
1. Outstanding checks, June 30 P 17,420

Add: Checks issued in July (P218,110 per cash
disbursements journal + P10,600 unrecorded check) 228,710
Total 246,130
Less: Checks paid by bank in July (236, 150 - 2,960
erroneous check charged by bank) 232, 190
Outstanding checks, July 31 P13,940
Answer: C
Checks outstanding on June 30
that did not clear in July (P17,420 - P16,920) P 500
Checks issued in July that did not clear in July (P218,110 - P204,670) 13,440
Page | 49
Outstanding checks, July 31 P 13,940
2. Deposits in transit, June 30 P 6,000

Add: July deposits per cash receipts journal 254,560
Total Less: Deposits credited by bank in July 260,560
Deposits in transit, July 31 250,560
P 10,000
Answer: B
3. Book Bank
Unadjusted balances P82,560 P 6,960
Outstanding checks (see no. 1) (13,940)
Deposits in transit (see no. 2) 10,000
Unrecorded check (10,600)
Check erroneously charged to Dion 3,960
NSF check Note payment (P58,000 principal +
P3,000 interest) (61,000) ________
Answer: A
4. The following audit procedures would be performed to verify the note payment:
1. Examine cancelled check.
2.Recompute interest.
3. Check for absence of note on July 31 bank confirmation.
Answer: B
5. The following audit procedures would be performed to verify the unrecorded check:
1. Examine check returned with July bank statement.
2. Trace number to absence in July cash disbursements journal and recording in August.
3. Examine supporting documentation.
4. Investigate why it was unrecorded.
The cutoff bank statement will no longer show the unrecorded check because it was already paid by
the bank in July.
Answer: A
PROBLEM 1-28 - PROOF OF CASH: UNADJUSTED TO ADJUSTED BALANCES

FORMAT
The cash account of VELASCO COMPANY shows the following activities:
Date Debit Credit Balance
Nov.30 Balance P115,000
Dec. 2 November bank charges P 50 114,950
4 November bank credit for notes
receivable collected P10,000 124,950
15 NSF check 1,300 123,650
20 Loan proceeds 48,500 172,150
21 December bank charges 60 172,090
Page | 50
31 Cash receipts book 707,300 879,390

31 Cash disbursements book 408,000 471,390
CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 11,000 801 P 2,000
2 121-136 21,300 802 3,000
3 137-150 20,000 803 1,000
4 151-165 56,000 804 3,000
5 166-190 39,000 805 12,000
8 191-210 66,000 806 19,000
9 211-232 88,000 807 26,000
10 233-250 77,000 808 30,000
11 251-275 21,000 809 61,000
12 276-300 30,000 810 7,000
15 301-309 55,000 811 8,000
16 310-350 8,000 812 16,000
17 351-390 19,000 813 20,000
18 391-420 9,000 814 22,000
19 421-480 17,000 816 36,000
22 481-500 21,000 817 11,000
23 501-525 32,000 818 50,000
23 - - 819 7,000
23 - - 820 4,000
26 526-555 74,000 821 3,000
28 556-611 5,000 822 12,000
28 - - 823 13,000
29 612-630 38,000 824 29,000
29 - - 825 2,000
29 - ______ - 826 11,000
Totals P 707,300 P 408,000
BANK STATEMENT
Date Check No. Charges Credits
Dec. 1 792 P2,500 P 8,500
2 802 3,000 11,000

3 - - 21,300
4 804 3,000 20,000
5 EC 81,000 81,000
8 805 12,000 95,000
9 CM 16 - 12,000
10 799 7,050 154,000
11 DM 57 1,300 77,000
12 808 30,000 21,000
15 803 1,000 -
16 809 61,000 85,000
17 DM 61 60 8,000
Page | 51
18 813 20,000 19,000

19 CM 20 - 48,500
22 815 6,000 -
23 816 36,000 47,000
23 811 8,000 -
23 801 2,000 -
26 814 22,000 32,000
28 818 50,000 74,000
28 DM 112 120 -
29 821 3,000 5,000
29 CM 36 - 12,000
29 820 4,000 -
Totals P 353,030 P 831,300
a. DMS 61 and 112 are for service charges.
b. EC is error corrected.
c. DM 57 is for an NSF check.
d. CM 20 is for loan proceeds, net of P 150 interest charges for 90 days.
e. CM 16 is for the correction of an erroneous November bank charge.
f. CM 36 is for customers' notes collected by bank in December.
g. Bank balance on December 31 is P592,270.
1. The total outstanding checks at November 30 should be

A. P9,550 C. P13,050
B. P7,050 D. P15,550
2. The total outstanding checks at December 31 should be
A. P147,000 C. P153,000
B. P162,550 D. P159,000
3. The deposit in transit at November 30 should be
A. P8,500 C. P48,500
B. P19,500 D. P 0
4. The deposit in transit at December 31 should be
A. P44,000 C. P46,500
B. P0 D. P38,000
5. The adjusted book balance at November 30 should be
A. P125,000 C. P115,000
B. P124,950 D. P136,950
6. The adjusted bank receipts for the month of December should
A. P763,800 C. P765,800
B. P773,800 D. P767,800
7. The adjusted book disbursements for the month of December should be
A. P403,480 C. P415,480
B. P415,540. D. P409,480
8. The adjusted bank balance at December 31 should be
A. P592,270 C. P558,270
B. P477,270 D. P483,270
Solution 1-28
Page | 52
1. OUTSTANDING CHECKS, NOVEMBER 30:

Check no. 792 P 2,500
799 7,050
Total P 9,550
Answer: A
2. OUTSTANDING CHECKS, DECEMBER 31:

Check no. 806 P 19,000
807 26,000
810 7,000
812 16,000
817 11,000
819 7,000
822 12,000
823 13,000
824 29,000
825 2,000
826 11,000
Total P 153,000
Answer: C
3. Deposits in transit, November 30 P 8,500

Answer: A
4. Deposit in transit, November 30 (see no. 3) P 8,500

Add: Collections per cash receipts book 707,300
Total P 715,800
Less: Deposits credited by bank:
Bank receipts P831,300
Correction of erroneous bank charge
in December (81,000)
Correction of erroneous bank
in November (12,000)
Loan proceeds (48,500)
Note collected (12,000) 677,800
Deposit in transit, December 31 P 38,000
Answer: D
PROOF OF CASH December 1-31
Balance Nov. 30 Receipts Disbursements Balance Dec. 31

Balances per bank P 114,000 P 831,300 P 353,030 P 592,270
Bank error corrected the
same date (81,000) (81,000)
Erroneous bank charge in
November 12,000 (12,000)
Deposits in transit:
November 30 8,500 (8,500)
Page | 53
December 31 38,000 38,000

Outstanding checks:
November 30 (9,550) (9,550)
December 31 __________ ________ 153,000 153,000
Adj. book balances P 124,950 P 767,800 P 415,480 P477,270
Bal. Nov. 30 Receipts Disbursements Balance Dec. 31
Balances per books P115,000 P 765,800 P 409,410 P 471,390

Bank service charges:
November 30 (50) (50)
December 31 120 (120)
Notes collected by bank:
November 30 10,000 (10,000)
December 31 12,000 12,000
Unrecorded disbursement
— Check no. 815 _______ _______ 6,000 (6,000)
Adj. bank balances P124,950 P767,800 P415,480 P477,270
5.Adjusted book balance, Nov. 30 P 124,950

Answer: B
6. Adjusted bank receipts in December P 767,800

Answer: D
7. Adjusted book disbursements in December P 415,480

Answer: C
8. Adjusted bank balance, December 31 P477,270

Answer: B
PROBLEM 1-29 PROOF OF CASH: BANK TO BOOK BALANCES FORMAT

Shown below is the May 31, 2023, bank reconciliation prepared by your client's staff.
Reconciliation
May 31, 2018
Bank balance P 652,000

Total P 662,000
No. 640 P10,000
652 8,000
653 2,000 20,000
Adjusted bank balance P 642,000
Book balance P 570,800
Page | 54
Add: Proceeds of note receivable

collected in May P70,000
Deposit on May 31 not recorded
on books until June 2,000 72,000
Total P 642,800
Less: Bank service charge 800
Adjusted book balance P 642,000
The June 2023 bank statement is shown below:

Pasig Bank Period covered: May 31, 2023- June 30, 2023
Account No.: 0021261
Date Checks Deposits
June 1 8,000 10,000
June 8 2,000
June 11 14,000 20,000
June 13 1,000 DM 1,000
June 16 4,000
June 21 12,000 56,000
June 27 18,000
June 29 1,000 EC 1,000 EC
June 30 200 SV
June 30 3,000 DM
SV-Service Charges DM-Debit Memo

EC - Error Corrected CM Credit Memo
The paid checks accompanying this bank statement (all clearing in June) are the following:
No. 652 P8,000 No. 654 P14,000 No. 657 P12,000
No. 653 P2,000 No. 655 P 4,000 No. 658 P18,000
The check register reveals that the last check issued in June is No. 659 for P5,000 and that
check no. 656 is for P2,600.
Cash received for the period June 22 through June 30 of P70,000 was deposited in the bank
on July 1.
The debit memos on June 13 and June 30 represent customers' NSF checks returned by the
bank. The June 13 NSF check was immediately redeposited without entry. The June 30 NSF
check was redeposited on July 1 without entry.
1. What is the total bank receipts in June?

A. P87,000 C. P77,000
B. P88,000 D. P78,000
2. What is the total bank disbursements in June?
A. P59,200 C. P58,200
B. P58,000 D. P63,200
3. What is the balance per bank statement on June 30, 2018?
A. P676,800 C. P732,400
B. P627,200 D. P729,200
4. What is the total book receipts in June?
A. P88,000 C. P146,000
B. P220,000 D. P218,000
Page | 55
5. What is the total book disbursements in June?

A. P53,000 C. P56,400
B. P57,400 D. P63,200
6. What is the book balance on June 30, 2018?

A. P732,200 C. P732,400
B.P729,200 D. P676,800
SOLUTION 1-29
1. Bank receipts in June (arrived at by footing the

Deposits column of the bank statement) P 88,000
Answer: B
2. Bank disbursements in June (arrived at by footing the

Checks column of the bank statement) P 63,200
Answer: D
3. Bank balance, May 31 P652,000

Add: Bank receipts in June 88,000
Total 740,000
Less: Bank disbursements in June 3,200
Bank balance, June 30 P676,800
Answer: A
PROOF OF CASH
June 1-30, 2023
June
Bal. May 31 Receipts Disbursements Bal. June 30
Bank balances P652,000 P88,000 P63,200 P676,800
May 31 10,000 (10,000)
June 30 70,000 70,000
Outstanding checks:
May 31 (20,000) (20,000)
June 30 17,600 (17,600)
May 31 800 800
June 30 (200) 200
Bank collection in May (70,000) 70,000
May deposit recorded By the
company in June (2,000) 2,000
NSF checks:
Already redoposited (1,000) (1,000)
Not yet deposited (3,000) 3,000
Bank error corrected
on the same date _________ (1,000) (1,000) _________
Book balances P570,800 P218,000 P56,400 P732,400
Page | 56
4.Total book receipts in June P218,000

Answer: D
5. Total book disbursements in June P56,400
Answer: C
6.Book balance on June 30, 2023 P732,400
Answer: C
PROBLEM 1-30 – PROOF OF CASH: BANK TO BOOK BALANCES FORMAT

The following information was obtained in an audit of the cash account of
CHELSEE.COMPANY as of December 31, 2023. Assume that the CPA has satisfied himself
as to the propriety of the cash book, the bank statements, and the returned checks, except as
noted:
1. The bookkeeper's bank reconciliation at November 30, 2023.
Balance per bank statement P 194,000
Total Less: Outstanding checks
No. 1434 P1,400
1562 7,500
1571 5,800
1584 8,000
1591 300 23,000
2. A summary of the bank statement for December 2023.

Balance brought forward P 194,000
Deposits 1,487,000
Total P1,681,000
Charges (1,325,000)
Balance, December 31, 2023 P356,000
3. Included in cancelled checks returned with the December bank statement were the checks
listed below.
4. The Chelsee Company discounted its own 60-day note for P90,000 with the bank on
December 1, 2023. The discount rate was 6 percent. The accountant recorded the proceeds as
a cash receipt at the face value of the note.
5. The accountant records customers' dishonored checks as a reduction of cash receipts.
When the dishonored checks are redeposited they are recorded as a regular cash receipt. Two
NSF checks for P 1,800 and P2,200 were returned by the bank during December. Both checks
were redeposited and were recorded by the accountant.
6. Cancellations of Chelsee Company checks are recorded by a reduction of cash
disbursements.
7. December bank charges were P200. In addition, a P 100 service charge was made in
December for the collection of a note receivable in November. These charges were not
recorded on the books.
8. Check no. 1434 listed in the November outstanding checks was drawn in 2021. Since the
payee cannot be located, the president of Chelsee Company agreed to the CPA's suggestion
that the check be written back into the accounts by a journal entry.
Page | 57
9. Outstanding checks at December 31, 2023, totaled P49,400, including checks 1434 and
1584.
10. The cutoff bank statement disclosed that the bank had recorded a deposit of P24,000 on
January 2, 2024. The accountant had recorded this deposit on the books on December 31,
2023, and then mailed the deposit to the bank.
Cancelled Checks Returned with the December Bank Statement

Number Date of Check Amount of check Comments_________
1562 11/28/23 P 750 This check was in payment of
an invoice for P7,500 and was
recorded in the cash book as
P7,500.
1571 11/28/23 5,800 This check was in payment of an
invoice for P5,800 and was
recorded in the cash book as
P5,800.
1583 12/04/23 1,500 Examination of this check
revealed that it was unsigned. A
discussion with the client
disclosed that it had been
mailed inadvertently before it
was signed. The check was
endorsed and deposited by the
payee and processed by the
bank even though it was a legal
nullity. The check was recorded
in the cash disbursements
journal.
1588 12/12/23 8,000 This check replaced 1584, which
was returned by the payee
because it was mutilated. Check
1584 was not cancelled on the
books.
---------- 12/19/23 2,000 This was a counter check drawn

at the bank by the president of
the company as a cash advance
for travel expense. The president
overlooked informing the
bookkeeper about the check.
--------- 12/20/23 3,000 The drawer of this check was the
Chelsea Company.
1595 12/20/23 3,500 This check had been labeled NSF
and returned to the payee
because the bank had
erroneously believed that
the check was drawn by
Chelseen. Subsequently, the
payee was advised to redeposit
Page | 58
the check.
1599 01/05/24 100,000 This check was given to the payee
on December 30, 2023, as a
postdated check with the
understanding that it would not be
deposited until January 5. The
check was not recorded on the
books in December.
1. What is the correct amount of outstanding checks on December 31?
A. P41,400 C. P48,000
B. P33,250 D.P40,000
2. What is the amount of cash receipts per book in December?
A.P1,496,900 C. P1,495,100
B. P1,504,900 D. P1,487,000
3. What is the amount of cash disbursements per book in December?
A. P1,254,850 C. P1,256,850
B. P1,252,850 D. P1,248,850
4. What is the cash in bank balance per book as of December 31?
A. P426,050 C. P430,050
B. P428,250 D.P343,050
5. What is the adjusted cash balance as of December 31?
A. P343,000 C. P347,000
B. P340,200 D. P344,200
Solution 1-30
1. Outstanding checks, December 31 (P49,400 – P1,400 - P8,000) P40,000

Answer: D
December
Bal. Nov. 30 Receipts Disbursements Bal. Dec 31
Per bank statement P194,000 P1,487,000 P1,325,000 P356,000
Outstanding checks:
Nov. 30 (23,000) (23,000)
Dec. 31 40,000 (40,000)
Nov. 30 11,000 (11,000)
Dec. 31 24,000 24,000
Interest on note
discounted
(P90,000 x 60/360) 900 900
NSF checks (4,000) (4,000)
Bank service charge (300) 300
Cancellation of check
no. 1434 1,400 (1,400)
Error in recording check
no. 1562
(P7,500 - P750) 6,750 (6,750)
Cancellation of check
no. 1584 8,000 (8,000)
Page | 59
Counter check drawn

by president (2,000) 2,000
Check of Chelsea
charged in Error (3,000) 3,000
Postdated check
presented for payment _______ _________ _(100,000) _100,000
Per book balances P182,000 P1,496,000 P1,248,850 P430,050
2. Book receipts in December P1,496,900

Answer: A
3. Book disbursements in December P1,248,850

Answer: D
4. Book balance on December 31 P 430,050

Answer: C
5. Book Bank
Interest on note discounted (900)
Cancellation of check no. 1434 1,400
Error in recording check no. 1562 6,750
Cancellation of check no. 1584 8,000
Counter check (2,000)
Check of Chelsea charged in error 3,000
Postdated check presented for payment (100,000) _______
Adjusted balance P343,000 P343,000
PROBLEM 1-31 PROOF OF CASH BOOK TO BANK BALANCES FORMAT

The following information was obtained in connection with the audit of PINKY
COMPANY's cash account as of December 31, 2023.
Outstanding checks, Nov. 30, 2023 P16,250

Outstanding checks, Dec. 31, 2023 12,500
Deposit in transit, Nov. 30, 2023 12,500
Cash balance per general ledger Dec. 31, 2023 37,500
Actual company collections from its customers during December 152,500
Company checks paid by bank in December 130,000
Bank service charges recorded on company books in December 2,500
Bank service charges per December bank statement 3,250
Deposits credited by bank during December 145,000
November bank service charges recorded on company books in December 1,500
The cash receipts book of December is underfooted by P2,500.

Page | 60
The bank erroneously charged the company’s account for a P3,750 check of another
depositor. This bank error was corrected in January 2024.
1. How much is the deposit in transit on December 31, 2023?

A. P5,000 C. P22,500
B. P20,000 D. P17,500
2. The total unrecorded bank service charges as of December 31, 2023, is
A. P750 C. P1,750
B. P2,250 D. P4,250
3. What is the total book receipts in December?
A. P150,000 C. P155,000
B.P152,000 D. P147,500
4. What is the total amount of company checks issued in December?
A. P130,000 C. P133,750
B. P123,000 D. P126,250
5. What is the total book disbursements in December?
A. P123,750 C. P126,250
B. P128,500 D. P128,750
6. What is the book balance on November 30, 2023?
A. P16,250 C. P37,500
B. P21,250 D. P35,000
7. What is the bank balance on November 30, 2023?
A. P23,000 C. P43,500
B.P18,500 D. P16,250
8. What is the total bank receipts in December?

A. P120,000 C. P145,000
B. P140,000 D. P150,000
9. What is the total bank disbursements in December?
A. P154,500 C. P129,500
B.P132,500 D. P137,000
10. What is the bank balance on December 31, 2023?
A. P21,500 C. P310,000
B. P26,500 D. P33,250
SOLUTION 1-31
1. Deposit in transit, November 30 P 12,500
Add: Company collections in December 152,500
Total 165,000
Less: Deposits credited by bank in December 145,000
Deposit in transit, December 3 P 20,000
Answer: B
2. Bank service charges per December bank statement P 3,250

Less: December bank service charges recorded on
company books in December
(2500-1500) 1,000
Unrecorded December Bank Service Charge P 2,250
Answer: B
Page | 61
3. Actual company collections in December P152,500

Less: Underfooting of December cash
receipts book 2,500
Book receipts in December P 150,000
Answer: A
4. Outstanding checks, December 31 P 12,500

Add: Checks paid by bank in December 130,000
Total 142,500
Less: Outstanding checks, November 30 16,250
Checks issued in December P 126,250
Answer: D
5. Checks issued in December (see no. 4) P126,250

Add: Bank service charges recorded in December 2,500
Book disbursements in December P 128,750
Answer: D
6. Book balance, December 31 P 37,500

Add: Book disbursements in December (see no. 5) 128,750
Total 166,250
Less: Book receipts in December (see no. 3) 150,000
Book balance, November 30 P16,250
Answer: A
Pinky Co.
PROOF OF CASH
For the Month of December 2023
December
Bal. Nov. 30 Receipts Disbursements Bal. Dec 31
Book balances P 16,250 P150,000 P128,750 P37,500
Outstanding checks:
Nov. 30 16,250 16,250
Dec. 31 (12,500) 12,500
Nov. 30 (12,500) 12,500
Dec. 31 (20,000) (20,000)
Nov. 30 (1,500) (1,500)
Dec. 31 2,250 (2,250)
Underfooting of
December book
receipts 2,500 2,500
Erroneous bank charge
in December ______ ________ 3,750 (3,750)
Page | 62
7. Bank balance, November 30, 2023 P 18,500

Answer: B
8, Total bank receipts in December P 145,000

Answer: C
9. Total bank disbursements in December P 137,000

Answer: D
10. Bank balance, December 31, 2023 P 26,500

Answer: B
Problem 1-32 - PROOF OF CASH: UNADJUSTED TO ADJUSTED BALANCES

FORMAT
In your audit of HARRY INC.'s cash account as of December 31, 2023, you ascertain the
following information:
The bookkeeper's bank reconciliation on November 30, 2023, is as follows:
Balance per bank statement, November 30 P 24, 298
Add: Deposits in transit 3,643
Total P 27,946
No. 3408 P440
No. 3413 300
No. 3414 6,820
No. 3416 3,924
No. 3417 800 12,284
Balance P15,662
Add: Bank Service Charge For November 36*
Balance per general ledger, November 30 P15,698
*Entered in Check Register in December
The Cash Receipts Journal shows total receipts for December of P371, 766. The Check
Register reflects total checks issued in December of P377, 632. A collection of P5, 912 was
recorded on company books on December 31 but was not deposited until January 2, 2024.
The balance per bank statement at December 31, 2023, is P17,516. This statement shows total
receipts of P373, 502 and checks paid of P380,284.
Your examination reveals the following additional information:
1) Check no. 3413 dated November 24, 2023, was entered in the Check Register as P300.
Your examination of the paid checks returned with the December bank statement reveals that
the amount of this check is P30
2) Check no. 3417 was mutilated and returned by the payee. A replacement check (no. 3453)
was issued. Both checks were entered in the Check Register but no entry was made to cancel
check no. 3417.
3) The December bank statement includes an erroneous charge of P 480.
Page | 63
4) On January 3, 2024, the bank informed your client that a December bank service charge of
P42 was omitted from the statement.
5) Your examination of the bank credit memo accompanying the December bank statement
discloses that it represents proceeds from the note receivable' collection in December for
P4,000.
6) The outstanding checks at December 31, 2018, are as follows:
No. 3408 P440 No.3418 P2,814
No. 3417 800 No. 3419 5,788
1. What is the total book disbursement for the month of December?

A. P377,668 C. P377,632
B. P377,710 D. P377,596
2. What is the book balance at December 31?
A. P9,832 C. P9,754
B. P9,868 D. P9, 796
3. The outstanding checks at December 31 totaled

A. P8,602 C. P9,042
B. P9,072 D. P9,842
4. What is the adjusted bank balance on November 30?
A. P16, 690 C. P16, 804
B. P16, 732 D. P16, 774
5. The adjusted book receipts for the month of December should be
A. P375, 724 C. P371, 238
B. P371, 766 D. P375,766
6. The adjusted book disbursements for the month of December should be
A. P377, 590 C. P377,674
B. P377, 662 D. P377,632
7. What is the adjusted book balance on December 31?
A. P14, 824 C. P14, 908
B. P14, 866 D. P14, 782
8. A proof of cash used by an auditor

A. Provides that the client's year-end balance of cash is fairly stated.
B. Confirms that the client has properly separated the custody function from the recording
function with respect to cash.
C. Validates that the client's bank did not make an error during the period being examined.
D. Determines whether any unauthorized disbursements or unrecorded deposits were made
for the given time period.
Solution 1-32
1. Company check issued in December P377,632

Add: November Bank service charge 36
Total book disbursement in December P377,668
Answer: A
2. Book balance, November 30 P 15,698

Add: December book receipts 371,766
Page | 64
Total 387,464
Less: December book disbursements 377,668
Book balance, December 31 P 9,796
Answer: D
3. Outstanding checks, December 31:

Check no. 3408 P 440
3418 2,814
3419 5,788
Total P9,042
Answer: C
December
Bal. Nov. 30 Receipts Disbursements Bal. Dec. 31
Book balances P15,698 P371,766 P377,668 P 9,7963
November 30 (36) (36)
December 31 42 (42)
Overstatement of Nov.
disbursement
(check #3413) 270 270
Mutilated check (#3417) 800 800
Note collected by bank _________ 4,000 _________ 4,000
Adj. book balance P16,732 P375,766 P377,674 P14,824
December
Bal. Nov. 30 Receipts Disbursements Bal. Dec. 31
November 30 3,648 (3,648)
December 31 5,912 (5,912)
Erroneous bank charge (480) 480
Bank service charge 42 (42)
Outstanding checks:
November 30 (11,214) (11,214)
December 31 ________ _________ 9,042 (9,042)
Adj. bank balance P16,732 P375,766 P377,674 P14,824
4. Adjusted bank balance, November 30 P16,732

Answer: B
5. Adjusted book receipts in December P375, 766

Answer: D
6. Adjusted book disbursements in December P377, 674

Answer: C
Page | 65
7. Adjusted book balance, December 31 P14, 824

Answer: A
8. A proof of cash usually consists of four columns, with reconciliations of beginning and
end-of-period cash balances and reconciliations of cash receipts and disbursements during the
period. The amounts appearing in the ledger and on bank statement should reconcile both
horizontally and vertically. This reconciliation detects unauthorized disbursements and
unrecorded deposits for the period. This is useful when internal control over cash transactions is
weak or inadequate.
Answer: D
Page | 66
PROBLEM 1-33
Proof of Cash: Unadjusted to Adjusted Balances Format
The following data are assembled by the accountant of HAROLD COMPANY:

Nov. 30, 2023 Dec. 31, 2023
Cash account balance P 41,175.00 P 100,712.50

Bank statement balance 267,705.00 344,542.50
Deposits in transit 20,502.50 32,200.00
Outstanding checks 69,295.00 75,280.00
Bank service charges 1,800.00 1,500.00
NFS check* 20,625.00
Company’s notes receivable
collected by bank 179,537.00 202,250.00
*Redeposited in the same month. No entries made to take up the return and redeposit.
The bank statement and the company’s cash records show the following totals:
Canceled checks and debit memos per bank
statement P545,932.50
Cash receipts per cash book 411,592.50
Checks written per cash book 529,792.50
Deposits and credit memos per bank
statement 622,770.00

A. P613,842.50 C. P411,592.50
B. P591,130.00 D. P580,330.00

A. P531,592.50 C. P533,092.50
B. 529,792.50 D. P531,292.50
3. What is the adjusted book balance on November 30?

A. P220,712.50 C. P218,912.50
B. P222,512.50 D. P217,412.50
4. The adjusted bank receipts in December should be

A. P634,168.50 C. P632,667.50
B. P622,770.00 D. P634,467.50
5. The adjusted book disbursements in December should be

A. P545,932.50 C. P548,917.50
B. P552,517.50 D P551,917.50

A. P301,462.50 C. P322,087.50
B. P302,662.50 D. P280,537.50
Page | 67
SOLUTION 1-33
1. Cash receipts per cash book P411,592.50

Add: Notes collected by bank in November 179,537.50
Total book receipts in December P591,130.00
Answer: B
2. Checks written per cash book P529,792.50
Add: Bank service charge in November 1,800.00
Total book disbursements in December P531,592.50
Answer: A
Balance Balance
Nov.30 Receipts Disbursements Dec. 31
Balance per bank
statement P267,705.00 P622,770.00 P545,932.50 P344,542.50
Deposits in transit
Nov. 30 20,502.50 (20,502.50)
Dec. 31 32,200.00 32,200.00
Outstanding checks
Nov. 30 (69,295.00) (69,295.00)
Dec. 31 75,280.00 (75,280.00)
Adj. balances P218,912.50 P534,467.50 P551,917.50 P310,462.50
3. Adjusted book balance, November 30 P218,912.50
Answer: C
4. Adjusted bank receipts in December P634,467.50
Answer: D
5. Adjusted book disbursements in December P551,917.50
Answer: D
6. Adjusted book balance, December 31 P301,462.50
Answer: A
PROBLEM 1-34
Proof of Cash: Book to Bank Balances Format
The auditor of TSIKOY COMPANY gathered the following information:

1. The November 30 bank statement balance included bank service charges of P2,000.
2. The November 30 cash balance in the general ledger was P244,500.
3. Outstanding checks on November 30 were P63,000 while undeposited receipts were
P36,000.
4. The bank service charges as shown on the bank statement totaled P3,000.
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5. The December 31 cash balance in the general ledger was P319,750, which recognized
P482,750 for December receipts and P405,500 for checks written during December.
In transit to the bank were receipts of P28,750. Checks of P15,000 written prior to
December and checks of P60,500 written in December had not yet cleared the bank.
1. What is the total book disbursements for December?

A. P403,500 C. P407,500
B. P404,500 D. P405,500
2. What is the November 30 bank balance?

A. P271,500 C. P268,500
B. P269,500 D. P266,500

A. P490,000 C. P497,250
B. P482,750 D. P488,000
4. What is the total bank disbursements in December?

A. P419,000 C. P408,500
B. P405,500 D. P396,000
5. What is the bank balance on December 31?

A. P316,750 C. P322,750
B. P363,500 D. P366,500
SOLUTION 1-34
1. Checks written during December P405,500

Add: November bank service charges recorded on company
books in December 2,000
Total book disbursements in December P407,500
Answer: C
Balance Balance
Balance per books P244,500 P482,750 P407,500 P319,750
Undeposited receipts:
Nov. 30 (36,000) 36,000
Dec. 31 (28,750) (28,750)
Outstanding checks
Nov. 30 63,000 63,000
Dec. 31 (75,500) 75,500
Bank service charges
Nov. 30 (2,000) (2,000)
Dec. 31 3,000 (3,000)
Balance per bank P269,500 P490,000 P396,000 P363,500
Page | 69
1. Bank balance, November 30 P269,500
Answer: B
2. Total bank receipts in December P490,000
Answer: A
3. Total bank disbursements in December P396,000
Answer: D
4. Bank balance, December 31 P363,500
Answer: B
Problem 1-35
RODELIO CO. has a current account in Pinoy Bank. Your audit of the company’s cash
account reveals the following:
1. Balances taken from the company’s general ledger:

Cash balance, Nov. 30,2023 P637,860
Cash balance, Dec. 31, 2023 576,420
Receipts, Dec. 1-31,2023 306,220
2. Balances taken from the December bank statement:

Bank balance, Nov. 30,2023 P685,180
Bank balance, Dec. 31, 2023 637,220
Disbursements (debits) 356,080
3. Outstanding checks, Nov. 30, 2023 (P26,140 was paid by

bank in December) 64,140
4. Checks written and recorded in December; not included
in the checks returned with the December bank statement 36,080
5. Deposit in transit, Nov. 30, 2023 15,260
6. Deposit in transit, Dec. 31, 2023 16,140
7. A bank credit memo was issued in December to correct

an erroneous charge made in November 1,500
8. Note collected by bank in December (company was not

informed of the collection) 2,060
9. A check for P2,021 (payable to a supplier) was recorded

in the Check Register in December as P3,000 980
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10. A check for P2,240 was charged by the bank as P2,420 in

December 180
11. Rodelio Co. issued a stop payment to the bank in

December. This pertains to a check written in December
which was not received by the payee. A new check was
written and recorded in the Check Register in December.
The old check was written off by a journal entry also in
December. 780
12. Bank service charge, Nov. 30, 2023 60

A. P367,660 C. P369,720
B. P244,780 D. P368,540

A. P260,160 C. P306,060
B. P308,120 D. P309,020
3. What is the total outstanding checks on December 31?

A. P100,220 C. P62,220
B. P38,000 D. P74,080
4. What is the adjusted bank balance on November 30?

A. P636,300 C. P637,800
B. P685,180 D. P634,800
5. What is the adjusted book receipts in December?

A. P307,500 C. P303,380
B. 306,220 D. P305.440
6. What is the adjusted bank disbursements in December?
A. P353,980 C. P345,960
B. 365,840 D. P366,020

A. P577,500 C. P576,420
B. P577,400 D. P579,460
SOLUTION 1-35
1. Book balance, November 30 P637,860
Add: Book receipts in December 306,220
Total 944,080
Less: Book disbursements in December (SQUUEZE) 367,660
Book Balance, December 31 P576,420
Answer: A
2. Bank balance, November 30 P685,180

Add: Bank receipts in December (SQUEEZE) 308,120
Page | 71
Total 993,300
Less: Bank disbursements in December 356,080
Bank balance, December 31 P637,220
Answer: B
3. Checks issued prior to December (P64,140 – P26,140) P38,000

Checks issued in December 36,080
Total outstanding checks, December 31 P74,080
Answer: D
Balance Balance
Balance per books P637,860 P306,220 P367,660 P576,420

Note collected by bank
in December 2,060 2,060
Overstatement of
December book
disbursement
(P3,000 – P2,020) (980) 980
Check stopped for
payment (780) (780)
Bank service charge in
November (60) (60)
Adj. book balances P637,800 P307,500 P365,840 P579,460
Balance Balance
Outstanding checks:
November 30 (64,140) (64,140)
December 31 74,080 (74,080)
November 30 15,260 (15,260)
December 31 16,140 16,140
Erroneous bank charge
in November 1,500 (1,500)
Overstatement of bank
disbursement in
December (180) 180
Balance per bank P637,800 P307,500 P365,840 P579,460
4. Adjusted bank balance, November 30 P637,800
Answer: C
Page | 72
5. Adjusted book receipts in December P307,500
Answer: A
6. Adjusted bank disbursements in December P365,840
Answer: B
7. Adjusted book balance, December 31 P579,460
Answer: D
PROBLEM 1-36
Data for the ANNABELLE, INC. are shown below:
Nov. 30 Dec. 31
Cash account balance P 20,340 P 48,540
Bank statement balance 107,060 137,820
Deposits in Transit 8,200 12,880
Outstanding checks 27,700 30,100
Bank service charges for the month, not shown on
company books 720 600
NSF checks returned by bank, not shown on
company books 4,300 8240
Bank collection from company customers, not
shown on company books 72,240 80,900
1. Deposits and credit memos per bank statement P249,100
2. Canceled checks and debit memos per bank statement 218,340
3. Cash receipts per cash book 172,880
4. Checks written per cash book 211,900

A. P172,880 C. P253,780
B. P245,120 D. P181,540

A. P211,900 C. P211,180
B. P216,200 D. P216,920
3. What is the adjusted cash balance on November 30?

A. P89,000 C. P71,160
B. P87,560 D. P96,160
4. What is the adjusted cash balance on December 31?

A. 120,600 C. P137,080
B. 94,840 D. P155,040
5. What is the adjusted book receipts in December?

Page | 73
A. P253,780 C. P244,420
B. P236,460 D. P270,180
6. What is the adjusted bank disbursements in December?

A. P215,940 C. P248,440
B. P220,740 D. P204,260
SOLUTION 1-36
1. Cash receipts per cash book P172,880
Add: November bank collections 72,240
Total book receipts (debits) in December P245,120
Answer: B
2. Checks written per cash book P211,900

Add: Bank service charges in November P720
NSF checks returned in November 4,300 5,020
Total book disbursements (credits) in December P216,920
Answer: D
Balance Balance
Unadjusted book balances P20,340 P245,120 P216,920 P48,540
November 30 (720) (720)
December 31 600 (600)
NSF checks:
November 30 4,300 (4,300)
December 31 8,240 (8,240)
Bank collections:
November 30 72,240 (72,240)
December 31 80,900 80,900
Adjusted book balances P87,560 P253,780 P220,740 P120,600
Balance Balance
Unadjusted bank
balances P107,060 P249,100 P218,340 P137,820
November 30 8,200 (8,200)
December 31 12,880 12,880
Outstanding
checks:
November 30 (27,700) (27,700)
December 31 30,100 (30,100)
Adj. bank balances P87,560 P253,780 P220,740 P120,600
Page | 74
3. Adjusted cash balance, November 30 P87,560
Answer: B
4. Adjusted cash balance, December 31 P120,600
Answer: A
5. Adjusted book receipts in December P253,780
Answer: A
6. Adjusted bank disbursements in December P220,740
Answer: B
PROBLEM 1-37
Computation of Cash Shortage
On January 10, 2024, you started the audit of the financial records of the KEMIRARA
COMPANY for the year ended December 31, 2023. From your investigation, you discovered
the following:
1. The bookkeeper acts also as the cashier. Her December 31, 2023, year-end cash
reconciliation contained the following items:
Cash per ledger, Dec. 31, 2023 P184,200
Cash per bank, Dec. 31, 2023 194,550
Checks outstanding 15,660
Amnesia Co. check charged by the bank in error Dec. 20, 2023;
corrected by the bank on Jan. 5, 2024 450
Cash in transit, credited by the bank on Jan. 2, 2024 2,160
2. The cash account balances per ledger as of December 31, 2023, were:
Cash P184,200
Petty Cash 450
3. The count of the cash on hand at the close of the business on January 10, 2024,
including the petty cash, was as follows:
Currency and coins P1,155
Expense vouchers 60
Employees’ IOU’s dated Jan. 5, 2024 165
Customers’ checks in payment of account 870
4. From January 2, 2024 to January 10, 2024, the date of your cash count, total cash
receipts appearing in the cash records were P25,800. According to the bank statement
for the period from January 2, 2024 to January 10, 2024, total deposits were P22,800.
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5. On July 5, 2023, cash of P1,200 was received on account from a customer; the
Allowance for Doubtful Accounts was charged and Accounts Receivable was
credited.
6. On December 5, 2023, cash of P900 was received on account from a customer;

Inventory was charged and Accounts receivable was credited.
7. Cash of P2,190 received during 2023 was not recorded.
8. Checks received from customers from January 2, 2024 to January 10, 2024, totaling
P1,260, were not recorded but were deposited in the bank.
9. On July 1, 2023, the bank refunded interest of P60 because a note of the Kemirara
Company was paid before maturity. No entry was made for the refund.
10. In the cahier’s petty cash, there were receipts for collection from the customers on
January 9, 2024, totaling P2,550; these were unrecorded and undeposited.
11. In the outstanding checks, there is one for P150 made payable to a trade creditor;
investigation shows that this check had been returned by the creditor on November
14, 2023, and a new check for P300 was issued in its place; the original check for
P150 was made in error as to amount.
Required:
1. Compute the correct bank balance as of December 31, 2023.
2. Compute the cash shortage as of December 31, 2023.
3. Compute the cash shortage for the period January 1, 2024 to January 10, 2024.
SOLUTION 1-37
Book Bank
Outstanding checks (P15,660 – P150) (15,510)
Amnesia Co. check charged by bank in error 450
Deposit in transit 2160
Collection from a customer charged to Allowance
for Doubtful Accounts 1,200
Collection from a customer charged to Inventory
account 900
Unrecorded collection 2,190
Bank credit for refund of interest 60
Check returned and replaced 150
Corrected balances P188,700 P181,650
SHORTAGE AS OF DEC. 31, 2023 (Req.2) (7,050) -
Adjusted balances (Req. 1) P181,650 P181,650
Requirement 3
Cashier’s accountability:
Page | 76
Cash receipts per cash records, Jan. 2-10, 2024 P25,800

Unrecorded deposited collections, Jan. 2-10, 2024 1,260
Unrecorded undeposited collections, Jan. 9, 2024 2,550
Petty cash fund 450
Total P30,060

Count of cash on hand and petty cash fund:
Expense vouchers 60
Employees’ IOUs 165
Customers’ checks 870 P2,250
Total deposits per bank statement P22,800
Correction of bank error (450)
Deposit in transit, Dec. 31 (2,160) 20,190 22,440
CASH SHORTAGE, Jan. 2-10, 2024 P 7,620
PROBLEM 1-38
You have been asked by the proprietor of the SOMALIA CO. to verify the accountability of
the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago.
A. The bank reconciliation statements prepared by the cashier-bookkeeper are presented

below:
November 20, 2023

Cash on Hand 500
Total 22,000
Outstanding checks:
No. 2520 P2,000
2521 1,400
2522 1,900 (3,300)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P20,200
December 31, 2023

Cash on hand 6,300
Total 141,300
Outstanding checks:
No 2674 P31,000
2575 10,300
Page | 77
2676 5,000 (41,300)

Erroneous bank charge 3,000
Erroneous bank credit (600)
Bok balance P102,400
B. The Cash in Bank account in the general ledger shows the following debits and
credits during December:
Cash in Bank
Dec. Dec.
1 Balance P20,200 1 Checks issued P2,000
2 Received from customers 4,500 5 Checks issued 5,200
23 Received from customers 9,000
27 Received from customers 70,000
31 Received from customers 48,500 31 Balance 102,400
Total P198,200 Total P198,200
C. The following summarized transactions were taken from the bank statement for the
month of December 2023:
Balance, December 1, 2023 P16,500
P173,700
Total deposits
The total deposits per bank statement include:

a. Collection of notes receivable P5,000
b. Correction of November erroneous bank charge 2,000
c. December 10 deposit of Lava, Inc. credited in
error to Somalia 600
Total P7,600
Total Checks P65,200
The total checks per bank statement include:

a. Correction of November erroneous bank credit P500
b. December check of Nile Co. charged in error to
Somalia 3,000
Total P3,500
D. Cash on hand per count in the morning of January 2, 2024, amounted to P6,300.
E. Before leaving his company for one-week vacation, the proprietor had left several
signed blank checks that the cashier-bookkeeper had cashed for his personal use.
1. What is the cash shortage as of November 30, 2023?

A. P5,000 C. P33,000
B. P7,000 D. P13,200
2. The amount of unaccounted receipts in December is

A. P11,000 C. P9,000
Page | 78
B. P13,200 D. P15,100
3. The amount of unrecorded/unsupported disbursements in December is

A. P15,100 C. P7,000
B. P10,900 D. P5,000
4. What is the total cash shortage as of December 31, 2023?

A. P26,000 C. P33,000
B. P15,100 D. P7,000
5. What is the adjusted cash balance on December 31, 2023?

A. P102,400 C. P87,400
B. P125,000 D. P111,400
SOLUTION 1-38
Nov. 30 Receipts Disbursements Dec. 31
Undeposited collections:
Nov. 30 500 (500)
Dec. 31 6,300 6,300
Outstanding checks:
Nov. 30 (5,300) (5,300)
Dec. 31 46,300 (46,300)
Erroneous bank charges:
Nov. 30 2,000 (2,000)
Dec. 31 (3,000) 3,000
Erroneous bank credits:
Nov. 30 (500) (500)
Dec. 31 (600) (600)
Adjusted bank balances P13,200 P176,900 P102,700 P87,400
Book balances P20,200 P178,000 P95,800 P102,400

Underfooting of receipts 9,0000 9,000
Overfooting of disbursements (4,000) 2 4,000
Bank collection 5,000 5,000
Corrected book balances P20,200 P192,000 P91,800 P120,400
Adjusted bank balances 13,200 176,900 102,700 87,400
Shortage as of November 30 P7,000
Unaccounted receipts P15,100
Unsupported/Unrecorded
disbursements P10,900
Shortage as of December 31 P33,000
1 Cash receipts per ledger (P198,200 – P102,400) P178,000

Total Cash receipts per audit 187,000
Underfooting of cash receipts P (9,000)
Page | 79
2 Cash disbursements per ledger (P198,200 – P102,400) P95,800

Total cash disbursements per audit 91,800
Overfooting of disbursements P 4,000
1. B 2. D 3. B 4. C 5. C
Problem 1-39
The bookkeeper-cashier of the TANYING COMPANY absconded on the evening of April

26,2024, apparently with a large portion of the company’s cash. He had taken with him
certain accounting records, including the cash journals and the general ledger. You are called
upon to ascertain, if possible, the shortage with which the missing employee may be charged.
You obtained the following information from the available subsidiary journals, ledgers, and
other data.
Balances at close of business, April 16,2024:
Accounts Receivable P442,500

Cash in bank, less checks outstanding 98,830
Transactions, January 1-April 16, 2024:
Sales, per receivable clerk P5,876,170

Cash sales None
Sales allowances in customers’ accounts 18,330
Cash purchase of furniture, per dealers’ invoice 3,000
Total merchandise purchases 3,615,260
Expenses paid, supported by paid invoices and payrolls 1,865,830
Cash dividend declared, P50,000 (of which, P10,000 remains unpaid.) 40,000
A check for P10,000 had been cashed by the bookkeeper shortly before his departure.
Although the signature on the check had been obviously forged, it was paid by the bank and
returned with other canceled checks.
A statement of financial position prepared from the books and other files follows:
Tanying Company
Statement of Financial Position
December 31,2023
ASSETS
Cash P32,670
Accounts Receivable 226,230
Inventory (at cost) 440,350
Furniture P74,560
Less: Accumulated depreciation 31,800 42,760
Total assets P742,010
Page | 80
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts Payable P114,720

Share capital 500,000
Retained earnings 127,290
Total liabilities and shareholders’ equity P742,010
1. What is the total amount paid for merchandise purchases?

A. P3,615,260 C. P3,522,680
B. P3,293,240 D. P3,707,840
2. What is the total amount of collections from sales?

A. P5,641,520 C. P6,074,160
B. P5,659,850 D. P6,092,490
3. What is the total amount of cash disbursements from January 1-April 16, 2024?
A. P5,524,090 C. P5,431,510
B. P5,202,070 D. P5,432,510
4. What is the cashier’s accountability (correct cash balance before shortage) on April
16, 2024?
A. P242,680 C. P143,850
B. P98,830 D. P43,850
5. What is the amount of cash shortage chargeable against the cashier?

A. P100,000 C. P143,850
B. P43,850 D. P242,680
SOLUTION 1-39
1. Accounts payable, Dec. 31, 2023 P114,720
Purchases 3,615,260
Total 3,729,980
Accounts Payable, April 16, 2024 (207,300)
Payments for merchandise purchases P3,522,680
Answer: C
2. Accounts receivable, Dec. 31,2023 P226,230
Net sales (P5,876,170 – P18,330) 5,857,840
Total 6,084,070
Accounts receivable, April 16, 2024 (442,550)
Collections from sales P5,641,520
Answer: A
3. Payment for purchases P3,522,680
Furniture 3,000
Expenses 1,865,830
Dividends 40,000
Total cash disbursements P5,431,510
Page | 81
Answer: C
4. Cash balance, Dec. 31, 2023 P32,670
Collections 5,641,520
Disbursements (5,431,510)
Cash balance, April 16, 2024 (accountability) P242,680
Answer: A
5. Cash accountability P242,680
Cash accounted (98,830)
Total shortage 143,850
Shortage chargeable against bank (100,000)
Shortage chargeable against the cashier P43,850
Answer: B
Problem 1-40
The JUNNEL COMPANY had weak internal controls over its cash transactions. Facts about
its cash position at November 30, 2023, were as follows:
The cash book showed a balance of P94,508, which included undeposited receipts. A credit
of P500 on the bank’s records did not appear on the books of the company. The balance per
bank statement was P77,750. Outstanding checks were no. 8420 for P581, no. 8422 for P750,
no. 8430 for P1,266, no. 8621 for P954, no. 8623 for P1,034, and no. 8632 for P726.
The cashier stole all undeposited receipts in excess of P18,972 and prepared the following
reconciliation:
Balance per books, Nov. 30, 2023 P94,508
Add: Outstanding checks
8621 P954
8623 1,034
8632 726 2,214
96,722
Less: Undeposited receipts 18,972
Balance per bank, Nov. 30, 2023 77,750
Less: Unrecorded credit 500
True cash, Nov. 30, 2023 P77,250
1. What is the correct amount of cash that should be on hand for deposit on November
30, 2023?
A. P23,069 C. P22,569
B. P18,972 D. P22,069
2. How much was stolen by the cashier?

A. P3,597 C. P4,097
B. P3,097 D. P 0
3. The cashier attempted to conceal his theft by

I. Not listing all outstanding checks
II. Underfooting outstanding checks shown on the reconciliation.
Page | 82
III. Adding an item to the bank balance that should be deducted from the book
balance.
A. I and II only C. I and III only
B. II and III only D. I, II, and III
4. Taking only the information given, which of the following internal control
deficiencies allowed the cashier to steal cash and conceal his theft?
A. The cashier is also responsible for preparing the reconciliation
B. No one other than the cashier responsible for tracing cash receipts to the
deposits in the bank.
C. Both A and B.
D. Neither A nor B
5. What is the adjusted cash balance as of November 30, 2023?

A. P95,008 C. P94,008
B. P91,411 D. P87,814
SOLUTION 1-40
1. Cash balance per books, Nov. 30 P94,508
Add: Bank credit 500
Adjusted cash balance (on hand and 95,008
in bank)
Less: Adjusted bank balance:
Bank balance, Nov. 30 P77,750
No. 8420 P581
8422 750
8430 1,266
8621 954
8623 1,034
8632 726 5,311 72,439
Cash that should be on hand for deposit P22,569
Answer: C
2. Cash that should be on hand for deposit (see no.1) P22,659

Cash reported 18,972
Amount of theft P3,597
Answer: A
3. The cashier attempted to conceal his theft by:
1. Not listing all outstanding checks.

2. Underfooting outstanding checks shown on the reconciliation.
3. Subtracting an item from the bank balance that should be added to book
balance.
Answer: A
Page | 83
4. The following internal control deficiencies are noticeable:

1. The cashier is also responsible for preparing the cash reconciliation.
2. No one other than the cashier is responsible for tracing cash receipts to the
deposits in the bank.
Answer: C
5. Book Bank
Unrecorded credit 500
Undeposited receipts 18.972
Corrected balances 95,008 91,411
Cash shortage (amount of theft) (3,597) -
Adjusted cash balances P91,411 P91,411
Answer: B
Problem 1-41
Presented below is the cash receipts book of APPLE, INC.:

CASH RECEIPTS BOOK
June 1-30, 2023
Date Accounts Cash Sales Sales Net Cash
Receivable Discount
June 1 Cash Sales P800 P800
10 BA P3,200 P64 3,136
15 BO 6,000 120 5,880
20 BE 4,800 96 4,664
20 Cash Sales 2,400 2,400
25 BU 10,800 216 10,504
26 BO 4,000 4,000
26 BE 12,000 240 11,680
30 BO 3,600 3,600
30 BA 800 800
P45,200 P3,200 P936 P47,464
The following are the company’s accounts receivable subsidiary ledgers. All the debits
represent sales. The credit terms are 2%-10days, net 30 days.
BA BO
June 3 3,200 June 10 3,200 June 2 6,000 June 15 6,000
4 4,800 30 800 9 4,000 26 4,000
15 3,600 30 3,600
BU BO
Page | 84
June 2 6,000 June 25 10,800 June 15 4,800 June 20 4,800

10 4,800 16 12,000 26 12,000
1. What is the correct amount of cash receipts in June?

A. P47,800 C. P48,000
B. P47,600 D. P47,664
2. What is the cash shortage on June 30?

A. P336 C P200
B. P 0 D. P536
SOLUTION 1-41
1. Cash receipts per book P47,464
Understatement of cash receipts by:
Recording sales discounts for collection
made beyond the discount period:
June 15 P120
June 25 216 336
Overfooting the sales discounts column
(P936 – P736) 200*
Cash receipts as corrected P48,000
*To balance, the following extensions to the “Cash” column are understated:
Correct Amount Amount Extended Understatement
June 20 (P4,800 – P96) P4,704 P4,664 P40
June 25 (P10,800 – P216) 10,584 10,504 80
June 26 (P12,000 – P240) 11,760 11,680 80
Total P200
Answer: C
2. Cash receipts as corrected P48,000

Cash receipts per book 47,464
Cash shortage, June 30 P536
Answer: D
Problem 1-42
You started the audit of the financial statements of ARCHIE, INC. on January 15, 2024, for
the year ended December 31, 2023. The general ledger shows cash account balance of
P247,200 as at December 31, 2023.
The following items are included in the December 31, 2023, reconciliation prepared by the
cashier:
Cash per records, December 31, 2023 P247,200
Cash per bank statement, December 31, 2023 264,095
Check of Tsikoy Co., charged by bank in error on December 28, 2023;
corrected by bank on January 2, 2024 750
Page | 85
Deposit in Transit 3,500
From January 2, 2024, to January 15, 2024, the date of your cash count, total cash receipts
appearing in the cash records amounted to P53,500. During the same period, the bank had
credited total deposits of P47,965.
The following cash and cash items were on hand at the close of business on January 15, 2024:
Currency P1,425
Customers’ checks 1,950
Expense vouchers 375
P3,750
Your further investigation revealed the following:

a. Cash received on account from customers:
DATE AMOUNT ENTRY MADE
07/05/23 P4,000 Allowance for bad debts 4,000
12/10/23 P3,000 Inventory 3,000
12/15/23 P3,500 Not recorded
b. Unrecorded but deposited checks received from customers from January 2, 2024, to
January 15, 2024, totaled P2,000.
c. The cashier presented receipts for collections from customers on January 10, 2024, totaling
P4,500; these were unrecorded and undeposited.
1. What adjusting entries would you provide for items (a) through (c)?
2. What is the total cash shortage as of December 31, 2023?
A. P21,180 C. P14,680
B. P16,180 D. P4,180
3. What is the total cash shortage as of January 15, 2024?

A. P26,465 C. P27,965
B. P18,430 D. P24,930
SOLUTION 1-42
1. ADJUSTING JOURNAL ENTRIES:
1. a. Cash 4,000
Allowance for bad debts 4,000
2. Cash 3,000
Inventory 3,000
3. Cash 3,500
4. b. Cash 2,000
5. c. Cash 4,500
Page | 86
2.
Book Bank
Bank error 750
AJE 1 4,000
2 3,000
3 3,500
SHORTAGE as of Dec. 31, 2023 (14,680) -
Answer: C
3.
Deposit in transit, Dec. 31, 2023 P3,500
Add: Company collections, Jan. 2-15, 2024
Per records P53,500
AJE 4 P2,000
5 4,500 6,500 60,000
Total 63,500
Less: Deposits credited by bank, Jan. 2-15,
2024 47,965
Deposit in transit, Jan. 15, 2024 15,535
Cash and cash items per count on Jan. 15,
2024 (3,750)
Cash shortage, Jan. 2-15, 2024 P11,785
Add: Cash shortage as of Dec. 31, 2023
(see no. 2) 14,680
Total shortage P26,465
Answer: A
Problem 1-43
Computation of cash shortage
The LEINOR COMPANY does not have adequate controls over its cash transactions. During
an audit, you found the following data concerning its cash position at December 31, 2023.
1. On the company’s records the cash balance is P173,500.
2. A credit of P2,500 for a note collected by the bank does not appear on the company’s
records.
3. The bank statement balance is P135,000.
4. Outstanding checks are as follows:
Number Amount
1428 P5,200
1431 3,600
Page | 87
1445 4,080
1446 3,460
The cashier made the following reconciliation:

Deduct: Outstanding checks
No. 1431 P3,600
1445 4,080
1446 3,460 10,140
P124,860
Add: Undeposited collections (per count) P46,140
Collected note 2,500 48,460
Cash per books, December 31, 2023 P173,500
1. What is the total shortage?

A. P11,200 C. P5,000
B. P8,700 D. P6,000
2. How did the cashier attempt to conceal the shortage?
SOLUTION 1-43
1. Book Bank
Note collected by the bank 2,500
SHORTAGE (11,200)
Answer: A
2. Concealment of shortage:
Omission of outstanding check no. 1428 P5,200
Underfooting of outstanding checks in reconciliation (P11,140 – P10,140) 1,000
Adding (instead of deducting) the unrecorded note collected by the bank 5,000
Total shortage P11,200
Problem 1-44
The following table summarizes the cash receipts and disbursements of LOI COMPANY for
the last six months of 2023:
Month Receipts Disbursements
July P102,000 P60,000
August 70,000 110,000
September 120,000 68,000
October 172,000 92,000
November 260,000 122,000
Page | 88
December 280,000 180,000

P964,000 P668,000
1. Bank Balance, July 1, 2023 P200,000
2. Bank balance, December 31, 2023 524,000
3. Outstanding checks, December 31, 2023 42,000
(No checks were outstanding on July 1)
4. Undeposited receipts, December 31, 2023
(Included in the December receipts) 24,000
5. Bank deposits, July 1 through December 31 914,000
What is the total shortage?

