ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Weeks 1-3

AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla

AP-100: ACCOUNTING CHANGES, ERROR CORRECTIONS,

CASH/ACCRUAL and SINGLE ENTRY

CORRECTION OF ERRORS

PROBLEM 1: The financial statements of A Co., a calendar year entity, contained the following
errors: (Amounts are in thousands)

2017 2018 2019

Accounts Receivable 90 under 75 over 80 under
Accounts Payable 50 under 20 over
Merchandise Inventory 70 over 60 under 30 over
Accrued Expense 18 under 19 over
Prepaid Expense 12 under 17 over
Unearned Income 14 under 27 over
Depreciation Expense 13 over 16 under

Compute for the following:

a. Net adjustments on 2018 and 2019 Profits
b. Effects of errors on the 2017 and 2019 Accumulated Profits
c. Adjusted 2017 and 2018 Working Capital assuming unadjusted balances are P500
and P900 for the years 2017 and 2018, respectively.
d. Net adjustments on 2017 and 2019 Total Assets
e. Effects of errors on 2018 and 2019 Total Liabilities

PROBLEM 2: You are auditing the financial statements of B Inc. for the year 2019. The details of
the company’s Accumulated Profit account, before any adjustments, are as follows:

ACCUMULATED PROFIT
Date Particulars Debit Credit Balance
01.01. 2017 Beginning Balance 400,000
09.30. 2017 Gain on sale of treasury shares 30,000 430,000
12.31. 2017 Net loss for the year 50,000 380,000
01.31 2018 Dividends paid 60,000 320,000
04.30 2018 Paid in Capital in excess of par 35,000 355,000
08.31 2018 Gain on sale of debt investment
at fair value through OCI 40,000 395,000
12.31 2018 Net income for the year 255,000 650,000
01.31 2019 Dividends paid 70,000 580,000
12.31 2019 Net loss for the year 90,000 490,000

Your examination disclosed the following:

a. Omissions at the end of each year of the following:

2016 2017 2018 2019
Accrued Expense 2,000 4,000
Prepayments 3,000 7,000
b. Major repairs done at the beginning of 2017 on the company’s equipment for P40,000 were
recognized as outright expenses. The company depreciates equipment at 10% per annum.

c. The company paid on July 1, 2017 an operating expense covering a period of three years
beginning July 1, 2017 in the amount of P30,000, which were all charged as outright expense.
No adjusting journal entry was ever made pertinent to this transaction.

d. Dividends were declared in 2017 and 2018 amounting to P60,000 and P70,000, respectively, but
were not recognized until they were paid the following year.

Compute for the following:

a. Accumulated profit as of December 31, 2017 and 2019
b. Profit(Loss) for the years ended December 31, 2017 and 2018

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1-3: ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY

ACCOUNTING CHANGES

PROBLEM 3: C Co. has been using the FIFO method of inventory costing since it began operations
in 2017. C Co. has reported the following net income:

Net income Under FIFO

2017 P 500,000
2018 385,000
2019 420,000

Beginning 2020 the company decided to change the inventory cost formula to weighted average
method. The following are the December 31 inventory balances under each method:

MI,end under Weighted Average MI, end under FIFO MI, end Understated
(New Method) (Old Method) Under Old Method
2017 430,000 280,000 150,000
2018 210,000 133,000 77,000
2019 395,000 220,000 175,000

Compute for the following:

a. Restated net income for 2018 and 2019 as a result of the change in policy
b. Retroactive adjustment to the accumulated profits beginning balance of 2020 as a
result of this change

PROBLEM 4: D Company purchased an equipment at the beginning of 2017 in the amount of

P1,200,000. The company depreciates this asset over a 4-year period, with a salvage value of 10%
of original cost. At the beginning of 2019, the following changes were effected:

a. Useful life has been extended by two years

b. The salvage value has been reduced to 5% of the asset’s original cost.