A. P 0 C. P30,000
B. P76,000 D. P66,000
SOLUTION 1-44
Book balance, July 1 (see note 1) P200,000
Add: Total book receipts as corrected (see note 2) 1,004,000
Total 1,204,000
Less: Total book disbursements as corrected (see note 2) 632,000
Corrected book balance, December 31 P572,000
Bank balance, December 31 P524,000

Add: Undeposited receipts 24,000
Total 548,000
Less: Outstanding checks 42,000
Adjusted bank balance 506,000
Corrected book balance (accountability) (572,000)
Cash shortage P (66,000)
Answer: D
NOTES:
1. Because there were no book and bank reconciling items on July 1, the bank balance
on that date was also the cash balance per books.
2. The receipts column of the table of cash receipts and disbursements is underfooted by
P40,000 (P1,004,000 correct total – P964,000) while the disbursements column is
overfooted by P36,000 (P668,000 – P632,000 correct total).
Problem 1-45
In connection with the audit of the financial statements of JEM COMPANY for the year
ended October 31, 2023, you conducted a surprise count of undeposited receipts on October
31, 2023. It was witnessed by the company’s cashier whose accountability on October 31 was
determined to be P80,000. Your count revealed the following:
Unused postage stamps 440
Page | 89
Checks:
Date Payee Maker
1-22 Cash Cashier 4,000
10-19 Jem Company DWU, Inc. 9,400
10-28 Jem Company PSU Co. 7,840
10-31 CCP Co. Jem Company 3,600
Office supplies paid out of receipts 6,400
Total per count P80,520
1. What is the cash shortage on October 31, 2023?

A. P7,080 C. P3,080
B. P3,480 D. P7,600
2. A cash shortage may be concealed by transporting funds from one location to another
or by converting negotiable assets to cash. Because of this, which of the following is
vital?
A. Simultaneous confirmations
B. Simultaneous bank reconciliations
C. Simultaneous verification
D. Simultaneous surprise cash counts
SOLUTION 1-45
1. Cashier’s accountability P80,000
Total per count P80,520
Less: Cashier’s stale check P4,000
Unreleased disbursement
check 3,600 7,600 72,920
Cash shortage P7,080
Answer: A
2. Simultaneous verification
Answer: C
Problem 1-46
Computation of Working Capital and Current Ration
JAM COMPANY’s unadjusted trial balance at December 31, 2023, included the following
accounts:
Debit Credit
Cash P69,200
Accounts payable P789,715
Accrued expenses 13,214
Page | 90
Jam Co.’s year-end is December 31. At the end of 2023, it held its cash book open so that its
statement of financial position would show a more favorable financial condition. Your audit
revealed the following items:
1. The December cash book included January cash receipts of P65,460, of which
P36,010 represents cash sales and P29,450 represents collections from customers, net
of 5% cash discounts.
2. The December check register included payments of accounts to suppliers of P37,240
on which discounts of P1,240 were taken.
3. The merchandise inventory account balance was determined by physical count on
December 31, 2023
1. What are Jam’s working capital and current ratio at December 31, 2023, based on
balances per company books?
Working Current
Capital Ratio
A. P316,081 1.42
B. 316,081 1.39
C. 329,295 1.42
D. 329,295 1.39
2. What are Jam’s correct working capital and current ratio at December 31, 2023?
Working Current
Capital Ratio
A. P244,381 1.29
B. 278,831 0.33
C. 330,835 1.40
D. 280,381 1.33
SOLUTION 1-46
December 31, 2023
a. Accounts receivable (P29,450 ÷ 95%) 31,000

Sales 36,010
Cash 65,460
Sales discounts (P31,000 ÷ 5%) 1,550
b. Cash 36,000
Purchase discounts 1,240
COMPUTATION OF WORKING CAPITAL AND CURRENT RATIO

Per Books Per Audit
Current assets:
Cash (P69,200 – P65,450 + P36,000) P69,200 P39,740
Accounts receivable (P102,650 + P31,000) 102,650 133,650
Merchandise inventory 947,160 947,160
Total P1,119,010 P1,120,550
Page | 91
Current liabilities:
Accounts payable (P789,715 + P37,240) P789,715 P826,955
Accrued expenses 13,214 13,214
Total P802,929 P840,169
Working capital (CA – CL) P316,081 P280,281
Current ratio (CA ÷ CL) 1.39 1.33
1. Answer: B
2. Answer: D
Problem 1-47
FE COMPANY, organized on March 1, 2023, has a very poor internal control system. The
company’s cashier is also its accountant. After 9 months of operations, the company’s
manager suspects that the cashier-accountant has been misappropriating company collections.
You have been engaged to audit the company’s accounts to determine the extent of fraud, if
any.
You started the audit on November 15. On that date, the cash on hand per your surprise count
was P5,140. Also on that date, the bank confirmed that the balance of the company’s current
account was P26,328. Your examination of the records reveals that a check for P1,852 was
outstanding on November 15. The company’s markup is 40% of sales.
Further examination of the company’s records reveals the following balances at November
15,2023:
Ordinary share capital P300,000
Share premium 20,000
Real property purchased for cash 200,000
Mortgage payable 80,000
Furniture and fixtures (of the acquisition cost, P6,000 remains unpaid as
of Nov. 15) 29,000
Notes payable – bank 32,000
Accounts payable – trade 46,284
Expenses paid (excluding purchases) 60,756
Merchandise inventory at cost 93,920
Accounts receivable – trade 85,380
Total sales 340,000
1. How much was paid for inventory purchases?

A. P157,716 C. P183,636
B. P293,716 D. P251,636
2. How much was collected from customers?

A. P118,620 C. P50,620
B. P254,620 D. P340,000
3. How much is the cashier’s accountability at November 15, 2023?

A. P131,228 C. P145,228
B. P83,228 D. P151,228
Page | 92
4. What is the adjusted bank balance as of November 15, 2023?

A. P31,468 C. P29,616
P26,328 D. P23,040
5. The cash shortage as of November 15, 023, totaled

A. P121,612 C. P127,612
B. P101,612 D. P206,992
SOLUTION 1-47
1. Cost of sales (P340,000 total sales x 60%) P204,000
Add: Merchandise inventory, November 15 93,920
Purchases 297,920
Less: Accounts payable-trade, November 15 46,284
Payments for purchases P251,636
Answer: D
2. Sales P340,000
Less: Accounts receivable-trade, November 15 85,380
Collections from sales P254,620
Answer: B
3. Cashier’s Accountability:
Receipts:
Issuance of ordinary shares
(P300,000 + P20,000) P320,000
Mortgage payable 80,000
Note payable – bank 32,000
Collections from sales (see no. 2) 254,620
Total 686,620
Disbursements:
Real property P200,000
Furniture and fixtures (P29,000 +
P6,000) 23,000
Expenses 60,756
Purchases (see no. 1) 251,636 535,392
Cash balance P151,228
Answer: D
4. Bank balance, Nov. 15 P26,328

Add: Undeposited collections 5,140
Total 31,468
Less: Outstanding check 1,852
Adjusted bank balance, Nov. 15 P29,616
Answer: C
5. Cashier’s accountability (see no. 3) P151,228

Page | 93
Cash accounted (see no. 4) (29,616)

Cash shortage as of Nov. 15, 2023 P121,612
Answer: A
Problem 1-48
Your client, a successful small business, has never given much attention to a sound internal
control. In its employ is Alex Coopit, the company’s cashier-bookkeeper. Alex handles cash
receipts, makes small disbursements from the cash receipts, maintains accounting records,
and prepares the monthly bank reconciliation.
The bank statement for the month ended March 31, 2023, shows a cash balance of P590,000.
The following checks are outstanding on March 31:
No. 7163 P 8,623
No. 7284 7,320
No. 7285 10,612
No. 8722 6,322
No. 8724 12,280
No. 8733 6,200
The company’s general ledger shows a cash balance of P696,499 on March 31, 2022:
Realizing that being the cashier-accountant of the company he can easily misappropriate
collections and conceal it, Alex removed all the cash on hand in excess of P127,301, and then
prepared the following reconciliation in an effort to conceal his theft.
BANK RECONCILIATION
Balance per accounting records P696,499
Add: Outstanding checks
No. 8722 P6,322
No. 8724 12,280
No. 8733 6,200 20,802
Total 717,301
Deduct: Cash on hand 127,301
Balance per bank statement, March 31 P590,000
1. How much was taken by the cashier-accountant?

A. P30,555 C. P4,000
B. P157,856 D. P26,555
2. What is the amount of cash that should be on hand at March 31, 2023?
A. P127,301 C. P157,856
B. P131,301 D. P30,555
SOLUTION 1-48
1. Book Bank
Outstanding checks:
No. 7163 P8,623
No. 7284 7,320
Page | 94
No. 7285 10,612

No. 8722 6,322
No. 8724 12,280
No. 8733 6,200 (51,357)
CASH SHORTAGE (30,555) -
Adjusted balances P665, 944 P665,944
Answer: A
2.
Cash on hand P127,301
Add: Cash shortage (see no. 1) 30,555
Cash that should be on hand, March 31 P157,856
Answer: C
AUDIT OF RECEIVABLES
(Audit Program for Receivables)
Audit Objectives:
To determine that:
1. Receivables represent valid claims against customers and other parties and
have
been properly recorded.
2. The related allowance for doubtful accounts, returns and allowances, and
discounts are reasonably adequate.
3. Receivables are properly described.
4. Disclosures with respect to the accounts are adequate.
Audit Procedures:
1. Obtain a list of aged accounts receivable balances from the subsidiary
ledger, and:
● Foot and cross-foot the list.
● Check if the list reconciles with the general ledger control account.
● Trace individual balances to the subsidiary ledger.
● Test the accuracy of the aging.
● Adjust non-trade accounts erroneously included in customers'
accounts.
● Investigate and reclassify significant credit balances.
Page | 95
2. Test accuracy of balances appearing in the subsidiary ledger.

3. Confirm accuracy of individual balances by direct communication with
customers.
● Investigate exceptions reported by customers and discuss with
appropriate officer for proper disposal.
● Send a second request for positive confirmation requests without any
replies from customers.
● If the second request does not produce a reply from the customer,
perform extended procedures, like:
➤ Reviewing collections after year-end.
➤ Checking supporting documents.
➤Discussing the account with appropriate officer.
● Discuss with appropriate officer, confirmation requests returned by the
post office and perform extended procedures.
● Prepare a summary of confirmation results.
4. Review correspondence with customers for possible adjustments.
5. Test propriety of cutoff:
● Examine sales recorded and shipments made a week before and after
the end of the reporting period and ascertain whether the sales were
recorded in the proper period.
● Investigate large amounts of sales returned shortly after the end of the
reporting period.
6. Perform analytical procedures, like:
● Gross profit ratio
● Accounts receivable turnover
● Ratio of accounts written off to sales or balance of accounts receivable
● Compare with prior year and industry averages
7. Review individual balances and age of accounts with appropriate officer,
and:
● Determine accounts that should be written off.
● Determine adequacy of allowance for doubtful accounts.
8. Obtain analyses of significant other receivables.
9. Ascertain whether some receivables are pledged, factored, discounted, or
assigned.
10. Determine propriety of financial statement presentation and adequacy of
disclosures.
11. Obtain receivable representation letter from client.
Page | 96
PROBLEM 2-1
Analysis of Accounts Receivable and Allowance for Doubtful Accounts
The December 31, 2022, statement of financial position of the UPAT COMPANY included
the following information:
Accounts receivable P672,000
Less: Allowance for doubtful accounts (42.300) P629,700
Notes receivable* 65.400
Total receivables P695.100
* The company is contingently liable for discounted notes receivable of P114,000.
During the year ending December 31, 2023, the following transactions occurred:
1. Sales on credit P2,623,800
2. Collections of accounts receivable 2,523,000
3. Accounts receivable written off as uncollectible 41,400
4. Notes receivable collected 87,000
5. Customer notes received in payment of accounts receivable 216,000
6. Notes receivable discounted that were paid at maturity 108,000
7. Notes receivable discounted that were defaulted, including
interest of P60 and a P15 fee. This amount is expected to be
collected during 2023 6,075
8. Proceeds from customer notes discounted with recourse
(principal P135,000, accrued interest, P600) 135,225
9. Collections on accounts previously written off 1,500
10. Sales returns, and allowances (on credit sales) 6,000
11. Increase in allowance for doubtful accounts 39,357
Based on the preceding information, determine the balances of the following accounts at
December 31, 2023.
1. Accounts receivable
A. P473,718 C. P513,975
B. P509,400 D. P515,475
2. Allowance for doubtful accounts
A. P39,357 C. P40,857
B. P40,800 D. P41,757
3. Notes receivable
A. P59,400 C. P200,400
B. P194,400 D. P329,400
4. Notes receivable discounted
A. P114,000 C. P129,000
B. P120,000 D. P135,000
SOLUTION 2-1
Page | 97
Journal Entries
1. Accounts receivable 2,623,800
Sales 2,623,800
2. Cash 2,523,000
Accounts receivable 2,523,000
3. Allowance for doubtful accounts 41,400
4. Cash 87,000
Notes receivable 87,000
5. Notes receivable 216,000
6. Notes receivable discounted 108,000
7. Accounts receivable 6,075
Cash 6,075
Notes receivable discounted 6,000
8. Cash 135,225
Loss on discounting of notes receivable 375
Notes receivable discounted 135,000
Interest income 600
Proceeds P135,225
CV of note (P135,000+P600) 135,600
Loss on discounting P 375

Allowance for doubtful accounts 1,500
Cash 1,500
10. Sales returns and allowances 6,000
11. Doubtful accounts expense 39,357
Accounts Allowance for Notes Notes Receivable

Receivable Doubtful Accounts Receivable Discounted
Jan. 1 P 672,000 (P42,300) P179,400 (P144,000)
1 2,623,800
2 (2,523,000)
3 (41,000) 41,400
4 (87,000)
5 (216,000) 216,000
Page | 98
6 (108,000) 108,000
7 6,075 (6,000) 6,000
8 (135,000)
9 1,500 1,500
(1,500)
10 (6,000)
11 (39,357)
Dec. 31 P515,475 (P41,757) P194,400 P(135,000)

1. D 2. D 3. B 4. D
PROBLEM 2-2
Computation of Accounts Receivable Balance
Shown below is GOROSPE COMPANY's aging schedule of its accounts receivable

on December 31, 2023.
Balance Days Past Due
Customers Due Current 1-30 31-60 Over 60
AA. Co. P23,000 P0 P0 P23,000 P0
BB. Inc. 105,000 62,000 20,000 13,000 10,000
CC. Corp. 87,500 23,000 14,500 10,000 40,000
DD. Inc. 93,500 53,000 20,500 10,000 10,000
EE Transport 40,000 0 0 0 40,000
FF. Inc. 31,000 15,000 16,000 0 0
GG Co. 1,000 1,000 0 0 0
HH Corp. 64,000 20,000 18,000 16,000 10,000
II Company 60,000 60,000 0 0 0
Totals P505,000 P234,000 P89,000 P72,000 P110,000
The accounts receivable balance per general ledger is P505,000 on December 31, 2023.
The following are audit comments for possible adjustments:
AA Co.
Page | 99
Merchandise found defective; returned by the customer on November 10 for credit, but the
credit memo was issued by Gorospe only on January 2, 2024.
BB, Inc.
Account is good but usually pays late.
CC Corp.
Merchandise worth P40,000 destroyed in transit on June 4, 2023. The carrier was billed on
July 1. (See EE Transport and II Company)
DD, Inc.
Customer billed twice in error for P10,000. Balance is collectible.
EE Transport
Collected in full on January 15, 2024.
FF, Inc.
Paid in full on December 29, 2023, but not recorded. Collections were deposited January 3,
2024.
GG Co.
Received account confirmation from customer for P11,000. Investigation revealed an
erroneous credit for P10,000. (See HH Corp.)
HH Corp.
Neglected to post P10,000 credit to customer's account.
II Company
Customer wants to know the reason for receipt of P40,000 credit memo as its account payable
balance is P100,000.
REQUIRED:
Based on the foregoing information, what should be the adjusted balance of the Accounts
receivable - trade at December 31, 2023?
SOLUTION 2-2
Accounts receivable per general ledger P505,000

AA Co. - Delayed issuance of credit memo (23,000)
CC Corp. - Damaged merchandise credited to II Company (40,000)
DD, Inc. - Double billing (10,000)
FF, Inc. - Collection not recorded (31,000)
GG Co. - Erroneous posting of credit for HH Corp. 10,000
HH Corp. - Payment credited in error to GG Co. (10,000)
II Company - Credit for CC Corp. erroneously posted to II Company 40,000
Adjusted balance of accounts receivable-trade P441,000
PROBLEM 2-3
Sales Cutoff Test
DAFFODIL AUTO PARTS sells new parts to auto dealers. Company policy requires that a
prenumbered shipping document, be issued for each sale. At the time of pickup or shipment,
the shipping clerk writes the date on the shipping document. The last shipment made in the
Page | 100
year ended December 31, 2023, was recorded on document 3167. Shipments are billed in the
order that the billing clerk receives the shipping documents.
For late December 2023 and early January 2024, shipping documents are billed on sales
invoices as follows:
Shipping Sales
Document No. Invoice No.
3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334
The December, 2023 and January 2024 sales journals have the following information
included:
SALES JOURNAL - DECEMBER 2023
Day of Month Sales Invoice No. Amount of Sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774
SALES JOURNAL - JANUARY 2024
Day of Month Sales Invoice No. Amount of Sale
1 5332 P264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658
1. What is the net overstatement (understatement) of Daffodil's sales for the year ended
December 31, 2023?
A. P21,318 C. (P253,452)
B. P253,452 D. (P21,318)
2. What adjusting entry is necessary to correct Daffodil's financial statements for the year
ended December 31, 2023?
A. Accounts receivable 21,318
Sales. 21,318
B. Accounts receivable 253,452
Sales 253,452
C. Sales 21,318
D. Sales 253,452
3. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management's assertion of
A. Rights and obligations
Page | 101
B. Completeness
C. Existence
D. Valuation and allocation
4. Tracing shipping documents to prenumbered sales invoices provides evidence that
A. No duplicate shipments or billings occurred
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped
D. All prenumbered sales invoices were accounted for
5. An auditor most likely would review an entity's periodic accounting for the numerical
sequence of shipping documents and invoices to support management's financial statement
assertion of
A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Completeness
SOLUTION 2-3
1. December 2023 Sales

Shipping Misstatement in Overstatement
Document No. Sales Cutoff or Understatement of
Invoice No. December 31
Sales
5326 3164 P191,430 Overstatement
5329 3169
5327 3165
5328 3168 62,022 Overstatement
5330 3166
253,452
January 2024 Sales
5332 3163 264,131 Understatement
5331 3167 10,639 Understatement
5333 3170
5335 3171
5334 3172
Net understatement P 21,318
Answer: D
Sales 21,318
Answer: A
3. Completeness
Answer: B
4. Shipments to customers were properly invoiced.
Answer: B
5.Completeness
Answer: D
PROBLEM 2-4
Page | 102
Accounts Receivable and Related Account
Presented below are unrelated situations. Answer the question relating to each situation.
1. The following information is from GUMAMELA CORP.'s first year of operations:
● Merchandise purchased P450,000
● Ending merchandise inventory 123,000
● Collections from customer 150,000
● All sales are on account and good sell at
30% above set
What is the accounts receivable balance at the end of the company’s first year of
operations?
2. BANANA CO. reported the following information at the end of its first year of
operations, December 31, 2023:
Doubtful accounts expense for 2023 P271,000

Uncollectible accounts written off during 2023 35,400
Net realizable value of accounts receivable 895,000
What is the accounts receivable balance at December 31, 2023?
3. MAHOGANY COMPANY’s analysis and aging of its accounts receivable at

December 31, 2023, disclosed the following:
● Accounts receivable P460,000

● Accounts estimated to be uncollectible (per aging) 95,000
● Allowance for doubtful accounts (per books) 103,000
What is the net realizable value of Mahogany’s receivables at December 31, 2023?
4. The following amounts are shown on the 2023 and 2022 financial statements of SAN
FRANCISCO CO.:
2023 2022
Accounts receivable ? 470,000
Allowance for doubtful accounts 20,000 10,000
Net sales 2,600,000 2,400,000
Cost of goods sold 1,900,000 1,752,000
San Fransisco Co.’s accounts receivable turnover for 2023 is 6.5 times
What is the accounts receivable balance at December 31, 2023?
SOLUTION 2-4
1. Purchases P 450,000
Page | 103
Less: Merchandise inventory, ending 123,000

Cost of goods sold P327,000
Multiply by sales ratio x 130%
Sales 425,100
Less: Collections from customers 150,000
Accounts receivable, ending P275,100
2. Doubtful accounts expense for 2023 P 450,000

Less: Accounts written off during 2023 35,400
Allowance for doubtful accounts, Dec. 31, 2023 235,600
Add: Net realizable value of accounts
Receivable, Dec. 31, 2023 895,000
Accounts receivable, Dec. 31, 2023 P1,130,600
3. Accounts receivable P460,000

Less: Allowance for doubtful accounts (per aging) 95,000
Net realizable value P365,000
4. (X = Net receivables, December 31, 2023)
A/R turnover = Net sales / Ave. net receivables

6.5 = P2,600,000 / P460,000 + X
2
P2,990,000 + 6.5X = P2,600,000
2
P2,990,000 + 6.5X = P5,200,000
6.5X = P2,210,000
X = P340,000
Net receivables, Dec. 31, 2023 P340,000

Add: Allowance for doubtful accounts, Dec. 31, 2023 20,000
Accounts receivable, Dec. 31, 2023 P360,000
PROBLEM 2-5
Estimating Doubtful Accounts
LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The
company estimates its uncollectible accounts based on past experience, which indicates that
1.5% of net credit sales will be uncollectible. Its total sales for the year ended December 31,
2023, amounted to P4,000,000 including cash sales of P400,000. After a thorough evaluation
of the accounts receivable from Nolog Company amounting to P20,000, Lagundi has decided
to write off this account before year-end adjustments are made.
Shown below are Lagundi's account balances at December 31, 2023, before any
adjustments and the P20,000 write off.
Sales P4,000,000
Page | 104

Sales discounts 250,000
Allowance for credit loss 33,000
Sales returns and allowances 350,000
Expected credit loss 0
Lagundi has decided to value its accounts receivable using the statement of financial position
approach as suggested by its external auditors. Presented below is the aging of the accounts
receivable subsidiary ledger accounts at December 31, 2023.
Accounts Balance Less than 60 61-90 91-120 Over
days days days 120 days
Antiporda P100,000 P100,000
Balbakwa 256,000 180,000 P76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 P50,000
Empoy 420,000 P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000
% collectible 99% 95% 85% 60%
1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000
will
A. Decrease total assets and net income for 2023\
B. Increase total assets and decrease net income for 2023
C. Have no effect on total assets and increase net income for 2023
D. Have no effect on total assets and increase net income for 2023
2. Lagundi’s doubtful accounts expense for 2023 based on net credit sales is
A. P60,000 C. P45,000
B. P12,000 D. P56,250
3. The final entry to adjust the allowance for doubtful accounts is

A. Doubtful accounts expense 285,000
B. Doubtful accounts expense 15,000
C. Allowance for doubtful accounts 255,000
Doubtful accounts expense 255,000
D. Allowance for doubtful accounts 313,500
4. What is the net realizable value of Lagundi’s accounts receivable on

December 31, 2023?
A. P1,435,700 C. P1,397,700
B. P1,435,000 D. P1,377,700
5. Which of the following most likely would give the most assurance concerning
the valuation and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping
documents.
Page | 105
B. Comparing receivable turnover ratios with industry statistics for

reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for doubt accounts for doubtful accounts for
reasonableness.
SOLUTION 2-5
1. No effect on total assets and net income for 2023. The entry to record the write off is:

Answer: C
2. Credit sales (P4,000,000 – P400,000) P3,600,000

Less: Sales discounts P250,000
Sales return and allowance 350,000 600,000
Net sales 3,000,000
Multiply by bad debt rate x 1.5%
Doubtful accounts expense P 45,000
Answer: C

Age Accounts Rate Amount

Receivable Balance
Less than 60 days P780,000 1% P7,800
61-90 days 230,000 5% 11,500
91-120 days 420,000 15% 63,000
Over 120 days 50,000 40% 20,000
Required allowance 102,300
Allowance balance (58,000)
(P33,000 + P45,000
– P20,000)
Adjustment – P 44,300
increase in
allowance
Answer: A
4. Accounts receivable P1,480,000

Less: Allowance for doubtful accounts (see no. 3) 102,000
Net realizable value, Dec. 31, 2023 P1,377,700
Answer: D
Page | 106
5. Assessing the allowance for doubtful accounts for reasonableness.
Answer: D
PROBLEM 2-6
Valuation of Accounts Receivable

VICTORY COMPANY sells office equipment and supplies to many organizations in the city
and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit
customers have taken advantage of the discount by paying within 10 days of the invoice date.
The number of customers taking the full 30 days to pay has increased within last year.
Current indications are that less than 60% of the customers are now taking the discount. Bad
debts as a percentage of gross credit sales have risen from 1.5% provided in the past years to
about 4% in the current year.
The controller has responded to a request for more information on the deterioration in
collections of accounts receivable with the report reproduced below.
VICTOR COMPANY
Finance Committee Report – Accounts Receivable Collections
December 31, 2023
The fact that some credit accounts will prove uncollectible is normal. Annual bad debts
write-offs have been 1.5% of gross credit sales over the past five years. During the last
calendar year, this percentage increased to slightly less than 4%. The current Accounts
Receivable balance is P3,200,000. The condition of this balance in terms of age and
probability of collections is as follows:
Proportion of Total Age Categories Probability of Collection
68% Not yet due 99%
15% Less than 30 days past due 96 ½ %
8% 30 to 60 days past due 95%
5% 61 to 120 days past due 91%
2½ 121 to 180 days past due 70%
1½ Over 180 days past due 20%
Allowance for Doubtful Accounts bad a credit balance of P86,600 on January 1, 2023.
Victory Company has provided for bad debt expense accrual during the current year of
P320,000 based on the assumption that 4% of gross credit sales will be uncollectible.
Write-offs of bad accounts during the year totaled P290,000
1. What is the required allowance balance on December 31, 2023?
A. P106,400 C. P99,800
B. P128,160 D. P116,600
2. What year-end adjustment is necessary to bring Victory Company’s Allowance for

Doubtful Accounts to the balance indicated by the aging analysis?
A. Allowance for bad debts 11,560
Bad debt expense 11,560
B. Bad debt expense 320,000
Allowance for bad debt 320,000
C. Bad debt expense 191,840
Page | 107
D. Bad debt expense 11,560

3. What is the net realizable value of Victory Company’s account receivable at

December 31, 2023?
A. P3,071,840 C. P3,083,400
B. P3,200,000 D. P3,188,440
4. Victory Company should report bad debt expense for 2023 of

A. P308,440 C. P331,560
B. P128,160 D. P320,000
5. What is Victory Company’s total credit sales for the year ended December 31, 2023?
A. P3,071,840 C. P3,083,400
B. P3,200,000 D. P3,188,440
SOLUTION 2-6
1. AGING SCHEDULE
Category Aging Ratio Accounts Receivable Uncollectible

Balances Rate Amount
Not yet due 68% P2,176,000 1% P21,760
Less than 30 days past 15% 480,000 3½ 16,800
due
30 to 60 days past due 8% 256,000 5% 12,800
61 to 120 days past 5% 160,000 9% 14,400
due
121 to 180 days past 2½ 80,000 30% 24,000
due
Over 180 days past 1½ 48,000 80% 38,400
due
Total P3,200,000 P128,160
Answer: B
2. Bad debt expense 11,560

Allowance for bad debts 11,560
Allowance for bad debts, Jan. 1, 2023 P 86,600

Add: 2023 bad debt expense 320,000
Total 406,600
Less: Accounts written off 290,000
Allowance balance before adjustment, Dec. 31, 2023 116,600
Required allowance per aging 128,160
Adjustment – increase in allowance P 11,560
Answer: D
Page | 108
3. Accounts receivable P3,200,000

Less: Allowance for bad debts 128, 160
Net realizable value, Dec. 2023 P3,071,840
Answer: A
4. Bad debt expense recorded P320,000

Add: Adjustment to bring the allowance
Balance to the amount indicated by
The aging analysis (see no.2) 11,560
Correct bad debt expense for 2023 P331,000
Answer: C
Alternative Computation
Allowance for bad debts, Jan. 1, 2023 P 86,600

Accounts written off (290,000)
Bad debt expense (SQUEEZE) 331,560
Allowance for bad debts, Jan. 1, 2023 P128,160
5. Total credit sales for 2023 ( P320,000 / 4%) P8,000,000
Answer: B
PROBLEM 2-7
Allowance for Doubtful Accounts

INGRID COMPANY’s accounting records disclose the following:
Accounts receivable, Jan. 1, 2023 P1,800,000
Allowance for doubtful accounts, Jan. 1, 2023 (credit) 90,000
Sales for the year 15,000,000
Collections from the customers during the year 13,080,000
The following additional information was also obtained:
1. Included in the amount collected from customers was the recovery of P30,000
receivable from a customer whose account had been charged off as worthless in
this prior year.
2. Ingrid Company determined that its receivable from a customer of P150,000 will
not be collected, and management authorized its write-off.
3. A customer settled its account on December 2, 2023 by issuing a 12%, 6-month

note for P600,000.
4. The Accounts Receivable balance on December 31, 2023, includes P900,000 past
due accounts.
Page | 109
5. The entity estimated that 20% of past due accounts will not be collected and that
the probable loss on current accounts is 5%.
1. The current assets section of Ingrid Company’s statement of financial position on

December 31, 2023, should include Accounts Receivable of
A. P3,600,000 C. P3,000,000
B. P2,400,000 D. P2,970,000
2. What is the balance of the Allowance for doubtful accounts before adjustment on
December 31, 2023?
A. P120,000 credit C. P30,000 credit
B. P120,000 debit D. P30,000 debit
3. The required Allowance for doubtful accounts on December 31, 2023 is

A. P285,000 C. P315,000
B. P283,500 D. P255,000
4. The Allowance for doubtful accounts should be increased (decreased) by

A. P315,000 C. P285,000
B. (P255,000) D. (P313,500)
5. What is the adjusting entry to record the doubtful accounts expenses for the current
year?
SOLUTION 2-7
1. Accounts receivable, Jan. 1, 2023 P1,800,000

Sales for 2023 15,000,000
Collections (13,080,000)
Recovery of accounts written off 30,000
Customer’s account written off (150,000)
Accounts settled by issuance of note (600,000)
Accounts receivable, Dec. 31, 2023 P3,000,000
Answer: C
Page | 110
2. Allowance for doubtful accounts, Jan. 1 (credit) P90,000

Recovery of accounts written off 30,000
Accounts written off (150,000)
Allowance before adjustment, Dec. 31 (Debit) (P30,000)
Answer: D
3. Current accounts (P3,000,000 – P900,000 =

P2,100,000 x 5%) P105,000
Past due accounts (P900,000 x 20%) 180,000
Required allowance, Dec. 31, 2023 P285,000
Answer: A
4. Required allowance, Dec. 31, 2023 (see no.3) P285,000

Allowance before adjustment – Debit (see no. 2) 30,000
Increase in allowance P315,000
Answer: A

Answer: B
PROBLEM 2-8
Estimating Doubtful Accounts
From inception of operations to December 31, 2023, MAKAHIVA CORP. provided for
doubtful accounts under the allowance method; provisions were made monthly at 2% of
credit sales; bad debts written off were charged to the Allowance account; recoveries of bad
debts previously written off were credited to the Allowance account, and no year-end
adjustments to the Allowance account were made Makahiya's usual credit terms are net 30
days.
The balance in the Allowance for doubtful account was P143,000 at January 1, 2023. During
2023, credit sales totaled P15,000,000, interim provisions for doubtful accounts were made at
2% of credit sales, P140,000 of bad debts were written off, and recoveries of accounts
previously written off amounted to P43,000. Makahiya installed a computer facility in
November 2023 and an aging of accounts receivable was prepared for the first time as of
December 31, 2023.
A summary of the aging is as follows:
Classification by Month of Balance in Each Default Rate
Sale Category
November – December 2023 P2,160,000 2%
July – October 2023 1,300,000 10%
January – June 2023 840,000 25%
Prior to January 1, 2023 300,000 70%
P4,600,000
Page | 111
Based on the review of collectibility of the account balances in the "prior to January 1, 2023"
aging category, additional receivables totaling P120,000 were written off as of December 31,
2023. The 70% uncollectible estimate applies to the remaining P180,000 in the category.
Effective with the year ended December 31, 2023, Makahiya adopted a new accounting
method for estimating the allowance for doubtful. accounts at the amount indicated by the
year-end aging analysis of accounts receivable.
1. What is the balance of the Allowance for doubtful accounts on December 31, 2023
(before year-end adjustment)?
A. P3,600,000 C. P3,000,000
B. P2,400,000 D. P2,970,000
2. What is the journal entry for the year-end adjustment to the Allowance for doubtful
accounts balance as of December 31, 2023?
C. Doubtful accounts expense 143,000
D. Doubtful accounts expense 509,200
3. For the year ended December 31, 2023, Makahiya’s doubtful accounts expense would
be
A. P626,200 C. P300,000
B. P283,200 D. P583,200
4. The net realizable value of Makahiya’s accounts receivable at December 31, 2023
should be
A. P4,374,000 C. P300,000
B. P3,896,800 D. P583,200
5. An auditor’s purpose in reviewing credit ratings of customers with delinquent

accounts receivable most likely is to obtain evidence concerning management’s
assertion about
A. Completeness
B. Existence
C. C. Rights and Obligations
D. Valuation and Allocation
SOLUTION 2-8
1. Allowance for doubtful accounts, Jan. 1, 2023 P143,000

Add: Doubtful accounts expense for 2023
(P15,000,000 x 2%) P300,000
Recoveries of accounts previously
written-off 43,000 343,000
Total 486,000
Page | 112
Less: Accounts written off 260,000

Allowance balance before adjustment, Dec. 31, 2023 P226,600
Answer: C

Classification Balances Uncollectible

Rate Amount
November – December P2,160,000 2% P43,200
2023
July – October 2023 1,300,000 10% 130,000
January – June 2023 840,000 25% 210,000
Prior to January 1, 2023 180,000 70% 126,000
(P300,000 – P120,000
write off)
Required allowance P509,200
balance, Dec. 31, 2023
Less: Allowance balance 226,000
before adjustment (see
no.1)
Answer: A
3. Doubtful accounts expense recorded P285,000

Additional doubtful accounts expense to arrive
at the required allowance based on aging 283,200
Correct doubtful accounts expense for 2023 P583,200
Answer: D
4. Accounts receivable (P4,600,000 – P120,000) P4,480,000

Less: Required allowance per aging 509,200
Net realizable value, Dec. 31, 2023 P 3,970,800
Answer: C
5. Valuation and allocation

Answer: D
PROBLEM 2-9
Various Adjustment to Correct Accounts Receivable and Related Accounts

Page | 113
You are examining the financial statements of SALUYOT COMPANY for You wear ended
December 31, 2023. Your audit of the accounts receivable and other related accounts
disclosed the following information:
1. The December 31, 2023, balance in the Accounts Receivable control account is
P788,000.
2. The only entries in the Doubtful accounts expense account were:
a. A credit for P1,296 on December 1, 2023, because customer A remitted in full
for the account charged off October 31, 2023.
b. A debit on December 31 for the amount of the credit to Allowance for
doubtful accounts.
3. The Allowance for doubtful accounts account is presented below:
Date Particulars Debit Credit Balance

Jan. 1 Balance P15,250
Oct. 31 Uncollectible:
Customer A. P1,296
B. 3,280
C. 2,256 P6,032 9,218
Dec. 31 3% of P788,000 32,858
4. An aging schedule of accounts receivable as of December 31, 2023, and the decisions
are as shown in the table below:
Amount to which the

allowance is to be adjusted
AGE Net Debit Balance after adjustments and
corrections have been
made
0 – 1 month P372,960 1%
1 – 3 months 307,280 2%
3 – 6 months 88,720 3%
Over 6 months 24,000 Definitely uncollectible,
P4,000; P8,000 is
considered to be 50%
uncollectible; the
remainder is estimated to
be 80% collectible
P792,960
5. There is a credit balance in one account receivable (0 – 1 month) of P8,000; it

represents an advance on a sales contract; also, there is a credit balance in one of the
Page | 114
1 – 3 months accounts receivable of P2,000 for which merchandise will be accepted

by the customer.
6. The Accounts Receivable control account is not in agreement with the subsidiary
ledger. The difference cannot be located and the company’s accountant decides to
adjust the control to the sum of the subsidiaries after corrections are made.
1. The adjustment to correct the entry made on December 1, 2023, is

C. Accounts receivable 1,296
D. No adjusting entry is necessary.
2. The required allowance balance (per aging) on December 31, 2023, is

A. P29,354 C. P19,858
B. P19,058 D. P32,858
3. The net realizable value of Saluyot’s accounts receivable on December 31, 2023,
amounts to
A. P779,902 C. P793,200
B. P774,142 D. P788,664
4. Saluyot should report doubtful accounts for 2023 of

A. P13,344 C. P10,296
B. P22,344 D. P33,936
5. What entry is necessary to adjust the allowance account at December 31, 2023
SOLUTION 2-9
1. ADJUSTING JOURNAL ENTRY

ENTRY MADE
Cash 1,296
Page | 115
CORRECT ENTRIES
Cash 1,296
Answer: B
2.
Age Net Debit Adjustment Adjusted Rate Required

Balance Balance Allowance
0 – 1 month P372,960 P8,000 P380,960 1% P3,810

1 – 3 months 307,280 2,000 309,280 2% 6,186
3 – 6 months 88,720 88,720 3% 2,662
Over 6 24,000 (4,000) 8,000 50% 4,000
months
12,000 20% 2,400
Total P792,960 P6,000 P798,960 P19,058
Answer: B
3.
Control Subsidiary
Account Ledgers
Understatement of accounts
written off on October 31 (800)
(P6,832 – P6,032)
Written off of uncollectible
accounts in the “over 6 (4,000) (4,000)
months” category
Customers’ credit balances
(P8,000 + P2,000) 10,000 10,000
Corrected balance 793,200 798,960

Page | 116
Unlocated difference
(P798,960 – P793,200) 5,760 -

Accounts receivable, Dec. 31,
2023 P798,960
Less: Required allowance per
aging 19,058
Net realizable value, Dec. 31, P779,902
2023
Answer: A
4. Doubtful accounts expense recorded P23,640

Adjustment to arrive at the required allowance (10,296)
Correct doubtful accounts expense for 2023 P13,344
Answer: A
5. Allowance for doubtful accounts 10,296

Required allowance balance (see no. 2) P19,058

Allowance balance, December 31:
Per books P32,858
Recovery of account written off 1,296
Understatement of write off on Oct. 1
(P6,832 – P6,032) (800)
Unrecorded write off (4,000) 29,354
Adjustment – decrease in allowance P10,296
Answer: C
PROBLEM 2-10
Analysis of Accounts Receivable and Related Accounts

Page | 117
The following information is based on a first audit of SABILA COMPANY. The client has
not prepared financial statements for 2020, 2022, or 2023. During these years, no accounts
have been written off as uncollectible, and the rate of gross profit on sales has remained
constant for each of the three years.
Prior to January 1, 2021, the client used the accrual method of accounting. From January 1,
2021, to December 31, 2023, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2020.
As a result of your examination, the correct data shown in the table below are available:
12/31/20 12/31/23
Accounts receivable
balance:
Less than one year old P15,400 P28,200
Old to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
P16,600 P33,000
Inventories P11,600 P18,800
Accounts payable for

inventory purchased P5,000 P11,000
Cash received on accounts receivable in:

2021 2022 2023
Applied to: P208,800
Current year collections P148,800 P161,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of the two years 600 400 2,000
prior
Total P162,800 P177,200 P227,600
Cash sales P17,000 P26,000 P31,200
Cash disbursements for

inventory purchased P125,000 P141,200 P173,800
1. The company’s sales revenue for the three-year period amounted to

A. P658,200 C. P625,400
B. P74,200 D. P415,300
2. What is the company’s total sales revenue for 2022?

A. P206,400 C. P268,200
B. P183,600 D. 180,400
3. The aggregate amount of purchases for the three-year period is

Page | 118
A. P131,000 C. P434,000
B. P440,000 D. 446,000
4. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33% C. 35.16%
B. 28.35% D. 31.15%
5. What is the company’s gross profit for each of the three-year period?
2021 2022 2023

A. P60,933 P68,200 P80,000
B. 55,533 60,133 79,000
C. 122,400 137,600 178,800
D. 61,200 68,800 89,400
SOLUTION 2-10
1. Accounts receivable, Dec. 31, 2023 P 33,000

Add: Collections, 2021-2023 567,600
Total 600,600
Less: Accounts receivable, Jan. 1, 2023 16,600
Total credit sales 584,000
Add: Cash sales, 2021 – 2023 74,200
Total sales, 2021 – 2023 P 658,200
Answer: A
2. Sales revenue for 2022 (see no. 5) P206,400

Answer: A
3. Accounts payable, Dec. 31, 2023 P 11,000

Add: Payments to suppliers 440,000
Total 451,000
Less: Accounts payable, Jan. 1, 2021 5,000
Total purchases, 2021 - 2023 446,000
Answer: D
4.
Sales (see no. 2) P658,200
Less: Cost of Sales
Inventory, Jan. 1, 2021 P11,600
Page | 119
Add: Purchases (see no.3) 446,000

Goods available for sale 457,600
Less: Inventory, Dec. 31, 2023 18,800 438,800
Gross profit P219,400
Gross profit ratio (P219,400 / P658 33 1/3%
Answer: A
5.
2021 2022 2023 TOTAL
Cash sales P17,000 P26,000 P31,200 P74,200
Collections in
2021 148,800 - - 148,800
2022 15,000 161,800 - 176,800
2023 2,000 16,800 208,800 227,600
A/R, Dec, 31 800 1,800 28,200 30,800
Total sales 183,600 206,400 268,200 658,200
Multiply by
gross profit
ratio 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Gross profit P 61,200 P 68,800 P 89,400 P 219,400
Answer: D
PROBLEM 2-11
Analysis of Accounts Receivable and Allowance for Doubtful Accounts
You are auditing the Accounts receivable and the related Allowance for doubtful accounts of
IKEBANA COMPANY.
The following data are available:
General Ledger
Accounts Receivable
Page | 120
2023
December 31 424,000
Allowance for Doubtful Accounts

2023 2023
July 31 GJ – Write off 8,000 Jan. 1 Balance 10,000
Dec. 31 GJ – Provision 24,000
Summary Aging Schedule

The summary of the subsidiary ledger balances as of December 31, 2023, is shown below:
Debit balances:
Under one-month P180,000
One to six months 184,000
Over six months 76,000
P440,000
Credit balances:
AA Co. P 4,000 – OK; additional billing in Jan. 2024
BB Co. 7,000 – Should have been credited to DD Co.*
CC Co. 9,000 – Advance on a sales contract
P 20,000
*Account is in “one to six months” classification.
The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.
Allowance for Doubtful Accounts Requirements
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require an allowance of 2 percent. Accounts over six months are
analyzed as follows:
Definitely bad P24,000
Doubtful (estimated to be 50% collectible) 12,000
Apparently good but, slow
(estimated to be 90% collectible) 40,000
Total P 76,000
1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is

A. P164,000 C. P177,000
B. P171,000 D. P184,000
2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is
A. P76,000 C. P69,000
B. P52,000 D. P45,000
3. The adjusted accounts receivable balance on December 31, 2023, should be

A. P404,000 C. P409,000
B. P420,000 D. P413,000
4. The required balance of the allowance for doubtful accounts on December 31,
2023, is
A. P47,340 C. P15,480
B. P15,340 D. P21,340
Page | 121
5. The entry to adjust the allowance for doubtful accounts is

B. Allowance for doubtful accounts 2,000
C. Doubtful accounts expense 17,340
D. Doubtful accounts expense 15,340
SOLUTION 2-11
A G I N G
Control Subsidiary Ledger Under 1 1 to 6 Over 6
Account CR DR Month Months Months
Unadjusted P424,000 P20,000 P440,000 P180,000 P184,000 P76,000
balances
Accounts 13,000 (20,000) (7,000) (7,000)
with credit
balances
Write off (24,000) (24,000) (24,000)
Unlocated
difference (4,000)
P409,000 - P409,000 P180,000 P177,000 P52,000
1. Answer: C 2. Answer: B 3. Answer: C

4.
Adjusted Balance Rate Amount

Under 1 month P180,000 1% P 1,800
1 to 6 months 177,000 2% 3,540
Over 6 months:
Doubtful 12,000 50% 6,000
Good but slow 40,000 10% 4,000
Required allowance P15,340
Answer: B
5. Doubtful account expense 13,340

Page | 122
Required allowance (see no. 4) 15,340

Allowance balance (P10,000 +
P24,000 – P24,000 – P8,000) 2,000
Adjustment – increase in allowance P13,340
Answer: B
PROBLEM 2-12
Valuation of Accounts Receivable
The unadjusted trial balance of the ISIDRO COMPANY at December 31, 2023, included the
following accounts:
Debit Credit
Accounts receivable P1,452,700
Allowance for doubtful accounts P 10,200
Sales 4,820,000
Your review of the accounts receivable schedule disclosed that various collections totaling
P17,350 were not recorded in the books but already reflected in the subsidiary ledgers. You
also noted the following information:
1. Postdated checks totaling P37,900 were included in the deposits in transit. These
represent collections of accounts receivable from customers. The checks were actually
2. A customer’s deposit of P38,000 for goods to be delivered in January 2024 was

deducted from accounts receivable.
3. A cash advance to an officer of P75,000 was included as part pf accounts receivable.
4. Goods sold on account and delivered on December 21, 2023, amounting to P31,810
were not recorded.
5. Collection of P15,275 on October 31. 2023, from Cathay Trading was credited to the
account of Supreme Mercantile.
6. A promissory note was issued by a customer to Isidro Company for goods purchased
worth P168,000. The promissory note carries an interest of 12% per annum with a
term of 60 days, value dated November 15, 2023. This was reflected as part of
accounts receivable. No interest was accrued as of year-end.
7. Bad debts are provided based on 2% of outstanding accounts receivable at the end of
the year.
8. Included in the physical count were goods sold to a customer on FOB shipping point
on December 27, 2023. These goods with a selling price of P52,830 and a cost of
P35,600 was already recorded as sales on account but were shipped only on January
5, 2024.
1. The Accounts receivable balance at December 31, 2023, should be

A. P1,300,060 C. P1,262,160
Page | 123
B. P1,247,230 D. P1,209,330
2. What is the year-end adjustment to the Allowance for doubtful accounts?

A. P14,745 C. P35,145
B. P15,801 D. P15,043
SOLUTION 2-12
1. B. Accounts receivable per book P1,452,700

Postdated checks 37,900
Unrecorded collections (17,350)
Customer’s deposit 38,000
Cash advance to an officer (75,000)
Unrecorded sale 31,810
Promissory note received from
customer (168,000)
Unshipped goods (52,830)
Adjusted balance P1,247,230
2. A. Required allowance (P1,247,230 x 2%) P24,945

Allowance balance per book (10,200)
PROBLEM 2-13
Assignment and Factoring of Accounts Receivable

Presented below are unrelated situations. Answer the question relating to each situation.
1. On December 5, 2023, BANDERA ESPAÑOLA, INC. sold its accounts receivable (net
realizable value, P260,000) for cash of P230,000. Ten percent of the proceeds was withheld
by the factor to allow for possible customer returns and other account adjustments. The
related allowance for doubtful accounts is P40,000.
A. What amount of loss on factoring should be recognized?
B. What is the entry to record the factoring of accounts receivable?
3. On April 1, 2023, SAMPAGUITA CORPORATION assigned accounts receivable

totaling P400,000 as collateral on a P300,000, 16% note from Iwahig Bank. The
assignment was done on a non-notification basis. In addition to the interest on the
note, the bank also receives a 2% service fee, deducted in advance on the P300,000
value of the note.
a. Collections of assigned accounts in April totaled P191,100, net of a 2% sales
discount.
Page | 124
b. On May 1, Sampaguita Corporation paid the bank the amount owed for April
collections plus accrued interest on note to May 1.
c. The remaining accounts were collected by Sampaguita Corporation during May
except for P2,000 accounts written off as worthless.
d. On June 1, Sampaguita Corporation paid the bank, the remaining balance of the
note plus accrued interest.
Prepare the journal entries to record the above transactions on the books of Sampaguita
Corporation.
4. ROSAL FINANCE CORP. purchases the accounts receivable of other companies on a

without recourse, notification basis. At the time the receivables are factored, 15% of
the amount factored is charged to the client as commission and recognized as revenue
in Rosal's books. Also, 10% of the receivables factored is withheld by Rosal as
protection against sales returns or other adjustments. This amount is credited by Rosal
to the Client Retainer account. At the end of each month, payments are made by Rosal
to its clients so that the balance in the Client Retainer account is equal to 10% of
unpaid factored receivables. Based on Rosal's bad debt loss experience, an allowance
for doubtful accounts of 5% of all factored receivables is to be established. Rosal
makes adjusting entries at the end of each month.
On January 3, 2023, Poor, Inc. factored its accounts receivable totaling P1,000,000.
By January 31, P800,000 on these receivables had been collected by Rosal. Prepare
the entries on Rosal’s and Poor’s books to record the above information.
SOLUTION 2-13
1. A. Net realizable value of accounts receivable P260,000

Less: Cash proceeds 230,000
Loss on factoring P 30,000
B. Cash (P230,000 x 90%) 207,000

Loss on factoring 30,000
Receivable from factor (P230,000 x 10%) 23,000
Accounts receivable (P260,000 + P40,000) 300,000
2. April 1 Accounts receivable-assigned 40,000

1 Cash 294,000
Finance charge (P300,000 x 2%) 6,000
Notes payable 300,000
(a) Cash 191,100

Sales discounts 3,900
Accounts receivable-assigned (P191,100 / 98%) 195,000
Page | 125
(b) Notes payable 195,000

Interest expense (P300,000 x 16% x 1/12) 4,000
Cash 199,000
(c) Cash 203,000

Accounts receivable-assigned
(P400,000 – P195,000) 205,000
(b) Notes payable (P300,000 – P195,000) 105,000

Interest expense (P105,000 x 16% x 1/12) 1,400
Cash 106,400
3. ROSAL’S BOOKS
2023
Jan. 3 Accounts receivable factored 1,000,000
Commission Income (P1,000,000 x 15%) 150,000
Client Retainer (P1,000,000 x 10%) 100,000
Cash 750,000
31 Cash 800,000
Accounts receivable factored 800,000
31 Client Retainer 80,000

Cash (P100,000 – [10% x P200,000]) 80,000
31 Doubtful accounts expense

Allowance for doubtful accounts
(P1,000,000) x 5%
POOR, INC.’s BOOKS
2023
Jan. 3 Cash 750,000
Page | 126
Receivable from factor 100,000

Commission 150,000
31 Cash 80,000
Receivable from factor 80,000
PROBLEM 2-14
Discounting of Notes Receivable
NOTES RECEIVABLE
Date Debit Credit
Sept. 1 Cornea, 20%, due in 3 P 80,000
months
Oct. 1 Hunk Co., 24%, due in 2 300,000
months
1 Discounted Cornea note P 80,000
at 25%
Nov. 1 Valerie, 24%, due in 13 600,000
months
30 Cellular Co., no 500,000
interest, due in one year
30 Discounted Cellular 500,000
note at 18%
Dec. 1 Tictic, 18%, due in 5 900,000
months
1 O. Reyes, President, 1,200,000
12%, due in 3 months
(for cash loan given to
O. Reyes)
All notes are trade notes unless otherwise specified. The Cornea note was paid on December
1 as per notification received from the bank. The Hunk Co. note was dishonored on the due
date but the legal department has assured management of its full collectibility.
The company, with your concurrence, will treat the discounting as a conditional sale of note
receivable.
1. At what amount on the current assets section of the December 31, 2023, statement of
financial position will the Notes receivable- trade be carried?
A. P1,500,000
Page | 127
B. P1,800,000
C. P2,400,000
D. P2,080,000
2. What amount of loss on notes receivable discounting should be reported in the 2023
income statement of the company?
A. P90,500
B. P90,833
C. P90,000
D. P 0
3. Based on the ledger account presented, what amount of interest income should be
accrued on December 31, 2023?
A. P55,500
B. P61,500
C. P49,5 00
D. P67,500
Solution 2- 14
1. Valerie P 600,000
Tictic 900,000
Total notes receivable-trade, Dec. 31, 2023 P1,500,000
Answer: A
2. Net proceeds:
Principal P 80,000
Interest (P80,000 x 20% x 3/12) 4,000
Discount (P84,000 x 25% x 2/12) (3,500) P80,500
Book value:
Principal P80,000
Accrued interest receivable
(P80,000 x 20% x 1/12) 1,333 81,333
Loss on discounting of Cornea note P 833
Principal/Maturity value P500,000

Discount (P500,000 x 18% x 1 year) (90,000)
Net proceeds 410,000
Book value 500,000
Loss on discounting of Cellular note P 90, 000
Total loss on discounting (P833 + P90,000) P 90,833

Answer: B
3. Hunk (P300,000 x 24% x 3/12) P18,000

Valerie (P600,000 x 24% x 2/12) 24,000
Tictic (P900,000 x 18% x 1/12) 13,500
O. Reyes (P1,200,000 x 12% x 1/12) 12,000
Total accrued interest receivable, Dec. 31, 2023 P 67 500
Page | 128
Answer.: D
PROBLEM 2-15
Analyzing Various Receivable Transaction
The AUTOMATIC COMPANY sells plastic products to wholesalers. The end of the
company's reporting period is December 31. During 2023, the following transactions related
to receivables occurred:
March 31 Sold merchandise to Mismo Co. and accepted a 10% note. Payment of
P120,000
principal plus interest is due on March 31, 2024.
April 12 Sold merchandise to Abe Co. for P20,000 with terms 2/10, n/30. Automatic
uses the gross method to account for cash discounts.
21 Collected the entire amount due from Abe Co.
27 A customer returned merchandise costing Automatic P60,000. Automatic
reduced the customers receivable balance by P80,000, the sales price of the
merchandise.
The company records sales returns as they occur.
May 30 Transferred receivables of P1,000,000 to a factor without recourse. The factor
charged Automatic a 2% finance charge on the receivables transferred. The
criteria to derecognize the asset are met.
July 31 Sold merchandise to Fabon Company for P150,000 and
accepted an 8%, 6-month note. 8% is an appropriate rate for this type of note.
Sep. 30 Discounted the Fabon Company note at the bank. The bank's discount rate is
12%.
The note was discounted without recourse.
Required:
1. Prepare the necessary journal entries to account for the above transactions. For transactions
involving the sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries on December 31, 2023. Adjusting entries are only
recorded at year-end.
Solution 2- 15
Mar. 31 Notes receivable 120,000

Sales 120,000
April 12 Accounts receivable 20,000
Sales 20,000
21 Cash (P20,000x 98%) 19,600
Sales discounts (P20,000 x 2%) 400
27 Sales returns 80,000
Inventory 60,000
Cost of goods sold 60,000
May 30 Cash (P1,000,000 x 98%) 980,000
Loss on factoring (P1,000,000 x 2%) 20,000
Page | 129

July 31 Notes receivable 150,000
Sales 150,000
Sep. 30 Cash 149,760

Loss on note receivable discounting 2,240
Net proceeds:
Principal P 150,000
Interest (P150,000 x 8% x 6/12) 6,000
Discount (P156,000 x 12% x 4/12) (6,240) P149,760
Book value:
Principal 150,000
Accrued interest
(P150,000 x 8% x 2/12) 2,000 152,000
Loss on discounting P 2, 240
Dec.31 Accrued interest receivable 9,000

(P120,000 x 10% x 9/12)
PROBLEM 2-16
Notes: Receivable: Classification and Interest Computation

The following long-term receivables were reported in the December 31, 2022, statement of
financial position of MANGO CORPORATION:
Note receivable from sale of plant P3,000,000
Note receivable from officer 800,000
The following transactions during 2023 and other information relate to the company's
long-term receivables:
1. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual installments P1,000,000 plus interest on the unpaid balance every April
1. The initial principal and interest payment was made on April 1, 2023.
2. The note receivable from the officer is dated December 31, 2022, earns interest at 10% per
annum, and is due on December 21 2025. The 2023 interest was received on December 31,
2023.
3. Mango sold a piece of equipment to Banana, Inc. on April 1, 2023, in exchange for a
P400,000 non-interest-bearing note due on April 1, 2025. The note had no ready market, and
there was no established exchange price for the equipment. The prevailing interest rate for a
note of this type at April 1, 2023, was 12%. The present value factor of 1 for two periods at
12% is 0.797.
4. A tract of land was sold by Mango to Orange, Inc. on July 1, 2023, for P2,000,000 under
an installment sale contract. Orange signed a 4-year 11% note for P1,400,000 on July 1,
2023, in addition to the down payment of P600,000. The equal annual payments of principal
and interest on the note will be P451,250 payable on July 1, 2024, 2025, 2026, and 2027. The
Page | 130
land had an established cash price of P2,000,000, and its cost to Mango was P1,500,000. The
collection of the installments on this note is reasonably assured.
1. The amount to be reported as noncurrent receivables in the statement of financial
position at December 31, 2023, is
A. P3,096,242 C. P3,221,550
B. P3,067,550 D. P3,250,242
2. The current portion of notes receivable on December 31, 2023, should be
A. P1,451,250 C. P2,097,250
B. P1,297,250 D. P2,297,250
3. The accrued interest receivable on December 31, 2023, should be
A. P257,000 C. P285,692
B. P180,000 D. P334,000
4. On December 31, 2023, the unamortized discount on note receivable from sale of
equipment should be
A. P42,944 C. P 0
B. P109,892 D. P52,508
5. The total interest income for the year ended December 31, 2023, should be
A. P427,000 C. P375,692
B. P455,692 D. P532,692
Solution 2- 16
1. NONCURRENT RECEIVABLES (NET OF CURRENT PORTION)

Note receivable from sale of plant:
Balance, 12/31/23 P2,000,000
(P3,000,000 - P1,000,000)
Less: Installment due April 1, 2024 1,000,000 P1,000,000
Note receivable from officer due Dec. 31, 2025 800,000
Note receivable from sale of equipment:
Present value of note on April 1, 2023
(P400,000 x 0.797) P318,800
Add: Interest income,
April 1 - Dec. 31, 2023
(P318,800 x 12% x 9/12) 28,692 347,492
Note receivable from sale of land:

Balance, Dec. 31, 2023 P1,400,000
Less: Installment due July 1, 2024:
Total amount to be received P451,250
Less: Interest (P1,400, 000 x 11%) 154,000 297,250 1,102,750
Total P 3,250,242
Answer: D
2. CURRENT PORTION OF NONCURRENT RECEIVABLES
Note receivable from sale of plant P1,000,000
Note receivable from sale of land (see no. 1) 297,250
Total P1,297,250
Answer: B
3. ACCRUED INTEREST RECEIVABLE, DEC. 31, 2023
Page | 131
Note receivable from sale of plant, April 1 - Dec. 31

(P2,000,000 x 12% x 9/12) P180,000
Note receivable from sale of land, July 1- Dec. 31
(P1,400,000 x 11% x 6/12) 77,000
Total P257,000
Answer: A
4. UNAMORTIZED DISCOUNT, DEC. 31, 2023
Unamortized discount, April 1, 2023
(P400,000- P318,800) P81,200
Less: Amortization, April 1-Dec. 31 (see no. 1) 28,692
Total P 52, 508
Answer: D
5. INTEREST INCOME FOR THE YEAR ENDED DEC. 31, 2023

Note receivable from sale of plant:
Interest income, Jan. 1- Mar. 31
(P3,000,000 x 12% x 3/12) P 90,000
Interest income, April 1 - Dec. 31
(P2,000,000 x 12% x 9/12) 180,000 P270,000
Note receivable from officer (P800,000 x 10%) 80,000
Note receivable from sale of equipment (see no. 1) 28,692
Note receivable from sale of land (see no, 3) 77,000
Total P 455,692
Answer: B
PROBLEM 2-17
Notes: Receivable
Presented below are unrelated situations. Answer the questions relating to each situation.
1. On January 1, 2023, WALING-WALING CO. sells its equipment with a carrying value of
P160,000. The company receives a noninterest-bearing note due in 3 years with a face
amount of P200,000. There is no established market value for the equipment. The prevailing
interest rate for a note of this type is 12%. The following are the present value factors of 1 at
12%:
Present value of 1 for 3 periods 0.71178
Present value of an ordinary annuity of 1 for 3 periods 2.40183
a. What is the gain or loss to be recognized on the sale of the equipment?
a. What is the discount on note receivable on January 1, 2023?
a. What is the discount amortization at the end of the third year (using the effective
interest method)?
2. On January 2, 2023, a tract of land that originally Cost P800,000 was sold by VIETNAM
ROSE COMPANY. The company received a P1,200, 000 note as payment. It bears interest
rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%.
The present value table shows the following present value factors of 1 at 10%:
Present value factor of 1 for 3 periods 0.75132
Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity 2.48685
of 1 for 3 periods
a. What amount of gain on sale of land should be recognized on January 2, 2023?
Page | 132
a. How much interest income should be reported for 2023?

3. The notes receivable account of CAIMITO, INC. consisted of the following:
A. 60-day note of P10,000 dated May 15 with a 9% interest rate, discounted at the bank on
June 8 at 12%.
B. 120-day note of P100,000 (face amount) dated October 1 with no stated interest rate and a
market rate of 9% interest, discounted at the bank on November 30 at 12%. This note was
received from the sale of equipment.
Determine the proceeds from discounting of notes receivable.
Solution 2- 17
a. Sales price/Present value of note

(P200,000 x 0.71178) P 142,356
Less: Book value of equipment 160,000
Loss on sale of equipment P 17,644
b. Face value of note P 200,000

Less: Present value of note (see no. 1) 142,356
Discount on note receivable P 57.644
c. Present value of note, Jan. 1, 2023 P142,356

Add: Interest income in 2023 (P142,356 x 12%) 17,083
Present value of note, Jan. 1, 2024 159,439

Add: Interest income in 2024 (P159,439 x 12%) 19,133
Present value of note, Jan. 1, 2025 178,572
Face value of note 200,000
Discount amortization at the end of the third year P 21428
2. AMOUNT OF CASH TO BE RECEIVED EACH YEAR

Year Interest Principal Total
2024 (P1,200,000 x 4%) P 48,000 P 400,000 P
448,000
2025 (P800,000 x 4%) 32,000 400,000 432,000
2026 (P400,000 x 4%) 16,000 400,000 416,000
P 96,000 P1,200,000
P1,296.000
PRESENT VALUE OF THE NOTE AT 10% INTEREST RATE

Cash to be Present Value Present
Year Received Factor Value
2024 P 448,000 0.90909 P 407,272
2025 432,000 0.82645 357,026
2026 416,000 0.75132 312,549
P1,296,00 P1,076,847
a. Note receivable from sale of plant P1,000,000
Note receivable from sale of land (see no. 1) 297,250
Total P1,297,250
Page | 133
b. Interest Income for 2023 (P1,076,847 x 10%) P107,685
3. A. 60-DAY NOTE
Face amount P10,000
Add: Interest (P10,000 x 9% x 60/360) 150
Less: Bank discount (P10,150 x 12% x 36/360) 122
Net proceeds P10,028
B. 120-DAY NOTE
Maturity value (same as face amount) P100,000
Less: Bank Discount (P100,000 x 12% x 60/360) 2,000
PROBLEM 2-18
Various Notes Receivable Transaction

The Notes Receivable account of BUNSOY CO. has a debit balance of P239,200 on
December 31, 2023. There was no balance at the beginning of the year. Your analysis of the
account reveals the following:
1. Notes amounting to P845,000 were received from customers during the year.
2. Notes of P416,000 were collected on due dates and notes amounting to P221,000
were discounted at the Aggressive Bank. The Notes Receivable account was credited
for the notes discounted.
3. Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note
for P31,200 was dishonored and was charged back to Notes Receivable account.
4. Cash of P33,000 was received as partial payment on notes not yet due. The amount
received was credited to Liability on Partial Payments account.
5. A note for P50,000 was pledged as collateral for a bank loan.
6. Included in the company's cash account balance is a three-month note from an officer
amounting to P8,000 which is over a month past due.
Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2023, is
A. P260,800
B. P323,200
C. P364,800
D. P175,000
Solution 2- 18
Unadjusted balance
(P845,000 - P416,000 - P221,000 + P31,200) P239,000
Partial collection recorded as a liability (33,000)
Notes receivable discounted still outstanding
(P221,000 - P104,000- P31,200) 85,000
Dishonored note (31,200)
Adjusted balance P260,000
Page | 134
Answer: A
PROBLEM 2-19
Impairment of Loan
YOKE BANK loaned P16,500,000 to Bargain Company on January 1,
2023. The initial loan repayment terms include a 10% interest rate plus annual principal
payments of P3,300,000 on January 1 each year, Bargain made the required interest payment
in 2023 but did not make the P3,300,000 principal payment nor the P1,650,000 interest
payment for 2024. Yoke is preparing its annual financial statements on December 31, 2024.
Bargain is having financial difficulty, and Yoke has concluded that the loan is impaired.
Analysis of Bargain's financial condition on December 31, 2024, indicates the principal
payments will be collected, but the collection of interest is unlikely. Yoke did not accrue the
interest on December 31, 2024.
The projected cash flows are:
December 31, 2025 P5,250,000
December 31, 2026 6,000,000
December 31, 2027 5,250,000
1. What is the loan impairment loss on December 31, 2024?

A. P2,824,500 C. P 0
B. P1,650,000 D. P16,500,000
2. What is the interest income to be reported by Yoke Bank in 2025?

A. P1,504,305 C. P1,367,550
B. P979,305 D. P1,650,000
3. What is the carrying value of the loan receivable on December 31, 2026?
A. P4,772,355 C. P9,793,050
B. P5,250,000 D. P13,675,500
4. What is the interest income in 2026?

A. P477,237 C. P1,367,550
B. P1,650,000 D. P979,305
5. What is the interest income 2027?

A. P477,645 C. P979,305
B. P1,650,000 D. P1,367,550
Solution 2- 19
1. A Book value of loan receivable P16,500,000

Present value of projected cash flows:
12/31/25 (P5,250,000 x 0.9091) P4,772,775
12/31/26 (P6,000,000 x 0.8264) 4,958,400
Page | 135
12/31/27 (P5,250,000 x 0.7513) 3,944,325 13,675,500

Loan impairment loss P2,824,500
Date Loan Allowance Net Loan Interest Payment

Receivable for Loan Receivable Income Received
Before Impairment
Current
Payment
Dec. 31, P16,500,000 P2,824,500 P13,675,500 P1,367,550 P5,250,000
2025
Dec. 31, 11,250,000 1,456,950 9,793,050 979,305 6,000,000
2026
Dec. 31, 5,250,000 477,645 4,772,355 477,645 5,250,000
2027
2. C Interest income in 2025 P1,367,550
3. A Loan receivable
(P16,500,000 – P5,250,000 – P6,000,000) P5,250,000
Allowance for loan impairment (477,645)
Carrying value, Dec.31, 2026 P4,772,355
4. D Interest Income in 2026 P979,305
5. A Interest income in 2027 P477,645
PROBLEM 2-20
Loan Impairment
On January 1, 2024, ZOOM BANK provided a loan of P4,000,000 to D Company. Under the
loan agreement, the effective interest rate is 10% and that D Company is to pay the annual
interest every December 31. The principal amount of the loan is due on December 31, 2028.
On December 31, 2024, Zoom Bank needs to measure the 12-month expected credit loss for
the loan. Zoom Bank determined that the probability of the loan being in default over the next
12 months is 1% and that 20% of the gross carrying amount will be lost over the term of the
loan, i.e., the Loss Given Default (LGD) is 20%.
On December 31, 2024, Zoom Bank has determined that there is a significant increase in the
credit risk of the loan receivable. The probability of the loan being in default over the life of
the loan is 10% and the LGD is 25% of the gross carrying amount.
During 2026, D Company began to face financial difficulties. At year end, Zoom Bank
considered the loan to be impaired. Interest for that year was collected. However, only 40%
of the principal amount is expected to be received on due date.
1. What amount of impairment loss should be recognized on December 31, 2024?

A. P 0 C. P8,000
Page | 136
B. P18,140 D. P5,464

A. P100,000 C. P156,470
B. P75,130 D. P93,270
3. What amount of interest income should be reported for the year ended December 31,
2026?
A. P382,584 C. P174,160
B. P200,000 D. P400,000

A. P2,503,600 C. P2,400,000
B. P3,577,760 D. P1,600,000
5. What amount of interest income should be reported for the year ended December 31,
2027?
A. P132,226 C. P145,447
B. 200,000 D. P 0
Solution 2- 20
January 1, 2024
Loan receivable 4,000,000
Cash 4,000,000
December 31, 2024

Cash 400,000
Interest income
(P4,000,000 x 10%) 400,000
Impairment loss 18,140

Carrying amount, Dec. 31, 2024 P4,000,000

Present Value of expected cash flows, Dec. 31, 2024:
(P4,000,000 x 80% x 0.683) 2,185,600
Expected credit loss 1,814,400
Probability of default within 12 months 1%
12-month expected credit loss allowance P 18,140
1. Answer: B
Under PFRS 9, a 12-month expected credit loss (ECL) is to be recognized for debt
instruments where there has not been any significant increase in credit risk from the
date of initial recognition (Stage 1 under the general approach of impairment
recognition).
Page | 137
A 12-month ECL represents a portion of the lifetime ECL that will result if a default
occurs within the 12 months after the reporting period. It is calculated by
multiplying the probability of a default within the next 12 months after the reporting
period by the lifetime or total ECL.
December 31, 2025

Cash 400,000
Interest income
(P4,000,000 x 10%) 400,000
Impairment loss 156,470


(P4,000,000 x 75% x 0.7513) 2,253,900
Expected credit loss 1,746,100
Probability of default within 3 years 10%
Lifetime expected credit loss allowance 174,610
Expected credit loss allowance, December 31, 2024 (18,140)
Impairment loss P156,470
2. Answer: C
If there has been a significant increase in credit risk since the initial recognition,
the impairment loss to be recognized shall be based in the lifetime ECL. The
financial asset moves from Stage 1 to Stage 2 under the general approach of
impairment loss recognition in PFRS 9,
Interest income on financial assets under the Stage 1 or Stage 2 category is to be
calculated based on the gross carrying amount of the instruments.
December 31, 2026

Cash 400,000
3. Answer: D
Impairment loss 2,503,600

Loan receivable 2,400,000
(P4,000,000 x 60%)

Page | 138
(P4,000,000 x 40% x 0.8264) 1,322,240

Lifetime expected credit loss 2,677,760
Allowance for credit loss, Dec. 31, 2025 (174,160)
Impairment loss P2,503,600
4. Answer: A
The financial instrument moves from Stage 2 to Stage 3 once it becomes

credit-impaired. Similar to Stage 2, impairment loss is to be recognized based on
the instrument's lifetime ECL. Interest income is calculated based on the net
carrying amount of the instrument, i.e., after deducting any allowance for credit
loss. However, note that the interest income recognized in 2024 is based on the
gross carrying amount because the loan was still in Stage 2 throughout the year.
Cash 132,224

(P1,322,240 x 10%)
5. Answer: A
AUDIT OF INVENTORIES
PROBLEM 3-1
Correcting Inventory Errors

The TILL CORPORATION has adjusted and closed its books at the end of 2023. The
company arrives at its inventory position by a physical count taken on December 31 of each
year. In March 2024, the following errors were discovered:
(a) Merchandise that cost P7,500 was sold for P10,200 on December 30, 2023. The order was
shipped December 31, 2023 with terms FOB shipping point. The merchandise was not
included in the ending inventory. The sale was recorded on January 15, 2024, when the
customer made payment on the sale
(b) On January 2, 2024, Till Corporation received merchandise that had been shipped to it on
December 31, 2023. The terms of the purchase were FOB shipping point. Cost of the
merchandise was P5,250. The purchase was recorded and the goods included in the inventory
on January 2, 2024.
Page | 139
(c) On January 8, 2024, merchandise that had been included in the ending inventory was
returned to Till because the consignee had not been able to sell it. The cost of this
merchandise was P3,600 with a selling price of P5,400. (d) Merchandise costing P2,250,
located in a separate warehouse. was overlooked and excluded from the 2023 inventory count
(e) On December 27, 2023. Till Corporation purchased merchandise costing P3,525 from a
supplier. The order was shipped December 28 (terms FOB destination) and was still in transiť
on December 31. Because the invoice was received on December 31, the purchase was
recorded in 2023. The merchandise was not included in the inventory count.
(f) The corporation failed to make an entry for a purchase on account of P2.505 at the end of
2023, although it included this merchandise in the inventory count. The purchase was
recorded when payment was made to the supplier in 2024.
(g) The corporation Included in its 2023 ending inventory merchandise with a cost of P4,050.
This merchandise had been custom built and was being held according to the customer's
written request until the customer could come and pick up the merchandise. The sale, for
P5,475, was recorded in 2024.
Required:
Give the entry in 2024 (2023 books are closed) to correct each error. Assume that the errors
were made during 2023, all amounts are material, and the periodic Inventory system is used.
SOLUTION 3-1
(a) Sales 10,200

(b) Merchandise inventory 5,250

Purchases 5,250
(c) No entry necessary. Consigned goods should be included in the consignor's (Till's)
inventory.
(d) Merchandise inventory 2,250
(e) Purchases 3,525
(f) Retained earnings 2,505
Purchases 2,505
(g) Sales 5,475
PROBLEM 3-2

Correcting Inventory Errors WALLNUT Co. asks you to review its December 31, 2023,
inventory values and prepare the necessary adjustments to the books. The following
information is given to you.
1. Wallnut uses the periodic method of recording inventory. A physical count reveals
P704,670 of inventory on hand at December 31, 2023.
2. Not included in the physical count of inventory is P31,260 of merchandise purchased on
December 15 from Benggay. This merchandise was shipped fo.b. shipping point on
December 29 and arrived in January. The invoice arrived and was recorded on December 31.
Page | 140
3. Included in inventory is merchandise sold to Bubbly on December 30, fo.b. destination.

This merchandise was shipped after it was counted. The invoice was prepared and recorded
as a sale on account for P38,400 on December 31. The merchandise cost P22,050, and
Bubbly received it on January 3.
4. Included in inventory was merchandise received from Doodle on December 31 with an
invoice price of P46,890. The merchandise was shipped f.o.b. destination. The invoice, which
has not yet arrived, has not been recorded.
5. Not included in inventory is P25,620 of merchandise purchased from Maundy Company.
This merchandise was received on December 31 after the inventory had been counted. The
invoice was received and recorded on December 30.
6. Included in inventory was P31,314 of inventory held by Wallnut an consignment from Jaka
Corporation.
7. Included in inventory is merchandise sold to Simson f.o.b. shipping point. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as a
sale for P56,700 on December 31. The cost of this merchandise was P34,560, and Simson
received the merchandise on January 5.
8. Excluded from inventory was a carton labeled "Please accept for credit. This carton
contains merchandise costing P4,500 which had been sold to a customer for P7,800. No entry
had been made to the books to reflect the return, but none of the returned merchandise
seemed damaged.
Required:
a. Compute the correct inventory balance for Wallnut at December 31, 2023.
b. Prepare any correcting entries to adjust inventory and related accounts to their proper
amounts at December 31, 2023. Assume the books have not been closed.
SOLUTION 3-2
a. Inventory per count Transaction P704,670

Transaction 2 31,260
3 ---
4 ---
5 25,620
6 (31,314)
7 (34,560)
8 4,500
Inventory as corrected P700.176
b. ADJUSTING JOURNAL ENTRIES

December 31, 2023
Transaction 3
Sales 38,400
Transaction 4
Purchases 46,890
Transaction 8
Sales returns and allowances 7,800
PROBLEM 3-3
Page | 141
Computation of Adjusted Sales and

Inventories
In testing the sales cut-off for the BIG LOVE COMPANY in connection with an audit for the
year ended October 31, 2023, you find the following information.
A physical inventory was taken as of the close of business on October 31, 2023. All
customers are within a three-day delivery area of the company's plant. The unadjusted
balances of Sales and Inventories are P7,500,000 and P330,000, respectively
Invoice FOB Terms Date Shipped Date Recorded Sales Cost
6671 Destination Oct. 20 Oct 31 P3,000 P2,700
6672 Shipping point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping point Oct. 25 Oct 31 5,400 3,600
6674 Destination Oct. 31 Oct 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600
24,000
6676 Shipping point Nov. 2 Oct.23 19,500
15,300
6677 Shipping point Nov. 5 Nov. 6 22.500
17.400
6678 Destination Oct. 25 Nov. 3 11,700
6,000
6679 Shipping point Nov. 4 Oct. 31 25,800
24,600
6680 Destination Nov. 5 Nov. 2 15,000
12,000
Based on the foregoing information, compute the October 31, 2023, adjusted balances of the
following accounts:
1. Sales
A. P7,461,300 C. P7,449,600
B P7,455,900 D. P7,487,100
2. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300
SOLUTION 3-3
Sales
Inventories
Unadjusted balances P7,500,000 P330,000
Invoice No. 6672 7,500 ---
6674 (12,600) 9,300
6675 --- 24,000
6676 (19,500) ---
6678 11,700 ---
6679 (25,800) ---
Adjusted balances P7.461.300 P363.300
1. Sales
P7.461.300
Page | 142
Answer: A
2. Inventories
P363,300
Answer: B
PROBLEM 3-4
Cut-off Test for

Purchases
You are conducting a financial statement audit of the BEVERLY HILLS CORP. for the year
ended December 31, 2018. You have observed the taking of physical inventory and have
noted that all merchandise actually received up to the close of business on December 28,
2018, has been recorded on the inventory sheets. The total invoice cost of the items included
in the physical count is P300,000.
The following purchase invoices have been recorded in the Purchases Journal as follows:
December 2023
Invoice Invoice
Date
Number Amount Date FOB Term
Received
251 PI0,248 Dec. 23 Destination Dec. 24
252 8,136 Dec. 23 Destination Dec. 29
253 3,123 Dec. 26 Shipping point Dec. 30
254 12,600 Dec. 26 Shipping point Jan. 5
255 13,833 Jan. 2 Destination Dec. 31
256 6,309 Dec. 31 Destination Jan. 4
258 21,162 Jan. 8 Shipping point Jan. 2
January 2024
261 P3,672 Dec. 28 Destination Jan. 4
264 14,700 Jan. 2 Shipping point Jan. 5
265 41,400 Dec. 28 Shipping point Jan. 4
266 17,877 Dec. 30 Destination Jan. 6
Required:
1.Auditor's adjusting entries, if any, required by the above information.
2.Show the detailed composition of the value of the inventory to be used on the financial
statements. Transportation-in charges on purchases averaged 6% during the year and are to be
included in the inventory valuation.
Page | 143
SOLUTION 3-4
1. ADJUSTING ENTRIES
December 31, 2018
a. Accounts payable 27,471

Purchases 27,471
Invoice no. 256 P6,309
258 21,162
Total 27,271
b. Purchases 70,503
Accounts Payable 70,503
Invoice no. 262 P11,391

263 17,712
264 41,400
Total P70,503
c. Freight- in 3,240
Estimated freight- in payable 3,240
In transit
Invoice no. 254 12,600
265 41,400
Total 54,000
Average freight in x6%
P3,240
2. Balance per client at invoice cost P300,000
Add: Invoice No. 252 P8,136
253 3,123
254 12,600
255 13,833
263 17,712
265 41,400 96,804
Corrected inventory at invoice cost
P396,804
Add: Average freight - in (6% x P396,804) 23,808
Adjusted inventory P420,612
PROBLEM 3-5
Inventory
Estimation
The Malawi Company is an importer and wholesaler. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to customers. In conducting his audit for the
year ended December 31, 2023, the company’s CPA determined that the system of internal
control was good. Accordingly, he observed the physical inventory at an interim date,
November 30, 2023, instead of at year end.
Page | 144
The following information was obtained from the general ledger:

Inventory, January 1, 2023 P 90,000
Inventory, November 30, 2023 225,000
Sales for 11 months ended November 30, 2023 800,000
Sales for year ended December 31, 2023 950,000
Purchase for 11 months ended November 30, 2023
(before audit adjustments) 720,000
Purchase for year ended December 31, 2023
(before audit adjustments) 810,000

a. Goods received on November 28 but recorded as purchases in December 10,000
b. Deposits made in October 2023 for purchases to be made in 2021 but charged to
Purchases 14,000
c. Defective merchandise returned to suppliers:
Total at November 30, 2023 5,000
Total at December 31, 2023, excluding November items 7,000
The returns have not been recorded pending receipt of credit memos from the suppliers.
The defective goods were not included in the inventory.
d. Goods shipped in November under FOB destination and received in
December were recorded as purchases in November 18, 500
e. Through the carelessness of the client’s warehouseman, certain goods
were damaged in December and sold in the same month at its cost 20,000
f. Audit of the client’s November inventory summary revealed the following::
Items duplicated P 3,000
Purchase in Transit:
Under FOB shipping point 12,000
Under FOB destination 18,500
Items counted but not included in the inventory summary 7,000
Errors in extension that overhauled the items 4,000
1.The correct amount of net purchases up to November 30, 2020, is
a. P716,000 c. P692,500
b. P682,500 d. P706,500
2. The correct amount of net purchases up to December 31, 2020, is
a. P765,500 c. P784,000
b. P803,000 d. P789,000
3. The correct inventory on November 30, 2020, is
a. P206,500 c. P237,000
b. P214,500 d. P218,500
4. What is the gross income for 11 months ended December 31, 2020?
a. P234,000 c. P224,000
b. P217,000 d. P237,500
5. What is the estimated inventory on December 31, 2020
a. P183,100 c. P184,400
b. P175,900 d. P190,000
SOLUTION 3-5
1. C Net purchases up to November 30 P692.500

2. C Net purchases up to December 31 P784.000
Page | 145
UP TO Per books
NOV. 30 DEC 31
Per book P720,000 P810,000
November purchases recorded in December 10,000 ---
October deposits recorded as purchases (14,000) (14,000)
Defective items returned (5,000) (12,000)
December purchases recorded in November (18,500) ---
P692.500 P784.000
3. A Per count P225,000

Items duplicated (3,000)
In transit under FOB destination (18,500)
Items counted but not included in list 7,000
Overvaluation - extension errors (4.000)
P206,500
4. C Sales P800,000
Cost of sales:
Inventory, Jan. 1 P 90,000
Net purchases 692,500
Inventory, Nov. 30 206,500 576,000
Gross income P224.000
5. C Inventory, Nov. 30
P206,500
December net purchases 91,500
Cost of goods sold for December (113,600)
Estimated inventory, Dec. 31 P184,400
PROBLEM 3-6
Analyzing Inventory Transactions

The GOAT COMPANY reviewed its inventories and found the following items:
1. In the shipping room was a product costing P 13,400 when the physical count was taken.
Because it was marked "Hold for shipping instructions," it was not included in the count. The
customer order was dated December 15, but the product was shipped and the customer billed
on January 4, 2024..
2. On December 27, 2023, merchandise costing P 11,648 was received and recorded. The
invoice accompanying the merchandise was marked "on consignment."
3. The company received merchandise costing P4,625 on January 2, 2 024. The invoice,
which was recorded on January 3, 2024, showed shipment was made under FOB shipping
point on December 31, 2023. The merchandise was not included in the inventory because it
was not on hand when the physical count was taken.
4. A product, fabricated to order for a particular customer, completed and in the shipping
room on December 31. Although it was shipped on January 5, 2024, the customer was billed
on December 31, 2018, and it was excluded from the inventory.
5. Merchandise costing P16,666 was received on January 5, 2024 and the related purchase
invoice was recorded January 6. The shipment of this merchandise was made on December
31, 2023 FOB destination.
Page | 146
6. A product costing P 150,000 was sold on an installment basis on December 10, 2023. It
was delivered to the customer on that date. The product was included in inventory because
Goat still holds legal title. The company's experience suggests that full payment on
installment sales is reasonably assured.
7. An item costing P65,000 was sold and delivered to the customer on December 29, 2023.
The goods were included in the inventory because the sale was with a repurchase agreement
that requires Goat to buy back the inventory on January 15, 2024.
Indicate which of the above items are to be included in the inventory balance at December
31, 2023. State your reasons for the treatment you suggest.
SOLUTION 3-6
1. Included - Merchandise, except "special orders", should be included in the inventory until
shipped.
2. Excluded - Goat Company does not possess legal title because the merchandise was
received on a consignment basis.
3. Included - Because the purchase was made under FOB shipping point term, the
merchandise should be included in the inventory on the shipping date.
4. Excluded - A product that is manufactured for a particular customer (special order) is
considered sold upon its completion.
5. Excluded - The merchandise was purchased under FOB destination term and was not
received until January 5, 2019.
6. Excluded - The sale is recognized even though legal title has not passed.
7. Included - This is actually a loan transaction with the inventory as collateral.
PROBLEM 3-7
Physical Count of
Inventory
A physical count of merchandise on hand was made by SUMMIT COMPANY, your audit
client, on December 30 and 31, 2023, which reflected a balance of P3,873,000. Your review
of the inventory list disclosed the following:
1. Goods costing P148,000 shipped FOB shipping point on December 30, 2023, by a supplier
to Summit Company was received on January 3, 2024. The purchase was recorded on
December 30, 2023.
2. Goods costing P195,000, shipped FOB destination by the supplier on December 28, 2023,
were recorded and received on January 5, 2024.
3. Goods purchased in cash for P41,700 were returned to the supplier on December 22, 2023.
These goods were still included in the inventory schedule and the refund was received and
recorded on January 10, 2024.
4. Goods consigned to Summit Company totaling P89,500 were included in the physical
count.
5. Included in the physical count were goods sold to a customer on FOB shipping point on
December 27, 2023. These goods with a selling price of P52,830 and a cost of P35,600 were
already recorded as sales on account but were shipped only on January 5, 2024.
What is the adjusted Inventory on December 31, 2023?
A. P3,979,300 C. P3,889,800
B. P3,854,200 D. P4,084,800
SOLUTION 3-7
Page | 147
C Inventory per count

P3,873,000 Goods in transit, purchased FOB shipping point
148,000 Goods returned to supplier
(41,700) Goods received on
consignment (89,500)
Adjusted inventory
P3.889.800
PROBLEM 3-8
Determining Inventory
Quantity
The management of PIG, INC. has engaged you to assist in the preparation of year-end
(December 31) financial statements. You are told that on November 30, the correct inventory
level was 145,730 units. During the month of December, sales totaled 138,630 units including
40,000 units shipped on consignment to AA Corp. A letter received from AA indicates that as
of December 31, it has sold 15,200 units and was still trying to sell the remainder.
A review of the December purchase orders to various suppliers shows the following:
Purchase Order Invoice Quantity Date Date
Date Date in Units Shipped Received Term
12/31/23 01/02/24 4,200 01/02/24 01/05/24 FOB Destination
12/05/23 01/02/24 3,600 12/17/23 12/22/23 FOB Destination
12/06/23 01 /03/24 7,900 01/05/24 01/07/24 FOB Shipping point
12/18/23 12/20/23 8,000 12/29/23 01/02/24 FOB Shipping point
12/22/23 01/05/24 4,600 01/04/24 01/06/24 FOB Destination
12/27/23 01/07/24 3,500 01/05/24 01/07/24 FOB Destination
Pig, Inc. uses the “passing of legal title” for inventory recognition
1. Goods purchased during December totaled
A. 11,600 units C. 19,500 units
B. 15,800 units D. 8,000 units
2. How many units were sold during December?

A. 138,630 units C. 98,630 units
B. 113,830 units D. 153,830 units
3. How many units should be included in Pig, Inc.'s inventory at December 31, 2018?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units
4. Purchase cut off procedures should be designed to test whether all inventory
A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year-end was recorded.
D. Owned by the company is in the possession of the company at year-end.
Page | 148
5. The audit of year-end physical inventories should include steps to verify that the client's
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.
SOLUTION 3-8
Inventory Quantity, Nov. 30

145,730
Add: December purchases:
PO DATE
12.05.23 Purchase under FOB Destination
term; received 12.22.18 3,600
12.18.23 Purchased under FOB Shipping point
term; shipped 12.29.18 8,000 11,600
Units available for sale 157,330
Less: Unit sold in December:
Consignment sales 15,200
Other sales (138,600-40,000) 98,630 113,830
Inventory quality, Dec. 31 43,500
1. Goods purchased in December

Answer: A 11,600
2. Goods sold in December
Answer: B 11,830
3. Inventory Quantity
Answer: C 43,500
4. Purchased and received before year end was recorded
Answer: C
5. Sale in the current period.
Answer: C
PROBLEM 3-9
Computing cash Expenditure for

Inventory
The following audited balanced pertain to OWL COMPANY
Accounts payable:
January 1, 2023 P286,924
December 31, 2018 737,824
Inventory balance:
January 1, 2023 815,386
December 31, 2023 488,874
COST OF GOODS SOLD - 2023 1,859,082
How much was paid by Owl company to its suppliers in 2023?

A. 2,636,494 C. 1,734,694
Page | 149
B. 1,081,670 D. 1,983,470
SOLUTION 3-9
Cost of goods sold – 2023 P1,859,082

Add: Inventory, Dec. 31, 20123 488,874
Goods available for sale 2,347,956
Less: Inventory, Jan. 1, 2023 815,386
Purchases 1,532,570
Add: Accounts payable, Jan. 1,2023 286,924
Total 1,819,494
Less: Accounts payable, December 31, 2023 737,824
Amount paid to suppliers in 2018 P1,081,670
Cost of goods sold P1,859,082
Less: Decrease in inventory (P815,386 - 488,874) 326,512 1
Purchases 1,532,570
Less: Increase in accounts payable
(P737,824 - P286,924) 450,900 2
Amount paid to suppliers in 2023 P1,080,670
1. The decrease in inventory indicates that more goods were sold than purchased during
the year. Hence, such decrease in inventory level is deducted from cost of goods sold
to arrive at the cost of purchases.
2. The increase in accounts payable balance shows that purchases on account are greater
than payments made to suppliers during the period. This explains why the increase in
accounts payable is deducted from purchases to arrive at the amount paid to suppliers
during the period.
Answer: B
PROBLEM 3-10
FIFO Costing Method

The following information was provided by the bookkeeper of COW, INC.
1. Sales for the month of June totaled 286,000 units
2. The following purchases was made on June:
Date: Quantity Unit Cost
June 4 50,000 P13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40
3. There were 108,500 units on hand on June 1 with a total cost of P1,450,000
COW Inc. uses a periodic FIFO costing system. The company’s gross profit for June was
P2,058,750.
1. How many units were on hand on June 30?

Page | 150
A. 80,000 C. 28,500
B. 177,500 D. 149,000
2. What is the FIFO cost of the company’s inventory on June 30?
A. P1,025,000 C. P988,000
B. P1,016,230 D. P1,069,124
3. What is the total cost of good sold in June?
A. 3,632,200 C. 3,580,126
B. 3,617,900 D. 3,661,250
4. The 286,000 sold in June had a unit selling price of?
A. P20 C. P12.70
B. P13 D. P7.20
5. An essential procedural control to ensure the accuracy of the recorded inventory quantity
is?
A. Performing a gross profit test
B. Testing inventory extensions
C. Calculating unit cost and valuing obsolete or damaged inventory items in accordance with
inventory policy.
D. Establishing a cutoff for goods received and shipped.
SOLUTION 3-10
1. Inventory quantity, June 1 108,500

Add: Units purchased during June 257,500
Less: Units sold during June 286,000
Inventory quantity, June 30 80,000
Answer: A
2. FIFO COST OF JUNE 30 INVENTORY:
From Quantity Unit cost Amount
June 24 purchase 70,000 P12.40 P868,000
June 11 purchase 10,000 12.00 120,000
80,000 P988,000
Answer: C
3. COMPOSITION OF JUNE COST OF GOODS SOLD
From Quantity Unit cost Amount
Beginning inventory 108,500 P1,450,000
June 4 purchase 50,000 P13.00 650,000
June 8 purchase 62,500 12.50 781,250
June 11 purchase (SQUEEZE) 65,000 12.00 780,000
286,000 P3,661,250
Answer: D
4. Gross profit P2,058,750
Add:Cost of goods sold (see no. 3) 3,661,250
Sales P5,720,000
Divide by units sold 286,000
Sales price per unit P20
Answer: A
5. Establishing a proper cutoff for goods received and shipped will ensure that only
goods owned by the client are included in the inventory
Answer: D
Page | 151
PROBLEM 3- 11
Passage of Title
In your audit of the December 31, 2018, financial statements of CHICKEN, INC., you found
the following inventory-related transactions.
a. Goods costing P50,000 are on consignment with a customer. These goods were not
included in the physical count on December 31, 2023.
b. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2024. The invoice
for these goods was received and recorded on January 10, 2024. The invoice showed the
shipment was made on December 29, 2023, FOB shipping point.
c. Goods costing P21,640 were shipped FOB shipping point on December 31, 2023, and were
received by the customer on January 2, 2024. Although the sale was recorded in 2016, these
goods were included in the 2018 ending inventory.
d. Goods costing P8,640 were shipped to a customer on December 31, 2023, FOB
destination. These goods were delivered to the customer on January 5, 2024, and were not
included in the inventory. The sale was properly taken up in 2024.
e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on
January 3, 2024, and thus were not included in the physical inventory. Because the related
invoice was received on December 31, 2023, this shipment was recorded as a purchase in
2023.
f. Goods valued at P51,000 were received from a vendor under consignment term. These
goods were included in the physical count.
g. Chicken, Inc. recorded as a 2023 sale a P64,300 shipment of goods to a customer on
December 31, 2023, FOB destination. This shipment of goods costing P37,500 was received
by the customer on January 5, 2024, and was not included in the ending inventory figure.
Prior to any adjustments, Chicken, Inc.'s ending inventory is valued at P445,000 and the
reported net income for the year is P1,648,000
1. Chicken's December 31, 2018, inventory should be increased by
A. P8,OOO C. P66,OOO
B. P40,OOO D. P61,640
2. Which of the errors described in "a to g" will not affect the company's net income for
2018? A. Item a C. Item e
B. Item g D. Item b
3. What is Chicken's adjusted net income for the year 2018?
A. P1,565,800 C. P1,615,800
B. P1,607,160 D. P1,666,800
4. Purchase cutoff procedures test the cutoff and completeness assertions. A company should
include goods in its inventory if it
A. Has sold the goods.
B.Holds legal title to the goods.
C. Has physical possession of the goods.
D. Has paid for the goods.
5. When title to merchandise in transit has passed to the audit client, the auditor engaged in
the performance of a purchase cutoff will encounter the greatest difficulty in gaining
assurance with respect to the
A. Quantity C. Price
B. Quality D. Terms
Page | 152
SOLUTION 3-11
Inventory 2023
December 31, 2018 Net Income
Per client P445,000 P1,648,000
a. Goods on consignment with a customer 50,000 50,000
b. Goods purchased FOB shipping point 16,500 -
c. Goods sold FOB shipping point (21,640) (21,640)
d. Goods sold FOB destination 8,640 8,640
e. Goods purchased FOB destination - 8,600
f. Goods received on consignment (51,000) (51,000)
g. Goods sold FOB destination 37,500 (26,800)
Per audit P485,000 P1,615,800
1. Inventory per audit P485,000
Inventory per client 445,000
Adjustment-increase P40,000
Answer: B
2. In item b, the goods were purchased under FOB Shipping point term and they were
shipped on December 29, 2023. The company’s failure to record the purchase in 2023 will
overstate the income by P16,500. However since the goods were not included in the year end
physical count, the client’s inventory is understated and the company’s bet income will be
understated by P16,500. Hence, the combined effect on 2023 net income is nil.
Answer: D
3. Adjusted net income for 2018 P1,615,800
Answer: C
4. Holds legal title to the goods.
Answer: D
5. Quality
Answer: B
PROBLEM 3-12
Inventory Valuation
You are engaged in an audit of the KURATSO CO. for the year ended December 31, 2018.
To reduce the workload at year-end, the company took its annual physical inventory under
your observation on November 30, 2023.
The company's inventory account, which includes raw materials and work in process, is on a
perpetual basis and it uses the first-in, first out method of pricing. It has no finished goods
inventory.
The company's physical inventory revealed that the book inventory of P 181,710 was
understated by P9,000. To avoid distorting the interim financial statements, the company
decided not to adjust the book inventory until year-end except for obsolete inventory items.
Your audit revealed this information about the November 30 inventory:
a. Pricing tests showed that the physical inventory was overpriced by P6,600.
b. Footing and extension errors resulted in a P450 understatement of the physical inventory
c. Direct labor included in the physical inventory amounted to P30,OOO. Overhead was
included at the rate of 200% of direct labor.
d. You determined that the amount of direct labor was correct and the overhead rate was
proper. The inventory included obsolete materials recorded at P750. During December, these
Page | 153
materials were removed from the inventory account by a charge to cost of sales. Your audit
also disclosed the following information about the December 31, 2018, inventory.
e. Total debits to certain accounts during December are:
Purchases P74,100
Direct labor 36,300
Manufacturing overhead expense 75,600
Cost of sales 205,800
f. The cost of sales of P205,800 included direct labor of P41,400.
g. Normal scrap loss on established product lines is negligible. However, a special order
started and completed during December had excessive scrap loss of P2,400, which was
charged to Manufacturing overhead expense.
1. What is the inventory per physical count on November 30, 2023?
A. P183,810 C. P172,710
B. P190,710 D. P181,710 2.
2. What is the correct amount of physical inventory at November 30, 2023
A. P183,810 C. P165,810
B. P190,710 D. P184,560
Without prejudice to your answers to questions 1 and 2, assume the correct amount of
the inventory on November 30, 2023 was P173,100
3. What is the material inventory at December 31,2023?
A. P74,700 C. P73,950
B. P76,350 D. P78,750
4. What is the amount of direct labor cost included in the December 31, 2023 inventory?
A. P30,000 C. P66,300
B. 24,900 D. 41,400
5. What is the correct inventory at December 31, 2023?
A. P148,650 C. 149,400
B. P198,150 D. P151,050
SOLUTION 3-12
1. Inventory per books, Nov. 30, 2018 P181,710

Understatement of book inventory 9,000
Inventory per physical count, Nov 30 P190,720
Answer: B
2. Inventory per physical count, Nov 30 P190,710
Pricing errors.
(6,600) Footing and extension errors.
450 Obsolete materials.
(750) Corrected physical inventory, Nov 30. P183,810
Answer: A
3. Assumed correct physical inventory. Nov 30. P173,000
Direct labor included. (30,000)
Overhead included (200% x P30,000). (60,000)
Materials inventory Nov 30. 83,100
Purchases. 74,100
Total materials available. 157,200
Cost of sales. P205,800
Direct labor cost (41,400)
Overhead included (82,800)
Page | 154
Obsolete items included in cost of sales (750) (80,850)

Scrap loss in new product. (2,400)
Materials inventory Dec 31 P73,950
Answer: C
4. Direct labor inventory, Nov 30. P30,000
Direct labor cost incurred in Dec. 36,000
Total 66,300
Charges to cost of sales in December (41,400)
Direct labor in inventory Dec 31. P24,900
Answer: B
5. Materials inventory Dec 31. P73,950
Direct labor cost. 24,900
Overhead(200% x P24,900). 49,800
Inventory Dec 30. P148,650
Answer: A
PROBLEM 3-13
Inventory
Valuation:
Lower of Cost or Net
Realization Value
ZEBRA MUSIKAHAN CO. sells musical instruments. In your audit of the company's
financial statements for the year ended December 31, 2023, you have gathered the
following data concerning inventory. At December 31, 2023, the balance in Zebra's
Inventory account was P502,000, and the Allowance for Inventory Writedown had a balance
of P32,000. The relevant inventory cost and market data at December 31, 2023, are
summarized in the schedule below.
Replacement Sales Net Realizable Normal
Cost Cost Price Value Profit
Guitars P 89,000 P 86,000 P 91,500 P 87,000 P 6,400
Xylophones 94,000 92,000 93,000 85,000 7,440
Trumpets 125,000 135,000 129,000 111,000 11,610
Violins 194.000 114.000 205.000 197.000 20.500
Total P502,000 P427,000 P518.500 P480,000 P45.950
1. What is the proper balance in the Allowance for Inventory Writedown at December
31, 2023?
A. P75,000 C. P32,000
B. P22,000 D. P25,000
2. The adjusting entry on December 31, 2018, to arrive at the proper allowance balance
should be
A. Allowance for inventory writedown 7,000
Gain on inventory recovery 7,000
B. Loss on inventory writedown 7,000
Allowance for inventory writedown
7,000
C. Allowance for inventory writedown 3,000
Loss on inventory writedown 43,000
Page | 155
Allowance for inventory writedown

43,000
SOLUTION 3-13
1. Lower of Cost
Cost NRV* Cost or NRV
Guitars P 89,000 P 87,000 P87,OOO
Xylophones 94,000 85,000 85,000
Trumpets 125,000 111,000 111,000
Violins 194,000 197 000 194 000
Total P502,000 P480,000 P477,000
* NRV (net realizable value) = estimated sales price — estimated cost of completion and cost
to sell.
Required allowance for inventory writedown on

December 31, 2018 (P502,OOO - P477,OOO) P25,000
Inventories are usually written down to net realizable value on an item by item basis. The
practice of valuing inventories at the lower of cost or net realizable value is consistent with
the view that assets should not be carried in excess of amounts expected to be realized from
their sale or use.
Answer: D
2. Allowance for inventory writedown 7,000
Required allowance (see no. 1) P25,000
Allowance balance 32,000
Decrease in allowance (P7,000)
Under PAS 2, a new assessment of net realizable value is made in each subsequent period.
If the circumstances that caused the writedown no longer exist or if there has been a
positive change in circumstances, the previous writedown is reversed. The reversal is
limited to the previous writedown and the new carrying amount is the lower of the cost and
the revised net realizable value.
Answer: A
PROBLEM 3-14
Valuation of Inventories
MALOX Specialty Company manufactures three models of gear shift components for
bicycles that are sold to bicycle manufacturers retailers, and catalog outlets. Since its
inception, Malox has used normal absorption costing and has assumed a first-in, first-out
cost flow in its perpetual inventory system. The balances of the inventory accounts at the end
of Malox's fiscal year, November 30, 2023, are shown below. The inventories are stated at
cost before any year-end adjustments.
Finished Goods P1,941,000
Work in Process 337,500
Raw Materials 792,000
Factory Supplies 207,000
Page | 156
The following information relates to Malox's inventory and operations.

1. The finished goods inventory consists of the items analyzed below.
Cost NRV
Down tube shifter
Standard model P202,500 P201,000
Click adjustment model 283,500 267,000
Deluxe model 324,000 330,000
Total down tube shifters 810,000 798000
Bar end shifter

Standard model 249,000 270,150
Total bar end shifters 546,000 562,800
Head tube shifter

Standard model 234,000 232,950
Total head tube shifters 585,000 590,850
Total finished goods P1,941,000 951,650
2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on
consignment.
3. Three-quarters of the bar end shifter finished goods inventory had been pledged as
collateral for a bank loan.
4. One-half of the raw materials balance represents derailleurs acquired at a contracted price
20 percent above the net realizable value. The net realizable value of the rest of the raw
materials is P382,200.
5. The total net realizable value of the work in process inventory is P326,100.
6. Included in the cost of factory supplies are obsolete items with historical cost of P
12,600. The net realizable value of the remaining factory supplies is P197,700.
7. Malox applies the lower of cost or net realizable value method to each of the three types of
shifters in finished goods inventory. For each of the other three inventory accounts, Malox
applies the lower of cost or net realizable value method to the total of each inventory account.
8. Consider all amounts presented above to be material in relation to Malox's financial
statements taken as a whole.
Based on the preceding information, determine the proper values of the following on
November 30, 2023
1. Finished goods inventory
A. P1,941,000 C. 1,951,650
B. P1,929,000 D. 1,963,650
2. Work in process inventory
A. P324,900 C. P326,100
B. P337,500 D. P313,500
3. Raw materials inventory
A. P792,000 C. P726,000
B. P682,200 D. P712,200
4. Factory supplies
A. P194,400 C. P185,100
D. P207,000 D.207,000
5. Which of the following best describes the PAS 2 requirement for applying the same cost
formula to all inventories?
Page | 157
A. When they are purchased from different suppliers.

B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.
SOLUTION 3-14
Finished Work in Raw Factory

Goods Process Materials Supplies
Down tube shifters at NRV P798,000
Bar end shifters at cost 546,000
Head tube shifters at cost 585,000
Work-in-process at NRV P326,000
Derailleurs at NRV P330,0001
Remaining items at NRV 382,200
Supplies at cost P194 4002
Totals P1 ,929,000 P326.000 P712,200 P194.400
1 1
P792,000 x /2 = P396,000; P396,OOO/1.2 = P330,000
2
P207,000 - P12,600 = P194,400
1. Finished goods inventory P929,000
Answer: B
2. Work in process inventory P326,100
Answer: C
3. Raw materials inventory P712,200
Answer: D
4. Factory supplies P194,400
Answer: A
5. When they are similar in nature or use.
Answer: C
PROBLEM 3-15
FIFO Costing Method

GAVIAL, INC. sells electric stoves. It uses the perpetual inventory system and allocates
cost to inventory on a first-in, first-out basis. The company's reporting date is December
31. At December 1, 2023, inventory on hand consisted of 350 stoves at P820 each and 43
stoves at P850 each. During the month ended December 31, 2023, the following inventory
transactions occurred (all purchase and sales transactions are on credit):
2023
Dec. 1 Sold 300 stoves for P 1,200 each.

3 Five stoves were returned by customers. They had originally cost P820 each and
were
sold for P 1,200 each.
Page | 158
9 Purchased 55 stoves at P910 each.

15 Sold 86 stoves for P 1,350 each.
17 Returned one damaged stove to the supplier. This stove had been purchased on
December 9.
22 Sold 60 stoves for PI,250 each 26 Purchased 72 stoves at P980 each.
1. What is the FIFO cost of Gavial's inventory on December 31, 2023?
A. P148,930 C. P133,607
B. P148,980 D. P126,280
2. What is the cost of goods sold in December 2023?
A. P367,230 C. P366,320
B. P371,330 D. P389,930
3. What is Gavial's gross profit in December 2023?
A. P173,770 C. P177,870
B.. P155,170 D. P183,870
4. PAS 2 requires inventories to be measured at the lower of cost and net realizable value.
Which of the following are possible reasons why the net realizable value of the stoves on
hand at December 31, 2023, may be below their cost?
I. Inventories are damaged.
II. Inventories are wholly or partially obsolete.
Ill. Selling prices have declined below cost.
A. I and II only C. I and Ill only
B. Il and Ill only D. 1,Il, and Ill
5. If the net realizable value of Gavial's inventory on December 31, 2023, falls to P920, the
inventory value should be reduced by
A. P7,300 C.P8,162
B. P7,250 D. P0
SOLUTION 3-15
PURCHASES COST OF GOODS SOLD

BALANCE
No. of Unit Total No. of Unit
Total No. of Unit Total
Date Detail Units Cost Cost Units Cost
Cost Unit Cost Cost
Dec 1 Beg. balance 350 P820 P287,000
40 850 36,550
1 Sales 300 P820 P146,000 50 820 41,000
43 350 36,550
3 Sales return (5) 820 (4,100) 55 820 45,100
43 850 36,550
9 Purchases 55 P910 P50,050 55 910 45,100
43 850 36,550
55 910 50,050
10 Purchases 76 960 72,960 55 910 45,100
43 850 36,550
55 910 50,050
76 960 72,960
15 Sales 55 820 45,100 12 850 10,200
31 850 26,350 55 910 50,050
Page | 159
76 960 72,960
17 purch. ret. (1) 910 (910) 12 850 10,200
54 910 49,140
76 960 72,960
22 Purchases 12 850 10,200 6 910 5,460
48 910 43,680 76 960 72,960
26 Purchases 72 984 70,560 6 910 5,460
76 960 72,960
72 980 70,560
P192,660 P367,230 154 P148,980
1. Inventory, December 31, 2023 P148,980

Answer: B
2. Cost of goods sold in December 2023 P367,230
Answer: A
3. Sales P545,100
Less: Cost of goods sold
367,230
Gross profit P177,870
Answer: C
4. Possible reasons why net realizable value (NRV) may decline below cost:
1. Inventories are damaged.
2. Inventories are wholly or partially obsolete.
3. Selling prices have declined below cost.
4. As part of an overall marketing strategy, the entity may decide to sell its products for
the time being at a loss.
5. Errors in processing purchase transactions.
Answer: D
5. Cost of inventory on December 31, 2023
141,680
Decline in value P7,300
Answer: A
PROBLEM 3-16
FIFO
Costing Method
The following information was obtained from the statement of financial position of LION,
INC.:
December 31, 2018 Dec. 31.2017
Cash P706,600 P200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000
All operating expenses are paid by Lion, Inc. with cash and all purchases of inventory are
made on account. .Lion, Inc. sells only one product. All sales are cash sales which are made
for P100 per unit. Lion, Inc. purchases 1,500 units of inventory per month and values its
inventory using periodic FIFO. The unit cost of inventory during January 2023 was
P65.20 and increased PO.20 per month during the year. During 2023, payments to
Page | 160
suppliers totaled P943,400 and operating expenses totaled P440,000. The ending
inventory for 2022 was valued at P65.00 per unit.
Based on the preceding information, determine the following:
1. Number of units sold during 2018
A. 18,900 C. 16,000
B. 18,400 D. 21,400
2. Total cost of purchases during 2023
A. P1,173,600 C. P1,213,200
B. P1,191,600 D. 1,193400
3. Accounts payable balance at December 31, 2023
A. P793,400 C. P400,000
B. P393,400 D. P419,800
4. Inventory quantity at December 31, 2023
A. 5,750 C. 5,250
B. 6,550 D. 8,150
5. FIFO cost of inventory on December 31, 2023
A. P352,500 C. P385,900
B. P439,230 D. P425,830
SOLUTION 3-16
1. Cash balance, Jan. 1, 2023 P 200,000

Add: Sales (SQUEEZE) P1,840,000
Collection of notes receivable 50,000 1,890,000
Total 2,090,000
Less: Cash paid for operating expenses P440,000
Cash paid on accounts payable 943.400 1,383,400
Cash balance, Dec. 31, 2023 P706.600
Sales during 2023 P1,840,000
Divide by sales price per unit ÷ PI00
Number of units sold 18,400 units
Answer: B
2. Computation of total purchases during 2023

Month Unit Cost Quantity Total Cost
January P65.20 1,500 P97,800
February 65.40 1,500 98,100
March 65.60 1,500 98,400
April 65.80 1,500 98,700
May 66.00 1,500 99,000
June 66.20 1,500 99,300
July 66.40 1,500 99,600
August 66.60 1,500 99,900
September 66.80 1,500 100,200
October 67.00 1,500 100,500
November 67.20 1,500 100,800
December 67.40 1.500 101.100
Total 18.000 1,193.400 *
* Alternative method:
P65.20 + P67.40 x (1,500 units x12)
Page | 161
2
P66.30 x 18,000 units = P193.400
Answer: D
3. Accounts payable, Jan. 1, 2023 P 150,000
Add: Purchases (see no. 2) 1,193,400
Total 1,343,400
Less: Cash paid on accounts payable 943,400
Accounts payable, Dec. 31, 2023 P400,000
Answer: C
4. Inventory quantity, Jan. 1, 2023 (P399,750 / P65) 6,150
Add: Purchases (see no. 2) 18,000
Less: Units sold (see no. 1) 18,400
Inventory quantity, Dec. 31, 2023 5,750
Answer: A
5. Computation of inventory FIFO cost at December 31, 2023

From Qty Unit Cost Total Cost
December purchase 1,500 P67.40 P101,I00
November purchase 1,500 67.20 100,800
October purchase 1,500 67.00 100,500
September purchase (SQUEEZE) 1,250 66.80 83.500
5,750 P385,900
Answer: C
PROBLEM 3-17
Perpetual Inventory System

Your client took a complete physical inventory under your observation as of
December 15 and adjusted the inventory control account (perpetual inventory
method) to agree with the physical inventory. You have decided to accept the
balance of the control account as of December 31, after reflecting transactions
recorded therein from December 16 to December 31, in connection with your
financial statement audit for the year ended December 31.
Your examination of the sales cut-off as of December 15 and December 31
revealed the following items not previously considered.
D A T E________
credited to
Cost Sales Price Shipped Billed Inventory Control
P5,650 P7,200 12/14 12/17 12/17
2,430 4,650 12/13 12/20 12/13
6,870 9,200 01/03 12/31 12/31
1. What adjusting journal entries, if any, would you make for each of these items?
2. Periodic or cycle counts of selected inventory items are made at various times
during the year rather than a single inventory count at year-end. Which of the
following is necessary if the auditor plans to observe inventories at interim dates?
A. Complete recounts by independent teams are performed.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting records.
Page | 162
D. Inventory balances are rarely at low level

3. If the perpetual inventory records show lower quantities of inventory than the physical
count, an explanation of the difference might be unrecorded
A. Sales C. Purchases
B. Sales discounts D. Purchase discounts
4. The physical count of inventory of a retailer was higher than shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailer's books for several items returned to its
suppliers.
D. An item purchased "FOB shipping point" had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
5. An auditor is most likely to learn of slow-moving inventory through
A. Inquiry of sales personnel
B. Inquiry of warehouse personnel
C. Physical observation of inventory
D. Review of Perpetual inventory Records
SOLUTION 3-17
1. ADJUSTING JOURNAL ENTRY

December 31
1. Inventory 5,650
Inventory over and short 5,650
To reverse erroneous adjustment to
physical count at December 15.
2. Sales 9,200
To reverse sale recorded 12/31
but not shipped until 1/2.
3. Inventory 6,870
Cost of sales 6,870
To reverse cost of sale recorded 12/31
but not shipped until 1/2.
No adjusting entry is needed for the item shipped on December 13 because the entries
to take up the sale and cost of sale were appropriately made in the current year.
2. Perpetual inventory records are maintained.
Answer: B
3. Purchases
Answer: C
4. Credit memos for several items retumed by customers had not been recorded.
Answer: B
5. Review of perpetual inventory records. .
Answer: D
PROBLEM 3-18
Correcting Inventory Errors:

Page | 163
Perpetual Inventory System

CAIMAN, INC. uses a perpetual inventory system and reports inventory at the lower of FIFO
cost or net realizable value. Caiman's inventory control account balance at June 30, 2018, was
P442,040. A physical count conducted on that day found inventory on hand worth P440,400.
Net realizable value for each inventory item held for sale exceeded cost. An investigation of
the discrepancy disclosed the following:
1. Goods worth P 13,200 held on consignment for Bugok Co. had been included in the
physical count
2. Goods costing P2,400 were purchased on credit from Amor Co. on June 27; 2023, on F()B
shipping point terms. The goods were shipped on June 28, 2023, but, as they had not arrived
by June 30, 2023, were not included in the physical count. The purchase invoice was received
and processed on June 30, 2023.
3. Goods costing P4,800 were sold on credit to Acero Co. for P7,800 on June 28, 2023, on
FOB destination terms. The goods were still in transit on June 30, 2023. The sales invoice
was processed and recorded on June 29, 2023.
4. Goods costing P5,460 were purchased on credit (FOB destination) from San Miguel Co. on
June 28, 2023. The goods were received on June 29, 2023, and included in the physical
count. The purchase invoice was received on July 2, 2023.
5. On June 30, 2023, Caiman sold goods costing P 12,600 on credit (FOB shipping point)
terms to Pisaro Corp. for P 19,200. The goods were dispatched from the warehouse on June
30, 2023, but the sales invoice had not been processed at that date.
6. Damaged inventory items valued at P5,300 were discovered during the physical count.
These items were still recorded on June 30, 2023, but were omitted from the physical count
records pending their write-off.
1. What is the adjusted inventory balance on June 30, 2023?
A, P424,800 C. P445,000
B. P421,200 D. P434,400
2. What adjustment should be made to Caiman's sales revenue for the year ended June 30,
2023?
A. Net increase of P11,400
B. Net decrease of P 11,400
C. Increase of P 19,200
D. Decrease of P7,800
3. Caiman's accounts payable at June 30, 2023, should be
A. Decreased by P5,460
B. Increased by P5,460
C. Decreased by P5,300
D. Increased by P 160
4. The "unlocated difference" between the perpetual balance and the physical count amounts
to
A. P5,300 C. PI,640 B. P160
B. P160 D. P0
5. The entry to correct the error described in item no. 2 is
A. Purchases 2,400
B. Inventory 2,400
C. Inventory 2,400
Cost of sales 2,400
D. No adjusting entry is necessary
Page | 164
SOLUTION 3-18
1. Perpetual Physical
Inventory Count
Unadjusted Balances P442,040 P440,000
Good held on consignment
Incorrectly counted (13,200)
Good in Transit, purchased FOB shipping point 2,400
Sale incorrectly recorded FOB destination 4,800 4,800
Unrecorded purchase 5,460
Unrecorded sale (12,600)
Damaged inventory (5,300) ________
Adjusted balances P434.400 P434,400
Answer: D
2. Item no. 3 sale recorded in error (P7,800)
Item no. 5 unrecorded sale 19,200
Net adjustment — increase in sales P11,400
Answer: A
3. Item no. 4 — unrecorded purchase P5,460
Answer: B
4. There is no unlocated difference. (please refer to the reconciliation in no. 1)
Answer: D
5. The purchase was properly recorded on June 30, 2018. Hence, no adjusting entry is
necessary.
Answer: D
PROBLEM 3-19
Purchases Cut-off Test

You are engaged in an audit of the financial statements of the CARABAO COMPANY for
the year ended October 31, 2023, and have observed the physical inventory count on that
date.
All merchandise received up to and including October 30, 2023, has been included in the
physical count. The following list of invoices is for purchases of merchandise and are entered
in the purchases journal for the months of October and November 2023, respectively:
OCTOBER 2023
Amount FOB Date of Invoice Date of Merchandise
Received
P 7,200 Destination October 19 October 21
P 9,250 Shipping Point October 20 October 30
P 3,900 Destination October 25 November 3
P 2,500 Destination November 4 October 29
Page | 165

NOVEMBER 2023
Amount FOB Date of Invoice Date of Merchandise
Received
P 7,220 Shipping Point November 2 October 30
P 12,820 Shipping Point October 23 November 3
P 14,200 Shipping Point October 23 November 3
No perpetual inventory records are maintained, and the physical inventory count is to be used
as a basis for the financial statements.
1. What adjusting entry is necessary for the October 25 invoice?
A. Accounts payable 3,900
Purchases 3,900
B. Purchases 3,900
C. Inventory, ending 3,900
Cost of sales 3,900
2. What adjusting entry is necessary for the November 4 invoice?