Compute for the December 31, 2019 carrying value of the asset and the depreciation
expense for the year under each of the following independent cases:

a. A change from straight-line depreciation to SYD method beginning 2019

b. A change from straight-line to double-declining balance method beginning 2019

CASH/ACCRUAL, SINGLE ENTRY

PROBLEM 5: E Corp.’s operating expenses and interest income under cash basis amounted to
P650,000 and P800,000; respectively, for the year 2019. Further examination revealed the following
information:

January 1, 2019 Dec. 31, 2019

Accrued operating expenses P124,000 P178,000
Prepaid operating expenses 56,000 90,000
Accrued interest income 44,000 25,000
Unearned interest income 102,000 76,000

Compute for the following under the accrual basis:

a. Operating expenses for the year
b. Interest income for the year

PROBLEM 6: F Corp. accounts for its sales under the cash basis. For the year 2019, the total
collections from customers, including cash sales made and recoveries of previously written-off
accounts, based on F Corp.’s cash receipts books amounted to P1,800,000. Audit investigation
revealed the following additional information:

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1-3: ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY

Trade receivable, beginning P150,000

Trade receivable, end 210,000
Advances from Customers, beginning 60,000
Advances from Customers, end 40,000
Sales discounts 50,000
Sales returns before collections were made as evidenced
by the issuances of credit memos 35,000
Sales returns after collections were made, thus refunds were given 15,000
Write-offs of worthless accounts receivable 20,000
Cash recoveries from accounts previously written-off 5,000

Compute for the Net Sales under the accrual basis of accounting.

PROBLEM 7: G Corp., which maintains records under cash-basis, revealed total payments made to
suppliers amounting to P900,000. Additional information follow:

Trade payable, January 1, 2019 P88,000

Trade payable, December 31, 2019 97,000
Advances to Suppliers, January 1, 2019 43,000
Advances to Suppliers, December 31, 2019 29,000
Merchandise inventories, January 1, 2019 180,000
Merchandise inventories, December 31, 2019 115,000
Purchase discounts 35,000
Purchase returns before any payments were made, thus credit
memos were received from suppliers 63,000
Purchase returns after payments were made, thus cash was
received from suppliers as refunds 14,000

Compute for the Cost of Goods Sold.

PROBLEM 8: The H Co. began operations in 2019. During 2019, the bookkeeper used a check
register to record all cash receipts and cash disbursements. No other journals were used. The
following is a summary of the cash receipts and disbursements made during the year:

Cash receipts:
Sale of share capital P 70,000
Collections from customers 490,000
March 1, 2019, one-year, 12% loan 60,000
Total cash receipts P 620,000

Cash disbursements:
Payment of inventories P 240,000
Payment of salaries 90,000
Acquisition of equipment 80,000
Payment of rent 20,000
Miscellaneous expenses 15,000
Total cash disbursements P 445,000
Cash, End P 175,000

The following additional information were gathered:

a. Customers owed the company P36,000 at year end, P5,000 of which may probably not be
collected.
b. At year end, P50,000 was still due to suppliers of merchandise.
c. At year-end, merchandise inventory costing P30,000 still remained on hand.
d. Salaries owed to employees at year-end amounted to P13,000.
e. On November 1, 2019, P20,000 rent was paid representing rent for the months of November
2019 until March, 2020.
f. The equipment, which has a 10-year life was purchased on January 1, 2019. Straight-line
depreciation is used.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1-3: ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY

Determine the adjusted balances of the following:

a. Sales Revenue .
b. Cost of Sales
c. Expenses
d. Total Current Assets
e. Total Non-current Assets
f. Total Current Liabilities

PROBLEM 9: Your audit of I Corp. revealed that your client kept very limited records. Purchases of
merchandise were paid through issuances of checks, but most payments were out of cash receipts.
No record was kept for the cash in bank account, nor was a record kept for sales made. Accounts
receivable were recorded only by keeping copies of tickets. Copies of these tickets were released to
the customers upon collection of their accounts. The following information were obtained:

1. The company started its operations on January 2, 2019, on which date 216,000 ordinary shares
with a par value of P100 were issued in exchange for the following:

Cash P1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000

2. An analysis of the bank statements showed total deposits of P12,600,000. Included in the total
deposits were cash proceeds from the sale of the share capital made on January 2, 2019 for
P1,800,000. The bank statement balance on December 31, 2019 was P900,000.