A. Purchases 2,500
B. Accounts payable 2,500
Purchases 2,500
C. Cost of sales 2,500
Inventory, ending 2,500
3. The journal entry to adjust the purchases account should include

A. Debit to purchases of P45,510
B. Credit to purchases of P3,900
C. Net debit to purchases of P41,610
D. Net credit to purchases of P41,610
4. The net adjustment to accounts payable is

A. P3,900 increase
B. P3,900 decrease
C. P41,610 increase
Page | 166
D. P41,610 decrease
5. Carabao's October 31 physical inventory should be increased by

A. P31,870
B. P41,610
C. P45,510
D. P73,480
SOLUTION 3-19

a. Accounts payable 3,900
Purchases 3,900
To reverse entry made for October 25 invoice.
b. Purchases 45,510
To set up liability for the following invoices at October 31.
Invoice Date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45.510
Answer: A
2. D 3. C 4. C
5. The physical inventory at October 31 should be increased by P31,870.
Invoice Date Amount
October 30 P4,850
October 23 12,820
October 23 14,200
P31,870
Answer: A
PROBLEM 3-20
FIFO Costing Method

SEAL WHOLESALER wholesales food products to independent grocery stores. The
company uses the perpetual inventory system and assigns cost to inventory on a first-in,
first-out basis. Transactions and other related information regarding two of the items (baked
beans and plain flour) carried by Seal are given below for December 2023, the last month of
the company's reporting period.
Baked Beans Plain Flour

Page | 167
Unit of Packaging Case containing 25x410g Box containing 12x4kg bags

cans
Inventory @ Dec. 1 350 cases @ P196 625 boxes @ P384
Purchases 1. Dec. 10: 200 cases @ 1. Dec. 3: 150 boxes @

P195 P384.5
2. Dec. 19: 470 cases @ 2. Dec. 15: 200 boxes @
P197 per case P384.5
3. Dec. 29: 240 boxes @
P390
Purchase terms 2/10, n/30, FOB shipping n/30, FOB destination
December Sales 730 cases @P285 950 boxes @ P400
Returns and Allowances customer returned 50 cases Dec. 15 purchases has 10

that had been shipped in error. boxes damaged. credited
account credited for P14,250 P3,845
Physical count @ Dec. 31 326 cases on hand 15 boxes on hand
Explanation of variance no explanation; assumed boxes purchased on Dec. 29

stolen still in transit on Dec. 31
NRV @ Dec. 31 P290 per case P385 per box
1. What is the cost of Baked Beans inventory that was assumed stolen?
A. P2,744 B. P4,060 C. P2,730 D. P2,758
2. What is the cost of Plain Flour inventory on December 31, 2023?

A. P5,850 B. P5,760 C. P5,767 D. P5,775
3. What is the total cost of Seal's inventory (Baked Beans and Plain Flour) on December 31,
2023?
A. P69,989 B. P72,747 C. P77,301 D. P100,315
4. PAS 2 requires inventory to be stated at the lower of cost and

A. fair value B. net realizable value C. nominal value D. net selling
price
5. What amount of loss on decline in value of inventory should be recognized by Seal at the
end of its reporting period?
A. P38,236 B. P7,910 C. P30,326 D. P0
SOLUTION 3-20
1. Inventory of Baked Beans, Dec. 1 350

Purchases (200+ 470) 670
Sales (730)
Sales returns 50
Page | 168
Perpetual balance 340

Physical count 326
Assumed stolen inventory 14
Multiply by unit cost (from Dec. 19 purchase) X P197
Cost of assumed stolen inventory P2.758
Answer: D
2. Cost of Plain Flour Inventory, Dec. 31, 2023

(15 boxes per count x P384.5*) P5,767
* from Dec. 15 purchase
Answer: C
3. Baked Beans (326 cans x P197) P64,222

Plain Flour (15 boxes x P384.5) 5,767
Total FIFO cost P69,989
Answer: A
4. Inventories should be stated at the lower of cost and net realizable value.
Answer: B
5. Qty Cost NRV

Lower
Baked beans 326 P64,222 P94,540
Cost
Plain Flour 15 57,67 5,775
Cost
Answer: D
PROBLEM 3-21
Correcting Inventory Turnover and Average Days to Sell Inventory
The following information was taken from the audited financial statements of HORSE CO.:
Inventories:
Dec. 31, 2023 P791,000
Dec. 31, 2022 744,000
Dec. 31, 2021 720,800
2023 2022
Sales P10,832,000 P10, 053400
Cost of Goods Sold 4,482,000 4,246,000
Net Profit 952,800 734,800
Based on the preceding information, compute for the following:
1. 2022 inventory turnover
A. 5.80 times B. 5.89 times C. 5.71 times D. 6.12 times
2. 2023 inventory turnover

Page | 169
A. 5.67 times B. 5.53 times C. 5.84 times D. 6.02 times
3. 2022 average days to sell inventory

A. 63.9 B. 59.6 C. 62 D. 62.9
4. 2023 average days to sell inventory

A. 64.4 B. 62.5 C. 60.6 D. 66
SOLUTION 3-21
1. Inventory turnover = Cost of goods sold ÷ Average inventory

2022 inventory turnover = P4,246,000 ÷ P732,400* = 5.80 times
*average inventory (P720,800+ P744,000 = P1,464,800 ÷ 2)
Answer: A
2. 2023 inventory turnover = P4,482,000 ÷ P767,500* = 5.84 times

*average inventory( P744,000+ P791,000 = P1,535,000 ÷ 2)
Answer: C
3. Average days to sell inventory = 365 days + Inventory turnover

2022 average days to sell inventory = 365 days ÷ 5.80 = 62.9 days
Answer: D
4. 2023 average days to sell inventory = 365 days ÷ 5.84 = 62.5 days
Answer: B
PROBLEM 3-22

MONKEY CO.'s annual net income for the period 2019-2023 is as follows:
Year Net income (loss)
2019 P150,000
2020 340,000
2021 645,000
2022 (100,000)
2023 250,000
A review of the company's records reveals the following inventory errors:
2019 P 3,000 overstatement, end of year
2020 6,000 understatement, end of year
1. What is the adjusted net income in 2019?

A. P150,000 B. P159,000 C. P153,000 D. P147,000

A. P331,000 B. P337,000 C. P349,000 D. P340,000

Page | 170
A. P651,000 B. P648,000 C. P639,000 D. P645,000
4. What is the adjusted net loss in 2022?

A. P89,500 B. P101,500 C. P100,000 D. P95,500

A. P250,000 B. P234,500 C. P243,500 D. P256,500
SOLUTION 3-22
2019 2020 2021 2022 2023

Unadjusted net income P150,000 P340,000 P645,000 P(100,000) P250,000
2019 ending inventory
overstatement (3,000) 3,000
understatement 6,000 (6,000)
understatement 4,500 (4,500)
understatement 11,000
Adjusted net income P147.000 P349,000 P639.000 P(95.500) P256.500
1. D 2. C 3. C 4. D 5. D
PROBLEM 3-23
Income Effect of Inventory Errors

The SNAKE, INC. reported income before taxes of P842,650 for 2023 and P965,350 for
2024. The company takes its annual physical count of inventory every December 31. Your
audit revealed\ the following information:
a. The price used for 1,500 units included in the 2023 ending inventory was P109. The
correct cost was P190 per unit.
b. Goods costing P23,600 were received from a vendor on January 5, 2024. The shipment
was made on December 26, 2023, under FOB shipping point term. The purchase was
recorded in 2023 but the shipment was not included in the 2023 ending inventory.
c. Merchandise costing P64,750 was sold to a customer on December 29, 2023. Snake was
asked by the customer to keep the merchandise until January 3, 2024, when the customer
would come and pick it up. Although the sale was properly recorded in 2023, the
merchandise was included in the ending inventory.
d. A supplier sold merchandise valued at P14,000 to Snake, Inc. The merchandise was
shipped FOB shipping point on December 29, 2023, and was received by Snake on December
31, 2023. The purchase was recorded in 2024 and the merchandise was not included in the
2023 ending inventory.
1. What is the adjusted income before taxes for the year ended
Page | 171
December 31, 2023?

A. P809,500 B. P632,800 C. P875,800 D. P923,000
2. What is the adjusted income before taxes for the year ended
December 31, 2024?
A. P877,000 B. P932,200 C. P885,000 D. P843,850
SOLUTION 3-23
2023 2024
Reported income before taxes P842,650 P965,350
Adjustments:
a. Transposition error in unit cost
(P190 - P109 = P81 x 1,500) 121,500 (121,500)
b. Goods purchased FOB shipping point 23,600 (23,600)
c. Goods sold in 2023 (64,750) 64,750
d. Goods purchased FOB shipping point 0 0
Adjusted income before taxes P923,000 P885.000
1. Adjusted income before taxes in 2023

Answer: D P923,000
2. Adjusted income before taxes in 2024

Answer: C P885,000
PROBLEM 3-24
Correcting Physical Inventory Count

In your audit of the RABBIT, INC., you find that a physical inventory count on December 31,
2023, showed merchandise costing P463,000 was on hand at that date. Your examination
reveals the following items were all excluded from the inventory per count.
1. Merchandise of P20,000 which is held on consignment.
2. Goods costing P39,500 that were shipped FOB shipping point on December 31, 2023.
These goods were delivered to the customer on January 6, 2024.
3. Goods costing P16,800 that were shipped FOB destination to a customer on December 29,
2023. The customer received these goods on January 2, 2024.
4. Merchandise costing P76,150 shipped by a seller FOB destination on December 28, 2023,
and received by Rabbit, Inc. on January 3, 2024.
5. Goods costing P16,500 shipped by a vendor FOB seller on December 31, 2023, and
received by Rabbit, Inc. on January 4, 2024.
What is the amount that should appear on Rabbit, Inc.'s statement of financial position as
inventory at December 31, 2023?
A. P539,000 B. P519,000 C. P535,800 D. P496,300
SOLUTION 3-24
Page | 172
Inventory per physical count P463,000

Add: (3) Goods Sold FOB destination P16,800
(5) Goods purchased FOB seller 16,500 33,300
Adjusted inventory P496,300
Answer: D
PROBLEM 3-25

BIRD COMPANY is a manufacturer of small tools. The following information was obtained
from the company's accounting records for the year ended December 31, 2023:
Inventory at December 31, 2023 (based on physical count
in Bird's warehouse at cost on December 31, 2023) P1,870,000
Accounts payable at December 31, 2023 1,415,000
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
1. The physical count included tools billed to a customer FOB shipping point on December
31, 2023. These tools cost P64,000 and were billed at P78,500. They were in the shipping
area waiting to be picked up by the customer,
2. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2023.
These goods with invoice cost of P93,000 were shipped on December 29, 2023.
3. Work in process inventory costing P27,000, was sent to a job contractor for further
processing.
4. Not included in the physical count were goods returned by customers on December 31,
2023. These goods costing P49,000 were inspected and returned to inventory on January 7,
2024. Credit memos for P67,800 were issued to the customers at that date.
5. In transit to a customer on December 31, 2023, were tools costing P17,000 shipped FOB
shipping point on December 26, 2023. A sales invoice for P29,400 was issued on January 3,
2024, when Bird Company was notified by the customer that the tools had been received.
6. At exactly 5:00 pm on December 31, 2023, goods costing P31,200 were received from a
vendor. These were recorded on a receiving report dated January 2, 2024. The related invoice
was recorded on December 31, 2023, but the goods were not included in the physical count.
7. Included in the physical count were goods received from a vendor on December 27, 2023.
However, the related invoice for P36,000 was not recorded because the accounting
department's copy of the receiving report was lost.
8. A monthly freight bill for P32,000 was received on January 3, 2024. It specifically related
to merchandise bought in December 2023, one-half of which was still in the inventory at
December 31, 2023. The freight was not included in either the inventory or in accounts
payable at December 31, 2023.
1. Bird's December 31, 2023, inventory should be increased by
A. P216,200 B. P233,200 C. P252,200 D. P123,200
2. Bird's accounts payable balance at December 31, 2023, should be increased by
A. P68,000 B. P145,000 C. P125,000 D. P161,000
3. The amount of net sales to be reported on Bird's income statement for the year ended
December 31, 2023, should be
A. P9,547,100 B. P9,576,500 C. P9,591,000 D. P9,595,300
Page | 173
4. Bird's statement of financial position at December 31, 2023, should report accounts
payable of
A. P1,576,000 B. P1,483,000 C. P1,540,000 D. P1,431,000
5. The amount of inventory to be reported on Bird's December 31, 2023, statement of
financial position should be
A. P2,103,200 B. P2,086,200 C. P2,122,200 D. P1,993,200
SOLUTION 3-25
Inventory Accounts Payable Net Sales

Unadjusted balances P1,870,000 P1,415,000 P9,693,400
Adjustments:
1.
(78,500)
2. 93,000 93,000
3. 27,000
4. 49,000
(67,800)
5.
29,400
6. 31,200
7. 36,000
8. 16,000 32,000 .
Adjusted balances P2,086,200 P1,576,000 P9,576,500
1. Inventory per audit P2,086,200

Inventory per count 1,870,000
Net adjustment - increase P 216,200
Answer: A
2. Accounts payable per audit P1,576,000

Accounts payable per books 1,415,000
Net adjustment - increase P 161,000
Answer: D
3. Net sales for the year ended December 31, 2023 P9.576.500
Answer: B
4. Accounts payable, December 31, 2023 P1,576,000

Answer: A
5. Inventory, December 31, 2023 P2.086.200

Answer: B
PROBLEM 3-26
Page | 174

The cost of goods sold section of the income statement prepared by your client for the year
ended December 31 appears as follows:
Inventory, January 1 P 80,000
Purchases 1,600,000
Cost of goods available for sale P1,680,000
Inventory, December 31 100,000
Cost of goods sold P1,580,000
Although the books have been closed, your working paper trial balance is prepared showing
all accounts with activity during the year. This is the first time your firm has made an
examination. The January 1 and December 31 inventories appearing above were determined
by physical count of the goods on hand on those dates and no reconciling items were
considered. All purchases are FOB shipping point.
In the course of your examination of the inventory cutoff, both at the beginning and end of
the year, you discovered the following facts:
Beginning of the Year
1. Invoices totaling P25,000 were entered in the voucher register in January, but the goods
were received during December.
2. December invoices totaling P13,200 were entered in the voucher register in December, but
the goods were not received until January.
End of the Year

3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and the goods
delivered at that time, but all entries relating to the sales were made on January 2.
4. Invoices totaling P15,000 were entered in the voucher register in January, but the goods
were received in December.
5. December invoices totaling P18,000 were entered in the voucher register in December, but
the goods were not received until January.
6. Invoices totaling P12,000 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.
1. What working paper adjustment should be made at the end of the
current year for item no. 1?
A. Purchases 25,000
B. Retained earnings 25,000
Purchases 25,000
C. Inventory, beginning 25,000
Purchases 25,000
2. The working paper adjustment to correct the error described in item no. 3 should include a
debit to
A. Accounts receivable of P43,000
B. Sales of P43,000
C. Inventory of P12,900
D. Retained earnings of P30,100
3. The company's statement of financial position as of the end of the current year should
show inventory of
A. P130,000
Page | 175
B. P100,000
C. P93,200
D. P117,100
4. What is the net adjustment to purchases of the current year?
A. P27,000 increase
B. P25,000 decrease
C. P2,000 increase
D. P2,000 decrease
5. The cost of goods sold for the current year is
A. P1,561,200
B. P1,553,200
C. P1,580,000
D. P1,565,200
SOLUTION 3-26
Debit (Credit)
No. Retained Purchases Beginnin Accounts Sales Accounts Ending
Earnings g Receivabl Payable Inventory
Inventory e
1 P25,000 (P25,000)
2 (P12,200) P13,200
3 P43,000 (P43,000)
4 15,000 (P15,000)
5 P18,000
6 12,000 (12,000) 12,000
P11,800 P2,000 P13,200 P43,000 (P43,000) (P27,000) P30,000
1. Retained earnings 25,000

Purchases 25,000
Answer: B
Sales 43,000
Answer: A
3. Inventory per client-prepared

income statement P100,000
Add: Item no. 5 P18,000
Item no. 6 12,000 30,000
Adjusted inventory, December 31 P130.000
Answer: A
4. Net adjustment to purchases - increase P2,000
Page | 176
Answer: C
5. Inventory, Jan. 1 (P80,000 + P13,200) P 93,200
Add: Purchases (P1,600,000 + P2,000) 1,602,000
Cost of goods available for sale 1,695,200
Less: Inventory, Dec. 31 (P100,000 + P30,000) 130,000
Cost of goods sold P 1,565,200
Answer: D
PROBLEM 3-27

CHEETAH CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted
balances obtained from Cheetah’s accounting records are as follows:
Inventory (based on physical count of goods
in CHeetah’s warehouse at Dec. 31) P 432,000
Accounts Payable, Dec. 31:
Vendor Terms Amount
Zonrox, Inc. Net 30 P 36,000
Yeba COrp. Net 30 28,000
Xak, Inc. Net 30 83,000
Wais Co. Net 30 -
Velma, Inc. Net 30 - P 147,000
Sales P2,600,000
The following additional information was also obtained:
1. Goods held on consignment from Zonrox, Inc., the consignor, valued at P13,000 were
included in the physical count of goods in Cheetah's warehouse at December 31, and in
Accounts Payable balance as of December 31, 2023.
2. Goods costing P26,400 that were purchased from Wais Co. and paid for in December were
sold in the last week of the current year. The sale was properly recorded at P58,000 in
December. Because the goods were in the shipping area of Cheetah's warehouse to be picked
up by the customer, they were included in the physical count at December 31.
3. Retailers were holding goods costing P25,000 (retail price is P35,700) shipped by Cheetah
under consignment term.
4. Goods were in transit from Velma, Inc. to Cheetah on December 31. The cost of these
goods was P23,500, and they were shipped FOB shipping point on December 28.
Based on the preceding information, compute the adjusted balances of the following:
1. Inventory
A. P417,600 B. P416,100 C. P467,500 D. P441,100
2. Accounts payable
A. P134,000 B. P136,500 C. P157,500 D. P170,500
3. Sales
A. P2,600,000 B. P2,635,700 C. P2,564,300 D. P2,625,000
SOLUTION 3-27
Inventory Accounts Payable Sales

Unadjusted balances P 432,000 P 147,000 P 2,600,000
Page | 177
Item No. 1 (13,000) (13,000)

2 (26,400)
3 25,000
4 23,500 23,500
Adjusted balances P 441,100 P 157,500 P 2,600,00
1. Inventory P441,100
Answer: D
2. Accounts payable P157,500
Answer: C
3. Sales P2.600.000
Answer: A
PROBLEM 3-28

You have been engaged to audit the financial statements of CAMEL CORP. for the year
ended Dec. 31, 2023. The company is engaged in the wholesale chemical business and makes
all sales at 30% above cost.Shown below are the portions of the company’s Sales and
Purchases ledger accounts:
SALES
Date Reference Amount Date Reference Amount
12/31 Closing entry P1,221,027 Balance forwarded P946,720
12/28 SI No. 835 25,680
12/28 SI No. 836 14,196
12/28 SI No. 837 11,439
12/31 SI No. 839 65,436
12/31 SI No. 840 81,122
12/31 SI No. 841 76,434
P1,221,027 P1,221,027
PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P418,600 12/31 Closing entry P509,025
12/28 RR No. 949 14,500
12/30 RR No. 951 26,700

Page | 178
12/31 RR No. 952 34,550
12/31 RR No. 953 14,675
P509,025 P509,025
SI = Sales Invoice
RR = Receiving Report
Camel Corp. conducted its annual physical inventory at Dec. 31, 2023. You observed the
physical count and were satisfied that it was properly taken.
When performing a sales and purchases cutoff test, you found the following:
a. All receiving reports and sales invoices are prepared in strict numerical sequence.
b. The last receiving report number used in calendar year 2023 is RR No. 953.
c. The sales invoice number corresponding to the last shipment made in 2023 is SI No. 838.
You also obtained the following additional information:
1. Included in the physical count at December 31 were chemicals costing P25,000 that have
been purchased and received on RR No. 950. As of December 31, 2023, no vendor invoice
has been received for these chemicals.
2. There were goods located in the shipping area of Camel Corp. on December 31, 2023, but
were not included in the physical count. These had been sold to XYZ Co. who had already
paid for the goods. The goods were picked up by XYZ Co.'s truck on January 3, 2024. The
sale was recorded on SI No. 835.
3. At the close of business on December 31, 2023, there were two box- cars standing on
Camel Corp.'s siding:
(a) Boxcar 14344AA was unloaded on January 2, 2024. The receiving report for this
merchandise is RR No. 953. The freight was paid by the vendor.
(b) Boxcar 021261JR was loaded and sealed on December 31, 2023. The car was taken from
Camel Corp.'s siding on January 2, 2024. It contained a shipment of goods to ABC Co. and
was covered by SI No. 838. The sales price for this order was P65,000, and transportation
charges were to be paid by ABC Co.
4. Temporarily stranded on a distant railroad siding at December 31, 2023, was a boxcar of
chemicals en route to DEF Company. This was covered by SI No. 836. The terms of this
shipment were FOB destination.
5. Goods in transit from a vendor at December 31, 2023, were received on RR No. 954. The
terms of this shipment were FOB destination. Freight charges of P1,500 were paid by Camel
Corp. However, this P1,500 freight charge was deducted from the purchase price of P16,800.
Determine the net adjustment to be made at December 31, 2023, for each of the following
accounts.
1. Sales
A. P222,992 debit C. P171,752 debit
2. Accounts receivable
B. P222,992 credit D. P171,752 credit
3. Cost of sales
B. P75,595 credit D. P25,000 debit
4. Accounts payable
A. P39,675 credit C. P25,000 debit
B. P39,675 debit D. P25,000 credit
5. Inventory
Page | 179
A. P60,920 debit C. P75,595 debit

SOLUTION 3-28
1. Sales 222,992
To reverse sales entries for unshipped goods.
SI No. 839 P 65,436
SI No. 840 81,122
SI No. 841 76,434
Total P222,992
2. Cost of sales 25,000
To record purchase of chemicals per RR No. 950.
3. Inventory 14,675
To include in ending inventory goods purchased per RR No. 953.
4. Inventory 50,000
To include in ending inventory goods shipped to customers on January 2, 2024,
(P65,000 / 130% = P50,000)
5. Sales 14,196
To reverse entry made for goods in transit to customer shipped FOB destination.
6. Inventory 10,920
To include in ending inventory cost of goods in transit to customer shipped FOB
destination. (P14,196 130% = P10.920)
Accounts Cost Accounts
Sales Receivable of Sales Payable Inventory
AJE 1 P222,992 (P222,992)
2 P25,000 (P25,000)
3 (14,675) P14,675
4 (50,000) 50,000
5 14,196 (14,196)
6 (10,920) 10,920
Net P237,188 (P237,188) (P50,595) (P25,000) P75,595
1. Sales P237,188 debit

Answer: B
2. Accounts receivable P237,188 credit
Answer: C
3. Cost of sales P50,595 credit
Answer: A
4. Accounts payable P25,000 credit
Answer: D
5. Inventory P75,595 debit
Answer: C
Page | 180
PROBLEM 3-29
Retail Inventory Method

The following information was taken from the records of CROCODILE BOUTIQUE for the
month of December:
Sales P198,000
Sales returns 4,000
Additional markups 20,000
Markup cancellations 3,000
Markdowns 18,600
Markdown cancellations 5,600
Freight-in 4,800
Purchases at cost 96,000
Purchases at retail 176,000
Purchase returns at cost 4,000
Purchase returns at retail 6,000
Beginning inventory at cost 60,000
Beginning inventory at retail 93,000
1. What is the cost of Crocodile's ending inventory under the retail inventory (average cost)
method?
A. P40,880 B. P43,070 C. P51,296 D. P43,500
2. The difference in the calculation of the cost-to-retail percentage applying the conventional
retail method and the average cost method is that the average cost method
A. Excludes beginning inventory B. Excludes markdowns
C. Includes markups D. Includes markdowns
SOLUTION 3-29
1. Cost Retail
Beginning inventory P 60,000 P 93,000
Purchases 96,000 176,000
Freight-in 4,800
Purchase returns (4,000) (6,000)
Additional markups 20,000
Markup cancellations (3,000)
Markdowns (18,600)
Markdown cancellations 5,600
Goods available for sale P156,800 267,000
Less: Net sales (P198,000-P4,000) 194,000
Ending inventory at retail P73,000
Cost Ratio (P156,800 / P267,000) 59%
Ending Inventory at cost (73,000 x 59%) P43,070
Answer: B
2. Includes markdowns
Answer: D
Page | 181
PROBLEM 3-30
Inventory Fire Loss

On September 5, 2023, a fire damaged the warehouse of TIGER COMPANY. All inventory
items and many accounting records stored in the warehouse were destroyed. However, a
portion of the inventory could be sold for scrap. The company's backup files provide the
Cash sales, January 1 - September 5 445,000
Purchases, January 1 - September 5 2,770,000
Collection of accounts receivable,
January 1-September 5 4,230,000
Accounts receivable, January 1 350,000
Accounts receivable, September 5 530,000
Salvage value of inventory 15,000
Gross profit ratio 32%
1. What is the estimated inventory fire loss?

A. P208,400 B. P506,200 C. P203,600 D. P218,600
SOLUTION 3-30
Accounts receivable, September 5 P 530,000

Add: Collections, January 1 - September 5 4,230,000
Total 4,760,000
Less: Accounts receivable, January 1 350,000
Sales on account 4,410,000
Add: Cash sales 445,000
Total sales 4,855,000
Cost of sales ratio (100 - 32%) X 68%
Estimated cost of goods sold P 3,301,400
Add: Purchases 2,770,000
Less: Estimated cost of goods sold 3,301,400
Estimated inventory, September 5 218,600
Less: Salvage value of inventory 15,000
Estimated inventory loss P 203,600
Answer: C
PROBLEM 3-31
Inventory Fire Loss

Page | 182
CAT CORP. began operations in 2018. On July 15, 2023, a fire broke out in the company's
warehouse destroying all inventory and many accounting records. The following information
was assembled from the microfilmed records. All sales and purchases are on account.
Jan. 1, 2023 July 15, 2023
Inventory P 287,700
Accounts receivable 261,180 P 257,780
Accounts payable 176,280 245,700
Collections from customers, 1/1/23-7/15/23 1,507,600
Payments to suppliers, 1/1/23-7/15/23 975,000
Goods out on consignment on July 15, 2023, at cost 97,500
Goods in transit at July 15, 2023,
purchased FOB shipping point (included in
the July 15 accounts payable balance) 34,750
The following is a summary of prior years' sales and gross profit on sales:
2020 2021 2022
Sales P1,252,000 P1,410,000 P1,360,000
Gross profit 375,600 366,600 462,400
1. What is the company's average gross profit ratio based on its prior
years' sales?
A. 26% B. 34% C. 30% D. 29%
2. What is the company's total sales for the period January 1 through July 15 of the current
year?
A. P1,504,200 B. P1,511,000 C. P1,765,380 D. P1,768,780
3. What is the company's total purchases for the period January 1 through July 15 of the
current year?
A. P905,580 B. P912,170 C. P1,044,420 D. P1,009,670
4. What is the company's estimated inventory on July 15, 2023, before the fire?
A. P186,605 B. P244,430 C. P146,930 D. P279,180
5. What is the inventory fire loss?
A. P146,930 B. P186,605 C. P132,250 D. P112,180
SOLUTION 3-31
1. AVERAGE GROSS PROFIT RATIO BASED ON SALES

2020 2021 2022
Gross profit P 375,600 P 366,600 P 462,400
Divide by sales 1,252,000 1,410,000 1,360,000
Gross profit ratio 30% 26% 34%
Average gross profit ratio: (30% + 26% + 34%) = 30%
3
Answer: C
2. ESTIMATED SALES
Accounts receivable, July 15 P 257,780
Add: Collections from customers 1,507,600
Total 1,765,380
Less: Accounts receivable, Jan. 1 261,180
Estimated sales, January 1 - July 15 P 1,504,200
Page | 183
Answer: A
3. ESTIMATED PURCHASES
Accounts payable, July 15 P 245,700
Add: Payments to suppliers 975,000
Total 1,220,700
Less: Accounts payable, January 1 176,280
Estimated purchases, January 1 - July 15 P 1,044,420
Answer: C
4. ESTIMATED INVENTORY, JULY 15 (BEFORE THE FIRE)
Add: Estimated purchases 1,044,420
Less: Estimated cost of goods sold
(P1,504,200 x 70%) 1,052,940
Estimated inventory, July 15 P 279,180
Answer: D
4. INVENTORY FIRE LOSS
Estimated Inventory, July 15 P 287,700
Less: Goods out on Consignment P 97,500
Goods Goods in Transit 34,750 132,250
Inventory Fire Loss P 146,930
Answer: A
PROBLEM 3-32
Inventory Fire Loss

On April 15, 2023, fire damaged the office and warehouse of PEACOCK COMPANY. The
trial balance below was prepared from the general ledger which was the only accounting
record saved.
Peacock Company
TRIAL BALANCE
March 31, 2023
Debit Credit
Cash P 35,000
Held-for-trading securities 350,000
Inventory, December 31, 2022 225,000
Land 950,000
Building 800,000
Accumulated depreciation - Building P 260,000
Machinery and equipment 130,500
Page | 184
Accumulated depreciation - Mach. & Equip.

69,400
Other non-current assets 98,000
Accounts payable
71,100
Other expense accruals
15,400
Ordinary share capital 1,220,600
Retained earnings
849,000
Sales
405,000
Purchases 156,000
Other operating expenses 256,000
0
Totals P2,890,500 P2,890,500
The following additional information has been obtained:
1. The company's year-end is December 31.
2. An examination of the April bank statement and canceled checks revealed the following:
● Checks written, April 1-15 P39,000
(P17,100 paid to accounts payable as of March 31,
P10,200 for April merchandise shipments, and
P11,700 paid for other operating expenses)
● Deposits, April 1-15 38,850
(consisted of collections from customers with the
exception of a P2,850 refund from a supplier for
goods returned in April)
3. Communication with suppliers disclosed unrecorded payables at April 15 of P31,800 for
April merchandise shipments, including P6,900 for goods in transit (FOB shipping point) on
that date.
4. Customers acknowledged indebtedness of P108,000 (including P1,800 that will probably
be uncollectible). It was also estimated that customers owed another P24,000 that will never
be acknowledged or recovered.
5. The insurance company agreed that the fire-loss claim should be based on the assumption
that the overall gross profit ratio for the past 2 years was in effect during the current year. The
company's audited financial statements disclosed the following information:
Dec. 31, 2022 Dec. 31, 2021
Net sales P 1,590,000 P 1,170,000
Net purchases 840,000 705,000
Beginning inventory 150,000 225,000
Ending inventory 225,600 150,000
6. Inventory costing P21,000 was salvaged and sold for P10,500. The balance of the
inventory was a total loss.
1. Gross profit ratio
A. 52% B. 33% C. 44%
D. 47%
2. Sales, January 1, 2023- April 15, 2023
A. P429,000 B. P381,000 C. P205,000 D. P453,000
3. Net purchases, January 1, 2023 - April 15, 2023
Page | 185
A. P195,150 B. P198,000 C. P188,250 D. P204,900

4. Cost of inventory not destroyed by fire
A. P27,900 B. P17,400 C. P10,500 D. P21,000
5. Inventory fire loss
A. P175,950 B. P165,450 C. P138,570 D. P149,070
SOLUTION 3-32
1. GROSS PROFIT RATIO

Net sales (P1,590,000+ P1,170,000) P 2,760,000
Cost of goods sold:
Inventory, Jan. 1, 2021 P 225,600
Add: Net purchases (P840,000+ P705,000) 1,545,000
Less: Inventory, Dec. 31, 2022 225,000 1,545,600
Gross profit P 1,214,400
Gross profit ratio (P1,214,400 ÷ P2,760,000) 44%
Answer: C
2. SALES, JANUARY 1, 2023 - APRIL 15, 2023
ACCOUNTS RECEIVABLE
Balance, Mar. 31 120,000 36,000 Collections

(P38,850-P2,850)
Sales (SQUEEZE) 48,000 -
Balance, April 15 *132,000

*P108,000+ P24,000 = P132.000
Sales, January 1 - March 31 (per trial balance) P405,000
Sales, April 1 - April 1 548,000
Total sales, January 1 - April 15 P453,000
Answer: D
3. NET PURCHASES, JANUARY 1, 2023 - APRIL 15, 2023
Purchases Jan. 1- Mar. 31, 2022 (per trial balance) P 156,000
April merchandise shipments paid 10,200
Unrecorded purchases on account 31,800
Purchase returns (2,850)
Net purchases, Jan. 1-April 15, 2022 P 195,150
Answer: A
4. COST OF INVENTORY NOT DESTROYED BY FIRE
Salvaged inventory P 21,000
Goods in transit, purchased FOB shipping point 6,900
Total P 27, 900
Answer: A
Inventory, Jan. 1, 2023 P 225,000
Page | 186
Add: Net purchases (see no. 3) 195,150

Less: Estimated cost of goods sold
(P453,000 x 56%) 253,680
Estimated inventory 166,470
Less: Salvaged inventory P 10,500
Merchandise in transit 6,900 17,400
Inventory fire loss P 149,070
Answer: D
PROBLEM 3-33
Inventory Fire Loss

SHARK, INC. was organized on January 1, 2022. On December 31, 2023, the company lost
most of its inventory in a warehouse fire just before the year-end count of inventory was to
take place. The company's records disclosed the following data:
2022 2023
Inventory, January 1 P 0 P 204,000
Purchases 860,000 692,000
Purchase returns and allowances 46,120 64,600
Sales 788,000 836,000
Sales returns and allowances 16,000 20,000
On January 1, 2023, Shark's pricing policy was changed so that the gross profit rate would be
three percentage points higher than the one earned in 2022.
Salvaged undamaged merchandise was marked to sell at P24,000 while damaged
merchandise marked to sell at P16,000 had an estimated realizable value of P3,600.
1. What is the company's gross profit rate beginning January 1, 2023?
A. 24% B. 21% C. 17%
D. 20%
2. How much is the inventory fire loss?
A. P189,400 B. P183,640 C. P164,920 D. P254,000
SOLUTION 3-33
1. GROSS PROFIT RATE IN 2023

Net sales (P788,000 - P16,000) P 772,000
Cost of goods sold:
Net purchases (P860,000-P46,120) P 813,880
Less: Inventory, Dec. 31, 2022 204,000 609,880
Gross profit P 162,120
Gross profit rate - 2022 (P162,120 + P772,000) 21%
Add: Increase in gross profit rate in 2023 3%
Gross profit rate in 2023 24%
Answer: A
Page | 187

Inventory, Jan. 1, 2023 P 204,000
Add: Net purchases (P692,000-P64,600) 627,400
Less: Cost of goods sold
Net Sales (P836,000-P20,000) P 816,000
Cost of sales ratio (100-24%) x 76% 620,160
Estimated ending inventory 211,240
Less: Salvaged undamaged merchandise
(P24,000 x 76%) P 18,240
Net realizable value of damaged merchandise 3,600 21,840
Inventory fire loss P 189,400
Answer: A
PROBLEM 3-34
Effect of Inventory Errors on Current Ratio and Net Income

At December 31, 2023, SHEEP CORP. reported current assets of P2,400,000 and current
liabilities of P1,200,000. The following items may have been recorded incorrectly.
i. Goods purchased costing P132,000 were shipped FOB shipping point by a supplier on
December 28. Sheep received and recorded the invoice on December 29, but the goods were
not included in Sheep's physical count of inventory because they were not received until
January 4.
ii. Goods purchased costing P90,000 were shipped FOB destination by a supplier on
December 26. Sheep received and recorded the invoice on December 31, but the goods were
not included in Sheep’s physical count of inventory because they were not received until
January 2.
iii. Goods held on consignment from Black Corporation were included in Sheep's physical
count of inventory at P78,000.
1. What is Sheep's current ratio after corrections are made?
A. 2.21 to 1. B. 2.0 to 1. C. 2.09 to 1. D. 2.04 to 1.
2. By what amount will income before taxes be adjusted up or down as a result of the
corrections?
A. P120,000 increase. B. P78,000 decrease.
C. P36,000 decrease. D. P144,000 increase.
SOLUTION 3-34
1. Current Assets Current Liabilities

Balances per books P 2,400,000 P 1,200,000
i. Goods in transit, purchased
FOB shipping point, not included
in physical count 132,000
ii. Goods in transit, purchased
FOB destination, recorded as Purchase (90,000)
Page | 188
iii. Goods held on consignment,

included in physical count (78,000) 0
Adjusted balances P 2,454,000 P 1,110,000
Current ratio = Current assets / Current liabilities
= P 2,454,000 / P 1,110,000
= 2.21
Answer: A
2. Net Income Adjustment
i. Understatement of ending inventory P 132,000
ii. Overstatement of purchases 90,000
iii. Overstatement of ending inventory (78,000)
Net increase in income before taxes P 144,000
Answer: D
PROBLEM 3-35
Correcting Inventory and Related Accounts

A general ledger account is maintained by LIZARD COMPANY for each class of inventory.
Such inventory accounts are debited for increases during the period and credited for
decreases. The following transactions relate to Lizard's Raw Materials Inventory account,
which is debited for purchases of raw materials and credited when they are requisitioned for
use.
1. An invoice for P48,600, terms FOB destination, was received and entered January 2, 2024.
The receiving report shows that the materials were received December 29, 2023.
2. Materials costing P168,000, shipped FOB destination, were not entered by December 31,
2023, "because they were in a railroad car on the company's siding on that date and had not
been unloaded."
3. Materials costing P43,800 were returned on December 29, 2023, to the creditor, and were
shipped FOB shipping point. The return was entered on that date, even though the materials
are not expected to reach the creditor's place of business until January 7, 2024.
4. An invoice for P45,000, terms FOB shipping point, was received and entered December
31, 2023. The receiving report shows that the materials were received January 4, 2024, and
the bill of lading shows that they were shipped January 2, 2024.
5. Materials costing P118,800 were received December 31, 2023, but no entry was made for
them because "they were ordered with a specified delivery of no earlier than January 9,
2023."
Prepare correcting entries required at December 31, 2023, assuming that the books have not
been closed. Ignore income taxes.
SOLUTION 3-35
1. Raw materials inventory 48,600

3. No adjusting entry is necessary.
4. Accounts payable 45,000
Raw materials inventory 45,000
Page | 189

PROBLEM 3-36
Correcting Errors in Inventory and Related Accounts

The following transactions occurred a few days before and after LEOPARD COMPANY's
fiscal year which ends October 31. The company uses a periodic inventory system.
a. An invoice for P75,000, terms FOB shipping point, was received and entered November 2.
The invoice shows that the material was shipped October 31, but the receiving report
indicates receipt of goods on November 3.
b. An invoice for P162,000, terms FOB destination, was received and entered October 25.
The receiving report indicates that the goods were received October 30.
c. An invoice for P147,000, terms FOB shipping point, was received October 14 but never
entered. Attached to it is a receiving report indicating that the goods were received October
19. Across the face of the receiving report is the following notation: "Merchandise not of
same quality as ordered - returned for credit October 20."
d. An invoice for P114,000, terms FOB shipping point, was received and entered October 28.
The receiving report attached to the invoice indicates that the shipment was received October
28 in satisfactory condition.
e. An invoice for P42,600, terms FOB shipping point, was received and recorded November
3. The receiving report indicates that the merchandise was received October 31.
You are instructed to review these transactions and to determine whether any correcting
entries are to be prepared and whether the inventory per physical count on October 31 should
be adjusted.
1. Prepare any adjusting journal entries at October 31. Assume that the books have not been
closed.
2. What is the net adjustment to Leopard's inventory as determined by physical count on

October 317
A. P75,000 increase B. P90,000 increase
C. P33,000 decrease D. P72,000 decrease.
SOLUTION 3-36

October 31
a. Purchases 75,000
b. No adjusting entry is necessary.
c. Purchases 147,000
Page | 190

Purchase returns and allowances 147,000
d. No adjusting entry is necessary.
e. Purchases 42,600
2. INCREASE IN INVENTORY
Material purchased under FOB shipping point term,
shipped October 31, but received on November 3
(see item "a") P75,000
Answer: A
PROBLEM 3-37
Computation of Year-end Inventory

The physical inventory of BULL, INC. as of December 26, 2023, totaled P945,000. You
agreed on the December 26 count as the company has a good internal control system. In
trying to establish the December 31 inventory, you noted the following transactions from
December 27
to December 31, 2023.
Sales (30% markup on cost) P 390,000
Credit memos issued:
For goods returned on:
December 15 10,800
December 20 18,000
December 29 15,600
For goods delivered to customers not
in accordance with specifications 3,600
Credit memos received:
For goods returned on:
December 10 5,400
December 26 4,200
December 28 6,000
Purchases:
Placed in stock 90,000
In transit, FOB shipping point 124,500
In transit, FOB destination 39,000
What is the inventory balance on December 31, 2023?
A. P690,000 C. P693,600
B. P780,000 D. P865,500
SOLUTION3-37
Inventory per count, December 26, 2023 P 945,000

Add (deduct) transactions, December 27-31, 2023:
Cost of goods sold (P390,000+130%) (300,000)
Goods returned by customers on Dec. 29 (P15,600+130%) 12,000
Page | 191
Goods returned to suppliers on December 28 (6,000)

Purchases:
Placed in stock 90,000
In transit, purchased FOB shipping point 124,500
Inventory balance, December 31, 2023 P 865,500
Answer: D
PROBLEM 3-38
Computing Inventory Based on Incomplete Records

A recent fire severely damaged PENGUIN COMPANY's administration building and
destroyed many of its financial records. You have been contracted by Penguin's management
to reconstruct as much financial information as possible for the month of July. You learn that
Penguin makes a physical inventory count at the end of each month to determine monthly
ending inventory values. You also find out that the company applies the average cost method.
You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units
Total cost of goods available for sale in July P 356,400
Cost of goods sold during July P 297,000
Gross profit on sales for July P 303,000
Cost of inventory, July 1 P0.35 per unit
The following are Penguin's July purchases of merchandise:
Date Quantity Unit Cost
July 6 180,000 P 0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45
Penguin's management has asked you to provide the following information:
1. Number of units on hand, July 1
A. 450,000 B. 848,571
C. 169,714 D. 300,000
2. Units sold during July
A. 600,000 B. 300,000
C. 750,000 D. 450,000
3. Unit cost of inventory at July 31
A. P0.35 B. P0.396
C. P0.419 D. P0.279
4. Value of inventory at July 31
A. P59,400 B. P52,500
C. P62,850 D. P41,850
SOLUTION 3-38
1. Cost of goods available for sale P 356,400

Less: Purchases:
Units Unit Cost Total Cost
180,000 P 0.40 P 72,000
150,000 0.41 61,500
Page | 192
120,000 0.42 50,400

150,000 0.45 67,500 251,400
Cost of inventory, July 1 105,000
Divide by unit cost ÷ P 0.35
Inventory quantity, July 1 300.000
Answer: D
2. Inventory quantity, July 1 (see no. 1) 300,000
Add: Units purchased 600,000
Less: Inventory quantity, July 31 150,000
Units sold during July 750,000
Answer: C
3. Cost of goods available for sale P 356,400
Divide by units available for sale (see no. 2) 900,000
Unit cost of inventory, July 31 P 0.396
Answer: B
Cost of goods available for sale P 356,400
Less: Cost of goods sold 297,000
Cost of inventory, July 31 59,400
Divide by inventory quantity, July 31 150,000
Unit cost of inventory, July 31 P 0.396
4. Inventory value, July 31 (P0.396 x 150,000 units) P 59.400
Answer: A
AUDIT OF INVESTMENTS
(Audit Program for Investments)
Audit Objectives:
To determine that:
1. Investments exist (held by the entity or the entity's fund manager) and are owned by the
entity.
2. All recorded income from investments has accrued to the entity at the end of the reporting
period.
3. All investments owned by the entity at the end of the reporting period are included in the
statement of financial position.
4. All income accruing from investments at the end of the reporting period has been recorded.
5. Investments are included in the statement of financial position at appropriate amounts. The
related investment income is included in the income statement at the appropriate amount.
6. All investments are free of liens, pledges, or other security interests, or if not, are adequately
disclosed.
Page | 193
7. Investments and related investment income accounts are properly classified, described, and
disclosed in the financial statements in conformity with PFRS.
Audit Procedures:
1. Prepare or obtain an analysis of the investment account and:

● Trace to applicable general ledger balances.
● Vouch changes during the year by reference to board minutes and brokers' advices.
● Verify completeness of dividend and interest revenues, and where necessary, by
reference to outside published sources.
● Check footings and cross-footings.
2. Conduct securities count and:

● Inspect securities as to registered owner.
● Reconcile and compare details with investment analysis.
3. For securities held by an outside custodian:

● Arrange for a visit to the custodian and conduct a count; or
● Confirm from the custodian the details of securities held for the account of the entity.
4. Review minutes, agreements, and confirmation replies for evidence of liens, pledges, or other
security interests in the entity's investments and of commitments to acquire or dispose of
investments.
5. Inspect market quotations, financial statements of investee(s), and other evidence to

determine the current value of investments.
6. Discuss with the entity the process used by management in classifying its investments.
7. Determine whether the client's investment activities are consistent with its business model for
managing financial assets.
8. Determine whether the decline in fair value of held-for-collection financial assets below
amortized cost is other than temporary and is properly recognized.
9. Verify computations of gains and losses from disposals of investments.
10. Verify calculations of amortization of premium or discount on held-for-collection financial

assets.
11. Determine propriety of financial statement presentation and adequacy of disclosures.

Page | 194
AUDIT OF INVESTMENTS
PROBLEM 4-1
________________________________________________________________________
Financial Assets at Fair Value Through Profit or Loss (FVTPL): Trading Securities_
The following two subsidiary accounts reflect the Trading Securities of ANGOLA CORP. for the year
2023.
NOEL COMPANY
Date Transactions Shares Ref. Debit Credit

Feb. 22 Purchase 2, 000 CD P190, 000
Feb. 28 Raised to market value; offset - GJ 10,000
credit to retained earnings
Mar. 15 Sale at P150 1, 000 CR P150, 000
June 30 Stock dividend at par 1, 000 GJ 100, 000
July 15 Sale at P110 1, 000 CR 100, 000
ILAN COMPANY
Date Transactions Shares Ref. Debit Credit

Sep. 5 Purchase 20, 000 CD P1, 000, 000
Sep. 28 Cash dividend to stock of CR P50, 000
record September 15, declared
August 15
Oct. 1 Sale at P65 20, 000 CR 1, 000, 000
Oct. 5 Purchase 50, 000 CD 2, 500, 000
Nov. 30 Cash collected for sale made on 20, 000 CR 3, 300, 000
Nov. 10, after a Nov. 1
declaration of P5 cash dividend
per share to shareholders of
record as of December 1
Dec. 15 Cash dividend received CR 150, 000
The above trading securities had the following fair values at December 31, 2023:
Noel Company P50 per share

Ilan Company 30 per share
1. What is the gain on sale of Noel Company shares on March 15, 2023?
Page | 195
A. P50, 000
B. P55, 000
C. P60, 000
D. P0
Page | 196
2. What is the gain on sale of Noel Company shares on July 15, 2023?
Page | 197
A. P52, 500
B. P62, 500
C. P60, 000
D. P0
Page | 198
3. What is the gain on sale of Ilan Corporation shares on October 1, 2023?

Page | 199
A. P300, 000
B. P400, 000
C. P0
D. P350, 000
Page | 200
4. What is the gain on sale of Ilan Corporation shares on November 10, 2023?
Page | 201
A. P2, 300, 000

B. P2, 100, 000
C. P2, 200, 000
D. P0
Page | 202
5. At what amount should Angola report its investment in trading securities on its financial
position at December 31, 2023?
A. P947, 500 C. P950, 000
B. P1, 597, 500 D. P1, 547, 500
SOLUTION 4-1
___________________________________________________________________________
1. B Sales price (P150 x 1, 000) P150, 000

Cost (1, 000 x P190, 000) (95,000)
Gain on sale P 55, 000
2. B Sales price (P110 x 1, 000) P110, 000

Cost (1, 000/2, 000 x P95, 000) (47, 500)
3. D Sales price (P65 x 20, 000) P1, 300, 000

Cost (P1, 000, 000 – P50, 000 dividend) (950, 000)
4. C Sales prices (P3, 300, 000 – P100, 000 dividend) P3, 200, 000
Cost (20, 000/50, 000 x P2, 500, 000) (1, 000, 000)
Gain on sale P2, 200, 000
5. C Carrying value of investment in trading securities

on December 31, 2023 P 950,000
Shares Cost FV Dec. 31, 2023

Noel Company 1, 000 P47, 500 P50, 000
Ilan Company 30, 000 1, 500, 000 900, 000
Totals P1, 547, 500 P950, 000
Unrealized loss on trading securities 597, 500

Investment in trading securities 597, 500
(P1, 547, 500 –n P950, 000)
PROBLEM 4-2
__________________________________________________________________________
Investment in Trading Securities: Debt and Equity_______________________________
The statement of financial position of MADRIGAL CORPORATION on December 31, 2023, reports
Trading Securities at fair vale of P670, 770. Supporting records of the company show the following
debt and equity securities.
Security Cost Fair Value

600 Condura Co. ordinary shares P76, 350 P72, 900
P240, 000 Sinker Co. 7% bonds 238, 950 232, 200
Page | 203
P360, 000 Floater Co. 7 ½% bonds 362, 250 365, 670

Total P677, 550 P670, 770
Interest on bonds is paid semiannually on January 1 and July 1. Madrigal uses the income approach to
record the acquisition of bonds with accrued interest. The following transactions occurred during
2023.
Jan. 1 Received semiannual interest on bonds.

April 1 Sold P180, 000 of the Floater Co. bonds at 102 plus accrued interest.
Brokerage fees were P600.
May 21 Received dividend of P0.25 per share on the Condura ordinary shares.
July 1 Received semiannual interest on bonds. Sold the Sinker Co. bonds at 97 ½%.
Brokerage fees were P750.
Aug. 15 Purchased 300 Bobber Co. ordinary shares at P116 plus brokerage fees of P150.
Nov. 1 Purchased P150, 000 of 8% Leader Co, bonds at 101 plus accrues interest.
Brokerage fees were P375. Interest dates are January 1 and July 1.
Dec. 31 Market prices of securities were: Condura Co. Ordinary shares, P110; Floater
Co. bonds, 101 ¾; Leader Co. bonds, 101; Bobber Co. ordinary shares, P116.75.
1. What is the gain on sale of P180, 000 Floater Co, bonds on April 1, 2023?
Page | 204
A. P1, 875
B. P165
C. P765
D. P2, 610
Page | 205
2. What is the gain (loss) on the sale o Sinker Co. bonds on July 1, 2023?
Page | 206
A. P1, 800
B. (P5, 700)
C. P1, 050
D. (P4, 950)
Page | 207
3. What is the total interest income on bonds that should be reported in Madrigal’s income
statement for the year ended December 31, 2023?
Page | 208
A. P25, 275
B. P27, 275
C. P34, 650
D. P34, 025
Page | 209
4. What is the unrealized gain (loss) on trading securities that should be reported in
Madrigal’s income statement for the year ended December 31, 2023?
Page | 210
A. (P8, 625)
B. P8, 100
C. (P1, 845)
D. (P6, 360)
Page | 211
5. What is the accrued interest receivable on bonds that should be reported in Madrigal’s
statement of financial position at December 31, 2023?
Page | 212
A. P12, 750 C. P19, 500

B. P21, 900 D. P8, 750
SOLUTION 4-2
___________________________________________________________________________
1. B Sales price (P180, 000 x 102%) P183, 600

Brokerage fees (600)
Net 183, 000
Carrying value (P365, 670 x 180/360) 182, 835
Gain on sale of Floater Co. bond P 165
2. C Sales prices (P240, 000 x 97 ½ %) P234, 000

Brokerage fees (750)
Net P233, 250
Carrying Value 232, 200
Gain on sale of Sinker Co. bonds P 1, 050
3. B Floater:
Jan. 1 – April 1 P360, 000 x 7 ½% x 3/12 P 6, 750
April 1 – Dec. 31 P180, 000 x 7 1/12% x 9/12 10, 125
Sinker:
Jan. 1 – July 1 P240, 000 x 7% x 6/12 8, 400
Leader:
Nov. 1 – Dec. 31 P150, 000 x 8% x 2/12 2, 000
Total interest income P 27, 275
4. D Unrealized loss on trading securities

(P442, 035 CV – P435, 675 FV) P 6, 360
Carrying Value Fair Value

Condura Co. ordinary shares P72, 900 P66, 000
Floater Co. 7 1/2 % bonds 182, 835 183, 150
Bobber Co. ordinary shares 34, 800 35, 025
Leader Co, 8% bonds 151, 500 151, 500
Total P442, 035 P435, 675
5. A Floater P180, 000 x 7 ½% x 6/12 P 6,750

Leader: P150, 000 x 8% 6/12 6, 000
Accrued interest receivable, Dec. 31, 2023 P 12, 750
PROBLEM 4-3
___________________________________________________________________________Trading
Securities___________________________________________________________
Presented below are unrelated situations.

Page | 213
1. LITON COMPANY buys and sells securities expecting to earn profits on short-term
differences in prices. During 2023, Liton Company purchased the following trading
securities:
Security Cost FV Dec. 31, 2023

A P195, 000 P225, 000
B 300, 000 162, 000
C 660, 000 678, 000
Before any adjustments related to these trading securities, Liton Company had net income of
P900, 000.
1. What is Liton’s net income after making any necessary trading security
adjustments?
Page | 214
A. P900, 000 C. P762, 000

B. P810, 000 D. P948, 000
2. What would Liton’s net income be if the fair value of security B were
P285, 000?
A. P867, 000 C. P885, 000
B. P900, 000 D. P933, 000
2. CANDABA CO.’s portfolio of trading securities includes the following on December 32,
2022:
Cost Fair Value

15, 000 ordinary shares of Tomas Co. P477, 000 P417, 000
30, 000 ordinary shares of Gandara Co. 546, 000 570, 000
P1, 023, 000 P987, 000
All of the above securities have been purchased in 2022. In 2023, Candaba Co. completed
the following securities transactions:
Mar. 1 Sold 15, 000 shares of Tomas Co. ordinary shares for P460, 500.
April 1 Bought 1, 800 ordinary shares of Westin, Inc. at P45 plus commission,
taxes, and other transaction cost of P1, 650.
The Candaba Co. portfolio of trading securities appeared as follows on Dec. 31, 2023:
Cost Fair Value

30, 000 ordinary shares of Gandara Co. P546, 000 P580, 000 1
1, 800 ordinary shares of Westin, Inc. 82, 650 75, 000 2
P682, 650 P655, 000
1
Net of P6, 500 estimated transaction costs that would be incurred on the sale of the
securities.
2
Net of P1, 500 estimated transaction costs that would be incurred on the sale of the
securities.
1. What is the amount of unrealized gain on these securities should be reported in the
2023 income statement?
Page | 215
A. P12, 000
B. P10, 350
C. P26, 350
D. P28, 000
Page | 216
2. What is the gain or loss on the sale of Tomas Co. ordinary shares on March 1, 2023?
Page | 217
A. P48, 000
B. P9, 000
C. P43, 500
D. P4, 500
Page | 218
3. What amount should be reported as trading securities in the Candaba’s statement of

financial position on December 31, 2023?
Page | 219
A. P655, 000
B. P663, 000
C. P628, 650
D. P636, 650
Page | 220
SOLUTION 4-3
___________________________________________________________________________
1. LITON COMPANY
1. Net income before trading security adjustment P900, 000

Unrealized loss (P1, 155, 000 – P1, 065, 000) (90, 000)
Net income, as adjusted P810, 000
Cost FV Dec. 31, 2023

A P195, 000 P225, 000
B 300, 000 162, 000
C 660, 000 678, 000
P1, 155, 000 P1, 065, 000
ANSWER: B
2. Net income before trading security adjustment P900, 000

Unrealized loss (P1, 188, 000 – P1, 155, 000) (33, 000)
Net income, as adjusted P933, 000
Cost FV Dec. 31, 2023

A P195, 000 P225, 000
B 300, 000 285, 000
C 660, 000 678, 000
P1, 155, 000 P1, 188, 000
ANSWER: D
2. CANDABA CO.
1. Unrealized gain (P633, 000 – P651, 000) P12, 000
Carrying Value Fair Value

December 31, 2023 December 31, 2023
Gandara Co. P570, 000 P586, 500
Westin, Inc. 81, 000 76, 500
P651, 000 P663, 000
ANSWER: A
2. Proceeds from sale P460, 500

Carrying value 417, 000
Gain on sale of Tomas Co. ordinary shares P 43, 500
Page | 221
ANSWER: C
3. Trading securities at fair value (see no. 1) P633, 000
ANSWER: B
PROBLEM 4-4
__________________________________________________________________________Trading
Securities__________________________________________________________
MAGNOLIA CORP. invested its excess cash in equity securities during 2023. The business model
for these investments is to profit from trading on price changes.
(a) As of December 31, 2023, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value

LJ, Inc. 1, 000 shares P45, 000 P63, 000
Polland Co. 2, 000 shares 120, 000 126, 000
Alabang Corp. 2, 000 shares 216, 000 180, 000
Totals P381, 000 P369, 000
1. In the December 31, 2023. Statement of financial position, what should be reported as
carrying amount of the investments?
Page | 222
A. P369, 000
B. P345, 000
C. P381, 000
D. P405, 000
Page | 223
2. In the 2023 income statement, what amount should be reported as unrealized gain or
loss?
Page | 224
A. Unrealized gain of P12, 000

B. Unrealized loss of P12, 000
C. Unrealized loss of P36, 000
D. Unrealized gain of P24, 000
Page | 225
Page | 226
(b) During the year 2024, Magnolia Corp. sold 2, 000 shares of Polland Co. for P114, 600 and
purchased 2, 000 more shares of LJ, Inc. and 1, 000 shares of Dwarfy Company. On December
31, 2024, Magnolia equity securities portfolio consisted of the following:

LJ, Inc. 1, 000 shares P45, 000 P60, 000
LJ, Inc. 2, 000 shares 99, 000 120, 000
Dwarfy Company 1, 000 shares 48, 000 36, 000
Totals P408, 000 P282, 000
3. What is the gain or loss on the sale of Polland Co. investment?

Page | 227
A. P5, 400 gain

B. P5, 400 loss
C. P11, 400 gain
D. P11, 400 loss
Page | 228
4. What is the carrying amount of the investments on December 31, 2024?

Page | 229
A. P408, 000
B. P444, 000
C. P282, 000
D. P246, 000
Page | 230
5. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2024?
Page | 231
A. P126, 000 unrealized gain

B. P126, 000 unrealized loss
C. P108, 000 unrealized gain
D. P108, 000 unrealized loss
Page | 232
(c) During the year 2025, Magnolia sold 3, 000 shares of LJ, Inc. for P119, 700 and 500 shares of
Dwarfy Company at a loss of P8, 100. On December 31, 2025, Magnolia’s equity investment
portfolio consisted of the following:

Dwarfy Company 500 shares P24, 000 P18, 000
Totals P240, 000 P264, 000
6. What should be reported as loss on sale of trading securities in 2025?

Page | 233
A. P60, 300
B. P32, 400
C. P24, 300
D. P68, 400
Page | 234
7. What amount of unrealized gain or loss should be reported in the income statement for
Page | 235

B. P180, 000 unrealized loss
C. P24, 000 unrealized gain
D. P24, 000 unrealized loss
Page | 236
8. In the December 31, 2025, statement of financial position, what should be reported as
carrying amount of trading securities?
Page | 237
A. P240, 000
B. P234, 000
C. P264, 000
D. P270, 000
Page | 238
SOLUTION 4-4
___________________________________________________________________________
1. Trading securities, at fair value P369, 000
ANSWER: A
2. Fair value, December 31, 2023 P369, 000

Acquisition cost 381, 000
Unrealized loss P 12, 000
ANSWER: B
3. Sales price of Polland securities P114, 600

Carrying amount, December 31, 2023 126, 000
Loss on sale of Poland securities P 11, 400
ANSWER: D
ANSWER: C
5.
LJ, Inc. 1, 000 shares P63, 000 P60, 000
LJ, Inc. 2, 000 shares 99, 000 120, 000
Dwarfy Company 1, 000 shares 48, 000 36, 000
Totals P390, 000 P282, 000
Unrealized loss (P390, 000 – P282, 000) P108, 000
ANSWER: D
6. Sales price of LJ, Inc. securities P119, 700

Carrying amount, December 31, 2025:
1, 000 shares P60, 000
2, 000 shares 120, 000 P180, 000
Loss on sale of LJ, Inc. securities 60, 300
Loss on sale of Dwarfy Company securities 8, 100
Total realized loss in 2025 P 68, 400
ANSWER: D
Page | 239
7.
Dwarfy Company 500 shares P18, 000 P18, 000
Totals P84, 000 P264, 000
Unrealized gain (P264, 000 – P84, 000) P180, 000
ANSWER: A
ANSWER: C
PROBLEM 4-5
__________________________________________________________________________Non-trad
ing equity Securities: Fair Value Changes in (OCI)______________________
During the course of your audit of the financial statements of FISING CORPORATION for the
year ended December 31, 2023, you found a new account, “Investment in Equity Securities”. Your
audit revealed that during 2023, Fishing began a program of investments, and all
investment-related transactions were entered in this account. Your analysis of this account for
2023 follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2023
(a)
Salmon Company Ordinary Shares Debit Credit

Feb. 14 Purchased 36, 000 shares @ P55 per P1, 980, 000
share
July 26 Received 3, 600 ordinary shares of
Salmon Company as a stock dividend.
(Memorandum entry in general
ledger)
Sept. 28 Sold the 3, 600 ordinary shares of P252, 000
Salmon Company received July 26 @
P70 per share
(b)
Tamban, Inc. Ordinary Shares Debit Credit

April 30 Purchased 180, 000 shares @ P40 per P7, 200, 000
share
Page | 240
Oct. 28 Received dividend of P1.20 per share P216, 000
a. The fair value for each security as of the 2023 date of each transaction follow:
Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31

Salmon Company P55 P62 P70 P74
Tamban, Inc. P40 32
Fishing Corp. 25 28 30 33 35
b. All of the investments of Fishing Corporation are nominal in respect to percentage of ownership
(5% or less).
c. Each investment is considered by Fishing Corporation to be non-trading. Fishing Corporation has

made an irrevocable election to present in other comprehensive income subsequent changes in fair
value of its non-trading equity securities.
1. What amount should be reported as gain on sale of non-trading equity securities in the
income statement of Fishing Corporation for the year ended December 31, 2023?
Page | 241
A. P72, 000
B. P18, 000
C. P54, 000
D. P0
Page | 242
2. The receipt of 3, 600 stock dividend would cause the investment balance to increase by
Page | 243
A. P223, 200
B. P252, 000
C. P198, 000
D. P0
Page | 244
3. What entry is necessary to correct the recording of the cash dividend received from Tamban,
Inc?
A. Cash 216, 000
Dividend income 216, 000
B. Cash 216, 000
Investment in equity securities 216, 000
C. Investment in equity securities 216, 000
Dividend income 216, 000
D. Dividend income 216, 000
Investment in equity securities 216, 000
4. What amount of unrealized gain or loss should be reported in the 2023 statement of
comprehensive income as component of other comprehensive income?
Page | 245
A. P1, 440, 000 gain

B. P1, 440, 000 loss
C. P576, 000 gain
D. P576, 000 loss
Page | 246
5. What amount should be reported as Investment in Equity Securities in the statement of

financial position on December 31, 2023?
Page | 247
A. P9, 000, 000

B. P8, 425, 000
C. P7, 560, 000
D. P9, 846, 00
Page | 248
SOLUTION 4-5
__________________________________________________________________________
1. Sales price of Salmon ordinary shares (P70 x 3,600) P252,000

Acquisition cost (P1, 980,000 x 3,600/39,600) 180,000
Gain on sale of Salmon ordinary shares P 72.000
According to PFRS 9, gains and losses on disposals of equity investments measured at fair value
through other comprehensive income (FVOCI), shall be recognized in retained earnings.
ANSWER: D
2. The receipt of stock dividend does not affect the total cost of the investment.
ANSWER: D
3. Investment in equity securities 216,000

Dividend Income 216,000
(P1.20 x 180,000 shares)
ANSWER: C

Salmon Company 36,000 shares P1,800,000 P2,664,000
Tamban, Inc. 180,000 shares 7,200,000 5,760,000
Totals P9, 000,000 P8, 424,000
P74 x 36,000 shares
P34 x 180,000 shares
Unrealized loss (P9, 000,000 – P8, 424,000) P576, 000
ANSWER: D
5. Investment in equity securities, at fair value P8, 424,000
ANSWER: B
PROBLEM 4-6
__________________________________________________________________________
Investment in Bonds ________
Shown below is an amortization schedule related to ANGLER COMPANY's 5-year, P500, 000
bond with a 7% interest rate and a 5% yield, purchased on December 31, 2023, for P543, 300.
Date Interest Interest Premium Carrying

Received Income Amortization Amount
12/31/23 P543,300
12/31/24 P35,000 P27,165 P7,835 535,465
12/31/25 35,000 26,773 8,227 527,238
12/31/26 35,000 26,362 8,638 518,600
12/31/27 35,000 25,930 9,070 509,530
Page | 249
12/31/28 35,000 25,470 9,530 500,000
The following shows a comparison of the amortized cost and fair value of the bonds at year-end:
Amortized Cost Fair Value
December 31, 2024 P535, 465 P532,500
December 31, 2025 527,328 537,500
December 31, 2026 518,600 528,250
December 31, 2027 509,530 515,000
December 31, 2028 500,000 500,000
Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2023, assuming
the bonds are held as financial assets measured at amortized cost.
b. Prepare the journal entry(ies) related to these bonds for 2024.
c. Prepare the journal entry(ies) related to these bonds for 2026.
d. What should be reported as the carrying amount of these bonds in the statement of financial position
on December 31, 2027?
SOLUTION 4-6
__________________________________________________________________________
(a) December 31, 2023

Investment in bonds 543,300
Cash 543,300
(b) December 31, 2024

Cash 35,000
(c) December 31, 2026

Cash 35,000
(d) Investment in bonds at amortized cost, Dec. 31, 2027 P509, 530
PROBLEM 4-7
__________________________________________________________________________
Investment in Bonds at FVOCI ___
(Fair Value through Other Comprehensive Income) ___
COLOONG CO. holds debt securities within a business model whose objective is achieved both.
by collecting contractual cash flows and selling the debt securities. The contractual cash flows are
solely payments of principal and interest on specified dates.
Page | 250
The following amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on
December 31, 2020, for P1,086,565. The bonds were purchased to yield 5% interest.
Date Interest Interest Premium Amortized

Received Income Amortization Cost
12/31/20 P1,086,565
12/31/21 P 70,000 P 54,328 P 15,672 1,070,893
12/31/22 70,000 53,545 16,455 1,054,438
12/31/23 70,000 52,722 17,278 1,037,160
12/31/24 70,000 51,858 18,142 1,019,018
12/31/25 70,000 50,982* 19,018 1,000,000
*Adjustment due to rounding
The following schedule presents the amortized cost and fair value of the bonds at year-end.
Fair Value Amortized Cost

December 31, 2021 P1,065,000 P1,070,893
December 31, 2022 1,075,000 1,054,438
December 31, 2023 1,056,500 1,037,160
December 31, 2024 1,030,000 1,019,018
December 31, 2025 1,000,000 1,000,000
1. What amount should be reported as investment in bonds in the statement of financial position
of Coloong Co. on December 31, 2022?
A. P1, 086,565 C. P1, 075,000
B. P1, 054,438 D. P1, 065,000
2. What amount of unrealized gain should be shown as component of other comprehensive income
in the 2022 statement of comprehensive income?
A. P26, 455 C. P10, 000
B. P20,562 D. P16,455
3. What amount of unrealized loss should be shown as component of other comprehensive income
A. P14, 393 C. P19, 340
B. P18,500 D. P1,222
4. What amount of unrealized loss should be shown as component of other comprehensive income
A. P8, 358 C. P9, 792
B. P26,500 D. P10,982
5. What amount of unrealized gain should be shown in the 2024 statement of changes in equity?
A. P26, 455 C. P25,233
B. P16,883 D. P10,982
SOLUTION 4-7
__________________________________________________________________________
Page | 251
1. Investment in bonds – FVOCI P1, 075,000
ANSWER: C
2. Fair value, Dec. 31. 2022 P1, 075,000

Carrying value, Dec. 31.2022:
Fair value, Dec. 31.2021 P1,065,000
Premium amortization (16,455) 1,048,545
Unrealized gain P 26,455
ANSWER: A
Fair value, Dec. 31. 2022 P1, 075,000

Carrying amount per amortization schedule 1,054,438
Cumulative unrealized gain, Dec. 31, 2022 P 20,562
Unrealized loss in 2021 (P1, 065,000-P1, 070,893) 5,893
Unrealized gain in 2022 P 26,455
3. Fair value, Dec. 31. 2023 P1, 056,500

Fair value, Dec. 31.2022 P1,075,000
Unrealized loss P 1,222
ANSWER: D
4. Fair value, Dec. 31. 2024 P1, 030,000

Fair value, Dec. 31.2023 P1,056,500
Unrealized loss P 8,358
ANSWER: A
5.
Unrealized Gain (Loss)
2021 (P1,065,000 fair value – P1,070,893 carrying value) P (5,893)
2022 26,455
2023 (1,222)
2024 (8,358)
Cumulative unrealized gain P10, 982
ANSWER: D
Fair value, Dec. 31,2024 P1, 030,000

Carrying amount per amortization schedule 1,019,018
Page | 252
Cumulative unrealized gain, Dec. 31, 2024 P10, 892
PROBLEM 4-8
_________________________________________________________________________
Financial Assets at FVTPL and FVTOCI _
In June 2023, SANDIGING Company, transferred the amount of P59, 300 to SB Bank current
account of DBS Securities. This pertains to purchase of 5,000 shares of William Lines to be held as
trading securities. Based on quoted price as of December 31, 2023, the market value per share is
P8.20.
Also in 2023, SANDIGING Company purchased several non-trading equity securities. The
company has elected irrevocably to present changes in fair value in other comprehensive income.
At December 31, 2023, the company had the investments in equity securities listed below. None
was held at the last reporting date.
No. of Shares Cost Market Value Per Share

San Miguel “A” 2,000 P150,000 P58.50
Seniority Bank 2,000 110,000 49.25
Multivit 5,000 54,600 9.10
Total P314, 600
Your physical count of stock certificates disclosed that stock dividend of the following issues were not
yet recorded.
Issue No. of Shares

Seniority Bank 500
Multivit 200
1. What is the carrying value of the investment in William Lines on December 31, 2023?
A. P41, 000 C. P0
B. P59,300 D. P156,312
2. What amount of unrealized loss should be shown in the 2023 statement of comprehensive
income as component of other comprehensive income?
A. P0 C. P8, 855
B. P27,155 D. P45,455
SOLUTION 4-8
___________________________________________________________________________
1. A The investment in William Lines being held for trading purposes should be carried at fair value
of P41, 000 (P8.20 x 5,000) on December 31, 2023.
2. B
Cost Market Value
San Miguel “A” P150,000 P117,000 (P58.50 x 2,000)
Seniority Bank 110,000 123,125 (P49.25 x 2,500)
Page | 253
Multivit 54,600 47,320 (P9.10 x 5,200)

P314, 600 P287, 445
Unrealized loss on non-trading equity securities
(P314, 600-P287, 445) P27, 155
PROBLEM 4-9
_________________________________________________________________________
Investment in Equity Securities _
BUKIDNON CORP. has a policy of investing idle cash in equity securities. It has made periodic
investments in its principal supplier, Nocon Company. Bukidnon currently owns 12% of Nocon's
outstanding ordinary shares.
Cherry Kosme, Bukidnon's assistant controller, has gathered the following information about the
company's investments in equity securities.
1. Bukidon has trading equity investments in Delta Corp. and Polygon Company. During-2023,
Bukidnon purchased 100,000 shares of Delta Corp. for P4,200,000; these shares have a fair value of
P4,800,000 at December 31, 2023. The investment in Polygon consists of 50,000 shares acquired in
March 2023 at P60 per share and currently has a value of P2, 160,000.
2. Bukidnon's 12% ownership in Nocon Company has a fair value of P66, 675,000 on December 31,
2023. On initial recognition, Bukidnon made an irrevocable election to present in other
comprehensive income subsequent changes in fair value of this investment in equity securities. The
securities were purchased prior to 2022 for P67,500,000 and was valued at P64,500,000 on
December 31, 2022. Bukidnon has. not changed its holdings in the current year.
Questions:
1. What amount of unrealized loss should be reported as component of other comprehensive

income on Bukidnon's December 31, 2022, statement of comprehensive income?
A. P1, 065,000 C. P825, 000
B. P0 D. P3,000,000
2. What is the cumulative unrealized gain /loss that should be shown on the statement of changes
in equity for the year ended December 31, 2023?
A P2, 175,000 unrealized gain
B. P1,065,000 unrealized loss
C. P825,000 unrealized loss
D. P1,935,000 unrealized gain
3. What amount of unrealized gain/loss should be reported on Bukidnon's income statement for
B. P240,000 unrealized loss
C. P825,000 unrealized loss
D. P1,065,000 unrealized loss
SOLUTION 4-9
___________________________________________________________________________
Page | 254
1. Fair value of Nocon securities, Dec. 31, 2022 P64, 500,000

Acquisition cost 67,500,000
Unrealized loss P 3.000.000
ANSWER: D
2. Fair value of Nocon securities, Dec. 31, 2023 P66, 675,000

Fair value of Nocon securities, Dec. 31, 2022 64,500,000
Unrealized gain in 2023 2,175,000
Unrealized loss in 2022 (3,000,000)
Cumulative unrealized loss, Dec. 31, 2023 P (825,000)
Or
Fair value of Nocon securities, Dec. 31, 2023 P66, 675,000

Acquisition cost 67,500,000
ANSWER: C
3.
Cost Fair value Unrealized Gain (loss)
Delta Corp. P4,200,000 P4,800,000 P600,000
Polygon Company 3,000,000 2,180,000 (840,000)
P7, 200,000 P6, 960,000 P (240,000)
ANSWER: B
PROBLEM 4-10
__________________________________________________________________________
Purchase of Debt and Equity Securities __
Your audit of GUAVA CORPORATION's investments in debt and equity securities reveals the
a. On January 1, 2023, X Company issued P1,000,000 in debt securities. The stated interest is 9%, with
interest payable semiannually, on June 30 and December 31. On February 1, Guava purchased these
debt securities from an investor who acquired them when they were originally issued. Guava paid the
investor an amount equal to the face value of the securities plus accrued interest. The securities were
designated as held-for-trading.
b. On June 1, Guava purchased 10,000 shares of equity securities for P50 per share. These non-trading
equity securities are to be measured at fair value through other comprehensive income. Guava paid
P13,000 broker's commission on the purchase.
1. On initial recognition, a financial asset or financial liability is measured at
A. Acquisition cost, i.e., the consideration paid or received plus any directly attributable transaction
costs to the acquisition or issuance of the financial asset or financial liability.
B. The consideration paid or received for the financial asset or financial liability.
Page | 255
C. Fair value. For items that are not measured at fair value through profit or loss, transaction costs
are also included in the initial measurement.
D. Zero.
2. The entry to record the acquisition of debt securities on February 1 is
A. Investment in trading securities 1,007,500

Cash 1,007,500
B. Investment in trading securities 992,500

Cash 1,007,500
C. Investment in trading securities 1,000,000

Unrealized loss on trading securities 7,500
Cash 1,007,500
D. Investment in trading securities 1,000,000

Cash 1,007,500
3. The entry to record the purchase of equity securities on June 1 is
A. Investment in equity securities 500,000

Broker's commission expense. 13,000
Cash 513,000
B. Investment in equity securities 513,000

Cash 513,000
C. Investment in trading securities 513,000

Cash 513,000
D. Investment in trading securities 500,000

Broker's commission expense 13,000 Cash
513,000
SOLUTION 4-10
___________________________________________________________________________
1. Fair value. For Items that are not measured at fair value through profit or loss, transaction costs are
also included in the initial measurement.
ANSWER: C
2. Investment in trading securities 1,000,000

Interest income (or Interest receivable)
(P1,000,000 x 9% x 1/12) 7,500
Page | 256
Cash 1,007,500
ANSWER: D
3. Investment in equity securities 513,000

Cash 513,000
ANSWER: B
PROBLEM 4-11
__________________________________________________________________________
Investment in Debt Securities: ___
Computation of Interest Income and Amortized Cost ___
On January 1, 2023, RAMBUTAN CORP, purchased debt securities for cash of P765, 540 to be
held as financial assets at amortized cost. The securities have a face value of P600, 000, and they
mature in 15 years. The securities carry fixed interest of 10% that is receivable semiannually, on
June 30 and December 31. The prevailing market interest rate on these debt securities is 7%
compounded semiannually.
1. The carrying value of the debt securities on December 31, 2023, at amortized cost using the
effective interest rate method is
A. P771, 840 C. P765, 540
B. P759,016 D. P600,000
2. The interest income to be reported for 2023 using the effective interest rate method is
A. P66, 524 C. P60, 000
B. P6,524. D. P53,476
SOLUTION 4-11
___________________________________________________________________________
1. Carrying value, Jan. 1, 2023 P765, 540

Amortization of premium, Jan. 1 - June 30:
Nominal interest (P600,000 x 10% × ½) P30,000
Effective interest (P765, 540 x 7% x ½) (26,794) (3,206)
Carrying value, June 30, 2023 762,334
Amortization of premium, July 1- Dec. 31:
Nominal interest 30,000
Effective interest (P762, 334 x 7%x ½) (26,682) (3,318)
Carrying value at amortized cost, Dec 31, 2023 P 759, 016
ANSWER: B
2. Interest income for 2023 (P26, 794 + P26, 682) P53, 476
ANSWER: D
PROBLEM 4-12
__________________________________________________________________________
Sale and Valuation of Non-trading Equity Securities __
Page | 257
CHICO COMPANY purchased the following non-trading equity securities during 2023:
Security Cost Fair Value Dec. 31, 2023

X P450,000 P500,000
Y 500,000 800,000
At initial recognition, Chico classified these securities as at fair value through other comprehensive
income. On July 28, 2024, Chico sold all the shares of Security Y for a total of P835,000. As of
December 31, 2024, the shares of Security X had a fair value of P200,000. No other activity occurred
during 2024 in relation to the non-trading equity securities portfolio.
1. What total amount should be credited to retained earnings as a result of the sale of Security Y
In 2024?
А. Р35, 000 C. P300, 000
B. Р335,000 D. P265,000
2. What is the cumulative unrealized gain (loss) to be reported in the statement of changes in
equity for 2024?
A. P300, 000 C. (P300, 000)
B. P150,000 D. (P250,000)
SOLUTION 4-12
___________________________________________________________________________
1. Cash proceeds P835, 000

Less: Carrying value of Security Y, Dec. 31, 2023 800,000
Realized gain on sale P35, 000
Unrealized gain (P800, 000 - P500,000) 300,000
Total amount to be credited to retained earnings P335, 000
ANSWER: B
Gains or losses on disposals of investments in equity securities that are measured at fair value through
other comprehensive income (FVOCI) shall be recognized in retained earnings. Also, any cumulative
unrealized gain or loss that was previously recognized in other comprehensive income shall be
transferred to retained earnings.
2. Cumulative unrealized gain, Dec. 31, 2023 P350, 000

Unrealized gain related to Security Y (300,000)
Unrealized loss for 2024 - Security X
(P500, 000 - P200,000) (300,000)
ANSWER: D
Alterative computation:
Security X:
Fair value, Dec. 31, 2024 P200, 000
Cost 450,000
Unrealized loss, Dec 31, 2024 P (250,000)
Page | 258
PROBLEM 4-13
__________________________________________________________________________
Financial Assets at Amortized Cost __
SINEGUELAS COMPANY purchased P160 million of 8% bonds, dated January 1, on January 1,

2023, to be held as financial assets at amortized cost. On acquisition date, the market yield bonds
with similar risk and maturity were 10%. The company paid P132 million for the price of the
bonds. Interest is received semiannually on June 30 and December 31. Due to changes in market
conditions, the fair value of the bonds at December 31, 2023, was P140 million.
1. At what amount will Sineguelas Company report its investment in the December 31, 2023,
statement of financial position?
A. P132.2 million C. P132.41 million
B. P140 million D. P160 million
2. The unrealized holding gain or loss to be classified as component of other comprehensive

income at December 31, 2023, is
A. P8.39 million holding gain C. P7.59 million holding gain
B. P8.39 million holding loss D. P 0
3. The amount of interest income to be reported in Sineguelas Company's income statement for
the year ended December 31, 2023, is
B. P12.8 million D. P13.21 million
SOLUTION 4-13
___________________________________________________________________________
1.
(P in millions)
Initial cost P 132.00
Add: Discount amortization, Jan. 1- June 30
Effective interest (P132 x 5%) P6.60
Nominal interest (P160 x 4%) 6.40 0.20
Carrying value, June 30 132.20
Add: Discount amortization, July 1-Dec. 31:
Effective interest (P132.20 x 5%) P6.61
Nominal interest (P160 x 4%) 6.40 0.21
Carrying value / Amortized cost, Dec 31 P132.41
ANSWER: C
2. No unrealized holding gain/loss shall be recognized on financial assets measured at amortized cost.
ANSWER: D
3. Interest income (P6.60 + P6.61) P13.21
ANSWER: D
PROBLEM 4-14
__________________________________________________________________________
Accounting for Non-trading Equity Securities __
Page | 259
STRAWBERRY COMPANY has the following non-trading equirt securities on December 31,
2023:
Security Shares Cost Fair Value

Danica Co. ordinary shares 4,500 P220,500 P207,000
Rose Corp. ordinary shares 15,000 540,000 525,000
Assunta, Inc. preference shares 1,200 180,000 184,800
P940,500 P916,800
All of the above securities were bought in 2023. On initial recognition, Strawberry made an irrevocable
election to present such securities at fair value through other comprehensive income. In 2024, the
company had the following transactions relating to its investments:
April 1 Sold the 4,500 ordinary shares of Danica Co. for P65 per share
May 1 Bought 2,100 ordinary shares of Rita Corp. at P75 plus broker's fee of P5,200.
Strawberry's portfolio of non-trading equity securities appeared as follows on December31, 2024:
Security Shares Cost Fair Value

Rose Corp. ordinary shares 15,000 540,000 525,000
Rita Corp. ordinary shares 2,100 157,500* 151,200
Assunta, Inc. preference shares 1,200 180,000 174,000
P877, 500 P850, 200
*The P5, 200 broker’s fee was recorded as expense
1. The amount of gain or loss on the sale of Danica Co. ordinary shares to be reported in the 2023
income statement of Strawberry should be
A. P72, 000 gain C. P85,500 loss
B. P85,500 gain D. P 0
2. The 2,100 ordinary shares of Rita Corp. purchased on May 1, 2024, should be initially
measured at
A. P151, 200 C. P162,700
B. P156,400 D. P157,500
3. Strawberry's December 31, 2024, statement of financial position should report investments in
non-trading equity securities at
A. P850, 200 C. P881,400
B. P877,500 D. P916,800
SOLUTION 4-14
___________________________________________________________________________
1. Sales price (P65 x 4,500 shares) P292, 500

Less: Carrying value, Dec. 31, 2023 207,000
Realized gain on sale of Danico Co. ordinary shares P85, 500
Page | 260
The realized gain on sale of Danica shares shall be credited to retained earnings.
ANSWER: D
2. Purchase price (P75 x 2, 100 shares) P157, 500

Add: Broker's fee 5,200
Total cost P162, 700
ANSWER: C
3. The investments in non-trading equity securities should be reported at fair value of P850, 200 on
December 31, 2024.
ANSWER: A
PROBLEM 4-15
________________________________________________________________________
Reclassification from Amortized Cost to FVPL
On January 1, 2022, ELAGRO COMPANY purchased P2,000,000 face value bonds at a price of
P1,824,800 which will yield an interest rate of 10%. The nominal interest rate on the bonds is 8%
payable annually every December 31. The company's business model is to collect contractual cash flows
that are solely payments of principal and interest.
On December 31, 2023, Elagro Company changed the business model in managing the bonds
from collecting contractual cash flows that are. solely payments of principal and interest to
realizing short term gains. The market value of the bonds on January 1, 2024, is 105.
1. What amount should be reported as interest income for 2023?

A. P184, 728 C. P182, 480
B. P160,000 D. P24,728
2. What is the carrying amount of the bonds on December 31, 2023?

A. P2, 000,000 C. P1,847,280
B. P1,872,008 D. P1,782,088
3. On reclassification date, what amount of gain on reclassification of financial asset should be

recognized by Elagro Company?
A. P120,000 C. P0
B. P187,200 D. P247,992
SOLUTION 4-15
___________________________________________________________________________
1. Acquisition price P1,824,800
Add: Discount amortization for 2022:

Effective interest (P1,824,800 x 10%) P182,480
Nominal interest (P2,000,000 x 8%) 160,000 22,480
Interest income for 2023 (P1,847,280 x 10%) P184,728

Page | 261
ANSWER: A
2. Carrying amount, Jan. 1, 2023 P1, 847,280

Add: Discount amortization for 2023:
Effective interest (P1, 847,280 x 10%) P184, 728
Nominal interest (P2, 000,000 x 8%) 160,000 24,728
Carrying amount, Dec. 31, 2023 P1, 872,008
ANSWER: B
3. Market value of bonds, Jan. 1, 2024
(P2,000,000 x 106%) P2,120,000
Carrying amount, Jan. 1, 2024 1,872,008
Gain on reclassification P 247,992
ANSWER: D
PROBLEM 4-16
__________________________________________________________________________
Dividend Income __________________________
CHERRY, INC. received dividends from its investments in ordinary shares during the year ended
December 31, 2023, as follows:
(a) A cash dividend of P720,000 is received from JJ Corporation.

(Cherry, Inc. owns a 2% interest in JJ)
(b) A cash dividend of P3,600,000 is received from VV Corporation.

(Cherry, Inc. owns a 30% interest in VV)
(c). A stock dividend of 18,000 shares from YY Company was received on December 15, 2023, on
which date the quoted market value of YY's shares was P20 per share. Cherry, Inc. owns less
than 1% of YY's ordinary shares.
What amount of dividend income should be reported by Cherry, Inc. in its 2023 income
statement?
A. P1, 080,000 C. P4,320,000
B. P4,680,000 D. P720,000
SOLUTION 4-16
___________________________________________________________________________
Dividend income:
Cash dividend received from JJ Corporation P720,000
ANSWER: D
1. Because Cherry, Inc. owns a 30% interest in W Corporation, it is presumed that it has the ability to
exercise significant influence in the financial and operating policy decisions of W Corporation.
Cherry, Inc. shall account for this investment using the equity method in accordance with PAS 28:
Accounting for Investments in Associates. Under this method, distributions of earnings (dividends)
reduce the carrying amount of the investment.
Page | 262
2. The stock dividend received from YY Company should not be recognized as income. Stock dividends
increase the number of shares owned by an investor but do not affect the total cost of the investment.
PROBLEM 4-17
__________________________________________________________________________
Dividend Income __________________________
BERRIES COMPANY owns a 5% interest in ST Corporation, which declared a cash dividend of

P3, 720,000 on November 27, 2023, to shareholders of record on December 20, 2023, payable on
January 15, 2024. In addition, on October 15, 2023, Berries Company received a liquidating
dividend of P100, 000 from VG Corporation. Berries Company owns 6% of VG Corporation.
What amount of dividend income should be included in Berries Company's income statement for
A. P186, 000 C. P191,000
B. P3,720,000 D. P181,000
SOLUTION 4-17
___________________________________________________________________________
Cash dividend received from ST Corporation

(P3, 720,000 x 5%) P186, 000
ANSWER: A
1. Dividends shall be recognized as income when the Investor's right to receive payment is established,
i.e., upon declaration by the issuer of the equity instrument.
2. Liquidating dividends are not recognized as income. They represent return of invested capital.
PROBLEM 4-18
__________________________________________________________________________
Equity Method __________________________
DURIAN CORP. purchased 40% of Associate Company's outstanding ordinary shares on

January 2, 2023, for P270 million. The book value of Associate Company's net assets
(shareholders' equity) at the purchase date totaled P450 million. Book values and fair values were
the same for all financial statement items except for inventory and buildings, for which fair values
exceeded book values by P12.5 million and P112.5 million, respectively. All inventories on hand at
the purchase date was sold during 2023. The buildings have average remaining useful lives of 15
years.
Associate Company reported net income of P110 million for the year ended December 31, 2023,
and paid cash dividends of P40 million. The fair value of Durian's investment in associate was
P300 million at December 31, 2023.
1. Of the amount paid for the acquisition of Associate Company's ordinary shares, how much is
attributable to goodwill?
A. P50 million C. P40 million
Page | 263
2. What is the investment balance at December 31, 2023?

3. At what amount will Durian Corp. report its investment income in its 2023 income statement?
SOLUTION 4-18
___________________________________________________________________________
(P in millions)
1. Purchase price P270
Less: Fair value of Associate Company’s net assets
(P450 + P12.5 + P112.5 = P575 x 40%) 230
Goodwill P 40
ANSWER: C
2. Purchase price P270

Share of net income (P110 x 40%) 44
Cash dividends received (P40 x 40%) (16)
Increase in cost of goods sold (P12.5 x 40%) (5)
Additional depreciation
(P112.5 x 40% = P45 + 15 years) (3)
Investment balance, Dec. 31, 2023 P290
ANSWER: C
The fair value of the investment in associate at year-end is not reported under the equity accounting
method.
3. Share of net Income (P110 x 40%) P44

Increase in cost of goods sold (P12.5 x 40%) (5)
Additional depreciation
(P112.5 x 40% = P45 + 15 years) (3)
Investment income P36
ANSWER: B
PROBLEM 4-19
_________________________________________________________________________
Investment in Equity Securities _____________
On January 4, 2023, TOMATO CORP. The investment paid P1, 296,000 represents for 40,000a
30% 21 ordinary shares of Baron Company.
Interest in the net assets of Baron and gave Tomato the ability to exercise significant influence over
Baron's operating and financial policy decisions. Tomato received dividends of P1 per share on
Page | 264
December 4, 2023, and Baron reported net income of P640,000 for the year ended December 31, 2023.
The market value of Baron's ordinary shares at December 31, 2023, was P32 per share. The book value
of Baron's net assets was P3,200,000 and:
● The fair market value of Baron's depreciable assets, with an average remaining useful life of 8
years, exceeded their book value by P320,000.
● The remainder of the excess of the cost of the investment over the book value of net assets
purchased was attributable to goodwill.
1. What amount of the investment cost is attributable to goodwill?

A. P240, 000 C. P336, 000
B. P96,000 D. P144,000
2. What amount of investment income should be reported in Tomato's income statement for the
year ended December 31, 2023?
A. P120, 000 C. P180, 000
B. P108,000 D. P192,000
3. What is the carrying value of the investment in Baron ordinary shares on December 31, 2023?
A. P1, 280,000 C. P1, 296,000
B. P1,436,000 D. P1,368,000
Assume that the 40,000 shares represent a 10% interest in the net assets of Baron rather than a
30% interest.
4. What amount of investment income should be reported in Tomato's income statement for the
A. P40, 000 C. P60, 000
B. P64,000 D. P180,000
5. What is the carrying value of the investment in Baron ordinary shares at December 31, 2023?
A. P1, 296,000 C. P1, 280,000
B. P1,436,000 D. P1,236,000
SOLUTION 4-19
___________________________________________________________________________
1. Acquisition cost P1,296,000

Fair value of net assets purchased
(P3,200,000 + P320,000 = P3,520,000 x 30%) P1,056,000
Goodwill P240,000
ANSWER: A
2. Share in net income (P640, 000 x 30%) P192, 000

Depreciation adjustment
(P320, 000 x 30% = P96, 000 / 8) (12,000)
Investment Income P180, 000
ANSWER: C
Page | 265
3. Acquisition cost P1, 296,000

Share in net income 192,000
Depreciation adjustment (12,000)
Dividends received (P1 x 40,000) (40,000)
Carrying value of investment, Dec. 31, 2023 P1, 436,000
ANSWER: B
4. Investment income:
Dividends received (P1 x 40,000) P40, 000
ANSWER: A
5. Investment, at fair value (P32 x 40,000 shares) P1, 280, 000
ANSWER: C
PROBLEM 4-20
__________________________________________________________________________
Equity Method __________________________
CUCUMBER CORP. bought 40% of the outstanding ordinary shares of Super Company on
January 2, 2023. At the date of purchase, the book value of Super's net assets was P77.5 million.
The book values and fair values for all statement of financial position items were the same except
for inventory and plant facilities. The fair value exceeded book value by P500,000 for the
inventory and by P2 million for the plant facilities. The estimated useful life of the plant facilities
is 8 years. All inventory acquired was sold during 2023.
Super reported net income of P14 million for the year ended December 31, 2023, and paid a cash
dividend of P3 million. Cucumber's statement of financial position as of December 31, 2023 shows an
amount of P44.1 million as its investment in Super Company.
1. What amount should Cucumber report as its income from investment in Super Company for
2. What is the acquisition cost of Cucumber's investment in Super Company?

A. P40 million C. P45.6 million
3. Of the amount paid by Cucumber for the 40% interest in Super Company, how much is
attributable to goodwill?
A. P8 million C. P8.8 million
B. P8.2 million D. P9 million
4. What should Cucumber report in Its statement of cash flows regarding its investment in Super
Company?
A. P40 million cash outflow from investing activities and P1.2 million cash inflow among operating
activities.
Page | 266
B. P45.6 million cash outflow from Investing activities and P5.3 million cash inflow among
operating activities.
C. P40 million cash outflow from financing activities and P1.2 million cash inflow among operating
activities.
D. P39.4 million cash outflow from investing activities and P3 million cash inflow among operating
activities.
SOLUTION 4-20
___________________________________________________________________________
(P in millions)
1. Share of net income (P14 x 40%) P5.6
Adjustment for inventory sold (P0.5 x 40%) (0.2)
Adjustment for depreciation (P2 x 40% = P0.8 + 8 years) (0.1)
Investment Income P5.3
ANSWER: D
2. Acquisition cost (SQUEEZE) P40.0 *

Investment Income (see no. 1) 5.3
Dividends received (P3 x 40%) (1.2)
Carrying value, December 31, 2023 (given) P44.1
* P44.1 + P1.2 - P5.3 = 240.0
ANSWER: A
3. Acquisition cost (see no. 2) P40

Fair value of net assets purchased
(P77.5 + PO.5 + P2 = P80 x 40%) 32
Goodwill P8
ANSWER: A
4. P40 million cash outflow from Investing activides and P1.2 million (dividends received) cash inflow
among operating activities,
ANSWER: A
PROBLEM 4-21
___________________________________________________________________________
Investment in Equity Securities _______________
On June 30, 2023, CABBAGE COMPANY purchased 25% of the outstanding ordinary shares of
IB Co. at a total cost of P2, 100,000. The book value of IB Co.'s net assets on acquisition date was
Page | 267
P7, 200,000. For the following reasons, Cabbage was willing to pay more than book value for the
IB Co. shares:
● IB Co. has depreciable assets with a current fair value of P180,000 more than their book value.
These assets have a remaining useful life of 10 years.
● IB Co. owns a tract of land with a current fair value of P900,000 more than its carrying amount.
● All other identifiable tangible and intangible assets of IB Co. have current fair values that are
equal to their carrying amounts.
IB Co. reported net income of P1,620,000, earned evenly during the current year ended December 31,
2023. Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary
shareholders. Market value of IB Co.'s ordinary shares at December 31, 2023, is P9 million. Cabbage
Company's financial year-end is December 31
1. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage Company?
A. P300, 000 C. P120, 000
B. P1,080,000 D. P30,000
2. What amount of Investment income should Cabbage report In its Income statement for the year
ended December 31, 2023, under the fair value method?
A. P78, 750 C, P228, 750
B. P202,500 D. P71,250
3. What amount of investment income should Cabbage report In Its income statement for the year
ended December 31, 2023, under the equity method?
A. P202, 500 C. P78, 750
B. P200,250 D. P123,750
4. Under the equity method, the carrying value of Cabbage Company's investment in ordinary
shares of IB Co, on December 31, 2023, should be
A. P2, 221,500 C. P2, 070,000
B. P2, 100,000 D. P2, 250,000
5. What amount should Cabbage Company report in its December 31, 2023, statement of financial
position as its investment in IB Co. under the fair value method?
A. P2, 250,000 C. P2, 221,500
B. P2,070,000 D. P2,100,000
SOLUTION 4-21
___________________________________________________________________________
1. Underlying value of IB Co.'s owners' equity

(P2,100,000 + 25%) P8,400,000
Carrying value of IB Co.'s owners' equity 7,200,000
Excess underlying value over book value 1,200,000
Attributable to depreciable assets P180,000
Attributable to land P900, 000 1,080,000
Goodwill P120,000
Page | 268
ANSWER: C
Underlying value of IB Co.'s owners' equity P8,400,000

Fair value of IB Co.'s net assets
(P7, 200,000 + P180, 000 + P900,000) 8,280,000
Goodwill P120,000
2. Investment income - fair value method:

Dividend received (P315, 000 x 25%) P78, 750
ANSWER: A
3. Investment income - equity method:

Share of net income (P1,620,000 x 25% x 6/12) P202,000
Depreciation adjustment
(P180, 000 x 25% = P45,000 + 10 x 6/12) (2,250)
Investment income, as adjusted P200, 250
ANSWER: B
The undervaluation of land does not affect Cabbage Company's share of net income because it is non
depreciable.
4. Acquisition cost P2,100,000

Share of net Income, as adjusted (see no. 3) 200,250
Cash dividends received (P315, 000 x 25%) (78,750)
Carrying value, Dec. 31, 2023 - equity method P2, 221, 500
ANSWER: A
5. The stock investment should be carried at its fair value of P2,250,000 (P9 million x 25%) on
December 31, 2023.
The year-end adjustment is:
Investment in equity securities 150,000

Unrealized gain on equity securities 150,000
Cost P2, 100,000

Fair value (P9 million x 25%) 2,250,000
Fair value adjustment P150, 000
ANSWER: A
PROBLEM 4-22
__________________________________________________________________________
Equity Method_____ __________________________
Page | 269
LETTUCE CO. purchased 40% of MU Corp. on April 1, 2022, for P500,000 when MU's book
value was P1,260,000. On the date of acquisition, the market value of MU's net assets equaled
their book values except for the following:
● MU's equipment has a fair value of P50,000 less than its book value. The equipment has a
remaining useful life of 10 years.
● MU's building has a fair value of P40,000 more than its book value. The building has a
remaining useful life of 20 years.
MU's results of operations in 2022 and 2023 are as follows:
2022 net income P150,000

2023 net loss P30,000
MU paid cash dividends of P20,000 and P10,000 in 2022 and 2023, respectively.
1. What amount of investment income should be reported on Lettuce Company's income

statement for the year ended December 31, 2022?
A. P44, 100 C. P61, 200
B. P58, 800 D. P45, 900
2. The investment loss to be reported on Lettuce Company's 2023 income statement is

A. P10, 800 C. P13, 200
B. P8, 100 D. P12, 000
3. What is the carrying value of the stock investment on December 31, 2022?
A. P536, 100 C. P553, 200
B. P537, 900 D. P500, 000
4. What is the carrying value of the stock investment on December 31, 2023?
A. P521, 300 C. P523, 100
B. P536, 000 D. P500, 000
SOLUTION 4-22
___________________________________________________________________________
1. Share of net income (P150,000 x 40% x 9/12) P45,000

Depreciation adjustment - equipment:
(P50,000 x 40% = P20,000 - 10 x 9/12) 1,500
Depreciation adjustment – building
(P40, 000 x 40% = P16, 000 - 20 x 9/12) (600)
Investment income in 2022 P45, 900
ANSWER: D
2. Share of net loss (P30, 000 x 40%) P (12,000)

Depreciation adjustment - equipment (P20, 000 + 10) 2,000
Depreciation adjustment - building (P16, 000 + 20) (800)
Loss from investment in 2023 P (10,800)
Page | 270
ANSWER: A
3. Acquisition cost P500, 000

Adjusted share of Income in 2021 (see no. 1) 45,900
Dividend received in 2022 (P20, 000 x 40%) (8,000)
Carrying value of Investment, Dec. 31, 2022 P537, 900
ANSWER: B
4. Carrying value of investment, Dec. 31, 2022 (see no. 3) P537, 900
Loss from investment in 2023 (see no. 2) (10,800)
Dividend received in 2023 (P10, 000 x 40%) (4,000)
Carrying value of investment, Dec. 31, 2023 P523, 100
ANSWER: C
PROBLEM 4-23
___________________________________________________________________________
Discontinuance of the Equity Method _________
KANGKONG COMPANY purchased 250,000 shares of Secret Co. ordinary shares on July 1,
2022, at P66 per share, which reflected book value as of that date. At the time of purchase, Secret
Co. had 1,000,000 ordinary shares outstanding. Kangkong had no ownership interest in Secret
prior to this purchase. Secret reported net income of P3,360,000 for the six months ended June 30,
2022. Kangkong received a dividend of P420,000 from Secret on August 1, 2022. Secret reported
net income of P7,200,000 for the year ended December 31, 2022, and again paid Kangkong
dividends of P420,000.
On January 1, 2023, Kangkong sold 100,000 ordinary shares of Secret for P68 per share and reclassified
the remaining stock as at fair value through other comprehensive income. The quoted market price of
such investment on January 1, 2023, was P69 per share. Secret reported net income of P7,440,000 for
the year ended December 31, 2023, and paid Kangkong dividends of P240,000. The fair value of Secret
ordinary shares at December 31, 2023, was P70 per share.
1. What is the carrying value of the stock investment at December 31, 2022?
A. P16, 620,000 C. P16, 380,000
B. P16,500,000 D. P9,972,000
2. The total amount of gain to be reported in the 2023 income statement is

A. P152, 000 C. P530, 000
B. P378, 000 D. P680, 000
Page | 271
3. What amount of unrealized gain should be reported in the 2023 statement of comprehensive
income as component of other comprehensive income?
A. P0 C. P528, 000
B. P150,000 D. P378,000
4. The carrying value of the retained investment to be shown in the statement of financial position
on December 31, 2023, is
A. P9, 972,000 C. P10, 350,000
B. P10, 848, 000 D. P10, 500, 000
SOLUTION 4-23
___________________________________________________________________________
1. Acquisition cost (P66 x 250,000) P16, 500,000

Share of net income (P7, 200,000 - P3, 360,000 = P3, 840,000 x 25%) 960,000
Dividends received (P420, 000 x 2) (840,000)
Investment balance, Dec. 31, 2022 P16, 620,000
ANSWER: A
2. Sales price (P68 x 100,000) P6, 800,000

Carrying value of shares sold
(P16, 620,000 x 100,000/250,000) (6,648,000)
Gain on sale of investment in stock P 152,000
Fair value of retained investment

(P69 x 150,000) P10, 350,000
Carrying amount of retained investment
(P16, 620,000 x 150,000/250,000) (9,972,000)
Gain from re-measurement P 378,000
Total gain (P152, 000 + P378, 000) P 530,000
ANSWER: C
3. Fair value, Dec. 31, 2023 (P70 x 150,000) P10, 500,000

Fair value, Jan.1, 2023 (P69 x 150,000) 10,350,000
Unrealized gain on equity securities P 150,000
ANSWER: B
4. Fair value, Dec.31, 2023 (P70 x 150,000) P10, 500,000
ANSWER: D
PROBLEM 4-24
___________________________________________________________________________
Investment in Associate Achieved in Stages: Fair Value to Equity Method____________
Page | 272
On January 2, 2022, LOVELY, INC. acquired a 15% interest in CPS Corp. by paying P8, 000,000
for 100,000 ordinary shares. On this date, the net assets of CPS Corp. totaled P40, 000,000. The
fair values of CPS Corp.'s identifiable assets and liabilities were equal to their book values. Lovely
did not have the ability to exercise significant influence over the operating and financial policies of
CPS. Lovely received dividends of P1.40 per share from CPS on October 1, 2022. CPS reported
net income of P5, 000,000 for the year ended December 31, 2022. Lovely classified the investment
as at fair value through other comprehensive income. Market price for the 100,000 shares was P9,
000,000 on December 31, 2022.
Lovely paid P30, 000,000 on January 1, 2023, for 300,000 additional CPS ordinary shares, which
represents a 25% interest in CPS. The fair value of CPS Corp.'s identifiable assets, net of liabilities, was
equal to their book values of P92, 000,000. As a result of this additional acquisition, Lovely has the
ability to exercise significant influence. over the operating and financial policies of CPS. Lovely
received a dividend of P2.70 per share on October 5, 2023. CPS reported net income of P6, 000,000 for
the year ended December 31, 2023. The investment's fair value on December 31, 2023, is P45, 000,000.
1. In the December 31, 2022, statement of financial position; what is the carrying amount of the
investment in equity securities?
A. P8, 610,000 C. P8, 000,000
B. P9,000,000 D. P8,750,000
2. What is the total amount of investment-related income that should be reported in the 2022
income statement?
A. P140, 000 C. P750, 000
B. P1,140,000 D. P1,610,000
3. What amount of gain on re-measurement to equity should be reported in the 2023 income
statement?
A. P1, 320,000 C. P0
B. P1, 080,000 D. P1, 000,000
4. What is the goodwill arising from the acquisition of additional 300,000 shares on January 1,
2023?
A. P0 C. P7, 000,000
B. P2,200,000 D. P9,000,000
5. What is the carrying amount of the investment in associate on December 31, 2023?
A. P45, 000,000 C. P38, 120,000
B. P40,320,000 D. P39,000,000
SOLUTION 4-24
___________________________________________________________________________
1. Investment in equity securities, at fair value P9,000,000
ANSWER: B
2. Dividend income (P1.40 x 100,000) P140, 000
ANSWER: A
Page | 273
3. Any previous unrealized gain or loss on the existing Interest accounted for at fair value through other
comprehensive income is not reclassified to profit or loss.
Fair value, Dec. 31, 2022 P9,000,000

Carrying amount 8,000,000
Unrealized gain - reclassified to retained earnings P1,000,000
ANSWER: C
4. Fair value of 15% existing interest P9, 000,000

Cost of 25% additional interest 30,000,000
Total cost of investment in associate P39, 000,000
Carrying amount of net assets acquired
(P92, 000,000 x 40%) P36, 800,000
Goodwill (not amortized) P 2,200,000
ANSWER: B
5. Total cost of investment in associate, Jan. 1, 2023 P39, 000,000

Cash dividend received (P2.70 x 400,000) (1,080,000)
Share in net income (P6, 000,000 x 40%) 2,400,000
Carrying amount, Dec. 31, 2023 P40, 320,000
ANSWER: B
Page | 274
AUDIT OF PROPERTY, PLANT AND

EQUIPMENT (PPE)
PROBLEM 5-1
Acquisition/Self-construction of PPE
The following independent situations relate to the acquisition/self. construction of various property,
plant, and equipment items.
Answer the question/s at the end of each situation.
1. BRADPIT, INC. has constructed a production equipment needed for the company's expansion
program. Bradpit received a P1,500,000 bid from a reputable manufacturer for the construction of the
equipment.
The costs of direct material and direct labor incurred to construct the equipment were P960,000 and
P600,000, respectively. It is estimated that incremental overhead costs for construction amount to
140% of direct labor costs.
Fixed costs (excluding interest) of P2,100,000 were incurred during the construction period. This
amount was allocated to construction on the basis of total prime costs-the sum of direct labor and
direct material. The prime costs incurred to construct the new equipment amounted to 35% of the total
prime costs incurred for the period. The company's policy is to capitalize all possible costs on
self-construction projects.
To assist in financing the construction of the production equipment, Bradpit borrowed P1.5 million at
the beginning of the 6-month construction period. The loan was for 2 years with interest at 10%.
1. What is the total cost of the self-constructed equipment?
A. P3,210,000
B. P2,610,000
C. P3,021,000
D. P3,285,000
2. The following transactions relate to IMPO COMPANY.
a. The national government grants the company a large tract of land to be used as a plant site.
The land's fair value is determined to be P1,620,000.
b. Impo Company issued 280,000 ordinary shares (par value, P50) in exchange for land and
building. The fair value of the property is determined to be P16,200,000 with the following allocation:
Land P 3,600,000
Building 12,600,000
P16.200.000
Impo Company's ordinary shares are not listed on the stock exchange, but its records show that a
block of 2,000 shares was sold by a shareholder a year ago at P70 per share, and another block of
4,000 shares was sold by another shareholder 8 months ago at P63 per share.
Page | 275
c. Impo Company constructed machinery during the year. No entry was made to remove from
the accounts for materials, labor, and overhead the following costs that are properly chargeable to the
machinery account.
Raw material used P250,000

Factory supplies used 18,000
Direct labor costs incurred 320,000
Incremental overhead caused by
construction of machinery (excluding
factory supplies used
54,000
Fixed overhead rate applied to regular
manufacturing operations
60% of direct labor cost
The cost of similar machinery would be P880,000 if it had been purchased from a dealer.
The entries required to record these transactions should include debits to

Land Buildings Machinery
A. P5,540,000 P13,720,000 P834,000
B. P5,975,556 P15,244,444 P816,000
C. P5,757,778 P14,482,222 P780,000
D. P5,220,000 P12,600,000 P834,000
3. HAGAI COMPANY is a major supplier of computer parts and accessories. To improve

delivery services to customers, the company acquired four new trucks on July 1, 2023. Described
below are the terms of acquisition for each truck.
Truck List Price Terms

No. 1 P600,000 Acquired for a cash payment of P556,000.
No. 2 P800,000 Acquired for a down payment of P80,000 cash and a 1-year,
non-interest-bearing note with a face amount of P720,000. There was no established cash price for the
equipment. The prevailing interest rate for this type of note is 10%.
No. 3 P640,000 Acquired in exchange for a computer package that the company carries in
inventory. The computer package cost P480,000 and is normally sold by Hagai Co. for P608,000.
No. 4 P560,000 Acquired by issuing 40,000 of Hagai Co.'s ordinary shares. The shares have a
par value per share of P10 and a market value per share of P13.
What is the total cost of the trucks purchased on July 1, 2023?
A. P2,418,545
B. P2,458,545
C. P2,484,000
D. P2,524,000
4. On March 11, 2023, RAMBO COMPANY acquired the plant assets of Ina Corporation in
exchange for 25,000 ordinary shares (P100 par value), which had a fair value per share of P180 on the
date of the purchase of the property. The property had the following appraised values:
Land P 800,000
Building P2,400,000
Machinery and equipment P1,600,000
Page | 276
Below is a summary of Rambo's cash outflows between the acquisition date and December 29, the
date when it first occupied the building.
Repairs to building P210,000

Construction of bases for machinery to be installed later 270,000
Driveways and parking lots 244,000
Remodeling of office space in building, including
new partitions and walls
322,000
Special assessment by the city government on land 36,000
On December 27, Rambo paid cash for machinery, P560,000 (subject to a 2% cash discount) and
freight on machinery of P21,000.
Compute the total cost of each of the following:

a. Land
b. Buildings
c. Machinery and equipment
PROBLEM 5-2
Correcting Entries for PPE
The following are PPE acquisitions for selected companies:
1. FRENCH HORN COMPANY acquired land, buildings, and equipment from a financially
distressed company, Bankrupt Corp., for a lump sum price of P2,800,000. On the acquisition date,
Bankrupt's assets had the following book and fair values:
Book Values Fair Values

Land P 800,000 P 600,000
Buildings 1,000,000 1,400,000
Equipment 1,200,000 1,200,000
French Horn decided to take a conservative position by recording the lower of the two values for each
PPE item acquired. The following entry was made:
Land
Buildings
Equipment 600,000
1,000,000
1,200,000
Cash 2,800,000
2. TRUMPET, INC. purchased factory equipment by making a P200,000 cash down payment
and signing a 3-year P300,000, 10% note payable. The acquisition was recorded as follows:
Factory equipment 530,000
Cash
Note payable
Interest payable 200,000
300,000
30,000
3. TUBA CO. purchased store equipment for P800,000, terms 2/10, n/30. The company took the
discount and made the following entry when it paid for the acquisition:
Page | 277
Store equipment 800,000

Cash
Purchase discount 784,000
16,000
4. FLUTE CORP. constructed a building at a total cost of P43,000,000. The building could have
been purchased for P45,000,000. The company's controller made the following entry:
Building 45,000,000
Cash
Profit on construction 43,000,000
2,000,000
Prepare the necessary correcting entry for each acquisition.
PROBLEM 5-3
Acquisition of Equipment on a Deferred Payment Basis
SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2023, on

installment basis. The deferred payment contract provides for a down payment of P300,000 and an
8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of
P388,020, including 10% interest. The payments are to be made on December 31 of each year,
beginning December 31, 2023. The equipment has a cash price equivalent of P2,370,000. Saxophone's
financial year-end is December 31.
1. What is the acquisition cost of the equipment?