3. There were company’s checks amounting to P180,000, which were dated and issued in December
2019, but paid by the bank in January 2020. Cash on hand on December 31, 2019 amounted to
P450,000, which is inclusive of advances from a customer in the amount of P135,000.

4. During the year, the company borrowed P1,600,000 from the bank and repaid P400,000 in
principal and P80,000 in interest.

5. Disbursements made during the year, not through check issuances, but from cash receipts, were
as follows: Utilities of P360,000; Salaries of P360,000; Supplies of P720,000 and Dividends of
P540,000. There were neither accruals nor deferrals of expenses at the end of the year.

6. An inventory of merchandise taken on December 31, 2019 showed P2,718,000 of merchandise.

7. Accounts receivable at the end of the year totaled P3,240,000. Of this amount, P180,000 may
prove uncollectible.

8. Unpaid supplier invoices for merchandise purchased amounted to P1,260,000 at the end of the
year.

9. Equipment with a cash purchase price of P1,440,000 was purchased on January 2, 2019, on an
installment basis. During the year, the total checks issued for the total installment price of the
equipment totaled P1,602,000, which all cleared the bank during the year. The equipment has a
useful life of 10 years and is being depreciated under the straight-line method.

Compute for the profit under the accrual basis for the year ended December 31, 2019.

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 ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 42  October 2021 CPA Licensure Exam  Weeks 4 - 6

AUDITING (Auditing Problems) S. Ireneo  C. Espenilla

AP-200: ERROR CORRECTION, ACCOUNTING CHANGES,

CASH-ACCRUAL & SINGLE ENTRY
PROBLEM 1 (ERROR CORRECTION)

Rocku Co., a calendar year entity, contained the following independent errors at the
end of each reporting period: (Amounts in thousands)

2017 2018 2019

Accounts Receivable 85 under 92 over 78 under
Merchandise Inventory 97 over 68 under 33 over
Accrued Income 33 over 25 under 45 under
Prepaid Expense 12 under 17 over
Advances to Suppliers 105 under 85 over 45 under
Accounts Payable 50 under 40 under 20 over
Accrued Expense 18 under 19 over 27 under
Unearned Income 56 under 14 under 27 over
Advances from Customers 68 under 82 over 71 under
Depreciation Expense 12 under 16 under

Compute for the following:

a. Net adjustments on 2018 and 2019 Profits
b. Effects of errors on the 2017 and 2019 Accumulated Profits
c. Adjusted 2017 and 2018 Working Capital assuming unadjusted balances are P500
and P900 for the years 2017 and 2018, respectively.
d. Net adjustments on 2017 and 2019 Total Assets
e. Effects of errors on 2018 and 2019 Total Liabilities

PROBLEM 2: (CHANGE IN ACCOUNTING POLICY)

Yoda Co. has been using the weighted average method of inventory costing since it began
operations in 2017. Yoda Co. has reported the following net income:

Net income Under Weighted Average Method

2017 P 400,000
2018 285,000
2019 320,000

Beginning 2020 the company decided to change the inventory cost formula to FIFO
method. The following are the December 31 inventory balances under each method:

MI, end Per Books MI, End MI, End Per Books
(Weighted Average) (FIFO) Overstated By
2017 P 180,000 P 120,000 P 60,000
2018 250,000 170,000 80,000
2019 330,000 240,000 90,000

Compute for the following:

a. Restated net income for 2018 and 2019 as a result of the change in policy
b. Adjustment to the accumulated profits beginning balance of 2020 as a result of
this change

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200
Weeks 4-6: ERROR CORRECTION, ACCOUNTING CHANGES, CASH/ACCRUAL; SINGLE ENTRY

PROBLEM 3: (CHANGE IN ACCOUNTING ESTIMATE)

Choebee Company purchased an equipment at the beginning of 2017 in the amount of

P1,800,000. The company depreciates this asset over a 6-year period, with a salvage value
of 10% of original cost. At the beginning of 2019, the following changes were effected:

a. Remaining life has been extended by a year from the date of change
b. The salvage value has been reduced to 5% of the asset’s original cost.