A. P3,404,160 C. P2,370,000
B. P2,804,160 D. P3,104,160
2. The amount to be recognized on January 1, 2023, as discount on note payable is

A. P1,034,160 C. P827,160
B. P310,416 D. P 0
3. The amount of interest expense to be recognized in 2023 is

A. P 0 C. P310,416
B. P188,898 D. P207,000
4. The amount of interest expense to be recognized in 2024 is
A. P310,416 C. P207,000
B. P188,898 D. P0
5. The carrying value of the note payable at December 31, 2024, is

A. P1,689,858 C. P1,312,062
B. P1,888,980 D. P1,700,082
PROBLEM 5-4
Purchased and Self-constructed Equipment
Various equipment used by BASSOON CO. in its operations are either purchased from dealers or
self-constructed. The following items for two different types of equipment were recorded during the
calendar year 2023.
Manufacturing equipment (self-constructed):
Materials and purchased parts at gross invoice price
(Bassoon failed to take the 2% cash discount)
Imputed interest on funds used during construction
(stock financing)
Page | 278
Labor costs
Overhead costs (fixed-P40,000; variable-P60,000)
Gain on self-construction
Installation cost
P 450,000
36,000
185,000
100,000
74,000
8,600
Store equipment (purchased):
Cash paid for equipment
Freight and insurance cost while in transit
Cost of moving equipment into place at store
Wage cost for technicians to test equipment
Insurance premium paid during first year of operation on this
equipment
Special plumbing fixtures required for this equipment
Repair cost incurred in first year of operations related to this
Equipment
P 175,000
3,500
1,200
7,000
5,200
8,200
1,450
1. What is the total cost of the self-constructed equipment?
A. P674,600
B. P770,600
C. P734,600
D. P743,600
2. What is the total cost of the store equipment purchased?
A. P200,100
B. P193,700
C. P191,400
D. P194,900
PROBLEM 5-5
Noninterest-bearing Note Issued to Purchase Equipment
Page | 279
CELLO CORP. has been experiencing a significant increase in customers' demand for its product. To
expand its production capacity, Cello decided to purchase equipment from Pede Utang Company on
January 2, 2023. Cello issues a P2,400,000 5-year, noninterest-bearing note to Pede Utang for the new
equipment when the prevailing market rate of interest for obligations of this nature is 12%. The
company will pay off the note in five P480,000 installments due at the end of each year over the life
of the note. Cello's financial year-end is December 31. The appropriate present value factor of an
ordinary annuity of 1 at 12% for 5 periods is 3.60478.
1. What is the cost of the new equipment?
A. P2,112,000
B. P1,457,931
C. P1,730,294
D. P2,400,000
2. What amount of interest expense should be reported in Cello's income statement for the year
A. P174,951
B. P207,635
C. P230,400
D. P288,000
3. What is the carrying value of the note at December 31, 2025?
A. P1,440,000
B. P811,226
C. P1,480,932
D. P1,152,880
PROBLEM 5-6
Journal Entries for PPE Acquisitions
Described below are transactions related to GUITAR COMPANY.
a) The national government gives the company a large tract of land. The condition attached to
this government grant is that Guitar is to construct a plant facility on the site to provide employment
opportunities to its residents. The fair value of the land is determined to be P4 million.
b) 150,000 ordinary shares with a par value of P20 per share are issued in exchange for land and
building. The fair values of the land and building acquired are P5,400,000 and P18,900,000,
respectively. The company's stock is currently selling at P175 per share.
c) Still included in the materials, direct labor, and overhead accounts are amounts that are
properly chargeable to the machinery account. These represent costs of a machine constructed by
Guitar during the current year. These costs are:
Materials used
Factory supplies used
Direct labor incurred
Incremental overhead (over regular) arising from
construction of machine (excluding factory
supplies used)
Page | 280
Fixed overhead rate applied to regular

manufacturing operations
Cost of similar machine if it had been purchased

from an outside dealer P375,000
27,000
450,000
81,000
60% of direct labor cost
1,320,000
Prepare journal entries to record these transactions.
PROBLEM 5-7
Acquisition of PPE Items
The following information relates to PIANO COMPANY.
a) On July 1, Piano purchased the plant assets of Yokona Co., which had discontinued
operations. The following are the fair values of the plant assets acquired:
Land
Building
Machinery and equipment
Total P10,500,000
31,500,000
21,000,000
P63,000,000
Piano issued 550,000 shares of its P100 par value ordinary share capital in exchange for the above
plant assets. On the acquisition date, the stock had a fair value of P160 per share.
b) Piano expended the following amounts in cash between July 1 and December 20, the date
when the company first occupied the building:
Special assessment by city on land

Repairs to building
Construction of bases for machinery and
equipment acquired
Driveways and parking lots
Remodeling of office space in building, including new
partitions and walls P 540,000
3,150,000
4,050,000
3,660,000
4,830,000
c) On December 23, Piano paid cash for machinery, P7,800,000, subject to a 2% cash discount,
and freight on machinery of P315,000.
Based on the preceding information, calculate the cost of each of the following PPE items:
Page | 281
1. Land
A. P10,540,000
B. P14,700,000
C. P14,200,00
D. P11,040,000
2. Buildings
A. P39,480,000
B. P37,980,000
C. P31,500,000
D. P30,000,000
3. Machinery and equipment
A. P32,009,000
B. P28,959,000
C. P33,009,000
D. P21,000,000
4. Land improvements
A. P4,200,000
B. P3,660,000
C. P540,000
D. P0
5. The entry to record the purchase of Yokona's plant assets should include
A. Debit to Land of P22,666,667
B. Credit to Share Premium of P8,000,000
C. Credit to Ordinary Share Capital of P63,000,000
D. Debit to Machinery and Equipment of P29,333,333
PROBLEM 5-8
Acquisition of PPE Items
The following items are included in the PPE section of the audited statement of financial position of
DRUMS CORP. as of December 31, 2022:
Land
Buildings
Leasehold improvements
Machinery and equipment P 3,450,000
13,350,000
9,900,000
13,125,000
The following transactions occurred during 2023:

Page | 282
1. Land A was acquired for P12,750,000. In connection with the acquisition, Drums paid a
P765,000 commission to a real estate agent. Costs of P525,000 were incurred to clear the land. During
the course of clearing the land, timber and gravel were recovered and sold for P195,000.
2. Land B with an old building was acquired for P7,500,000. On the acquisition date, the fair
value of the land was P4,200,000 and the fair value of the building was P1,800,000. The old building
was demolished at a cost of P615,000 shortly after acquisition. A new building to be used as an
owner-occupied property was constructed for P4,950,000 plus the following costs:
Excavation fees
Architectural design fees
Building permit fee
Imputed interest on funds used during
construction (stock financing) P570,000
165,000
37,500
127,500
The building was completed and occupied on December 30, 2023.
3. Land C was acquired for P9,750,000 with the intention of selling it within 12 months from the
date of purchase.
4. During December 2023, costs of P1,335,000 were incurred to improve leased office space.
The related lease will terminate on December 31, 2025, and is not expected to be renewed.
5. A group of machines was purchased under a royalty agreement that provides for payment of
royalties based on units of production for the machines. The invoice price of the machines was
P1,305,000, freight costs were P49,500, installation costs were P36,000, and royalty payments for
2023 were P262,500.
Based on the preceding information, determine the balances of the following PPE items as of
December 31, 2023:
1. Land
A. P24,795,000
B. P25,410,000
C. P23,160,000
D. P22,545,000
2. Buildings
A. P19,815,000
B. P19,687,500
C. P21,322,500
D. P21,937,500
3. Leasehold improvements
A. P9,900,000
B. P0
Page | 283
C. P1,335,000
D. P11,235,000
A. P14,778,000
B. P14,515,500
C. P14,253,000
D. P14,430,000
5. Land C should be reported in the company's December 31, 2023, statement of financial
position under
A. PPE
B. Inventories
C. Non-current assets held for sale
D. Other non-current assets
PROBLEM 5-9
Determining the Cost of Specific PPE Items
ACCORDION COMPANY incurred the following expenditures in 2023:
Purchase of land
Land survey
Fees for search of title for land
Building permit fee
Temporary quarters for construction crews
Cost to demolish old building
Excavation of basement
Special assessment for street project
Dividends
Damages awarded for injuries sustained in construction
(no insurance carried)
Cost of construction
Cost of paving parking lot adjoining building
Cost of shrubs, trees, and other landscaping P7,892,000
104,000
12,000
70,000
215,000
940,000
200,000
40,000
100,000
168,000
58,000,000
800,000
660,000
Page | 284
A portion of the building site had been temporarily used by Accordion to operate a car park while the
building was being constructed. A total of P325,000 was earned by Accordion from this incidental
activity.
a) What is the cost of the land?
A. P8,896,000
B. P8,048,000
C. P9,648,000
D. P10,448,000
b) What is the cost of the land improvements?
A. P660,000
B. P1,500,000
C. P1,460,000
D. P800,000
c) What is the cost of the building?
A. P58,485,000
B. P58,160,000
C. P58,252,000
D. P59,425,000
PROBLEM 5-10
Correcting Improper Entries for a Self-constructed Asset
HARPSICHORD, INC. constructs equipment for its own use. The account below is for a
manufacturing equipment it had assembled in 2023.
EQUIPMENT
Debit Credit
Cost of dismantling old equipment
Cash proceeds from sale of old equipment
Raw materials used in construction of new equipment
Labor in construction of new machine
Cost of installation
Cost of testing the equipment
Materials spoiled in machine trial runs
Profit on construction P43,440
228,000
147,000
33,600
25,000
7,200
72,000
P36,000
Page | 285
An analysis of the details in the account disclosed the following:
a) The old equipment, which was removed before the installation of the new one, had been fully
depreciated.
b) Cash discounts received on the payments for materials used in construction totaling P9,000
were reported in the purchase discounts account.
c) The factory overhead account shows a balance of P876,000 for the year ended December 31,
2023; this balance exceeds normal overhead on regular plant activities by approximately P50,700 and
is attributable to equipment construction.
d) A profit was recognized on construction for the difference between costs incurred and the
price at which the equipment could have been purchased.
1. What is the total cost of the new equipment?
A. P486,500
B. P457,500
C. P477,500
D. P482,500
2. Prepare individual journal entries to correct the accounts as of December 31, 2023. Assume
that the nominal accounts are still open.
PROBLEM 5-11
Journal Entries for Various PPE Transactions
CYMBALS, INC. completed the following transactions during 2023:
Jan. 1 Purchased real property for P18,847,500, which included a charge of P547,500 representing
property tax for the current year that had been prepaid by the vendor. Of the total purchase price, 20%
is determined to be applicable to land and the balance to buildings. A mortgage of P11,250,000 was
assumed by Cymbals on the purchase. Cash was paid for the balance.
Feb. 5 Cymbals expended P888,000 to recondition the building because previous owners had
neglected the normal maintenance and repair requirements on the building.
May 20 The garage in the rear of the building was demolished, P135,000 being recovered on the
salvaged materials. Cymbals immediately constructed a warehouse. The cost of such construction was
P2,028,000, which was not materially different from the bids made on the construction by
independent contractors. Upon completion of the construction, city inspectors discovered that
Cymbals failed to comply with the building safety code and thus ordered the company to make
extensive modifications to the warehouse. The cost of such modifications, which could have been
avoided, was P288,000.
June 1 The company acquired a new machine in exchange for its own ordinary shares with a market
value of P600,000 (par P90,000). The new machine has a market value of P750,000.
July 1 Another machine was acquired by Cymbals. Payment was made by issuing bonds with a face
value of P1,500,000 and by paying cash of P540,000. The machine's fair value is P1,950,000.
Nov. 20 On September 1, the company engaged an independent contractor for parking lots and
landscaping at a cost of P1,638,000. The work was completed and paid for on November 20.
Dec. 31 Because the company's financial year-end is December 31, the business was closed to permit
taking the year-end inventory. On this same date, required redecorating and repairs were completed at
a cost of P225,000.
1. The journal entry to record the acquisition of real property on January 1 should include a
Page | 286
A. Debit to Land of P18,847,500

B. Debit to Buildings of P15,078,000
C. Credit to Mortgage payable of P18,300,000
D. Credit to Cash of P7,597,500
2. The transactions completed during 2023 should result in a net increase in the buildings
account of
A. P17,709,000
B. P17,421,000
C. P17,859,000
D. P17,646,000
3. The total additions to Machinery should be
A. P2,790,000
B. P2,640,000
C. P2,550,000
D. P2,700,000
4. The entry to record the acquisition of a new machine on June 1 should include a
A. Debit to Machinery of P750,000
B. Credit to Ordinary shares of P750,000
C. Credit to Share premium of P540,000
D. Debit to Machinery of P600,000
5. The entry to record the acquisition of a new machine on July 1 should include a
A. Debit to Bond discount of P90,000
B. Debit to Machinery of P2,040,000
C. Credit to Bonds payable of P960,000
D. Credit to Bond premium of P990,000
PROBLEM 5-12
Correcting Improper PPE Entries
BANJO COMPANY was organized in June 2023. In your audit of the company's books, you find the
following land, buildings, and equipment account:
LAND, BUILDINGS, AND EQUIPMENT

2023 Debit Credit
June
July
Aug.
Sept.
Dec. 7
15
30
3
29
Page | 287
1
15
15
20 Organization fees
Land site and old building
Corporate organization costs
Title clearance fees
Cost of razing old building
Salaries of Banjo Company executives
Stock bonus to corporate promoters, 6,000 ordinary shares, P50 per share market value
Real property tax
Cost of new building completed and occupied
on this date P 60,000
945,000
90,000
55,200
60,000
180,000
300,000
43,200
5,250,000
Your analysis of this account and other accounts disclosed the following additional information:
a) Banjo paid P60,000 for the demolition of the old building. It sold the scrap for P36,000 and
credited the proceeds to miscellaneous income.
b) Banjo executives did not participate in the construction of the new building.
c) The property tax was for the period July 1 - December 31, 2023.
1. The amount to be reported as organization expenses in Banjo's 2023 income statement is
A. P60,000
B. P390,000
C. P450,000
D. P90,000
2. Banjo's Land account should be adjusted by a

A. Net debit of P1,000,200
B. Net debit of P962,400
C. Net debit of P1,060,200
D. Credit of P36,000
3. The cost of the new building is
A. P5,415,000
B. P5,535,000
C. P5,355,000
D. P5,274,000
Page | 288
PROBLEM 5-13
Computation of PPE Account Balances
The audited statement of financial position of VIOLIN CO. as of December 31, 2022, shows the
following property, plant, and equipment items:
Land
Buildings
Automobiles
Leasehold improvements P 1,750,000
15,000,000
11,250,000
1,720,000
2,160,000
Violin Co. completed the following transactions during 2023:
Jan. 5 Acquired a plant facility consisting of land and a building in exchange for 750,000 shares of
Violin's ordinary share capital. On this date, Violin's ordinary shares had a market price of P25 per
share. The fair values of the land and building are P5,625,000 and P16,875,000, respectively.
Mar. 20 New parking lots, streets, and sidewalks at the acquired plant facility were completed at a
total cost of P5,760,000.
July 1 Machinery and equipment were purchased at a total invoice cost of P1,250,000. Additional
costs of P45,000 for delivery and P98,000 for installation were incurred
Sept. 1 Violin purchased a new automobile for P675,000.
Nov. 3 Violin purchased for P10,500,000, a tract of land for an undetermined future use.
Dec. 20 A machine with a cost of P425,000 and a carrying value of P89,250 at date of
disposition was scrapped without cash recovery.
Based on the preceding information, calculate the December 31, 2023, balances of the following
accounts:
1. Land
A. P6,437,500
B. P24,250,000
C. P7,375,000
D. P17,875,000
A. P12,240,000
B. P16,260,000
C. P0
D. P5,760,000
3. Buildings
Page | 289
A. P29,062,500
B. P31,875,000
C. P37,635,000
D. P15,000,000
A. P12,553,750
B. P12,218,000
C. P12,075,000
D. P12,307,250
5. Automobiles
A. P2,395,000
B. P1,720,000
C. P675,000
D. P2,444,000
PROBLEM 5-14
PPE Acquisitions
ORGAN CORP. has decided to expand its production capacity to meet the increased demand for its
product. In line with this, the company recently made several acquisitions of property, plant, and
equipment. These transactions are described below:
Acquisition 1
On June 1, 2023, Organ purchased equipment from Dongon Company under a deferred payment plan.
Organ issued a P1,000,000 four-year noninterest-bearing note to Dongon for the new equipment. The
loan agreement provides that Organ is to pay off the note in four equal installments due at the end of
each of the next four years. On the date of the acquisition, the prevailing market rate of interest for
obligations of this nature was 10 percent. The following costs were incurred to complete this
transaction:
Freight
Installation P21,250
25,000
The following are the appropriate factors for the time value of money at a 10% rate of interest:
Future value of 1 for 4 periods

Future value of an ordinary annuity for 4 periods
Present value of 1 for 4 periods
Present value of an ordinary annuity for 4 periods 1.46
4.64
0.68
3.17
Acquisition 2
Page | 290
On December 1, 2023, Organ purchased several assets of a small company. The lump sum price or
"basket price" amounted to P10,500,000 and included the assets listed below:
Book Value Fair Value

Land
Building
Totals P 3,000,000
2,000,000
3,500,000
P8,500,000 P 2,500,000
4,000,000
6,000,000
P12,500,000
During its fiscal year ended May 31, 2024, Organ incurred P400,000 for interest expense in
connection with the financing of these assets.
Acquisition 3
On March 1, 2023, Organ exchanged a number of used equipment plus cash for vacant land adjacent
to its plant facility. The land acquired is intended to be used for a parking lot. The equipment had a
combined carrying value of P1,750,000, as Organ had recorded P1,000,000 of accumulated
depreciation against these assets. The equipment had a fair market value of P2,300,000 at the time of
the transaction. To complete this transaction, Organ paid P950,000 cash for the land.
For each of the three acquisitions described above, determine the value at which Organ Company
should record the acquired assets.
1. Acquisition 1 - purchase of equipment.
A. P792,500
B. P838,750
C. P1,046,250
D. P1,206,250
2. Acquisition 2 - purchase of machinery and equipment, land, and buildings.

Machinery and Equipment
Land
Buildings
A. P3,705,882 P2,470,588 P4,323,530
B. 3,000,000 2,000,000 3,500,000
C. 2,500,000 4,000,000 6,000,000
D. 2,100,000 3,360,000 5,040,000
3. Acquisition 3 - purchase of land.
A. P2,700,000
B. P3,700,000
C. P3,250,000
D. P3,250,000
Page | 291
PROBLEM 5-15
Exchange Transactions
CARILLON COMPANY is contemplating to exchange a machine used in its operations. Carillon

received the following offers from interested companies.
1. Ayi Company offered to exchange a similar machine plus P345,000 cash.
2. Butsoy Company offered to exchange a similar machine.
3. Oneng Company offered to exchange a similar machine, but wanted P120,000 in addition to
Carillon's machine.
In addition, Carillon inquired from Soraya Corp., a dealer in machines. Carillon is to pay P1,395,000
cash plus the trade in of its old machine in order to acquire a new unit.
Presented below are the machine's cost, accumulated depreciation, and fair value:
Carillon Ayi Butsoy Oneng Soraya

Cost
Accumulated
depreciation
Fair value P2,400,000
750,000
1,380,000 P1,800,000
675,000
1,035,000 P2,205,000
1,065,000
1,380,000 P2,400,000
1,125,000
1,500,000 P1,950,000
2,775,000
For each of the above exchange situations, prepare the journal entries to record the exchange on the
books of each company. Assume that all exchange situations have commercial substance.
PROBLEM 5-16
Exchange Transactions
On July 1, 2023, BAGNET, INC. exchanged machines with Bondat Company. The following facts
pertain to these assets.
Bagnet's Asset Bondat's Asset
Original cost
Accumulated depreciation (to date of exchange)
Fair market value at date of exchange
Page | 292
Cash paid by Bagnet

Cash received by Bondat P288,000
135,000
180,000
45,000 P330,000
156,000
225,000
45,000
Although the fair values of the assets involved in the exchange had been reliably determined, certain
cash flow calculations made by both companies proved that this exchange transaction lacks
commercial substance.
What entry should be made on the books of each company to record the exchange?
PROBLEM 5-17
Acquisition, Depreciation and Disposition of PPE
Shown below are the Machinery and Equipment and Delivery Equipment accounts of the ZAMBIA
COMPANY. One-half year's depreciation is charged in the year of acquisition and/or disposition for
these assets. The client uses the straight-line method of depreciation.
a) A 2023 Isuzu Truck was purchased for P1,200,000 in June. In the same month, a 2017 Fuso
Truck was sold for P75,000. The truck was purchased in April 2019 at a cost of P630,000.
b) In June, a drill press was purchased for P33,000. Freight in was P3,000. A drill press which
had been purchased by the client in March 2019 for P30,000 was sold in June for P24,000.
c) One milling machine was purchased in July at a cost of P225,000. Installation cost which was
paid by the client and charged to Miscellaneous Expenses amounted to P10,500.
d) While analyzing the Miscellaneous Income account, your assistant found that the proceeds of
P1,500 from the sale of an electric welding machine had been credited to this account. The machine,
acquired in March 2018 had a cost of P12,000. The machine was sold in September 2023.
Machinery and Equipment

01/01/23 Balance450,000June CR 24,000
June VR 36,000
July VR 225,000
Accumulated Depreciation - Machinery and Equipment
(10% annual rate)
01/01/23 Balance207,000
Delivery Equipment
01/01/23
June 3 Balance
VR 2,850,000
1,200,000 June 7 CR 75,000
Page | 293
Accumulated Depreciation - Delivery Equipment

(20% annual rate)
01/01/23 Balance1,650,000
1. The loss on sale of Fuso Truck in June 2023 is
A. P75,000
B. P114,000
C. P51,000
D. P0
2. The correct balance of Delivery Equipment at December 31, 2023, is
A. P4,176,000
B. P3,456,000
C. P4,050,000
D. P3,420,000
3. What is the total depreciation expense for the year ended December 31, 2023?
A. P683,475
B. P882,150
C. P484,800
D. P682,800
4. What is the book value of Machinery and Equipment at December 31, 2023?
A. P428,025
B. P416,025
C. P434,025
D. P422,025
5. What is the correct balance of the Accumulated Depreciation - Delivery Equipment on

December 31, 2023?
A. P1,773,000
B. P2,277,000
C. P1,836,000
D. P1,647,000
PROBLEM 5-18
Capitalization of Interest
GONG COMPANY started construction of its administration building at an estimated cost of

P50,000,000 on January 1, 2023. The construction is expected to be completed by December 31,
2025. Gong has the following debt obligations outstanding during 2023:
Construction loan - 12% interest, payable

semiannually, issued December 31, 2022
Page | 294
P20,000,000
Short-term loan - 10% interest, payable monthly, and
principal payable at maturity on May 31, 2024
14,000,000
Long-term loan - 11% interest, payable on January 1 of
each year. Principal payable on January 1, 2027
10,000,000
Assume that the weighted-average of the accumulated expenditures during 2023 was P36,000,000.
What amount of interest incurred in 2023 would be included in the cost of the building being
constructed?
A. P4,900,000
B. P4,067,200
C. P2,400,000
D. P0
PROBLEM 5-19
MARACAS COMPANY constructs its own buildings. In 2022, a total of P1,228,500 interest was
included as part of the cost of a new building just being completed.
The following is a summary of construction expenditures in 2023:
Accumulated in 2022, including capitalized interest P18,228,500

March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Total P34,228,500
Maracas has the following outstanding loans at December 31, 2023:
12% note related directly to new building;

term, 5 years from beginning of construction P10,000,000
General borrowings:
10% note issued prior to construction of
new building; term, 10 years 5,000,000
8% note issued prior to construction of
new building; term, 5 years 10,000,000
1. The capitalization rate is
A. 8.67%
B. 10%
C. 12%
D. 8%
2. The average accumulated expenditures in 2023 is
A. P25,811,834
Page | 295
B. P24,166,667
C. P34,228,500
D. D. P25,395,167
3. The amount of avoidable interest for 2023 is
A. P3,656,500
B. P2,500,000
C. P2,739,517
D. P2,534,761
4. The amount of capitalizable interest in 2023 is
A. P2,500,000
B. P2,534,761
C. P2,739,517
D. P1,200,000
5. The total cost of the new building is
A. P35,500,000
B. P36,728,500
C. P36,763,261
D. P27,895,167
PROBLEM 5-20
On January 1, 2023, VIOLA CORPORATION contracted with Mega Construction Company to

construct a building for P40,000,000 on land that Viola purchased several years ago. The contract
provides that Viola is to make five payments in 2023, with the last payment scheduled for the date of
completion. The building was completed on December 31, 2023.
Viola made the following payments during 2023:
January 1 P4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000
Viola had the following debt outstanding at December 31, 2023:

Page | 296
a) A 12%, 4-year note dated January 1, 2023, with interest compounded quarterly. Both
principal and interest are payable on December 31, 2026. This loan relates specifically to the building
project.
P17,000,000
b) A 10%, 10-year note dated December 31, 2021, with simple interest; interest payable annually
on December 31
12,000,000
c) A 12%, 5-year note dated December 31, 2022, with simple interest; interest payable annually
on December 31 14,000,000
The following present and future value factors are taken from the present and future value tables:
3% 12%
Future value of 1 for:
4 periods 1.125511.57352
16 periods 1.604716.13039
Present value of 1 for;
4 periods 0.888490.63552
16 periods 0.623170.16312
1. In the computation of the avoidable interest for 2023, the appropriate capitalization rate is
A. 11%
B. 11.33%
C. 12%
D. 11.08%
2. What is the average accumulated expenditures in 2023?
A. P3,333,333
B. P18,300,000
C. P20,000,000
D. P40,000,000
3. What is the total avoidable interest cost in 2023?
A. P2,277,710
B. P2,184,040
C. P2,280,960
D. P2,466,070
4. What is the amount of interest that should be capitalized in 2023?
A. P2,184,040
B. P2,466,070
C. P5,013,670
D. P2,277,710
5. Viola's income statement for 2023 should include interest expense of
A. P5,013,680
Page | 297
B. P2,735,960
C. P2,277,710
D. P0
PROBLEM 5-21
Subsequent Expenditures
Some parts of XYLOPHONE COMPANY's factory building were replaced during 2023.
a) The outside corrugated covering on the factory walls was removed and replaced. The job was
done by a reputable construction firm and will extend the life of the building by four years. The cost
of the new wall was P189,000. The cost of the old wall was determined to be P150,000. The building
is 25% depreciated.
b) Dust filters installed in the interior of the factory were replaced at a cost of P90,000.
Management believes that the factory new filters will reduce health hazards and thus reduce employee
benefit cost. The original filters cost P45,000 and are one-third depreciated.
Prepare journal entries based on the preceding information.
PROBLEM 5-22
Acquisition and Depreciation of PPE
CABARA COMPANY, whose accounting year ends on December 31, provides delivery services for
packages to be taken between the city and the airport.
On January 1, 2022, the company acquired a delivery van from Togo Trucks. The company paid cash
of P1,020,000 to Togo, which included registration fees of P20,000. Insurance costs for the first year
amounted to P24,000. The truck is expected to have a useful life of five years. At the end of its useful
life, the asset is expected to be sold for P480,000, with costs relating to the sale amounting to P8,000.
On January 1, 2023, Cabara's management decided to add another vehicle, a flat-top, to the fleet. This
vehicle was acquired from a liquidation auction at a cash price of P600,000. The vehicle needed some
repairs for the elimination of rust (cost P46,000) and the replacement of all tires (cost P12,400). The
company believed it would use the flat-top for another two years and then sell it. Expected selling
price was P300,000, with selling costs estimated to be P8,000.
On January 1, 2023, a radio communication system was installed in both vehicles at a cost per vehicle
of P6,000. This was not expected to have any material effect on the future selling price of either
vehicle.
Insurance costs for 2023 were P24,000 for the first vehicle and P18,000 for the newly acquired
vehicle.
On January 1, 2024, the flat-top that had been acquired at auction broke down. The company thought
about acquiring a new vehicle to replace this one but, after considering the costs, decided to repair the
flat-top instead. The vehicle was given a major overhaul at a cost of P130,000. Although this was a
major expense, management believed that the company would keep the vehicle for another two years.
The estimated selling price in three years' time is P240,000, with selling costs estimated at P6,000.
Insurance costs for 2024 were the same as for the previous year.
1. On January 1, 2022, Cabara should record the delivery van at
A. P1,044,000
Page | 298
B. P1,052,000
C. P1,020,000
D. P1,000,000
2. What is the total cost of the flat-top vehicle?
A. P664,400
B. P600,000
C. P612,400
D. P646,000
3. What is the depreciation expense for 2022?
A. P109,600
B. P105,600
C. P114,400
D. P104,000
A. P300,600
B. P291,200
C. P293,000
D. P293,300
A. P231,833
B. P293,300
C. P212,500
D. P230,333
PROBLEM 5-23
Subsequent Expenditure; Depreciation
SHENG COMPANY constructed a building for use by the administration section of the company. The
completion date was January 1, 2016, and the construction cost was P16,800,000. The company
expected to remain in the building for the next 20 years, at which time the building would probably
have no real salvage value and have to be demolished. It is expected that demolition costs will amount
to P300,000.
In June 2022, following a storm that wreaked vast destruction in the city, the roof of the
administration building was considered to be in poor shape so the company decided to replace it. On
January 1, 2023, a new roof was installed at a cost of P4,400,000. The new roof was of a different
material to the old roof, which was estimated to have cost only P2,800,000 in the original
construction, although at the time of construction it was thought that the roof would last for the 20
years that the company expected to use the building. Because the company had spent the money
replacing the roof, it thought that it would delay construction of a new building, thereby extending the
original life of the building from 20 years to 25 years.
Page | 299
1. If the roof were treated as a separate component of the building, the total depreciation expense
for 2023 would be
A. P750,000
B. P681,566
C. P606,667
D. P672,000
2. If the roof were not treated as a separate component of the building, the total depreciation
expense for 2023 would be
A. P1,178,462
B. P861,944
C. P851,667
D. P750,000
PROBLEM 5-24
Determining the Cost of PPE
MANDOLIN CORP. uses different kinds of machines in its manufacturing process. It constructs some
of these machines itself and acquires others from the manufacturers. The following information relates
to two machines that it has recorded in 2023.
Machine A (purchased)
Cash paid for equipment P250,000

Cost of transporting machine - insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Insurance cost for 2023 4,500
Cost of training for personnel who will use the machine 7,500
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2023 to make it operate more efficiently 22,500
Machine B (self-constructed)
Cost of materials to construct machine P210,000

Labor cost to construct machine 129,000
Allocated overhead cost - electricity, factory space, etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000
Safety inspection cost prior to use 12,000
1. What is the cost of machine A?
A. P380,500
B. P358,000
C. P328,000
D. P350,500
Page | 300
2. What is the cost of machine B?
A. P471,000
B. P417,000
C. P483,000
D. P438,000
3. Which of the following combinations of procedures is an auditor most likely to perform to

obtain evidence about PPE 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. Confirming ownership and corroborating transactions through inquiries of client personnel.
PROBLEM 5-25
Various PPE Acquisitions
SITAR COMPANY commenced operations on January 1, 2022. During the following year, the
company acquired a tract of land, demolished the building on the land and built a new factory.
Equipment was acquired for the factory and, in September 2023, the plant was ready to commence
operation. A gala opening was held on September 18, with the City Mayor opening the factory. The
first items were ready for sale on September 25.
During this period, the following cash inflows and outflows occurred:
• While searching for a suitable block of land, Sitar placed an option

to buy with three real estate agents at a cost of P1,000 each.
Payment of option fees
P 3,000
• Receipt of loan from bank 3,000,000
• Payment to settlement agent for title search, stamp duties, and
settlement fees 100,000
• Payment of delinquent property taxes assumed by Sitar Company 50,000
• Payment for land 1,000,000
• Payment for demolition of old building 120,000
• Proceeds from sale of material from old building 55,000
• Payment to architect 230,000
• Payment to City Hall for approval of building construction 120,000
• Payment for safety fence around construction site 34,000
• Payment to construction contractor for factory building 2,400,000
• Payment for external driveways, parking bays and safety lighting 540,000
• Payment of interest on construction loan 400,000
• Payment for safety inspection on building 30,000
• Payment for equipment 640,000
• Payment of freight and insurance costs on delivery of equipment 56,000
• Payment of installation cost on equipment 120,000
• Payment for safety equipment surrounding equipment 110,000
Page | 301
• Payment for removal of safety fence 20,000

• Payment for new fence surrounding, the factory 80,000
• Payment for advertisements in the newspaper about the
forthcoming factory and its benefits to the community 5,000
• Payment for opening ceremony 60,000
• Payments to adjust equipment to more efficient operating levels
subsequent to initial operation 33,000
1. What is the cost of the land?
A. P1,218,000
B. P1,151,000
C. P1,166,000
D. P1,271,000
2. What is the cost of the building?
A. P3,299,000
B. P3,284,000
C. P3,200,000
D. P3,234,000
3. What is the cost of the land improvements?
A. P620,000
B. P654,000
C. P114,000
D. P134,000
4. What is the cost of the equipment?
A. P959,000
B. P849,000
C. P903,000
D. P1,359,000
5. The amount to be reported as expenses (excluding depreciation) in Sitar's income statement is
A. P60,000
B. P100,000
C. P65,000
D. P67,000
PROBLEM 5-26
Depreciation
FIDDLE COMPANY uses a large number of machines designed to produce garments. These
machines are generally depreciated at 10% per annum on a straight-line basis. In general, machines
Page | 302
are estimated to have a residual value on disposal of 10% of cost. At January 1, 2023, Fiddle had a
total of 73 machines, and its statement of financial position showed a total cost of P1,260,000 and
accumulated depreciation of P390,000.
During 2023, the following transactions occurred:
On March 1, 2023, a new machine was acquired for P45,000. This machine replaced two other
machines. One of the two replaced machines was acquired on January 1, 2020, for P24,600. It was
traded in on the new machine with Fiddler making a cash payment of P26,400 on the new machine.
The second replaced machine had cost P27,000 on October 1, 2020, and was sold for P21,900.
On July 1, 2023, a machine that had cost P12,000 on January 1, 2014, was retired from use and sold
for scrap for P1,500.
On July 1, 2023, a machine that had been acquired on July 1, 2020, for P21,000 was repaired because
its motor had been damaged from overheating. The motor was replaced at a cost of P14,400. It was
expected that this would extend the life of the machine by an extra two years.
On October 1, 2023, Fiddle fitted a new form of arm to a machine used for putting special designs
onto garments. The arm cost P3,600. The machine had been acquired on October 1, 2020, for
P30,000. The arm can be used on a number of other machines when acquired and has a 15-year life. It
will not be sold when any particular machine is retired, but retained for use on other machines.
1. What amount of gain (loss) should be recognized on the sale of the second replaced machine
on March 1, 2023?
A. P772
B. P1,425
C. P(772)
D. P(1,425)
2. What amount of gain (loss) should be recognized on the machine sold for scrap on July 1,
2023?
A. P(900)
B. P240
C. P900
D. P(240)
3. What amount of depreciation should be provided in 2023 on the machine whose motor was
replaced on July 1, 2023?
A. P1,890
B. P2,431
C. P2,972
D. P7,634
4. What amount of depreciation should be provided in 2023 on the machine arm installed on
October 1, 2023?
A. P129
B. P54
C. P60
D. P0
Page | 303
5. In testing for unrecorded retirements of equipment, an auditor is most likely to

A. Select items of equipment from the accounting records and then locate them during the plant
tour.
B. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
C. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.
PROBLEM 5-27
Separate Depreciation for Each Significant Part of PPE
HARP COMPANY, whose financial year-end is December 31, purchased a new manufacturing
equipment on April 1, 2018. The equipment has a special component that requires replacement before
the end of the equipment's useful life. This equipment was initially recognized in two accounts: one is
for the main unit and the other for the special component. Harp uses the straight-line method of
depreciation for all of its manufacturing equipment. Depreciation is recorded to the nearest month,
residual values being disregarded.
On April 1, 2022, the special component is removed from the main unit and is replaced with a similar
component. This component is expected to have a residual value of approximately 25% of cost at the
end of the main unit's useful life. Because of its materiality, the residual value will be considered in
calculating depreciation. Specific information about this equipment is as follows:
Main unit
Purchase price in 2018 P187,200
Residual value 13,200
Estimated useful life 10 years
Component 1
Purchase price P30,000
Residual value 750
Estimated useful life 6 years
Component 2
Purchase price P45,750
1. What is the depreciation charge to be recognized for the year 2018?
A. P17,790
B. P23,720
C. P16,706
D. P16,800
A. P30,154
B. P23,720
Page | 304
C. P28,548
D. P26,404
A. P27,298
B. P30,158
C. P18,720
D. P25,79
PROBLEM 5-28
Various PPE Acquisitions
KITHARA CORP. commenced operations early in 2023. During its first nine months, Kithara
acquired real estate for the construction of a building and other facilities. Operating equipment was
purchased and installed, and the company began operating activities in April 2023. The company's
accountant, who was not sure how to record some of the transactions, opened a Property, Plant, and
Equipment (PPE) ledger account and recorded debits and (credits) to this account as follows.
1. Cost of real estate purchased as a building site P1,700,000

2. Paid architect's fee for design of new building 230,000
3. Paid for the demolition of an old building on the
building site purchased in 1.
280,000
4. Paid property tax on the real estate purchased as a
building site in 1. 17,000
5. Paid excavation costs for the new building. 150,000
6. Made the first payment to the building contractor 2,500,000
7. Paid for equipment to be installed in the new building.
1,480,000 1,480,000
8. Received from sale of salvaged materials from demolishing
the old building (68,000)
9. Made final payment to the building contractor. 3,500,000
10. Imputed interest on Kithara's own construction fund. 220,000
11. Paid freight on equipment purchased. 19,000
12. Paid installation costs of equipment. 42,000
13. Paid for repair of equipment damaged during installation. 27,000
PPE ledger account balance P10,097,000
Based on the preceding information, determine the amount to be charged to each of the following:
1. Land
A. P1,717,000
B. P1,929,000
C. P2,149,000
D. P2,011,000
A. P82,000
B. P68,000
Page | 305
C. P150,000
D. PO
3. Building
A. P6,380,000
B. P6,592,000
C. P6,592,000
D. P6,000,000
4. Manufacturing equipment
A. P1,480,000
B. P1,507,000
C. P1,541,000
D. P1,568,000
5. Expenses (excluding depreciation)
A. P68,000
B. P44,000
C. P220,000
D. P27,000
PROBLEM 5-29
PPE Acquisitions and Depreciation
CORNETTE MANUFACTURING COMPANY's accounts at December 31, 2022, included the

following balances:
Machinery (at cost) P273,000
Accumulated depreciation – machinery 144,600
Vehicles (at cost; purchased November 21, 2021 140,400
Accumulated depreciation – vehicles 58,968
Land (at cost; purchased October 25, 2019) 243,000
Building (at cost; purchased October 25, 2019) 557,160
Accumulated depreciation – building 85,842
Details of machines owned at December 31, 2023, are as follows:
Machine Purchase Date Cost Useful Life Residual Value

1 Oct. 7, 2019 P129,000 5 years P7,500
2 Feb. 4, 2020 144,000 6 years 9,000
• Cornette calculates depreciation to the nearest month and uses straight-line depreciation for
all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per
annum.
• Cornette's financial year-end is December 31.

Page | 306
• The vehicles account balance reflects the total paid for two identical delivery vehicles, each of
which cost P70,200.
• On acquiring the land and building, Cornette estimated the building's useful life and residual
value at 20 years and P15,000, respectively.
The following transactions occurred from January 1, 2023:
2023
Jan. 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326
and installation costs of P5,274 were paid in cash. The useful life and residual value were estimated at
five years and P12,000, respectively
June 22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four
new tires costing P1,035 were paid for in cash.
Aug. 28Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of
exchange. The fair value of machine 1 at the date of exchange was P34,500. The office furniture
originally cost P108,000 and, to the date of exchange, had been depreciated by P72,300 in the
previous owner's books. Cornette estimated the office furniture's useful life and residual value at eight
years and P1,620, respectively
Dec. 31 Recorded depreciation.
2024
Apr. 30 Paid for repairs and maintenance on the machinery amounting to P2,784.
May 25 Sold one of the vehicles bought on November 21, 2021, for P19,800 cash.
June 26 Installed a fence around the property at cost of P16,500. The fence has an
estimated useful life of 10 years and zero residual value. (Debit the cost to a Land Improvements asset
account.)
2025
Jan. 5 Overhauled machine 2 at cost of P36,000, after which Cornette estimated its remaining life at
one additional year and revised its residual value to P15,000.
June 20 Traded in the remaining vehicle bought on November 21, 2021, for a new vehicle. A trade-in
allowance of P11,100 was received and P69,900 was paid in cash.
Oct. 4 Scrapped the vehicle bought on June 22, 2023, as it had been so badly damaged in a traffic
accident that it was not worthwhile repairing it.
1. Machine 3, purchased on January 3, 2023, should be recorded at
A. P171,000
B. P177,600
C. P165,600
D. P159,000
Page | 307
2. The second-hand vehicle purchased on June 22, 2023, should be recorded at
A. P45,600
B. P46,635
C. P47,565
D. P48,600
3. The office furniture acquired on August 28, 2023, should be recorded at
A. P34,500
B. P37,500
C. P35,700
D. P33,825
4. The gain to be recognized on the exchange of machine 1 for office furniture on August 28,
2023, should be
A. P1,875
B. P0
C. P3,675
D. P675
5. The total depreciation for 2023 is
A. P142,198
B. P126,391
C. P142,716
D. P142,591
6. The gain (loss) to be recognized on the sale of vehicle on May 25, 2024, is
A. P(558)
B. P(4,630)
C. P558
D. P4,630
7. The total depreciation expense for 2024, is
A. P112,987
B. P117,059
C. P117,434
D. P116,430
8. After the overhaul, machine 2's revised annual depreciation is
A. P22,560
B. P50,192
C. P26,100
Page | 308
D. D. P33,300
9. What is the cost of the new vehicle acquired on June 20, 2025?
A. P81,000
B. P69,900
C. P58,800
D. P91,398
10. The total depreciation expense for 2025 is
A. P114,678
B. P118,593
C. P118,218
D. P108,288
PROBLEM 5-30
Different Depreciation Methods
Your audit of LYRE COMPANY's property, plant, and equipment disclosed the following data at
December 31, 2023
A S S E T
I E T I
Original Cost P70,000 P102,000 P160,000 P160,000
Year purchased 2018 2019 2020 2022
Useful life 10 yrs. 15,000 hrs. 15 yrs. 10 yrs.
Salvage value P 6,200 P6,000 P10,000 P10,000
Depreciation
method Sum-of- years'-digits
Working hours
Straight-line declining-
balance
Accumulated
depreciation
through 2023
P46,400
P70,400 P30,000 P32,000
You noted that the client's policy on depreciation is that no depreciation is recorded in the year an
asset is purchased, and full year depreciation is provided in the year an asset is disposed of.
1. On May 5, Asset I was sold for P26,000 cash. The company's bookkeeper recorded this
retirement in the following manner in the cash receipts journal:
Cash 26,000
Asset J 26,000
Page | 309
2. On December 31, it was determined that Asset E had been used 2,100 hours during 2024.
3. On December 31, before computing depreciation expense on Asset R, the management of

Lyre decided the useful life remaining from January 1, 2024, was 10 years.
4. On December 31, it was discovered that a plant asset purchased in 2023 had been expensed
completely in the year. This asset costs P44,000 and has a useful life of 10 years and no salvage value.
Management has decided to use the double-declining balance method for this asset, which can be
referred to as "Asset C".
1. The 2024 depreciation expense on Asset J is
A. P6,960
B. P18,229
C. P6,364
D. P5,800
2. The gain to be reported on the sale of Asset J is
A. P8,200
B. P9,360
C. P8,764
D. P0
3. The 2024 depreciation expense on Asset E is
A. P17,600
B. P19,440
C. P13,440
D. P14,280
4. The 2024 depreciation expense on Asset R is
A. P17,143
B. P12,000
C. P13,000
D. P5,455
5. The total depreciation expense in 2024 on the above-mentioned PPE items is
A. P65,640
B. P63,880
C. P66,800
D. P66,640
6. Prepare the necessary adjusting journal entries for the year 2024, including the appropriate
depreciation expense on the above- mentioned items.
Page | 310
PROBLEM 5-31
PPE Acquisition and Depreciation
The following data pertain to UKULELE CORPORATION's property, plant, and equipment for 2023.
Audited balances at December 31, 2022:

DEBIT CREDIT
Land P 7,500,000
Buildings 30,000,000
Accumulated depreciation – Buildings 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation –
Delivery equipment 5,750,000
Accumulated depreciation - Delivery equipment 4,230,000
Depreciation data:
Depreciation Method Useful Life
Buildings 150% declining-balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years'-digits 4 years
Leasehold Improvements Straight-line -
Transactions during 2023 and other information are as follows:
a) On January 2, 2023, Ukulele purchased a new truck for P1,000,000 cash and trade-in of a
2-year-old truck with a cost of P900,000 and a book value of P270,000. The new truck has a cash
price of P1,200,000; the market value of the trade-in is not known.
b) On April 1, 2023, a machine purchased for P575,000 on April 1, 2018, was stolen. Ukulele
recovered P387,500 from its insurance company.
c) On May 1, 2023, costs of P8,400,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on December 31,
2029.
d) On July 1, 2023, machinery and equipment were purchased at a total invoice cost of
P7,000,000; additional costs of P125,000 for freight and P625,000 for installation were incurred.
e) Ukulele determined that the delivery equipment comprising the P5,750,000 balance at
January 1, 2023, would have been depreciated at a total amount of P900,000 for the year ended
December 31, 2023.
The salvage values of the depreciable assets are immaterial. The policy of Ukulele Corporation is to
compute depreciation to the nearest month.
Based on the preceding information, compute the following:
1. Depreciation expense for 2023 on Buildings
A. P1,405,350
B. P929,700
C. P1,200,000
D. P1,800,000
Page | 311
2. Depreciation expense for 2023 on Machinery and equipment
A. P2,637,500
B. B P2,981,875
C. P2,651,875
D. P2,594,375
3. Depreciation expense for 2023 on Delivery equipment
A. P1,110,000
B. P1,200,000
C. P1,380,000
D. P1,020,000
4. Depreciation expense for 2023 on Leasehold improvements
A. P700,000
B. P1,050,000
C. P840,000
D. P933,333
5. Accumulated depreciation - Buildings, December 31, 2023
A. P7,507,200
B. P7,982,850
C. P7,777,500
D. P8,377,500
6. Accumulated depreciation December 31, 2023 Machinery and equipment,

A. P8,644,375
B. P8,556,875
C. P8,600,000
D. P8,844,375
7. Accumulated depreciation - Delivery equipment, December 31, 2023
A. P5,430,000
B. P4,620,000
C. P4,710,000
D. P4,800,000
8. Gain (loss) on trade in of truck on January 2, 2023
A. P(200,000)
B. P200,000
C. P(70,000)
D. P70,000
Page | 312
PROBLEM 5-32
Depreciation and Maintenance Charges of Machine Components
SNARE DRUM COMPANY buys a machine for P228,600 on January 1, 2020. The maintenance
costs for the years 2020-2023 are as follows:
Year Cost
2020 P13,500
2021 10,800
2022 65,700*
2023 18,900
2020
* includes P54,900 for cost of a new motor installed in December 2022.
Snare Drum recorded the cost of the machine frame in one account at a cost of P176,400 and the
motor was recorded in a second account at a cost of P52,200. Straight-line method of depreciation is
used with a useful life of 10 years for the frame and 4 years for the motor. Residual values are
immaterial and thus ignored in the computation of depreciation charges.
1. What is the total machine-related expenses in 2020?
A. P44,190
B. P30,690
C. P70,650
D. P36,630
2. What amount of loss should be recognized on the replacement of motor in 20237
A. P10,800
B. P13,050
C. P26,100
D. P0
3. What is the depreciation expense in 2022?
A. P31,365
B. P17,640
C. P30,690
D. P44,415
A. P54,540
B. P41,490
C. P89,775
D. D. P42,165
A. P42,030
B. P31,365
C. P52,965
D. P50,265
Page | 313
PROBLEM 5-33
Computation of Depreciation
BUGLE COMPANY's property, plant, and equipment and related accumulated depreciation accounts
had the following balances at December 31, 2022:
Class of PPE Cost Accumulated Depreciation

Land P 3,900,000
Buildings 36,000,000 P7,962,000
Machinery and equipment 23,250,000 5,886,000
Transportation equipment 3,960,000 2,586,000
Leasehold improvements 6,630,000 3,315,000
Class of PPE Depreciation Method Useful Life

Land improvements Straight-line 12 years
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Transportation equipment 150% declining balance 5 years
Leasehold improvements Straight-line 8 years
Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are
considered immaterial.
Transactions during 2023 and other information are described below:
a) On January 5, 2023, a plant facility consisting of land and a building was purchased from
Torotot Company for P18,000,000. Of this amount, 20% was allocated to land.
b) On April 3, 2023, new parking lots, streets, and sidewalks at the purchase plant facility were
completed at a total cost of P5,760,000. These expenditures had an estimated useful life of 12 years.
c) The leasehold improvements were completed on December 31, 2019, and had an estimated
useful life of 8 years. The related lease, which would have terminated on December 31, 2025, was
renewable for an additional 4-year term. On April 30, 2023, Bugle exercised the renewal option.
d) On July 1, 2023, machinery and equipment were purchased at a total invoice cost of
P7,500,000. Additional costs of P300,000 for delivery and P900,000 for installation were incurred.
e) On August 31, 2023, Bugle purchased a new automobile for P450,000.
f) On September 29, 2023, a truck with a cost of P720,000 and a carrying amount of P243,000
on the date of sale was sold for P345,000. Depreciation for the 9 months ended September 30, 2023,
was P70,560.
g) On December 22, 2023, a machine with a cost of P510,000 and a carrying amount of P89,250
at date of disposition was scrapped without cash recovery.
Based on the preceding information, calculate the 2023 depreciation expense on each of the following
classes of PPE.
Page | 314
A. P480,000
B. P360,000
C. P320,000
D. P120,000
2. Buildings
A. P2,546,280
B. P3,024,000
C. P2,762,280
D. P1,682,280
A. P2,325,000
B. P3,195,000
C. P1,597,500
D. D. P2,760,000
4. Transportation equipment
A. P363,132
B. P454,860
C. P433,692
D. P527,760
5. Leasehold improvements
A. P828,750
B. P552,500
C. P663,000
D. P1,326,000
PROBLEM 5-34
Acquisition and Depreciation
DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in the demand for
its products over the last several years. This prompted the company to obtain additional
manufacturing facility. A real estate firm located an available factory near Debby's production facility,
and Debby agreed to purchase the factory and used machinery from Que Company on October 1,
2022. Renovations were necessary to convert the factory for Debby's manufacturing use.
The terms of the agreement required Debby to pay Que P1,500,000 when renovations started on
January 1, 2023, with the balance to be paid as renovations were completed. The overall purchase
price for the factory and machinery was P12,000,000. The building renovations were contracted to
Malibay Construction Company at P3,000,000. The payments made, as renovations progressed during
2023, are shown below. The factory was placed in service on January 1, 2024.
Que Malibay
January 1 P 1,500,000
April 1 2,700,000 P 900,000
Page | 315
October 1 3,300,000 900,000

December 31 4,500,000 1,200,000
P12,000,000 P3,000,000
On January 1, 2023, Debby obtained a 2-year, P3 million loan with a 12% interest rate to finance the
renovation of the acquired factory. This is Debby's only outstanding loan during 2023.
Debby's policy regarding purchases of this nature is to use the appraisal value of the land for book
purposes and prorate the balance of the purchase price over the remaining items. The building had
originally cost Que P9,000,000 and had a net book value of P1,500,000, while the machinery
originally cost P3,750,000 and had a net book value of P1,200,000 on the date of sale. The land was
recorded on Que's books at P1,200,000.
The following values were determined based on appraisal conducted by independent appraisers at the
time of acquisition.
Land P8,700,000
Building 3,150,000
Machinery 1,350,000
Gin G. Neer, Debby's chief engineer estimated that the renovated plant would be used for 15 years,
with an estimated residual value of P900,000. Neer estimated that the productive machinery would
have a remaining useful life of 5 years and residual value of P90,000. Debby's depreciation policy is
to apply the 200% declining balance method for machinery and the 150% declining balance method
for the plant. One-half year's depreciation is taken in the year the plant is placed in service and
one-half year is allowed when the property is disposed of or retired.
Determine the amounts to be recorded on the books of Debby Corp. as of December 31, 2023, for
each of the following properties.
1. Land
A. P7,909,000
B. P9,060,000
C. P8,700,000
D. P10,909,000
2. Building
A. P5,670,000
B. P6,223,600
C. P3,223,600
D. P5,310,000
3. Machinery
A. P1,227,300
B. P1,098,000
C. P1,335,300
D. P990,000
Calculate the 2024 depreciation expense for each of the following properties.
Page | 316
4. Building
A. P238,500
B. P311,180
C. P283,500
D. P265,500
5. Machinery
A. P180,000
B. P198,000
C. P219,600
D. P227,460
PROBLEM 5-35
Acquisition, Depreciation and Disposition of Machinery
The TGR COMPANY commenced operations on January 1, 2019. The company's machinery account
is shown below.
Date Particulars Debit Credit Balance

1/1/19 Purchase P157,200
120,000
132,000 P409,200
9/30/19 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
10/3/19 Freight and installation 6,000 487,200
12/31/19 Depreciation P97,440 389,760
2020 Installment payments for acquisition on Sept. 30, 2017
144,000
533,760
6/30/20 Purchase 240,000 773,760
12/31/20 Depreciation 154,752 619,008
6/30/21 Acquisition - trade in of old machine
150,000
769,008
12/31/21 Depreciation 153,802 615,206
1/1/22 Sale 71,250 543,956
12/31/22 Depreciation 108,791 435,165
10/1/23 Sale 24,000 411,165
12/31/23 Depreciation 82,233 328,932
The details of the transactions are as follows:
a) On September 30, 2019, a machine was purchased on an installment basis. The list price was
P180,000, but 12 payments of P18,000 each were made by the company. Only the monthly payments
were recorded in the machinery account starting with September 30, 2019. Freight and installation
charges of P6,000 were paid and charged to the machinery account on October 3, 2019.
b) On June 30, 2020, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2020.
Page | 317
c) On June 30, 2021, the machine acquired for P157,200 was traded for a larger one having a list
price of P279,000. Allowance of P129,000 was received on the old machine, the balance of the list
price being paid in cash and charged to the machinery account.
d) On January 1, 2022, the machine acquired on January 1, 2019 with cost of P132,000 was sold
for P75,000. The cost of removal and crating totaled P3,750.
e) On October 1, 2023, the machine purchased on January 1, 2019 was sold for P24,000 cash.
Assume a 5-year useful life for TGR Company's machinery.
1. What is the total amount of gain on the sale/trade-in of the machinery acquired on January 1,
2019?
A. P50,400
B. P40,200
C. P36,450
D. P86,850
2. What is the adjusted balance of the Machinery account on December 31, 2023?
A. P694,200
B. P705,000
C. P700,200
D. P703,950
3. What is the adjusted balance of the Accumulated depreciation account on December 31,
2023?
A. P465,600
B. P457,140
C. P462,240
D. P397,740
4. What is the correct total depreciation provision for the years 2019 – 2023?
A. P737,400
B. P734,040
C. P728,940
D. P669,540
5. The entry to correct the depreciation provision for the years 2019-2023 should include a
debit (credit) to Depreciation Expense Retained Earnings
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249
PROBLEM 5-36
Acquisition and Depreciation
Page | 318
URBANO COMPANY's property, plant and equipment consist of the following:
Furniture and equipment P1,045,000

Delivery equipment 1,637,000
Leasehold improvements 363.000
Total P3,045,000
Accumulated depreciation (936.500)
Net book value P2,108,500
The building under lease was renovated at a cost of P363,000 which was booked as leasehold
improvements on September 30, 2023. These improvements will be depreciated over 5 years. No
depreciation on these improvements was recorded as at December 31, 2023.
On May 31, 2023, the company bought new computers totaling P325,000. In addition to the cost, it
paid additional charges which were taken up as Repairs expense. These are delivery charges P12,500;
installation cost - P11,300; and testing cost - P6,520. The estimated useful life of these computers is 4
years. No depreciation was provided on the equipment as of December 31, 2023.
Urbano Company opened additional stores in nearby localities. To service more deliveries, additional
3 units of delivery equipment were bought on installment basis on December 29, 2023. The
installment price was P1,200,000 but the cash price was P1,000,000. The terms are P200,000 down
payment and the balance payable in four equal quarterly installments. A non-interest bearing
promissory note was issued for the unpaid portion on December 30, 2023. The down payment of
P200,000 was recorded as a debit to Delivery equipment and a credit to Cash.
1. The total cost of the company's Property, plant and equipment at December 31, 2023, is
A. P3,868,800
B. P4,075,320
C. P4,238,320
D. P3,875,320
2. What is the net book value of the company's Property, plant and equipment at December 31,
2023?
A. P2,862,332
B. P2,868,852
C. P3,231,852
D. P2,938,820
PROBLEM 5-37
Depreciation and Error Correction
The Delivery trucks account of your client, ALPHORN COMPANY, had a balance of P2,820,000 on
January 1, 2021, which included the following:
Page | 319
Truck No. Acquisition Date Cost

1 January 1, 2018 P 540,000
2 July 1, 2018 660,000
3 January 1, 2020 900,000
4 720,000
P 2,820,000
The Accumulated depreciation - Delivery trucks account had a balance of P906,000 on January 1,
2021. This amount represents depreciation on the four trucks from the respective dates of acquisition,
based on a 5-year life, no salvage value. No charges had been made against this account before
January 1, 2021.
Transactions completed during the period January 1, 2021, through December 31, 2024, and the
entries made to record them were as follows:
July 1, 2021
Truck No. 3 was traded for a larger one (Truck No. 5), the agreed price of which was P1,020,000.
Alphorn paid the dealer P500,000 cash on the transaction. The entry was:
Delivery trucks 500,000

Cash 500,000
January 1, 2022
Truck No. 1 was sold for P110,000. The entry was:
Cash 110,000
July 1, 2023
A new truck (No. 6) was purchased for P1,080,000 cash and was debited at that amount to the
Delivery trucks account. (Assume Truck No. 2 was not retired.)
July 1, 2023
Truck No. 4 was severely damaged in an accident and was sold as junk for P21,000 cash. Alphorn
received P75,000 from the insurance company. The entry made by the accountant was:
Cash 96,000
Sales 21,000
Entries for depreciation had been made at the end of each financial year as follows:
Year Depreciation Expense
2021 P609,000
2022 633,000
2023 733,500
2024 834,000
1. What amount of gain (loss) should have been recognized on the trade in of Truck No. 3 on
July 1, 2021?
A. P(130,000)
B. P230,000
C. P(110,000)
D. P0
2. Alphorn's net income for 2021 was overstated (understated) by

Page | 320
A. P77,000
B. P110,000
C. P(33,000)
D. P33,000
3. The gain (loss) on the sale of Truck No. 1 on January 1, 2022, was
A. P110,000
B. P2,000
C. P(108,000)
D. P(2,000)
4. Alphorn's net income for 2022 was understated by
A. P155,000
B. P153,000
C. P2,000
D. P 151,000
5. What amount of loss should have been recognized on the sale of Truck No. 4 on July 1, 2023?
A. P267,000
B. P192,000
C. P288,000
D. P213,000
6. Alphorn's net income for 2023 was overstated (understated) by
A. P213,000
B. P(70,500)
C. P(283,500)
D. P(213,000)
7. What amount of depreciation should have been recorded in 2024?
A. P414,000
B. P552,000
C. P420,000
D. P834,000
PROBLEM 5-38
Acquisition and Depreciation of Various PPE Items
Page | 321
BAGPIPE MANUFACTURING COMPANY began operations on October 1, 2021. The company's

accountant has started to gather pertinent information about each of the company's property, plant, and
equipment as shown below. When he was about to prepare a schedule of PPE and depreciation, he
was assigned to maintain the books of the company's foreign operations. You have been asked to
assist in the preparation of this schedule. In addition to ascertaining that the summarized data below
are correct, you have accumulated the following information from the company's records and
personnel.
a) Bagpipe computes depreciation from the first of the month of acquisition to the first of the
month of disposition.
b) Land A and Building A were purchased from Pobre Company. Bagpipe paid P12,300,000 for
the land and building together. At the time of acquisition, the land had a fair value of P1,350,000 and
the building had a fair value of P12,150,000.
c) Land B was acquired on October 3, 2021, in exchange for 37,500 ordinary shares of Bagpipe.
On the acquisition date, Land B had a fair value of P1,365,000 and the company's P5 par value
ordinary shares had a fair value of P35 per share.
d) Construction of Building B on the newly acquired land began on October 1, 2022. By

September 30, 2023, Bagpipe had paid P4,800,000 of the estimated total construction costs of
P6,750,000. It is estimated that the building will be completed and occupied by July 2024.
e) Certain equipment was donated to the corporation by the national government. An

independent appraisal of the equipment when donated placed the fair market value at P450,000 and
the salvage value at P45,000.
f) Machinery A's total cost of P2,473,500 includes installation cost of P9,000 and normal repairs
and maintenance of P223,500. Salvage value is estimated at P90,000. It was sold on February 1, 2023,
for P1,600,000.
g) On October 1, 2022, Machinery B was acquired with a down payment of P86,100 and the
remaining payments to be made in 11 annual installments of P90,000 each, beginning October 1,
2022. The prevailing interest rate was 8%. The following data were abstracted from present value
tables (rounded):
10 years 11 years 15 years
Present value of 1 at 8% 0.463 0.429 0.315
Present value of an ordinary
annuity of 1 at 8% 6.710
7.139
8.559
Land A
Acquisition date: October 1, 2021
Building A
Salvage value: P600,000
Depreciation method: Straight-line
Depreciation expense:
Year ended Sept. 30, 2022
P261,750
Page | 322
Land B
Building B
Acquisition date: Under construction
Cost: P4,800,000 to date
Salvage value: P 0
Estimated life: 30 years
Depreciation expense:
Year ended Sept. 30, 2022
P0
Donated equipment
Depreciation method: 150% declining balance
Machinery A
Depreciation method: Sum-of-the years'-digits (SYD)
Machinery B
Salvage value: P 0
1. What is the cost of Land A?
A. P1,350,000
B. P12,150,00
C. P11,070,000
D. P1,230,000
2. What is the cost of Building A?
A. P1,350,000
B. P12,150,00
C. P11,070,000
D. P1,230,000
3. What is the estimated useful life of Building A?
A. 42 years
B. 40 years
C. 44 years
D. 46 years
4. What is the depreciation expense on Building A for the year ended September 30, 2023?
Page | 323
A. P261,750
B. P288,750
C. P523,500
D. P577,500
5. What is the cost of Land B?
A. P1,552,500
B. P427,500
C. P1,365,000
D. P1,125,000
6. What is the depreciation expense on Building B for the year ended September 30, 2023?
A. P120,000
B. P168,750
C. P288,750
D. P0
7. At what amount should the donated equipment be measured and recognized?
A. P450,000
B. P405,000
C. P495,000
D. P0
8. What is the depreciation expense on the donated equipment for the year ended September 30,
2022?
A. P0
B. P74,250
C. P60,750
D. P 67,500
9. What is the depreciation expense on the donated equipment for the year ended September 30,
2023?
A. P60,750
B. P51,638
C. P57,375
D. P 67,500
10. What is the cost of Machinery A?
A. P2,473,500
B. P2,250,000
C. P2,160,000
D. P2,151,000
Page | 324
11. What is the depreciation expense on Machinery A for the year ended September 30, 2022?
A. P500,000
B. P529,667
C. P480,000
D. P478,000
12. What is the depreciation expense on Machinery A for the year ended September 30, 2023?
A. P140,000
B. P113,426
C. P130,926
D. P175,000
13. What amount of gain (loss) should be recognized on the sale of Machinery A on February 1,
2023?
A. P0
B. P60,000
C. P5,000
D. P(30,000)
14. What is the cost of Machinery B?
A. P728,610
B. P731,670
C. P780,000
D. P685,434
15. What is the depreciation expense on Machinery B for the year ended September 30, 2023?
A. P36,430
B. P39,000
C. P36,584
D. P34,272
Page | 325
PROBLEM 5-39
Acquisition and Disposition of Equipment
You are engaged to audit the financial statements of CORNET COMPANY for the year ended
December 31, 2023. You gathered the following information pertaining to the company's equipment
and accumulated depreciation accounts.
EQUIPMENT
1.1.23 BalanceP446, 000 9.1.23 No. 6 sold P9,000
6.1.23 No.12 36, 000 12.31.23 Balance474,000
9.1.23 Dismantling
of No. 6
1,000
P483,000 P483,000
ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.23 BalanceP271, 400 1.1.23 BalanceP224,000
12.31.23 2020
Depreciation
47,400
P271, 400 P271,400
The following are the details of the entries above:
1. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is
seven years old as of December 31, 2023.
2. The following adjusted balances appeared on your last year's working papers:
Equipment P446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 2016 at a cost of P30,000 and was sold on
September 1, 2023, for P9,000.
4. Included in charges to the repairs expense account was an invoice covering installation of
Machine No. 12 in the amount of P2,500.
5. It is the company's practice to take a full year's depreciation in the year of acquisition and
none in the year of disposition.
1. What is the gain (loss) on the sale of Machine No. 6?

A. P(4,000) C. P(1,000)
B. P8,000 D. P0
2. What is the equipment account balance on December 31, 2023?

A. P454,500 C. P475,500
B. P452,000 D. P484,500
3. What is the total depreciation expense on equipment for the year ended December 31, 2023?
A. P44,600 C. P51,450
B. P45,846 D. P45,450
Page | 326
4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on
September 1, 2023?
A. Loss on sale of equipment 1,000
Equipment 22,000
A. Loss on sale of equipment 4,000
Equipment 22,000
B. Accumulated depreciation 21,000
Equipment 21,000
D. Accumulated depreciation 30,000
Equipment 22,000
Gain on sale of equipment 8,000
A. Accumulated depreciation 1,950

Depreciation expense 1,950
B. Accumulated depreciation 2,800
C. Accumulated depreciation 1,554
D. Accumulated depreciation 4,050
5. What adjusting entry should be prepared on December 31, 2023, to correct the amount of
depreciation recorded on company books?
PROBLEM 5-40
Equipment Acquired Under Finance Lease (Lessee has a purchase option)
HORNPIPE COMPANY has a long-standing policy of acquiring company equipment by leasing. On

January 1, 2022, the company entered into a lease for a new machine. The lease contract provides that
annual payments will be made for 5 years. The payments are to be made in advance on December 31
of each year. At the end of the 5- year period, Hornpipe may purchase the machine and is reasonably
certain to exercise such purchase option. The estimated economic life of the machine is 12 years.
Hornpipe uses the calendar year for reporting purposes and depreciates its other equipment using the
straight-line method.
In addition, the following information about the lease is also available:
Annual lease payments P165,000

Purchase option price P75,000
Estimated fair market value of the machine
after 5 years
1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment January 1, 2009
The following data are abstracted from the present value tables:
Present value of 1 for 5 periods at 10% 0.62092
Present value of an annuity due for 5 periods at 10% 4.16986
Present value of an ordinary annuity for 5 periods at 10% 3.79079
Page | 327
1. What is the amount to be capitalized as the cost of the right of use asset for the lease of the
machine?
A. P672,049 C. P734,596
B. P837,232 D. P763,027
2. What is the amount of interest expense to be recognized for the year ended December 31,
2023?
A. P46,156 C. P34,271
B. P56,960 D. P103,116
3. How much depreciation should be provided on the leased equipment for the year ended
December 31, 2022?
A. P63,586 C. P146,920
B. P56,004 D. P61,216
4. What is the entry to record the lease payment on December 31, 2022?
A. Lease liability 108,040
Interest expense56,960
Cash 165,000
B. Lease liability 118,844
Cash 165,000
C. Lease liability 165,000
Cash 165,000
D. Lease liability 130,728
Cash 165,000
Assume the purchase option is exercised at the end of the lease. The actual fair market value of the
machine at the end of the lease is P285,000. On the date the purchase option is exercised, the
undiscounted sum of future cash flows expected from the machine is P375,000.
5. What is the entry to record the exercise of the option?

A. Lease liability 68,181
Cash 75,000
B. Equipment 68,181
Interest expense6, 819
Cash 75,000
C. Equipment 75,000
Cash 75,000
D. Lease liability 75,000
Cash 75,000
6. What is the amount of impairment loss that should be recognized by Hornpipe?

A. P90,000 C. P53,514
B. P143,514 D. P143,514
PROBLEM 5-41
Equipment Acquired Under Finance Lease
(Lese Guarantees the Asset’s Residual Value)
It has been the policy of VIBRAHARP COMPANY to acquire equipment by leasing. On January 1,
2022, Vibraharp entered into a lease with Lessor Company for a new delivery truck that had a selling
price of P1,060,000. The lease contract provides that annual payments of P210, 000 will be made for
Page | 328
6 years. Vibraharp made the first lease payment on January 1, 2022, and subsequent payments are
made on December 31 of each year. Vibraharp guarantees a residual value of P183,560 at the end of
the lease term. After considering the guaranteed residual value, the rate implicit in the lease is
determined to be 12%. Vibraharp has an incremental borrowing rate of 15%. The economic life of the
truck is 9 years. Vibraharp depreciates its other equipment using the straight-line method and uses the
calendar year for financial reporting purposes.
The present value tables show the following data:

12% 15%
Present value of 1 for 6 periods 0. 50663 0. 43233
Present value of an ordinary annuity for 6 periods 4.111413.78448
Present value of an annuity due for 6 periods 4.604784.35216
1. What is the cost of the leased delivery truck?

A. P993,312 C. P956,393
B. P1,060,000 D. P874, 100
2. What is the depreciation expense to be recognized by Vibraharp for the year ended December
31, 2022?
A. P146,073 C. P9,382
B. P 176,667 D. P134,959
3. What is the balance of the lease liability on December 31, 2025?

A. P163,193 C. P169,940
B. P485,565 D. P333,833
4. What is the carrying amount of the leased delivery truck on December 31, 2026?
A. P730,365 C. P183,560
B. P1,060,000 D. P329,635
5. What is the total amount of expenses that should be shown on Vibraharp's income statement
for the year ended December 31, 2027, in connection with this lease? Assume that Lessor Company
sells the truck for P116,000 at the end of the 6-year period to a third party.)
A. P233,302 C. P19,667
B. P146,075 D. P165,742
PROBLEM 5-42
Accounting for Leased Facilities
In 2020 TIMPANI TRUCKING COMPANY entered into a long-term lease contract for newly
constructed truck terminals and storage facilities. The buildings were constructed to the company's
specifications on land owned by the company. Timpani took possession of the leased properties on
January 1, 2021. On January 1, 2021 and 2022, the company made cash payments of P3,144,000.
Although the leased properties have a composite life of 40 years, the noncancellable lease runs for 20
years from January 1, 2021. Title to leased properties passes to Timpani at the lease expiration date.
The 20-year lease is effective for the period January 1, 2021, through December 31, 2040. Advance
rental payments of P2,700,000 are payable to the lessor on January 1 of each of the first 10 years of
the lease term. Advance rental payments of P960,000 are due on January 1 for each of the last 10
years of the lease. Also, the lease contract stipulates that Timpani should make annual payments to the
lessor of P375,000 for property taxes and P69,000 for insurance. The rate Implicit in the lease is 6%.
The company depreciates its other depreciable assets using the straight-line method and uses the
calendar year for financial reporting purposes.
Selected present value factors are as follows:
Page | 329
Period For an Ordinary

Annuity of 1 at 6 %
For 1 at 6%
1 0.943396 0.943396
2 1.833393 0.889996
8 6.209794 0.627412
9 6.801692 0.591898
10 7.360087 0.558395
19 11.158117 0.330513
20 11.469921 0.311805
1. What is the total cost of the leased Facilities?

A. P28,554,192 C. P23,817,677
B. P25,246,737 D. P26,937,917
Assume that the present value of the minimum lease payments is P25,200,000 on January 1, 2021.
2. What is the amount of interest expense to be shown on Timpani's income statement for the
A. P1,350,000 C. P1,183,140
B. P2,452,140 D. P1,269,000
3. The total lease-related expenses for the year ended December 31, 2024 should be
A. P1,722,128 C. P2,257,140
B. P2,796,128 D. P2,166,128
PROBLEM 5-43
Impairment of Assets
VIELE COMPANY purchased a manufacturing plant building on January 1, 2013, for P2,600,000.
The building has been depreciated using the straight-line method with a 30-year useful life and 10%
residual value. Viele’s manufacturing operations have experienced significant losses for the past two
years, so Viele has decided that the manufacturing building should be evaluated for possible
impairment. On December 31, 2022, Viele estimates that the building has a remaining useful life of 15
years, that net cash inflow from the building will be P100,000 per year, and that the fair value less
costs to sell of the building is P760,000.
What amount of impairment loss should be recognized in 2010?

A. P320,000 C. P973,333
B. P0 D. P1,060,000
PROBLEM 5-44
Impairment of Assets
KETTLEDRUM COMPANY has a department that performs machining operations on parts that are
sold to contractors. A group of machines had an aggregate carrying amount of P3,690,000 on
December 31, 2023. This group of machinery has been determined to constitute a cash generating unit
for purposes of applying PAS 36, Impairment of Assets. A cash generating unit as defined in this
standard is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
Page | 330
Presented below are data about future expected cash inflows and outflows based on the diminishing
productivity expected of the machinery as it ages and the increasing costs that will be incurred to
generate output from the machines.
Year
Revenues Cost, excluding Depreciation
2024 P2,250,000 P 840,000
2025 2,400,000 1,260,000
2026 1,950,000 1,650,000
2027 600.0000 450,000
Totals P7,200,000 P4,200,000
The fair value of the machinery in this cash generating unit, net of estimated disposition costs, is
determined to amount to P2,535,000. The company discounts the future cash flows of this cash
generating unit by using a 5% discount rate.
The following are lifted from the present value tables:
Present value of 1 at 5% for:
1 period 0.95238
2 periods 0.90703
3 periods 0.86384
4 periods 0.82270
5 periods 0.78353
How much impairment loss should be recognized at December 31, 2023?

A. P1,155,000 C. P224,427
B. P930,573 D. P0
PROBLEM 5-45
Revaluation of PPE
BELLS COMPANY acquired a machine on January 1, 2021, at a cost of P120,000. It was expected to
have a useful economic life of 10 years. Bells uses the straight-line method in depreciating its
machinery and 2023, the machine was appraised as having a gross replacement cost of P150,000.
Bells applies the revaluation model in valuing this class of property, plant, and equipment after its
initial recognition.
How much should be credited to revaluation surplus on December 31, 2023?

A. P30,000 C. P21,000
B. P105,000 D. P9,000
PROBLEM 5-46
Revaluation Model
On January 1, 2023, KHAEN CO. acquired two assets within the same class of plant and equipment.
Information on these assets is as follows:
Cost Expected Useful Life

Machine A P300,000 5 years
Machine B 180,0003 years
Page | 331
The machines are expected to generate benefits evenly over their useful lives. This class of plant and
equipment is measured using the revaluation model.
At December 31, 2022, information about the assets is as follows:
Fair Value Expected Useful Life

Machine B 114,0002 years
On July 1, 2023, machine B was sold for P87,000 cash. On the same day, Khaen acquired machine C
for P240,000 cash. Machine C has an expected useful life of four years.
At December 31, 2023, information on the machines is as follows:
Fair Value Expected Useful Life

Machine B 205,5001.5 years
1. The depreciation expense for 2022 is

A. P120,000 C. P165,000
B. P88,400 D. P123,000
2. Ignoring income tax, the December 31, 2022, statement of financial position of Khaen should
show revaluation surplus at
A. P18,000 C. P6,000
B. P0 D. P12,000
3. The gain (loss) that should be recognized on the sale of machine B on July 1, 2023, is
A. P1,500 C. P30,000
B. P(27,000) D. P0
4. The amount of revaluation loss to be reported on Khaen's income statement for the year ended
December 31, 2023, is
A. P16,500 C. P9,000
B. P25,500 D. P4,500
5. The depreciation expense for 2023 is

A. P123,000 C. P160,000
B. P121,500 D. P114,500
PROBLEM 5-47
Revaluation of PPE
In the December 31, 2022, statement of financial position of CLAPPERS, INC., the equipment was
reported as follows
Equipment (at cost) P1,500,000

P1,050.000
The equipment consisted of two machines: Machine A and Machine B. Machine A had a book value
of P540,000 at December 31, 2022 (cost, P900,000), while Machine B was carried at P510,000 (cost,
P600,000). Clappers depreciates its equipment over a ten-year period using the straight-line method.
Page | 332
On June 30, 2023, Clappers decided to change the basis of measuring the equipment from the cost
model to the revaluation model. Machine A was revalued to P540,000 with an expected useful life of
six years, and Machine B was revalued to P465,000 with an expected useful life of five years.
At December 31, 2024, Machine A was assessed to have a fair value of P489,000 with an expected
useful life of five years, while Machine B's fair value was P409,500 with an expected useful life of
four years.
1. What amount of revaluation increase (decrease) should be recognized for Machine A on June
30, 2023?
A. P45,000 C. P90,000
B. P(45,000) D. P0
2. What amount of revaluation increase (decrease) should be recognized for Machine B on June
30, 2023?
A. P45,000 C. P(15,000)
B. P15,000 D. P0
3. What amount of depreciation expense should be reported on Clappers' income statement for
Machine A Machine B
A. P60,000 P60,000
B. 90,000 76,500
C. 72,000 53,250
D. 70,500 78,000
4. What amount of revaluation increase (decrease) should be recognized for Machine A on

December 31, 2023?
A. P0 C. P6,000
B. P(24,000) D. P(6,000)
5. The entry to revalue Machine B on December 31, 2023, should include a debit to
A. Revaluation surplus of P9,000
B. Revaluation surplus of P32,250
C. Revaluation loss of P9,000
D. Impairment loss of P32,250
PROBLEM 5-48
Revaluation of PPE
The statement of financial position of ANGKLUNG COMPANY on December 31, 2023, showed the
following property, plant, and equipment items after recording depreciation:
Building P6,000,000
Accumulated depreciation (2.000.000) P4,000,000
Motor vehicle P2,400,000
Accumulated depreciation (800.000) 1,600,000
Angklung has adopted the revaluation model for the valuation of its PPE. This has resulted in the
recognition in prior periods of an asset revaluation surplus for the building of P280,000. On December
31, 2023, an independent appraiser assessed the fair value of the building to be P3,200,000 and the
vehicle to be P1,800,000. Assume that the building and the motor vehicle have remaining useful lives
of 25 years and 4 years, respectively, with zero residual value. The company uses the straight-line
depreciation method. Ignore income tax implications.
Page | 333
1. The entry to record the revaluation of the building should include a debit to
Revaluation Surplus Revaluation Loss
A. P800,000 P0
B. 280,000520,000
C. 0 800,000
D. 520,000280,000
2. What is the depreciation for 2023?

A. P82,000 C. P578,000
B. P461,200 D. P560,000
PROBLEM 5-49
Impairment Recovery
On January 1, 2022, KAZOO COMPANY acquired a factory equipment at a cost of P150,000. The
equipment is being depreciated using the straight-line method over its projected useful life of 10
years. On December 31, 2023, a determination was made that the asset's recoverable amount was only
P96,000. Assume that this was properly computed and that recognition of the impairment was
warranted. On December 31, 2024, the asset's recoverable amount was determined to be P111,000 and
management believes that the impairment loss previously recognized should be reversed. You have
been asked to assist the company's accountant in the application of PAS 36, the standard on
impairment of assets.
1. How much impairment loss should be recognized on December 31, 2023?

A. P54,000 C. P24,000
B. P9,000 D. P0
2. What is the asset's carrying amount on December 31, 2024?

A. P84,000 C. P86,400
B. P90,000 D. P96,000
3. What would have been the asset's carrying amount at December 31, 2024, had the impairment
not been recognized in 2022?
A. P105,000 C. P96,000
B. P84,000 D. P86,400
4. How much impairment recovery should be reported in the 2024 income statement of Kazoo
Company?
A. P27,000 C. P6,000
B. P0 D. P21,000
PROBLEM 5-50
Impairment Loss on Equipment Carried at Revalued Amount
KOTO, INC. purchased a machinery on January 1, 2022, at a cost of P100,000. It is being depreciated
using the straight-line method over its projected useful life of 10 years. At December 31, 2022, the
asset's fair value was P112,500. Accordingly, an entry was made on that date to recognize the
revaluation write-up.
An impairment was detected on December 31, 2024, and the recoverable amount of the asset was
determined to be P68,000. At December 31, 2025, the fair value of the asset was determined to be
P73,000.
1. What amount of revaluation surplus should be credited directly to equity on December 31,
2022?
Page | 334
A. P0 C. P10,000
B. P12,500 D. P22,500
2. What is the revaluation surplus balance at December 31, 2024, before recognition of the
impairment loss?
A. P17,500 C. P5,000
B. P22,500 D. P0
3. The amount of impairment loss to be reported on Koto's income statement for the year 2024 is
A. P19,500 C. P17,000
B. P2,000 D. P0
PROBLEM 5-51
Computation of Depreciation and Depletion
The following independent situations describe facts concerning the ownership of various assets.
1. The ABC Company purchased a tooling machine in 2013 for P600,000. The machine was
being depreciated on the straight- line method over an estimated useful life of 20 years with no
salvage value. At the beginning of 2023, when the machine had been in use for 10 years, ABC
estimated that the useful life of the machine would be extended an additional 5 years.
2. DEF Manufacturing Company, a calendar-year company, purchased a machine for P650,000

on January 1, 2021. At the date of purchase, DEF incurred the following additional costs:
Loss on sale of old machinery P15,000
Freight cost 5,000
Installation cost 20,000
Testing costs prior to regular operation 4,000
The estimated salvage value of the machine was P50,000, and DEF estimated that the machine would
have a useful life of 20 years, with depreciation being computed using the straight-line method. In
January 2023, accessories costing P48,600 were added to the machine in order to reduce its operating
costs. These accessories neither prolonged the machine's life nor did they provide any additional
salvage value.
3. On July 1, 2023, GHI Corporation purchased equipment at a cost of P680,000. The equipment
has an estimated salvage value of P60,000 and is being depreciated over an estimated life of 8 years
under the double-declining balance method of depreciation. For the 6 months ended December 31,
2023, GHI recorded one-half of a year's depreciation.
4. The JKL Company acquired a tract of land containing an extractable natural resource. JKL is
required by its purchase contract to restore the land to a condition suitable for recreational use after it
has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be
3,800,000 tons and that the land will have a value of P500,000 after restoration. Relevant cost
information follows:
Land P9,000,000
Estimated restoration costs 1,000,00
Tons mined and sold in 2023 700,000
5. In January 2023, MNO entered into a contract to acquire a new machine for its factory. The
machine, which had a cash price of P200,000, was paid for as follows:
Down payment P 30,000

Page | 335
Notes payable in 10 equal monthly

installments, including interest at 10%
150,000
500 shares of MNO ordinary share capital
at a par value of P70 per share
35,000
P215.000
The machine has an estimated useful life of 10 years. The straight- line method of depreciation is
used.
In each case, compute the amount of depreciation or depletion for 2023:
1. ABC
A. P84,000 C. P42,000
B. P20,000 D. P16,800
2. DEF
A. P33,880 C. P34,150
B. P37,640 D. P31,450
3. GHI
A. P77,500 C. P170,000
B. P155,000 D. P85,000
4. JKL
A. P1,750,000 C. P1,842,105
B. P0 D. P1,657,895
5. MNO
A. P20,700 C. P19,700
B. P20,500 D. P20,000
PROBLEM 5-52
Depletion and Depreciation
In 2019, SAHNAI MINING COMPANY purchased property with natural resources for P12,400,000.
The property was relatively close to a large city and had an expected residual value of P3,000,000.
However, P1,200,000 will have to be spent to restore the land for use.
The following information relates to the use of the property:
a) In 2019, Sahnai spent P800,000 in development costs and P600,000 in buildings on the
property. Sahnai does not anticipate that the buildings will have any utility after the natural resources
are depleted.
b) In 2020 and 2022, P600,000 and P1,600,000, respectively, were spent for additional
developments on the mine.
Page | 336
c) The tonnage mined and estimated remaining tons for years 2019-2023 are as follows:
Year
Tons Extracted Estimated Tons Remaining
2019 0 5,000,000
2020 1,500,000 3,500,000
2021 1,800,000 2,000,000
2022 1,700,000 900,000
2023 900,0000
Based on the preceding information, calculate the depletion and depreciation for:
1. 2020
Depletion Depreciation
A. P3,600,000 P180,000
B. 3,240,000 420,000
C. 3,600,000 420,000
D. 3,240,000 180,000
2. 2021
A. P4,149,474 P378,000
B. 4,149,474 198,000
C. 3,978,000 198,000
D. 3,978,000 378,000
3. 2022
A. P2,891,308 P153,000
B. 3,944,000 153,000
C. 2,891,308 274,615
D. 3,944,000 274,615
4. 2023
A. P3,944,000 P153,000
B. 3,944,000 69,000
C. 2,078,000 153,000
D. 2,078,000 69,000
PROBLEM 5-53
Depletion and Depreciation
MINA MINING CO. has acquired a tract of mineral land for P27,000,000. Mina Mining estimates
that the acquired property will yield 120,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 6,000 tons of ore will be mined the first and
last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land
will have a residual value of P900,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000. The
company estimates that these structures can be used for 15 years but, because they must be dismantled
if they are to be moved, they have no residual value. Mina Mining does not intend to use the buildings
elsewhere.
Page | 337
Mining machinery installed at the mine was purchased secondhand at a total cost of P1,800,000. The
machinery cost the former owner P4,500,000 and was 50% depreciated when purchased. Mina Mining
estimates that about half of this machinery will still be useful when the present mineral resources have
been exhausted but that dismantling and removal costs will just about offset its value at that time. The
company does not intend to use the machinery elsewhere. The remaining machinery will last until
about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is
to be allocated equally between these two classes of machinery.
1. What are the estimated depletion and depreciation charges for the first year?
A. P2,610,000 P189,000
B. P1,305,000 P378,000
C. P2,610,000 P234,000
D. P1,305,000 P189,000
2. What are the estimated depletion and depreciation charges for the 5th year?
A. P1,305,000 P378,000
B. P2,610,000 P234,000
C. P2,610,000 P378,000
D. P1,305,000 P234,000
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000
5. What are the depletion and depreciation charges for the first year assuming actual production
of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the company engineers to
change their estimates of either the mineral resources or the life of the structures and equipment.)
A. P1,087,500 P157,500
B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500
AUDIT OF PREPAYMENTS AND

INTANGIBLE ASSETS
Page | 338
(Audit Program for Prepayments and Intangible Assets)

Audit Objectives:
To determine that:
1. Charges to prepayments represent amounts that are reasonably expected to be realized

through future operations.
2. Prepayments are properly recorded.
3. The accounts are properly classified and described, and adequate disclosures have
been made.
Audit Procedures:
1. Obtain or prepare detailed analysis of the accounts.
2. Verify the accuracy of the analysis by performing tests of mathematical computations
to the extent deemed necessary.
3. Determine the nature of the accounts included in the analysis.
4. Determine the reasonableness of the amounts.
5. Examine supporting documentation.
AUDIT PROGRAM FOR INTANGIBLE ASSSETS
Audit Objectives:
To determine that:
1. The assets represent amounts that are reasonably expected to be realized through
future operations or otherwise, and that they are properly recorded.
2. The assets are properly described and classified, and adequate disclosures have been
made in the financial statements.
Audit Procedures:
1. Obtain an analysis of intangible assets.
2. Verify the accuracy of the analysis by performing tests of mathematical computations
to the extent deemed necessary.
3. In an initial audit, examine transactions of prior period/s to determine if costs had
been capitalized in accordance with PAS 38, Intangible Assets.
4. In a recurring audit, trace the beginning balances to last year's working papers.
5. Vouch current year transactions to supporting documentation.
6. Determine if the company's amortization policies are in accordance with PAS 38.
Recalculate the amortization recorded.
7. Determine if there is proper allocation of the amortization recorded for the period.
8. Determine if there is impairment of value of intangible assets.
9. Determine propriety of financial statement presentation and adequacy of disclosures.
PROBLEM 6-1
Acquisition and Amortization of Intangible Assets
The INTANGIBLES COMPANY engaged in the following transactions at the beginning of

2023:
Page | 339
1. Purchased a patent for P700,000 that had originally been filed in January 2017.
The acquisition was made to protect another patent that the company had filed for
in January 2019 and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000

ordinary shares (P10 par) selling for P60 per share. The book sells 1 million
copies in 2023 and is expected to sell a total of 500,000 copies in future years.
3. Purchased the franchise to operate a ferry service from the government for
P100,000. A bridge has been planned to replace the ferry, and it is expected that it
will be completed in five years. The company hopes that the ferry will continue as
a tourist attraction, but profits are expected to be only 20% of those earned before
the bridge is opened.
4. Paid P280,000 to attorneys for the services to successfully defend the patent
acquired in transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently displayed
on his taxis for two years.
Based on the preceding information, determine the carrying value of the following at the end
of
2023:
1. Patent
A. P630,000 C. P910,000
B. P656,250 D. P650,000
2. Copyright
A. P2,000,000 C. P3,000,000
B. P0 D. P4,000,000
3. Franchise
A. P100,000 C. P80,000
B. P84,000 D. P76,000
SOLUTION 6-1
1. Cost of patent P700,000

Amortization for 2023 (P700,000/14 years)
(50,000) Carrying value, December 31, 2023
P650,000
Answer: D
The competing patent purchased to protect another patent with a life of 16 years has a
remaining legal life of 14 years and should be amortized over that period.
Page | 340
2. Cost of copyright P6,000,000

Amortization for 2023
(6,000,000 x 1 milllion/1.5 million)
(4,000,000) Carrying value, December 31, 2023
P2,000,000
Answer: A
3. Cost of franchise P100,000

Amortization for 2023 (P100,000/5)
(20,000) Carrying value, December 31, 2023
P80,000
Answer: C
PROBLEM 6-2
Acquisition and Amortization
ACERO CORP. was incorporated on January 2, 2022. The corporation's financial statements
for its first year's operations were not examined by a CPA. You have been engaged to audit
the financial statements for the year ended December 31, 2023, and your audit is substantially
completed. The corporation's trial balance appears below:
Acero Corp.
TRIAL BALANCE
December 31,2023
Debit Credit
Cash P 450,000
Allowance for doubtful accounts P43,800
Inventories 1,506,000
Patents 3,846,000
Leasehold improvements 900,000
Prepaid expenses 1,350,000
Goodwill 900,000
Licensing agreement No. 1 1,800,000
Licensing agreement No. 2 1,680,000
Accounts payable 2,190,000
Unearned revenue 518,400
Share capital 9,000,000
Retained earnings, January 1, 2023 4,771,800
Sales
Page | 341
AUDIT OF LIABILITIES
(Audit Program for Liabilities)
Audit Program for Accounts Payable

Audit Objectives:
To determine that:
1. Accounts payable represent amounts currently payable to trade creditors for purchases of goods and
services as at the end of the reporting period.
2. Accounts payable have been properly recorded.
3. Accounts payable are properly described and classified and adequate disclosures have been made.
PROBLEM 7-1
Debt Classifications
BOOMERANG, INC. is a manufacturer and retailer of household furniture. Your audit of the
company's financial statements for the year ended December 31, 2023, discloses the following
debt obligations of the company at the end of its reporting period. Boomerang's financial
statements are authorized for issuance on March 6, 2024.
1. A P150,000 short-term obligation due on March 1, 2024. Its maturity could be extended to March
1, 2026, provided Boomerang agrees to provide additional collateral. On February 12, 2024, an
agreement was reached to extend the loan's maturity to March 1, 2026.
2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2024. The
company issued 75,000 ordinary shares for P36 per share on January 25, 2024. The proceeds from the
issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2024.
An agreement is reached to provide a waiver of the breach on December 11, 2023.
3. A long-term obligation of P2,500,000 due December 1, 2033. On November 10, 2023, Boomerang
breaches a covenant on its debt obligation and the loan becomes payable on demand. agreement is
reached to provide a waiver of the breach on December 11, 2023.
Page | 342
4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of
P1,000,000 per year. The loan is dated September 1, 2023, and the first maturity date is September 1,
2024.
5. A debt obligation of P1,000,000 maturing on December 31, 2026. The debt is callable on demand
by the lender at any time.
1. What amount of current liabilities should be reported on the December 31, 2023, statement of
financial position?
A. P8,250,000
B. P5,750,000
C. P4,750,000
D. P3,750,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2023,
statement of financial position?
A. P5,500,000
B. P3,000,000
C. P6,500,000
D. P7,500,000
SOLUTION 7-1
Current Non Current
1. P150,000
2. 360,000
3. P2,500,000
4. 1,000,000 3,000,000
5. 1,000,000
Total P5,750,000 P5,500,000
1. Current Liabilities P5,750,000

Answer: B
2. Noncurrent Liabilities P5,500,000

Answer: A
PROBLEM 7-2
Current Liabilities
The data below are from the records of ALMANOR, INC. on December 31, 2023:
Accounts payable P 680,000

Cash balance, ABC Bank 1,240,000
AUDIT OF LIABILITIES
Page | 343
Cash overdraft with XYZ Bank 80,000

Customers' accounts with credit balances 25,000
Dividends in arrears on preference shares 400,000
Employees' income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2023 maturing in 20 semi-annual
installments beginning on April 1, 2024) 4,000,000
Salaries payable 400,000
The amount to be shown as total current liabilities on Almanor's statement of financial position
at December 31, 2023, is
A. P2,225,000 C. P2,625,000
B. P2,025,000 D. P2,145,000
SOLUTION 7-2
Cash overdraft (XYZ Bank) P80,000

Notes payable due in 2024 (P4 million / 20 x 2) 400,000
Salaries payable 400,000
Employees' income tax payable 100,000
Income tax payable 400,000
Estimated warranty payable 50,000
Customers' accounts with credit balances 25,000
Total current liabilities P2,225,000
Answer: A
PROBLEM 7-3
Accounts Payable and Accrued Expenses
Included in DADANG Company's unadjusted trial balance on December 31, 2023, are Accounts
payable and Accrued expenses of P523,100 and P63,100, respectively. Upon verification, you
discovered the following information:
1. On December 28, 2023, the company issued checks to creditors totaling P115,000. These
checks were released on January 5, 2024.
2. A check dated December 12, 2023, in payment of accounts payable was recorded as
P12,000. Upon examination of the checks returned by the bank, the actual amount was P21,000.
3. On December 26, 2023, the company purchased on account goods worth P215,000, but
no entry was made in the books. The goods were already included in the year-end physical
count.
4. The. following items were erroneously included in accounts payable:

• Accrued expenses totaling P37,450
• A cash advance from the President of Dadang Company amounting to P350,000 to be
used as working capital. This will be repaid within 6 months without interest.
Page | 344
• A debit balance of P87,250 representing advance payment for goods ordered to be

shipped by the supplier on January 12,
2024.
5. Your review of subsequent payments from January 2-15, 2024, revealed that no accrual was
made on December 31, 2023, for the following:
Light and water for Nov. and Dec. 2023 P21,200
Telephone bills for Dec. 2023 18,150

Representation expenses for Dec. 2023 11,990
Minor repair of a delivery car on Dec. 26, 2023 3,180
Transportation expenses for 2024 2,560
Total P57,080
1. The adjusted balance of Accounts payable at December 31, 2023, is

A. P437,900 C. P395,900
B. P543,900 D. P738,900
2. The adjusted balance of Accrued expenses on December 31, 2023, is

A. P157,630 C. P155,070
B. P54,520 D. P57,080
SOLUTION 7-3
1. B
Accounts payable per book P523,100
Unreleased checks 115,100
Understatement of book disbursement
(P21,000 - P12,000) (9,000)
Unrecorded purchase 215,000
Accrued expenses (37,450)
Cash advance from the company president (350,000)
Advance payment for goods ordered
erroneously debited to Accounts payable 87,250
Adjusted balance P543,900
2.C
Accrued expenses per book P63,100
Accrued expenses erroneously included in
Various accruals (P21,200+P18,150+P11,990+P3,180) 54,520
Adjusted accrued expenses P155,070
Page | 345
PROBLEM 7-4
RECORDING PURCHASES
SAIMAA CORP. records its purchases at gross amounts but wishes to change to recording
purchases net of purchase discounts. Discounts on purchases recorded from January 1, 2023, to
December 31, 2023, totaled P80,000. Of this amount, P8,000 is still available in the accounts
payable balance. The balances in Saimaa's accounts as of and for the year ended December 31,
2023, before conversion are:
Purchases P 4,000,000
Accounts payable 1,200,000
1. The amount of purchase discounts lost to be recognized is

A. P8,000 C. P32,000
B. P0 D. P40,000
2. The accounts payable balance should be reduced by

A. P8,000 C. P32,000
B. P80,000 D. P40,000
3. The purchases account should be reduced by

A. P32,000 C. P40,000
B. P80,000 D. P8,000
4. The entry to record the conversion is

A. Accounts payable 80,000
Purchases 80,000
B. Purchase discounts lost 32,000

Purchases 32,000
C. Purchase discounts lost 40,000

Purchases 80,000
D. Purchase discounts lost 32,000

Purchases 40,000
SOLUTION 7-4
Discounts on 2023 purchases P80,000

Less: Discounts taken P32,000
Discounts still available in the
accounts payable balance 8,000 40,000
Purchase discounts lost 40,000
Page | 346
Answer: D
2. The accounts payable should be reported net of discounts still available at the end of the
reporting period which amounts to P8,000.
Answer: A
3. Under the net method, purchases are reported net of discounts, regardless of whether the
discounts are taken or not. Hence, the purchases account should be reduced by P80,000.
Answer: B
4. The entry to record the conversion is:
Purchase discounts lost 40,000

Purchases 80,000
Answer: C
PROBLEM 7-5
PREMIUMS
PUKAKI COMPANY sold 700,000 boxes of "Auto mix" under a new sales promotional
program. Each box contains one coupon, which if submitted with P40, entitles the customer to a
kitchen knife. Pukaki pays P60 per knife and P5 for handling and shipping. Pukaki estimates
that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed
during 2023.
How much should Pukaki report as liability for unredeemed coupons
at December 31, 2023?
A. P6,000,000 C. P15,600,000
A. P9,600,000 D. P12,250,000
SOLUTION 7-5
Boxes of "Auto mix" sold 700,000

Redemption rate 70%
Total coupons redeemable 490,000
Coupons to be redeemed (490,000 — 250,000) 240,000

Net cost per kitchen knife (P65 — P40) X P25
Liability for unredeemed coupons P6,000,000
Answer : A
PROBLEM 7-6
PREMIUMS
In packages of its products, PLACID, INC. includes coupons that may be presented at retail
stores to obtain discounts on other Placid products. Retailers are reimbursed for the face
amount of coupons redeemed plus 10% of that amount for handling costs. Placid honors
Page | 347
requests for coupon redemption by retailers up to 3 months after the consumer expiration date.
Placid estimates that 60% of all coupons issued will ultimately be redeemed. Information
relating to coupons issued by Placid during 2023 is as follows:
Consumer expiration date December 31 2020

Total payments to retailers as of Dec. 31, 2023 P165,000
Liability for unredeemed coupons as of Dec. 31, 2023 P99,000
What is the total face amount of coupons issued by Placid, Inc. in 2023?
A. P440,000
B. P400,000
C. P600,000
D. P264,000
SOLUTION 7-6
Liability for unredeemed coupons, Dec. 31, 2023 P99,000

Add: Total payments to retailers 165,000
Total cost 264,000
Less: Handling charges (P264,000 — [P264,000/110%]) 24,000
To be redeemed 240,000
Divide by redemption rate / 60%
Total face amount of coupons issued P400,000
ANSWER: B
PROBLEM 7-7
LIABILITY FOR RETURNABLE CONTAINERS
OMEGA COMPANY sells its products in expensive, reusable containers. The customer is
charged a deposit for each container delivered and receives a refund for each container
returned within two years after the year of delivery. Omega accounts for the containers not
returned within the time limit as being sold at the deposit amount. Information for 2023 is as
follows:
Containers held by customers at

December 31, 2022, from deliveries in: 2021 85,000
2022 240,000325,000
Containers delivered in 2023 430,000
Containers returned in 2023 from deliveries in:
2021 57,500
2022 140,000
2023 157,000 354,500
1. How much revenue from container sales shoUld be recognized for 2023?
Page | 348
A. P127,500 C. P27,500
B. P267,500 D. P85,000
'2. What is the total amount of Omega Company's liability for returnable containers at December
31, 2023?
A. P373,000 C. P267,500
B. P400,500 D. P430,000
SOLUTION 7-7
1.
Containers held by customers at Dec. 31, 2022,
from deliveries in 2021 P85,000
Less: Containers returned in 2023
from deliveries in 2021 57,500
Revenue from container sales P27,500
ANSWER: C
2. Liability for returnable containers, Dec. 31, 2022 P325,000

Add: Deliveries in 2023 430,000
Total 755,000
Less: 2023 container returns P354,500
2023 container sales (see no. 1) 27,500 382,000
Liability for returnable containers,
Dec. 31, 2023 P373,000
Answer: A
PROBLEM 7-8
VARIOUS TRANSACTIONS INVOLVING CURRENT LIABILITIES
Described below are certain transactions of ASHBY COMPANY:
Feb. 2 The company purchased goods from Happy Corp. for P150,000 subject to cash discount terms
of 2/10, n/30. The company records purchases and accounts payable at net amounts after cash
discounts. The invoice was paid on February 25.
April 1 The company purchased a truck for P120,000 from Broom Motors Corp., paying P12,000 in
cash and signing a one-year, 12% note for the balance of the purchase price.
May 1 The company borrowed P240,000 from Manila Bank by signing a P276,000
noninterest-bearing note due one year
from May 1.
Aug. 1 The company's board of directors declared a P900,000 cash dividend that was payable on
September 10 to shareholders
of record on August 31.
1. Prepare all the journal entries necessary to record the transactions described above.
Page | 349
2. Assume that Ashby Company's financial year ends on Decem abbey 31 31 and that no
adjusting entries relative to the transactions have been recorded. Prepare any adjusting journal entries
concerning interest that are necessary to present fair financial
statements at December 31.
SOLUTION 7-8
1. JOURNAL ENTRIES
1. JOURNAL ENTRIES
Feb. 2 Purchases 147,000
(P150,000 x98%)
Feb. 25 Accounts payable 147,000

Purchase discounts lost (P150,000 x 2%) 3,000
Cash 150,000
April 1 Trucks 120,000

Cash 12,000
Note payable 108,000
May 1 Cash 240,000

Discount on note payable 36,000
Note payable 276,000
Aug. 1 Retained earnings 900,000

Dividends payable 900,000
2. ADJUSTING ENTRIES December 31

1. Interest expense 9,720
(P108,000 x 12% x 9/12)

Discount on notes payable 24,000
(P36,000 x 8/12)
PROBLEM 7-9
WARRANTIES
Presented below are two independent situations. Answer the questions at the end of each
situation.
Situation 1
BARRADO CO. a machinery dealer sells a machine for P22,200 under a 1-year warranty
contract that requires the company to replace all defective parts and to provide the necessary
repair labor at no cost to the customers. With sales being made evenly throughout the year,
Barrado sells for cash 600 machines in 2023 (half of the warranty expense is incurred in 2023,
half in 2024). On the basis of 'past experience, the 1-year warranty costs are estimated to be
Page | 350
P510 parts and P660 labor. Assume that in 2023, these warranty costs are incurred exactly as
estimated.
1. What amount of warranty expense would be charged against 2023 revenue?