Compute for the December 31, 2019 carrying value of the asset and the
depreciation expense for the year under each of the following independent cases:

a. A change from straight-line depreciation to SYD method

b. A change from SYD method to double-declining balance method

PROBLEM 4: (ERROR CORRECTION)

You are auditing the financial statements of Nibi Inc. for the year 2019. The details of the
unadjusted balances of its Accumulated Profit account are as follows:

ACCUMULATED PROFIT
Date Particulars Debit Credit Balance
01.01.2017 Beginning Balance 500,000
08.31.2017 Gain on sale of treasury shares 40,000 540,000
12.31.2017 Net income for the year 200,000 740,000
02.28.2018 Payment of dividends declared in 70,000 670,000
2017
05.31.2018 Paid in capital in excess of par 20,000 690,000
07.31.2018 Loss on sale of treasury shares 30,000 660,000
09.30.2018 Loss on sale of debt investment at
fair value through OCI 10,000 650,000
12.31.2018 Net loss for the year 80,000 570,000
03.31.2019 Net income for the year 150,000 720,000
12.31.2019 Payment of dividends declared in 90,000 630,000
2018

Your examination disclosed the following:

a. Omissions at the end of each year of the following:

2016 2017 2018 2019

Merchandise Inventory, end 4,000 7,000
Accrued Expense 3,000 5,000
b. The cost of minor repairs on the company’s equipment on January 1, 2016 in the
amount of P50,000 was capitalized and depreciated at 10% per annum.
c. On January 1, 2017, the company paid an operating expense in the amount of P30,000
covering the period, 2017 to 2019. The company charged the entire payment as
outright expense and no adjusting journal entry was ever made pertinent to this
transaction.

Compute for the following:

a. Accumulated profit as of December 31, 2017 and 2019
b. Profit (Loss) for the years ended December 31, 2017 and 2018

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200
Weeks 4-6: ERROR CORRECTION, ACCOUNTING CHANGES, CASH/ACCRUAL; SINGLE ENTRY

PROBLEM 5: (CASH/ACCRUAL; SINGLE ENTRY)

Tofu Corp.’s operating expenses and interest income under cash basis amounted to P420,000
and P770,000; respectively, for the year 2019. Further examination revealed the following
information:

January 1, 2019 December 31, 2019

Accrued operating expenses P 133,000 P 122,000
Prepaid operating expenses 56,000 90,000
Accrued interest income 44,000 25,000
Unearned interest income 102,000 76,000

Compute for the following under the accrual basis:

a. Operating expenses for the year
b. Interest income for the year

PROBLEM 6: (CASH/ACCRUAL; SINGLE ENTRY)

Julius Corp. accounts for its sales under the cash basis. For the year 2019, the total
collections from customers, including cash sales made and recoveries of previously written-
off accounts, based on Julius Corp.’s cash receipts books amounted to P1,800,000. Audit
investigation revealed the following additional information:

Trade receivable, beginning P 190,000

Trade receivable, end 450,000
Advances from Customers, beginning 80,000
Advances from Customers, end 60,000
Sales discounts 20,000
Sales returns before collections were made as evidenced
by the issuances of credit memos 35,000
Sales returns after collections were made, thus cash refunds were given 18,000
Write-offs of worthless accounts receivable 22,000
Cash recoveries from accounts previously written-off 4,000

Compute for the Net Sales under the accrual basis of accounting.