A. P702,000 C. P153,000
B. P351,000 D. P396,000
2. What amount of warranty liability would appear on the December 31, 2023, statement of
financial position?
A. P0 C. P702,000
B. P153,000 D. P351,000
Situation 2
DP, INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract for P810
that requires the company to provide periodic maintenance services and to replace defective
parts.
During 2023, DP sold 300 washing machines and 270 warranty contracts for cash. The company
estimates that the warranty costs are P180 for parts and P360 for labor.
Assume sales occurred on December 31, 2023. DP's policy is to recognize income from the
warranties on a straight-line basis. In 2024, DP incurred actual costs relative to 2023 warranty
sales of P18,000 for parts and P36,000 for labor.
What liability relative to these transactions would appear on the December 31, 2023, statement
of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P0 P218,700
2. What amount of warranty expense would be shown on the income statement for the year
A. P18,000 C. P36,000
B. P0 D. P54,000
3. What liability relative to the 2023 warranties would appear on the December 31, 2024,
statement of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0
2023 warranty expense (P1,170* x 600) P702,000

* P510 parts + P660 labor
Answer: A
Page | 351
2. Warranty liability, Dec. 31, 2023 (P1,170 x 600 x 1/2) P351.000

Answer: D
Situation 2
1. Unearned warranty revenue:
Current (P810 x 270 x 1/3) P72,900
Noncurrent (P810 x 270 x 2/3) P145,800
Answer: C
2. Parts P18,000
Labor 36,000
Total warranty expense P54,000
Answer.' D
3. Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Noncurrent (P810 x 270 x 1/3) P72,900
Answer; B
PROBLEM 7-10
OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound

reproduction equipment, recorded music, and sheet music. To promote the sale of its products,
Olson uses two promotion techniques—premiums and warranties.
PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200
for a power bank. Olson pays P340 for each power bank and estimates that 60% of the coupons
given to customers will be redeemed. A total of 6,500 power banks used in the premium
program were purchased during the year and there were 1,200,000 coupons redeemed in 2021.
WARRANTIES
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of
sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2023.
Olson uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. Olson's sales for 2023 totaled P72,000,000—P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and
sheet music. The balances in the accounts related to warranties and premiums on Januaryl,
2023, were as shown below:
Inventory of premium power banks P 399,500
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts that will be shown on the 2023
financial statements for the following:
Page | 352
1. Warranty expense
A. P1,640,000
B. P1,080,000
C. P800,000
D. P360,000
2, Estimated liability from warranties

A. P1,920,000
B. P1,080,000
C. P240,000
D. P800,000
3. Premium expense
A. P1,836,000
B. P840,000
C. P756,000
D. P2,189,500
4. Inventory of premium power banks

A. P399,500
B. P569,500
C. P2,210,000
D. P739,500
5. Estimated premium claims outstanding
A. P364,000
B. P840,000
C. P756,000
D. P672,000
SOLUTION 7-10
1. Sales of musical instruments and

sound reproduction equipment
P54,000,000
Estimated warranty cost x 2%
Warranty expense for 2023 P1,080,000
Answer: B
2. Estimated liability from warranties, Jan. 1, 2023 P1,360,000

Add: 2023 warranty expense (see no. 1) 1,080,000
Total 2,440,000
Less: Actual warranty costs during 2023 1,640,000
Estimated liability from warranties, Dec. 31, 2023 P800,000
Answer: D
3. Coupons issued (P18,000,000/P10) 1,800,000

Multiply by estimated redemption rate x60%
Estimated number of coupons to be redeemed 1,080,000
Divide by exchange rate (200 coupons for a power bank) ÷ 200
Estimated number of power banks to be issued 5,400
Multiply by net cost of a power bank (P340 — P200) x P140
Page | 353
Premium expense for 2023 P756,000
Answer: C
4. Inventory of premium power banks P399,500

Add: Premium power banks purchased
during 2023 (P340 x 6,500) 2,210,000
Total 2,609,500
Less: Premium power banks distributed to customers
during 2023 (1,200,000/200 = 6,000 x P340) 2,040,000
Inventory of premium power banks, Dec. 31, 2023 P569,500
Answer: B
5. Estimated Premium claims outstanding, Jan. 1, 2023 P 448,000

Add: 2023 premium expense (see no. 3) 756,000
Total 1,204,000
Less: 2023 actual redemptions
(1,200,000/200 = 6,000 x P140) 840,000
Estimated premium claims outstanding, Dec. 31, 2023 P364,000
Answer: A
PROBLEM 7-11
Accounting for Noninterest-bearing Note
On December 31, 2023, BAIKAL COMPANY acquired a piece of equipment from Seller
Company by issuing a P1,200,000 note, payable in full on December 31, 2027. Baikal's credit
rating permits it to borrow funds from its several lines of credit at 10%. The equipment
is expected to have a 5-year life and a P150,000 salvage value. The

present value of 1 at 10% for 4 periods is 0.6830
1. What is the equipment's book value on December 31, 2025?

A. P551,767
B P630,000
C. P 491,767
D. P341,767

A. P1,090,903
B. P991,730
C. P1,200,000
D. P819,612
SOLUTION 7-11
1. Cost of equipment (P1,200,000 x 0.68301) P819,612

Less: Accumulated depreciation, Dec. 31, 2025
(P819,612 — P150,000 = P669,612 x 2/5) 267,845
Book value, Dec. 31, 2025 P551,767
Answer: A
2. Carrying value of note payable at Dec. 31, 2025 (see discount amortization schedule
below) P991,730
Page | 354
Answer: B
SCHEDULE OF DISCOUNT AMORTIZATION

Discount Carrying
Date Amortization Value of Note
12.31.23 -- P819,612
12.31.24 P81,9611 901,5732
12.31.25 90,157 991,730
12.31.26 ,99,173 1,090,903
12.31.27 109,0973 1,200,000
1 P81.961= P819,612 x 10%

2., MILL= P819,612 + P81,961
' P4 adjustment due to rounding
PROBLEM 7-12
Accounting for Noninterest-bearing Note (Payable in Installments)
OHRID COMPANY purchased machinery on December 31, 2023. paying P80,000 down and
agreeing to pay the balance in four equal installments of P60,000 payable each December 31.
Implicit in the purchase price is an assumed interest of 12%.
Page | 355
The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552

Present value of an ordinary annuity of 1 at 12%
for 4 periods 3.03735
1. What is the cost of the machinery purchased on December 31,

2023?
A. P233,083 C. P262,241
B. P320,000 D. P290,842
2. How much interest expense should be reported in Ohrid's income statement for the year
A. P38,131 C. P17,293
B. P21,869 D. P42,707

A. P120,000 C. P99,310
B. P144,110 D. P101,403
SOLUTION 7-12
1. Down payment P 80,000

Present value of installment payments
(P60,000 x 3.03735) 182,241
Cost of machinery P262,241
Answer: C
2. Interest expense for 2024 (see amortization schedule) P21.869

Answer: B
3. Carrying value of note at Dec. 31, 2024

(see amortization schedule) P101.403
Answer: D
SCHEDULE OF NOTE DISCOUNT AMORTIZATION
Discount Carrying
Date Payment Amortization Value of Note
12.31.23 P182,241
12.31.24 P60,000 P21,8691 144,1102
12.31.25 60,000 17,293 101,403
12.31.26 60,000 12,168 53,571
12.31.27 60,000 6,429 0
1
P21,869 = P182,241 x 12%
2
P144.110 = P182,241 - P60,000 + P21,869
Page | 356
PROBLEM 7-13
Notes Payable
On October 1, 2023, BALATON CORP. issued a P500,000, 12-month, 12% note to ABC
Company in payment of account. On the same date, the company borrowed P1,000,000 from
the Asian Bank by signing a 12-month, noninterest-bearing, P1,120,000 note.
1. Prepare adjusting journal entries at December 31, 2023.
2. What is the total/net liability to be reported in the December 31, 2023, statement of
financial position for:
a. the interest-bearing note?
b. the noninterest-bearing note?

SOLUTION 7-13

December 31, 2023
a. Interest expense 15,000

(P500,000 x 12% x 3/12)
b. Interest expense 30,000
(P120,000 x 3/12)
2. a. Note payable P500,000

Total P515,000
b. Note payable P1,120,000

Less: Discount on note payable
(P120,000 - P30,000) 90,000
Carrying value P1,030,000
PROBLEM 7-14
Notes Payable: Adjustments for Interest
Described below are certain transactions of TUNIS COMPANY.
1. On April 1, the corporation bought a truck for P400,000 from General Motors Company,
paying P40,000 in cash and signing a one-year, 12% note for the balance of the purchase
price.
2. On May 1, the corporation borrowed P800,000 from Prudent Bank by signing a P920,000
noninterest-bearing note due one year from May 1.
Page | 357
Prepare any adjusting journal entries to present fair financial statements at December 31.
SOLUTION 7-14
December 31

(P360,000 x 12% x 9/12)

(P120,000 x 8/12)
PROBLEM 7-15
Analyzing Various Transactions Involving Liabilities
In conjunction with your firm's examination of the financial statements of BATUR, INC. as
of December 31, 2023 you obtained the information from the company's voucher register
shown in the work paper below.
Item Entry Voucher

No. Date Reference Description Amount Account Charged
1 12/18/23 12-200 Supplies, shipped FOB Destination,

2/15/23; received 12/17/23 P15,000 Supplies on hand
2 12/18/23 12-203 Auto insurance, 12/15/23-12/15/2 22,000 Prepaid insurance
3 12/21/23 12-209 Repairs services; received 12/20/23 19,000 Repairs &
maintenance
4 12/26/23 12-212 Merchandise, shipped FOB shipping
Point, 12/20/23; received 12/24/23 123,000 Inventory
5 12/21/23 12-210 Payroll, 12/21/23 (12 working days) 69,000 Salaries and wages
6 12/21/23 12-234 Subscription to industry magazine
For 2024 5,000 Dues &
subscriptions
expense
7 12/28/23 12-236 Utilities for December 2023 24,000 Utilities expense
8 12/28/23 12-241 Merchandise, shipped FOB destination,
12/24/23; received 1/2/24 111,500 Inventory
10 1/2/24 1-1 Legal services; received 12/28/23 46,000 Legal and
professional
Fees expenses
11 1/2/24 1-2 Medical services for employees for
December 2023 25,000 Medical expenses
12 1/5/24 1-3 Merchandise, shipped FOB shipping,
Page | 358
point 12/29/23; received 1/4/24 55,000 Inventory

13 1/10//24 1-4 Payroll, 2/21/23 – 1/5/24 (12 working
days in total, 4 working days in
January 2024) 72,000 Salaries and wages
14 1/10/24 1-6 Merchandise, shipped FOB shipping,
point 1/2/24; received 1/6/24 64,000 Inventory
16 1/13/24 1-9 Maintenance services; received 1/9/24 9,000 Repairs &
maintenance
17 1/14/24 1-10 Interest on bank loan, 10/10/23-1/0/24 30,000 Interest expense
18 1/15/24 1-11 Manufacturing equipment; installed
12/29/23 254,000 Machinery &
equipment
19 1/15/24 1-12 Dividend declared, 12/15/23 160,000 Dividends payable
Accrued liabilities as of December 31, 2023, were as follows:
Accrued payroll P 48,000

Accrued interest payable 26,666
Dividends payable 160,000
The accrued payroll and accrued interest payable were reversed effective January 1, 2024.
Required:
Review the data given above and prepare journal entries to adjust the accounts on December
31, 2023. Assume that the company follows FOB terms for recording inventory purchases.
SOLUTION 7-15
ADJUSTING JOURNAL ENTRIES December 31, 2023
1. Insurance expense 917

Prepaid insurance 917
(P22,000 x 0.5/12)
2. Prepaid dues and subscriptions 5,000

Dues and subscriptions expense 5,000

Inventory 111,500

Inventory 84,000
5. Legal and professional fees expense 46,000

6. Medical expenses 25,000

Page | 359

7. Inventory 55,000
8. Machinery and equipment 254,000

PROBLEM 7-16
Provisions
You are engaged to audit the December 31, 2023, financial statements of MILANI
COMPANY, a manufacturer of household appliances. Your audit disclosed the following
situations.
1. In June 2023, the company began producing and selling a new line of dishwasher. By the
end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold
under a 1-year warranty, and the company estimates warranty costs to be P750 per
dishwasher. Milani had paid out P30 million in warranty expenses as of December 31, 2023,
which is also the amount shown as warranty expense in its income statement for the current
year.
2. In response to your letter of audit inquiry, Milani's lawyer informed you that the company
is involved in a lawsuit for violating environmental laws regulating hazardous waste.
Although the litigation is pending, Milani's lawyer is certain that Milani will most probably
have to pay cleanup costs and fines of P5,500,000. Milani neither accrued nor disclosed this
loss in the financial statements.
3. Milani is the defendant in a patent infringement suit by Megan Yang over Milani's use of a
hydraulic compressor in several of its manufactured appliances. Milani's lawyer informed
you that if the suit goes against your audit client, the loss may be as much as P10 million.
However, the lawyer believes that the loss of this suit is only possible. Milani did not in any
way disclose this pending litigation in its financial statements.
1. What amount of warranty expense should be shown on Milani's income statement for the
A. P30,000,000 C. P60,000,000
B. PO D. P90,000,000
2. What amount of warranty liability should be shown on Milani's statement of financial

position as of December 31, 2023?
A. P60,000,000 C. P30,000,000
B. P90,000,000 D. PO
3. What amount of lawsuit liability should be reported as a provision on Milani's December

31, 2023, statement of financial position?
A. P10,000,000 C. P15,500,000
B. P5,500,000 D. PO
SOLUTION 7-16
Page | 360
1. Warranty expense (P750 x 120,000) P90,000,000

Answer: D
2. Warranty liability (P90,000,000 - P30,000,000) P60,000,000

Answer: A
3. Environmental cleanup liability P5,500,000

Answer: B

PROBLEM 7-17
Loss Contingency
On November 1, 2023, 69 passengers on CANYON AIRLINES Flight No. 143 were injured
upon landing when the plane skidded off the runway. Personal injury suits for damages
totaling P10,000,000 were filed on January 12, 2024, against the airline by 21 injured
passengers. The airline carries no insurance. Legal counsel has studied each suit and advised
Canyon that it can reasonably expect to pay 70% of the damages claimed. The financial
statements for the year ended December 31, 2023, were authorized for issue on February 12,
2024. During the past decade, the company has experienced at least one. accident per year
and incurred average damages of P4,100,000.
1. Prepare the journal entry that should be made as of December 31, 2023, to recognize the
loss.
2. What liability due to the risk of loss from lack of insurance coverage should Canyon
Airlines record or disclose? (Ignore the November 1, 2023, accident.)
SOLUTION 7-17
1. Loss from uninsured accident 7,000,000
Liability for uninsured accident 7,000,000
(P10,000,000 x 70%)
The loss contingency should be accrued because the cause for litigation occurred before the
end of the reporting period and an unfavorable outcome is both probable and reasonably
estimable.
Under PAS 37: Provisions, Contingent Liabilities, and Contingent Assets, a provision shall be
recognized when:
a. an entity has a present obligation (legal or constructive) as a result of a past event;
b. it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
c. a reliable estimate can be made of the amount of the obligation.
2. The company is not required to establish a liability for risk of loss from lack of insurance
coverage. However, the fact that the company is self-insured will require note disclosure.
PROBLEM 7-18
Currently Maturing Debt Expected to be Refinanced
Page | 361
NAMEKUS COMPANY has the following three loans payable scheduled to be repaid in
February of next year. The company's accounting year ends on December 31.
a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In the
following October, the company intends to get a new loan for P80,000 from the same bank.
b. The company intends to refinance Loan 2 for P150,000 when it comes due in February.
The refinancing agreement, for P180,000, will be signed in April, after the financial
statements for this year have been authorized for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February.
The actual refinancing, for P175,000, took place in January, before the financial statements
for this year have been authorized for issue.
1. As of December 31 of this year, the total current liabilities to be reported in the company's
statement of financial position should be
A. P100,000 C. P450,000
B. P250,000 D. P125,000
2. As of December 31 of this year, the total noncurrent liabilities to be reported in the

company's statement of financial position
should be
Á. P25,000 B. PO
C. P175,000 D. P350,000
SOLUTION 7-18
1. Loan 1 P100,000
Loan 2 150,000
Loan 3 200,000
Total current liabilities P450,000
Answer: C
2. Noncurrent liabilities PO
Answer: B
PROBLEM 7-19
Short-term Loan Refinancing

The following items are based on the financial statements of CARMEL
COMPANY.
Current assets P 750,000

Short-term loan payable 600,000
Total liabilities 3,000,000
Current ratio 1.5
Page | 362
Debt-to-equity ratio 1.5
Carmel Company has arranged with its bank to refinance its short- term loan when it
becomes due in 3 months. The new loan will have a term of 5 years.
1. Compute the following:
a. Total current liabilities
b. Total shareholders' equity
c. Total noncurrent liabilities
2. As the auditor of Carmel Company, how would you verify the validity of the short-term
loan refinancing?
SOLUTION 7-19
Current assets
1. a. Current ratio = Current liabilities
P750,000
1.5 = Current liabilities
Current liabilities = P750,000/1.5

= P500.000
Total liabilities
b. Debt-to-equity ratio = Total equity
P3,000,000
1.5 = Total equity
Total equity = P3,000,000/1.5
= P2.000.000
c. Total liabilities P3,000,000

Less: Current liabilities 500,000
Noncurrent liabilities P2.500.000
2. The refinancing should occur on or before the end of the reporting period. The refinancing
agreement should be examined to verify that the refinancing has actually taken place.
PROBLEM 7-20
Debt Restructuring: Equity Swap
ALEGARIO Co. owes P10,000,000 to Boom Bank. Unpaid interest on this loan has been
accrued in the amount of P100,000. Because Alegario is in financial trouble, Boom Bank
agrees to accept from the company 160,000 ordinary shares (P10 par) that have a fair value of
P8,000,000, in full settlement of the P10,000 loan obligation.
1. How much gain on extinguishment of debt should Alegario Co. recognize in its books?
Page | 363
2. What entry should be made by Alegario Co. for the debt restructure?
SOLUTION 7-20
1. Loan payable P10,000,000

Accrued interest 100,000
Carrying amount of liability 10,100,000
Fair value of ordinary shares issued 8,000,000
Gain on extinguishment of debt P2.100.000

2. Loan payable 10,000,000
Ordinary shares 1,600,000
Share premium - Ordinary shares 6,400,000
Gain on extinguishment of debt 2,100,000
PROBLEM 7-21
Debt Restructuring: Modification of Terms
BONTONG CO. is having financial difficulty and therefore has asked Thrift Bank to
restructure its 5% P9 million note outstanding. The present note has 5 years remaining with
an accrued interest that is due immediately amounting to P450,000. The note was issued at its
face value. To assist Bontong Co., Thrift Bank agrees to restructure the loan. It agrees to
reduce the principal balance due to P7,250,000 and interest rate to 4%. The accrued interest
of P450,000 is forgiven outright. Given Bontong's current financial condition, the market rate
of interest for its debt would actually be 12%.
1. How much gain on extinguishment of debt should Bontong Co. recognize in its books?
2. What entry should be made by Bontong Co. for the debt restructure?
SOLUTION 7-21
1. Present value of old liability: P9,000,000

Principal 450,000 P9,450,000
Accrued interest
Present value of new liability at 5% rate:
Principal (P7,250,000 x 0.7835) P5,680,375
Interest (P7,250,000 x 4% =
P290,000 x 4.33) 1,255,700 6,936,075
Difference P2,513.925

Paragraph 3.3.2 of PFRS 9 states that a substantial modification of the terms of an existing
financial liability shall be accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability.
Under Application Guidance B3.3.6 of PFRS 9, the terms are substantially different if the
discounted present value of the cash flows under the new terms, including any fees paid net
Page | 364
of any fees received and discounted using the original effective interest rate, is at least 10 per
cent different from the discounted present value of the remaining cash flows of the original
financial liability.
The present value of the new debt is about 27% of the old debt (P2,513,925/P9,450,000)
which exceeds the 10% threshold. Hence, a gain will be recognized on the date of
restructuring.
1. Present value of old liability:

Principal P9,000,000
Accrued interest 450,000 P9,450,000
Present value of new liability (using 12% market interest rate):
Principal (P7,250,000 x 0.5674) P4,113,650
Interest (P7,250,000 x 4% =
P290,000 x 3.605) 1,045,450 5,159,100
Gain on extinguishment of debt P4.290.900
2. Note payable - old 9,000,000

Discount on note payable - new 2,090,900108
Note payable - new 7,250,000
Gain on extinguishment of debt 4,290,900
Face value of new note payable P7,250,000

Present value of new note payable at 12%
market rate of interest 5,159,100
Discount on new note payable P2.090.900

PROBLEM 7-22
Classification of Debt
At December 31, 2023, KISU COMPANY's liabilities include the following:
1. P10 million of 10% notes are due on March 31, 2028. The financing agreement contains a
covenant that requires Kisu to maintain current assets at least equal to 200% of its current
liabilities. As of December 31, 2023, Kisu has breached this loan covenant. On February 10,
2024, before Kisu's financial statements are authorized for issue, Kisu obtained a period of
grace from Mayumi Bank until January 31, 2025, having convinced the bank that the
company's normal 3 to 1 ratio of current assets to current liabilities will be reestablished
during 2024.
2. P15 million of noncancelable 12% bonds were issued at face value on September 30, 2002.
The bonds mature on August 31, 2024. Kisu expects to have sufficient cash available to
redeem the bonds at maturity.
3. P20 million of 10% bonds were issued at face value on June 30, 2004. The bonds mature
on June 30, 2033, but bondholders have the option to call (demand payment on) the bonds on
June 30, 2024. However, the call option is not expected to be exercised, given prevailing
market conditions.
Page | 365
What portion of Kisu Company's debt should be reported as a noncurrent liability?

B. P30 million D. PO.

SOLUTION 7-22
All of the above liabilities should be reported as current liabilities in Kisu's statement of
financial position as of December 31, 2023, for the following reasons:
1. P10 million notes - The period of grace was given by the bank only after Kisu's reporting
date. As of December 31, 2023, Kisu does not have the right to defer settlement of its liability
for at least 12 months after the reporting period.
2. P15 million bonds - These are payable in the succeeding year. As of the end of the
reporting period, no long-term refinancing has been made by Kisu.
3. P20 million callable bonds - Because these bonds are callable by the creditor in the
succeeding year, Kisu does not have the right to defer its settlement for at least 12 months
after the end of the reporting period, even if the debt is not expected to be called.
Answer: D
PROBLEM 7-23
Contingencies, Provisions, and Events After the Reporting Period
Your audit client, CHALA COMPANY, is involved in the situations described below. Chala's
accounting year ends on December 31, 2023, and its financial statements are authorized for
issue on March
20, 2024.
1. Chala is involved in a
customer. On January 28, 2024, judgment was rendered against lawsuit resulting from a
dispute with a Chala in the amount of P20 million. Chala plans to appeal the judgment and is
unable to predict its outcome though management believes that it will not have a material
adverse effect on the company.
2. On April 25, 2024, the Bureau of Internal Revenue (BIR) is in the process of examining
Chala's tax returns for 2021 and 2022, but has not proposed a deficiency assessment.
Management feels an assessment is reasonably possible, and if an assessment is made, an
unfavorable settlement of up to P5 million is reasonably possible.
3. On January 5, 2024, inventory purchased FOB shipping point from a foreign country was
detained at that country's border because of political unrest. The shipment is valued at P1
million. Chala's lawyers have stated that it is probable that Chala will be able to obtain the
shipment.
4. On November 1, 2023, a lawsuit was filed by a disgruntled customer who discovered a

safety hazard in one of Chala's best- selling products. Chala's lawyers feel it is probable that
the company will be liable for P500,000.
Page | 366
5. On December 5, 2023, Chala initiated a lawsuit seeking P1 million in damages from a

patent infringement.
Determine the appropriate means of reporting each situation. Prepare any necessary journal
entries on December 31, 2023.
SOLUTION 7-23
1. No accrual of the P20 million loss would be made. The judgment will be appealed and the
outcome is uncertain. A note disclosure would be appropriate.
2. Neither accrual nor disclosure would have to be made. The BIR claim is as yet unasserted,
and an assessment is not probable.
3. No adjustment or disclosure is required because the possibility of loss is remote.
4. The loss is both probable and reasonably estimable. Thus, the related obligation is not a
contingent liability but should be recognized as a provision as mandated by PAS 37. The
entry to recognize the provision is as follows:
Loss-litigation 500,000
Liability - litigation 500,000
5. The situation involves a contingent asset because the company is the plaintiff in the
lawsuit. Under PAS 37, a contingent asset shall not be recognized because this may result to
recognition of income that may never be realized. A contingent asset is only disclosed when
it is probable. However, when the realization of income is virtually certain, the related asset is
no longer a contingent asset and its recognition becomes appropriate.
PROBLEM 7-24
Analysis of Amortization Schedule
LARIO COMPANY issued 10-year bonds on January 1, 2023. The company's year-end is
December 31, and financial statements are prepared annually. The amortization and interest
schedule below reflects the bond issuance and the subsequent interest payments and charges.
AMORTIZATION SCHEDULE
Date Interest Paid Interest Expense Amount Unamortized Carrying Value
01/01/23 P28,253
P471,747
12/31/23 P 55,000 P 56,610 26,643
473,357
12/31/24 55,000 56,803 24,840
475,160
12/31/25 55,000 57,019 22,821
477,179
12/31/26 55,000 57,261 20,560
479,440
12/31/27 55,000 57,533 18,027
481,973
12/31/28 55,000 57,837 15,190
484,810
Page | 367
12/31/29 55,000 58,177 12,013

487,987
12/31/30 55,000 58,558 8,455
491,545
12/31/31 55,000 58,985 4,470
495,530
12/31/32 55,000 59,470* --
500,000
* Adjustment due to rounding.
1. The bonds were issued at

A. A premium C. Face value
B. A discount D. Par value
2. What amortization method is used in the amortization schedule presented?

A. Straight-line method C. Effective interest
method
B. Bonds outstanding method D. Declining balance method
3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2023?
A. 11% C. 10%
B. 12% D. 6%
4. What is the effective interest rate of the bonds issued on January 1, 2023?
A. 11% C. 10%
B. 12% D. 6%
5. On the basis of the schedule presented, what is the journal entry to record the issuance of
the bonds on January 1, 2023?
A. Cash 500,000
Bonds payable 500,000.
B. Cash 471,747
Interest expense 28,253
Bonds payable 500,000
C. Cash 500,000
Premium on bonds payable 28,253
D. Cash 471,747
Discount on bonds payable 28,253
SOLUTION 7-24
1. The bonds were sold at a discount of P28,253. The issue price (P471,747) is less than the
maturity value (or face value) of P500,000 on December 31, 2032.
Answer: B
2. The amortization schedule presents an increasing interest charge which characterizes the
effective interest method of amortizing bond premium or discount. Under the straight-line
method, the annual interest would have been P57,825.30 (see computation below).
Interest payment P55,000.00
Amortization of discount (P28,253/10) 2,825.30
Total P57.285.30
Page | 368
Answer: C
3. Stated or nominal interest rate (P55,000/P500,000) 11%

Answer: A
4. Effective interest rate (P56,610/P471,747) 12%

Answer: B
5. Cash 471,747
Discount on bonds payable 28,253
Answer: D
PROBLEM 7-25
Classifying Liabilities
ELEANOR CORP. has been producing quality disposable diapers for more than two decades.
The company's fiscal year runs from April 1 to March 31. The following information relates
to the obligations of Eleanor as of March 31, 2023.
BONDS PAYABLE
Eleanor issued P10,000,000 of 10% bonds on July 1, 2021. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2031.
Interest is paid semiannually on July 1 and January 1. Eleanor uses the effective interest rate
method to amortize bond premium or discount.
The following present value factors are taken from the present value tables:
Present value of an ordinary annuity of 1 at 12% 5.65022
for 10 periods
Present value of an ordinary annuity of 1 at 6% 11.46992
for 20 periods
NOTES PAYABLE
Eleanor has signed several long-term notes with financial institutions. The maturities of these
notes are given in the schedule below. The total unpaid interest for all of these notes amounts
to P600,000 on March 31, 2023.
Due Date
Amount Due
April 1, 2023 P400,000
July 1, 2023
600,000
October 1, 2023
300,000
January 1, 2024
300,000
April 1, 2024 - March 31, 2025 1,200,000
April 1, 2025 - March 31, 2026 1,000,000
April 1, 2026 - March 31, 2027 1,400,000
Page | 369
April 1, 2027 - March 31, 2028 800,000

April 1, 2028 - March 31, 2029 1,000.000
P7,000,000
ESTIMATED WARRANTIES
Eleanor has a one-year product warranty on some selected items in its product line. The
estimated warranty liability on sales made during the 2021-2022 fiscal year and still
outstanding as of March 31, 2022, amounted to P180,000. The warranty costs on sales made
from April 1, 2022, through March 31, 2023, are estimated at P520,000. The actual warranty
costs incurred during the current 2022-2023 fiscal year are as follows:
Warranty claims honored on 2021-2022 sales P180,000
Warranty claims honored on 2022-2023 sales 178,000
Total warranty claims honored
P358.000
OTHER INFORMATION
1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2023.
2. PAYROLL RELATED ITEMS

Accrued salaries and wages P300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000
Total P404.000
3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2023.
4. DIVIDENDS
On March 15, 2023, Eleanor's board of directors declared a cash dividend of P0.20 per
ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12,
2023, to the shareholders of record at the close of business on March 31, 2023. Data
regarding Eleanor ordinary share capital are as follows:
Par value P5.00 per share
Number of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares:

March 15, 2023 P22.00 per share
March 31, 2023 21.50 per share
April 12, 2023 22.50 per share
1. How much was received by Eleanor from the sale of the bonds on
July 1, 2021?
A. P8,852,960 C. P10,500,000
B. P10,000,000 D. P10,647,040
2. What is the current portion of Eleanor's notes payable at March 31, 2023?
A. P2,800,000 C. P1,300,000
B. P1,600,000 D. P3,800,000
3. The balance of the estimated warranties payable at March 31, 2023, is

Page | 370
A. P342,000 C. P520,000
B. P18,000 D. P180,000
4. On March 31, 2023, Eleanor's statement of financial position would report total current
liabilities of
A. P5,286,000 C. P5,336,000
B. P4,386,000 D. P5,642,000
5. On March 31, 2023, Eleanor's statement of financial position would report total noncurrent
liabilities of
A. P14,389,350 C. P14,370,783
B. P14,352,217 D. P14,252,960
SOLUTION 7-25
1. Present value of principal (P10,000,000 × 0.31180) P3,118,000
Present value of interest payments
(P10,000,000 × 5% = P500,000 × 11.46992) 5,734,960
Issue price/Proceeds
P8,852,960
Answer: A
2. Notes payable - current portion:

April 1, 2023
400,000
July 1, 2023
600,000
October 1, 2023
300,000
January 1, 2024
300,000
Total
P1.600.000
Answer: B
3. Estimated warranties payable:

Balance, April 1, 2022
P180,000
Add: Warranty expense for current year 520.000
Total
700,000
Less: Actual warranty costs 358.000
Balance, March 31, 2023
P342.000
Answer: A
4. Notes payable - current portion (see no. 2) P1,600,000

Estimated warranties payable (see no. 3) 342,000
Accounts payable
740,000
Page | 371
Payroll-related accruals and deductions withheld 404,000

Miscellaneous accruals
150,000
Cash dividends payable
1,200,000
Accrued interest on:
Bonds payable (P10,000,000 × 10% × 3/12) 250,000
Notes payable
600,000
Total current liabilities
P5,286,000
Answer.
5. AMORTIZATION SCHEDULE (PARTIAL)

Date Interest Paid Interest Expense Discount Amortization Carrying Value
07/01/21 -- -- --
P8,852,960
12/31/21 P500,000 P531,178 P31,178
8,884,138
07/01/22 500,000 533,048 33,048
8,917,186
12/31/22 500,000 535,031 35,031
8,952,217
07/01/23 500,000 537,133 37,133
8,989,350
Bonds payable P8,952,217

Carrying value, Jan. 1, 2023 18,566 P
8,970,783
Add: Discount amortization,
Jan. 1 - Mar. 31 (P37,133 × 3/6)
Notes payable - noncurrent portion:
(P7,000,000 - P1,600,000 current portion) 5,400,000
Total noncurrent liabilities
P14,370,783
Answer: C
PROBLEM 7-26
Bond Redemption Prior to Maturity Date
The following data were obtained from the initial audit of HANSTEEN COMPANY:
15%, 10-year, Bonds Payable, dated January 1, 2022
Debit Credit Balance
Cash proceeds from issue on
January 1, 2022, of 1,000,
P1,000 bonds. The market rate of interest
on the date of issue was 12%. P1,172,044
P1,172,044
Bond Interest Expense

Page | 372
Cash paid, 1/2/23 P 75,000

P 75,000
Cash paid, 7/1/23 75,000
150,000
Accrual, 12/31/23 75,000
225,000
Accrued Interest on Bonds
Balance, 1/1/23 P
75,000 P 75,000
Accrual, 12/31/23 75,000
150,000
Treasury Bonds
Redemption price and interest to
date on 200 bonds permanently
retired on Dec. 31, 2023 P265,000
P265,000

1. Carrying value of bonds payable at December 31, 2023
A. P831,110 C. P1,151,583
B. P800,000 D. P921,266
2. Loss on bond redemption

A. P4,683 C. P15,000
B. P19,683 D. P34,683
3. Accrued interest on bonds at December 31, 2023

A. P75,000 C. P60,000
B. P135,000 D. P52,500
4. Bond interest expense for the year ended December 31, 2023
A. P150,000 C. P69,745
B. P139,174 D. P160,826
SOLUTION 7-26
1. AMORTIZATION SCHEDULE (PARTIAL)
Date Interest Paid Interest Expense Premium Amortization Carrying Value
01/01/22 --- --- ---
P1,172,044
07/01/22 P75,000 P70,323 P4,677
1,167,367
01/01/23 75,000 70,042 4,958
1,162,409
07/01/23 75,000 69,745 5,255
1,157,154
01/01/24 75,000 69,429 5,571
1,151,583
Carrying value of bonds, Dec. 31, 2023

Page | 373
(P1,151,583 x 800/1,000)
P921,266
Answer: D
2. Cash paid
P265,000
Less: Interest (P200,000 × 15% × 6/12) 15,000
Redemption price
250,000
Carrying value of bonds redeemed
(P1,151,583 × 200/1,000)
230,317
Loss on bond redemption P
19,683
Answer: B
3. Accrued interest, Dec. 31, 2023 P60,000

(P800,000 × 15% × 6/12)
Answer: C
4. Interest expense for the year ended Dec. 31, 2023

(see amortization schedule):
Jan. 1 - July 1 P
69,745
July 1 - Dec. 31
69,429
Total
P139.174
Answer: B
PROBLEM 7-27
Bond Redemption Prior to Maturity Date
The long-term debt section of ELMO COMPANY's statement of financial position as of
December 31, 2022, included 9% bonds payable of P400,000, less unamortized discount of
P32,000. Further examination revealed that these bonds were issued to yield 10%. The
amortization of the bond discount was recorded using the effective interest method. Interest
was paid on January 1 and July 1 of each year. On July 1, 2023, Elmo retired the bonds at 105
before maturity. What is the amount of loss to be recognized on the retirement of bonds?
A. P52,400 C. P51,600
B. P20,000 D. P 0
SOLUTION 7-27
Effective interest
(P400,000 - P32,000 = P368,000 × 10% × ½) P18,400
Nominal interest
(P400,000 × 9% × ½)
18,000
Discount amortization, Jan. 1, 2023 - July 1, 2023 P 400
Retirement price (P400,000 × 105%) P420,000

Page | 374
Carrying value of bonds:

Face value P400,000
Less: Unamortized discount
(P32,000 - P400) 31,600 368,400
Loss on retirement of bonds P 51,600
Answer: C
PROBLEM 7-28
Bond Refunding
MALOMBE CORP. had outstanding P6,000,000 of 11% bonds (interest payable July 31 and
January 31) due in 10 years. On July 1, it issued P9,000,000 of 10%, 15-year bonds (interest
payable July 1 and lanuary 1) at 97. A portion of the proceeds was used to call the 11% bonds
at 103 on August 1. Unamortized bond discount and issue cost applicable to the 11% bonds
were P240,000 and P60,000, respectively.
Required:
Prepare journal entries to record the following:
a. sale of the new issue
b. retirement of the old issue
SOLUTION 7-28
a.Cash 8,730,000
Discount on bonds payable
(P9,000,000 × 3%) 270,000
Bonds payable
9,000,000
b. Bonds payable 6,000,000

Loss on redemption of bonds 480,000
Cash (P6,000,000 × 103%)
6,180,000
Discount on bonds payable
240,000
Unamortized bond issue costs
60,000
Redemption price
P6,180,000
Carrying value of bonds redeemed:
Face value P6,000,000
Unamortized bond discount (240,000)
Unamortized bond issue costs (60,000)
5,700,000
Loss on redemption
P 480,000
PROBLEM 7-29
Convertible Debt Issue
On January 1, 2023, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value
of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%.
Page | 375
Each bond is convertible, at the holder's option, into 200 P2 par value ordinary shares at any
time up to maturity. On the date of issuance, the prevailing market interest rate for similar
debt without the conversion privilege was 9%. On the same date, the market price of one
ordinary share was P3.The bonds were converted on December 31, 2024.
The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962
0.77218
Present value of an ordinary annuity of
1 for 3 periods 2.67301
2.53130
Present value of an annuity due of
1 for 3 periods 2.83339
2.75911
1. The liability component of the convertible debt is

A. P4,000,000 C. P1,600,000
B. P3,696,232 D. P3,730,242
2. The equity component of the convertible debt is

A. P303,768 C. P1,600,000
B. P1,973,621 D. P2,400,000
3. The interest expense to be reported on Dias Company's income statement for the year
ended December 31, 2024, is
A. P101,000 C. P240,000
B. P110,107 D. P341,000
4. The entry to record the bond conversion on December 31, 2024, should include a credit to
share premium - issuance of
A. P2,289,893 C. P2,593,661
B. P2,400,000 D. P 0
SOLUTION 7-29
1. Present value of principal (P4,000,000 × 0.77218) P3,088,720
Present value of interest payments
(P4,000,000 × 6% = P240,000 × 2.53130) 607,512
Liability component of convertible debt P3,696,232
Answer: B
2. Proceeds
P4,000,000
Less: Liability component (see no. 1) 3,696,232
Equity component of convertible debt P 303.768
Answer: A
3. AMORTIZATION SCHEDULE
Date Interest Paid Interest Expense Discount Amortization Carrying Value
01/01/23 -- -- --
P3,696,232
Page | 376
12/31/23 P240,000 P332,661 P 92,661

3,788,893
12/31/24 240,000 341,000 101,000
3,889,893
12/31/25 240,000 350,107* 110,107
4,000,000
.* Adjustment due to rounding.
Interest expense for 2024 (see amortization schedule) P341,000

Answer: D
4. Carrying value of bonds, Dec. 31, 2024

(see amortization schedule) P3,889,893
Add: Share premium - conversion privilege 303,768
Total consideration
4,193,661
Par value of ordinary shares [P2 × (4,000 × 200)] 1,600,000
Share premium – issuance P2,593,661
The entry to record the bond conversion is:

Bonds payable 4,000,000
Share premium - conversion privilege 303,768
Bond discount (P4,000,000 - P3,889,893) 110,107
Ordinary shares (P2 x 800,000 shares) 1,600,000
Share premium – issuance
2,593,661
Answer: C
A convertible bond is a compound financial instrument that has liability and equity
components. Such components should be classified separately on an entity's statement of
financial position. The separation is made at the time the instrument is issued and is not
subsequently revised.
An equity instrument evidences a residual interest in the assets of an entity after deducting all
of its liabilities. Thus, when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is assigned the residual
amount after deducting from the fair value of the instrument as a whole (i.e., the net proceeds
from the issue) the amount separately determined for the liability component.
In the case of convertible bonds, the amount allocated to the liability component is the fair
value of the bonds without the conversion privilege. In the absence of the fair value without
the conversion privilege, the sum of the present value of the face amount of the bonds and the
present value of future interest payments discounted using the effective interest rate is
assigned to the liability component.
On the conversion date, the carrying value of the bonds converted is used to measure the
ordinary shares issued. No gain or loss is recognized.
PROBLEM 7-30
Computation of Lease Liability and Other Related Accounts
On January 1, 2023, ERITREA CO. signs a 10-year noncancelable lease agreement to lease a
storage building from Storage Company. The following information pertains to this lease
agreement:
a. The agreement requires equal rental payments of P720,000 beginning on January 1, 2023.
Page | 377
b. The fair value of the building on January 1, 2023, is P4,400,000.

c. The building has an estimated economic life of 12 years, with an unguaranteed residual
value of P100,000. Eritrea depreciates similar buildings on the straight-line method.
d. The lease is nonrenewable. At the termination of the lease, the building reverts to the
lessor.
e. The interest rate implicit in the lease is 12% per year.
f. The yearly rental payment includes P24,705.10 of executory costs related to taxes on the
property.
The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197
1. What amount of lease liability should be recognized at the inception of the lease?
A. P4,432,197 C. P4,400,000
B. P4,556,340 D. P3,928,570
2. What is the book value of the leased storage building at December 31, 2024?
A. P3,520,000 C. P3,142,856
B. P3,540,000 D. P3,645,072
3. Which of the following should be shown under current liabilities in the statement of
financial position of Eritrea Company at December 31, 2024?
Lease Liability Interest Pavable
A. P280,818 P414,477
B. P695,295 P414,477
C. P280,818 P444,565
D. P695,295 P444,565
4. What is the noncurrent portion of the lease liability on December 31, 2024?
A. P3,704,705 C. P3,453,975
B. P4,400,000 D. P3,173,157
5. How much interest expense should be recognized for the year ended December 31, 2023?
A. P444,565 C. P859,042
B. P414,477 D. P 0
SOLUTION 7-30
1. C Minimum annual lease payment
P695,294.90
(P720,000 - P24,705.10)
Present value of an annuity due of 1 at 12%
for 10 periods
× 6.32825
Present value of minimum lease payment -
Lease Liability
P4,400,000.00
2. A Cost of leased storage building

P4,400,000.00
Page | 378
Accumulated depreciation
(P4,400,000 / 10 yrs. × 2)
(880,000)
Book value, Dec. 31, 2024 P3,520.000
3. A
Date Annual Lease Payment Interest Balance of Lease Liability
01/01/23 -- --
P4,400,000
01/01/23 695,294.90 --
3,704,705.10
01/01/24 695,294.90 P444,564.61
3,453,974.81
01/01/25 695,294.90 414,476.98
3,173,156.89
Current liabilities:
Lease liability (P695,294.90 - P414,476.98) P280,817.92
4. D Lease liability – noncurrent P3.173.156.89
5. A Interest expense for 2023 P444.565
PROBLEM 7-31
Deferred Tax Liability
EYASI, INC. began operating on January 1, 2023. At the end of the first year of operations,
Eyasi reported P7,500,000 income before income taxes on its income statement but only
P6,900,000 taxable income on its tax return. Analysis of the P600,000 difference revealed
that it was a temporary difference related to a current asset. At the end of 2024, the
accumulated temporary tax liability difference related to future years is P1,100,000. The
enacted tax rate is 25% for 2023 and 2024.
1. The journal entry to adjust the deferred tax liability at the end of 2024 should include a
A. Debit to Deferred tax liability of P125,000
B. Credit to Deferred tax liability of P125,000
C. Debit to Deferred tax asset of P125,000
D. Credit to Deferred tax liability of P275,000
2. Assume that at the end of 2024, the accumulated temporary tax liability difference related
to future years is P550,000. What journal entry should be made to adjust the deferred tax
liability at the end of 2024?
.A. Income tax expense 137,500
Deferred tax liability 137,500
B. Deferred tax asset 12,500
Income tax benefit 12,500
C. Deferred tax liability 12,500
Income tax expense 12,500
D. Deferred tax liability 12,500
Deferred tax asset 12,500
SOLUTION 7-81
1. Deferred tax liability; Dec. 31, 2024
(P1,100,000 × 25%) P275,000
Deferred tax liability, Dec. 31, 2023
Page | 379
(P600,000 × 25%) 150,000

Increase in deferred tax liability P125,000
Journal entry:
Income tax expense 125,000
Deferred tax liability
125,000
Answer: B
2. Deferred tax liability, Dec. 31, 2024

(P550,000 × 25%) P137,500
Deferred tax liability, Dec. 31, 2023
(P600,000 × 25%) 150,000
Decrease in deferred tax liability P(12,500)
Journal entry:
Deferred tax liability 12,500
Income tax expense
12,500
Answer: C
PROBLEM 7-32
Deferred Income Tax Asset and Liability
At December 31, 2022, GALILEE CORPORATION had a temporary difference (related to
depreciation) and reported a related deferred tax liability of P500,000 on its statement of
financial position. AtDecember 31, 2023, Galilee has four temporary differences. An analysis
of these reveals the following:
Temporary Difference Future Taxable (Deductible)
Amounts
2023 2024 Later Year
1. Use of straight-line depreciation

for accounting purposes and accelerated
depreciation for tax purposes P1,600,00 P2,200,000 P7,600,000
2. Rent collected in advance; recognized
when earned for accounting purposes and
when received for tax purposes (3,800,000) ---
3. Various expenses accrued when incurred
for accounting purposes; recognized for
tax purposes when paid (900,000) ---
---
4. Recognition of gain on installment
sales during the period of sale for
accounting purposes and during the
period of collection for tax purposes 2,760,000 2,100,000 ---
(P340,000) P4.300.000 P7.600,000
Assume that the company has income taxes of P3,625,000 due per the tax return for 2023.
The installment receivable collectible in 2023 is classified as noncurrent. The enacted tax rate
is 25% for all periods.
Page | 380
1. What amount of deferred tax asset should be shown on Galiliee's statement of financial
A. P950,000 C. P1,175,000
B. P1,215,000 D. P225,000
2. What amount of deferred tax liability should be shown on Galilee's statement of financial
A. P2,850,000 C. P1,175,000
B. P1,215,000 D. P4,065,000
3. How much is Galilee's pretax accounting income for 2023?

A. P15,639,000 C. P14,500,000
B. P24,060,000 D. P26,060,000
4. How much is Galilee's net income for 2023?

A. P19,710,000 C. P24,060,000
B. P18,045,000 D. P14,500,000
SOLUTION 7-32
1. Deferred tax asset, December 31, 2023
(see computation below)
P1,1750,000
Answer: C
2. Deferred tax liability, December 31, 2023

(see computation below)
P4,065,000
Answer: D
COMPUTATION OF DEFERRED TAX ASSET AND LIABILITY

Future Taxable
Deferred Tax
Temporary Difference (Deductible) Amounts Tax Rate Asset Liability
Depreciation P11,400,000 25%
P2,850,000
Unearned rent (3,800,000) 25% P 950,000
Accrued expenses (900,000) 25% 225,000
Installment sale 4,860,000 25%
1,215,000
Totals
P1,175,000 P4,065.000
3. Taxable income (P3,625,000/25%)

P14,500,000
Excess depreciation for tax (P1,600,000 + P2,200,000 +
P7,600,000 - P2,000,000*
9,400,000
Excess rent income for tax Excess expenses per books (900,000)
Excess income per books for installment sale
Page | 381
(P2,760,000 + P2,100,000)
4,860,000
Pretax accounting income
P24,060,000
* Beginning cumulative temporary difference related to depreciation.

(P500,000/25% = Р2,000,000)
Answer: B
4. Deferred tax liability, Dec. 31, 2023 (see computation) P4,065,000

Deferred tax liability, Jan. 1, 2023
(500,000)
Deferred tax expense for 2023
P3,565,000
Deferred tax asset, Dec. 31, 2023 (see computation) P1,175,000
Deferred tax asset, Jan. 1, 2023
0
Deferred tax benefit for 2023
P1,175,000
Income before income taxes
P24,060,000
Income tax expense:
Current P3,625,000
Deferred (P3,565,000 - P1,175,000) 2,390,000 (6,015,000)

Net income
P18,045,000
Answer: B
Alternative computation
Pretax accounting income
P24,069,000
Less: Income tax (P24,060,000/25%) 6,015,000
Net income
P18,045,000
PROBLEM 7-33
The following data pertain to the CARROLL COMPANY.
1. At December 31, 2023, the company has a P900,000 liability reported for estimated
litigation claims. This P900,000 balance represents amounts that have been charged to
income but are nottax deductible until they are paid. The company expects to pay the claims
and thus have tax-deductible amounts in the future in the following manner:
Year Payments
2026 P150,000
2027 690,000
2028 60,000
P900,000
2. The company uses different depreciation methods for financial reporting and tax purposes.
Consequently, at December 31, 2023, the company has a cumulative temporary difference
Page | 382
due to depreciable property of P2,400,000. This P2,400,000 cumulative temporary difference

is to result in taxable amounts in future years in the following manner:
Year Amount
2024 P 480,000
2025 P 480,000
2026 P 480,000
2027 P 480,000
2028 P 480,000
P2,400,000
3. The income tax rate is 25%.
4. Taxable income for 2023 is P7,200,000. The company expects to report taxable income for
the next five years.
5. No temporary differences existed at the end of 2022.
1. The deferred tax liability to be reported in Carroll's statement of financial position at

A. P600,000 C. P384,000
B. P480,000 D. P225,000
2. The deferred tax asset to be reported in Carroll's statement of financial position at

A. P225,000 C. P375,000
B. P600,000 D. P1,800,000
3. The amount of current income tax payable to be reported in Carroll's statement of financial
position at December 31, 2023, is
A. P1,575,000 C. P2,400,000
B. P1,425,000 D. P1,800,000
4. Carroll's pretax accounting income for 2023 is

A. P8,700,000 C. P6,300,000
B. P9,600,000 D. P5,700,000
5. Carroll's net income for 2023 is

A. P6,525,000 C. P7,425,000
B. P6,900,000 D. P4,125,000
SOLUTION 7-33
(P480,000 × 5 × 25%) P600,000
Answer: A
(P900,000 × 25%) P225,000
Answer: A
3. Taxable income for 2023 P7,200,000
Tax rate
25%
Income tax payable for 2023 (current) P1,800,000
Answer: D
Page | 383

Future taxable temporary difference – depreciation 2,400,000
Future deductible temporary difference – litigation (900,000)
Pretax accounting income for 2023 P8,700,000
Answer: A
5. Pretax accounting income (see no. 4) P8,700,000

Income tax expense:
Current (see no. 3) P1,800,000
Deferred (P600,0001 - P225,0002) 375,000
(2,175,000)
Net income
P6,525,000
1
Deferred tax liability, December 31, 2023 P600,000
Deferred tax liability, January 1, 2023 0
Deferred tax expense for 2023 P600,000
2
Deferred tax asset, December 31, 2023 P225,000
Deferred tax asset, January 1, 2023 0
Deferred tax benefit for 2023 P225,000
Answer: A
PROBLEM 7-34
KAMPESCA, INC., in its first year of operations, has the following differences between the
carrying value and tax base of its assets and liabilities at the end of 2023:
Carrying Value Tax Base
Equipment (net) P4,000,000
P3,400,000
Estimated warranty liability 2,000,000 0
Kampesca estimates that the warranty liability will be settled in 2024.
The difference in equipment (net) will result in taxable amounts as shown below:
Year Amount
2024 P200,000
2025 300,000
2026 100,000
The company has taxable income of P5,200,000 for 2023. The income tax rate is 25%.
1. What amount of deferred tax liability should be reported in Kampesca's statement of
financial position at December 31, 2023?
A. P150,000 C. P100,000
B. P125,000 D. P75,000
2. What amount of deferred tax asset should be reported in Kampesca's statement of financial
A. P150,000 C. P500,000
B. P0 D. P75,000
3. What is the amount of income tax payable (current) to be reported in Kampesca's statement
of financial position at December 31, 2023?
A. P950,000 C. P1,300,000
B. P396,000 D. P1,650,000
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4. What is the total income tax expense for 2023?

A. P950,000 C. P800,000
B. P1,650,000 D. P1,450,000
SOLUTION 7-34
(P200,000 + P300,000 + P100,000 = P600,000 × 25%) P150,000
Answer: A
(P2,000,000 × 25%)
P500,000
Answer: C
Tax rate
× 25%
Income tax payable for 2023 P1,300,000
Answer: C
4. Current tax expense for 2023 (see no. 3) P1,300,000
Deferred tax expense for 2023
150,000
Deferred tax benefit for 2023 (500,000)
Income tax expense for 2023 P 950,000
Answer: A
PROBLEM 7-35
Liability Under Finance Lease
On December 31, 2022, LEMAN CO. signs a 10-year noncancelable lease agreement to lease
a storage building from Storage Company.
The following information pertains to this lease agreement:
1. The agreement requires equal rental payments of P720,000 beginning on December 31,
2022.
2. The fair value of the building on December 31, 2022, is P4,400,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual
value of P100,000. Leman depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the
lessor.
5. The interest rate implicit in the lease is 12% per year.
6. The yearly rental payment includes P24,705 of executory costs related to taxes on the
property.
The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197
1. What amount should be capitalized as the cost of the right of use asset?
A. P4,556,340 C. P4,432,197
B. P4,400,000 D. P0
2. What amount should be included in the current liabilities section of Leman's statement of
financial position at December 31, 2023?
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A. P720,000 C. P695,295
B. P414,477 D. P280,818
3. What amount should be included in the noncurrent liabilities section of Leman's statement
of financial position at December 31, 2023?
A. P3,453,975 C. P5,562,360
B. P3,173,157 D. P0
4. What is the total lease-related expenses to be reported in Leman's income statement for the
A. P909,270 C. P1,160,000
B. P879,182 D. P464,705
SOLUTION 7-35
1. Present value of minimum lease payments:
(P720,000 - P24,705 [executory costs] × 6.32825) P4,400,000
Answer: B
2. Lease liability, Dec. 31, 2023 (current portion)
(P695,295 - P414,477)
P280,818
Answer: D
3. Lease liability, Dec. 31, 2023 (noncurrent portion) P3,73,157
Answer: B
LEASE AMORTIZATION SCHEDULE (PARTIAL)

Annual Interest
Payment Less on Unpaid Balance of
Date Executory Costs Lease Liability Lease
Liability
12/31/22 -- --
P4,400,000
12/31/22 P695,295 --
3,704,705
12/31/23 695,295 P444,565
3,453,975
12/31/24 695,295 414,477
3,173,157
4. LEASE-RELATED EXPENSES FOR 2023

Interest expense (see amortization schedule) P444,565
Executory costs - property tax
24,705
Depreciation expense (P4,400,000/10 years) 440,000
Total
P909,270
Answer: A

Auditing Problems Roque 2023-2024

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Auditing Problems Roque 2023-2024

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Page | 1

AUDIT OF CASH & CASH

PROBLEM 1 – 1 – Cash and Cash Equivalents

Note 1 – Cash on hand included the following:

2. Petty cash fund

3. Balanghay Bank current account

4. Cash and cash equivalents

2. Bills and coins P 3,000

3. Balanghay Bank Current Account

4. Cash on hand (see no.1) P 820,000

PROBLEM 1 – 2 – Cash and Cash Equivalents

● Undeposited customer checks of P22,200 (including a customer check dated

● Currency and coins on hand of P3,480.

● Savings account at the Northern Philippines Bank with a balance of P2,400,000.

● P120,000 in a current account at the Northern Philippines Bank. This represents a

● Time deposit (placement term is 2 months) P 100,000

● Commercial papers (maturities range from 30-90 days at the time

● Postal money orders received from customers P 200,000

PROBLEM 1 – 4 – Cash and Cash Equivalents

Oct. 31, 2023 90 days 40,000

The following are included in cash on hand:

The following information pertains to Tipid Bank current account:

PROBLEM 1 – 5 – Cash and Cash Equivalents

PROBLEM 1 – 6 – Cash and Cash Equivalents

6. A separate cash fund amounting to P2,250,000 is restricted for the retirement of

PROBLEM 1 – 7 – Computation of Correct Cash Balance

PROBLEM 1 – 8 – Cash and Cash Equivalents

Cash in bank – ER Bank (restricted account for plant expansion,

Bank service charges (1,260)

3. Accounts receivable (P22,500 + P67,300) P 89,800

4. Cash in bank – TLC Bank P 432,710

PROBLEM 1 – 9 – Cash in Bank and Petty Cash Fund

1. The cash balance per bank statement on December 31, 2023, is

2. The adjusted Cash in bank balance at December 31, 2023, is

3. The adjusted Petty cash fund balance at December 31, 2023, is

3. D Petty cash fund per ledger P 35,000

PROBLEM 1 – 10 – Petty Cash Fund

What amount should be reported as cash shortage or cash overage?

Postage stamps 750

PROBLEM 1 – 11 – Petty Cash Fund

1. How much is the petty cash shortage or overage?

PROBLEM 1 – 12 – Petty Cash Fund

The balance in the petty cash box is P3,200.

3. The entry to replenish the fund is

Postage expense 2,240

4. The objective of establishing a petty cash fund is to

3. Office supplies expense 3,460

Computation of cash shortage:

4. Facilitate payment of small, miscellaneous items.

5. Cash will be overstated, and expenses understated.

PROBLEM 1 – 13 – Count of Petty Cash Fund and Undeposited Collections

Bills and coins

Postage stamps (unused) – P365

Other items found inside the cash box:

1. What is the amount of shortage due from the sales manager?

2. What is the amount of undeposited collections on December 31, 2023?

4. The cash count should include total checks of

5. What is the total cash shortage?

2. Collections per OR nos. 4352 – 4355 P 43,300

3. Travel expenses (P16,000 + P1,200 + P880) P 18,080

4. Total checks P 42,980

5. Total cash shortage P 22,166

Total cash accounted for P 69,314