PROBLEM 7: (CASH/ACCRUAL; SINGLE ENTRY)

Tin Corp., which maintains records under cash-basis, revealed total payments made to
suppliers amounting to P700,000. Additional information follow:

Trade payable, January 1, 2019 P 92,000

Trade payable, December 31, 2019 105,000
Advances to Suppliers, January 1, 2019 57,000
Advances to Suppliers, December 31, 2019 19,000
Merchandise inventories, January 1, 2019 186,000
Merchandise inventories, December 31, 2019 125,000
Purchase discounts 39,000
Purchase returns before any payments were made, thus credit
memos were received from suppliers 54,000
Purchase returns after payments were made, thus cash was
received from suppliers as refunds 16,000

Compute for the Cost of Goods Sold.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200
Weeks 4-6: ERROR CORRECTION, ACCOUNTING CHANGES, CASH/ACCRUAL; SINGLE ENTRY

PROBLEM 8: (CASH/ACCRUAL; SINGLE ENTRY)

The Gian Co. began operations in 2019. During 2019, the bookkeeper used a check register
to record all cash receipts and cash disbursements. No other journals were used. The
following is a summary of the cash receipts and disbursements made during the year:

Cash receipts:
Sale of share capital P 90,000
Collections from customers 460,000
September 1, 2019, one-year, 12% loan 60,000
Total cash receipts P 610,000

Cash disbursements:
Payment of inventories P 230,000
Payment of salaries 80,000
Acquisition of equipment 90,000
Payment of rent 30,000
Miscellaneous expenses 11,000
Total cash disbursements P 441,000
Cash, End P 169,000

The following additional information were gathered:

a. Customers owed the company P56,000 at year end, P8,000 of which may probably
not be collected.
b. At year end, P70,000 was still due to suppliers of merchandise.
c. At year-end, merchandise inventory costing P24,000 still remained on hand.
d. Salaries owed to employees at year-end amounted to P13,000.
e. On November 1, 2019, P40,000 rent was paid representing rent for 6 months
beginning November 1, 2019.
f. The equipment, which has a 10-year life was purchased on January 1, 2019.
Straight-line depreciation is used.

Determine the adjusted balances of the following for the year ended/as of
December 31, 2019:
a. Sales Revenue .
b. Cost of Sales
c. Expenses
d. Total Current Assets
e. Total Non-current Assets
f. Total Current Liabilities

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200
Weeks 4-6: ERROR CORRECTION, ACCOUNTING CHANGES, CASH/ACCRUAL; SINGLE ENTRY

PROBLEM 9: (CASH/ACCRUAL; SINGLE ENTRY)

Your audit of Steph Corp. revealed that your client kept very limited records. All of the
company’s disbursements were made out of cash collections (coins and bills), but all
purchases of merchandise and acquisitions of equipment were paid through issuances of
checks. No record was kept for the cash in bank account, nor was a record kept for sales
made. Accounts receivable were recorded only by keeping copies of tickets. Copies of these
tickets were released to the customers upon collection of their accounts. The following
information were obtained:

1. The company started its operations on January 2, 2019, on which date 216,000
ordinary shares with a par value of P100 were issued in exchange for the following:

Cash P1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000

2. An analysis of the bank statements showed total deposits of P12,600,000. Included in

the total deposits were cash proceeds from the sale of the share capital made on
January 2, 2019 for P1,800,000. The bank statement balance on December 31, 2019
was P900,000.

3. There were company’s checks amounting to P180,000, which were dated and issued in
December 2019, but paid by the bank in January 2020. Cash on hand on December
31, 2019 amounted to P450,000, which is inclusive of advances from a customer in the
amount of P135,000.

4. During the year, the company borrowed P1,600,000 from the bank and repaid
P400,000 in principal and P80,000 in interest.

5. Disbursements made during the year, not through check issuances, but from cash
receipts, were as follows: Utilities of P360,000; Salaries of P360,000; Supplies of
P720,000 and Dividends of P540,000. There were neither accruals nor deferrals of
expenses at the end of the year.

6. An inventory of merchandise taken on December 31, 2019 showed P2,718,000 of

merchandise.

7. Accounts receivable at the end of the year totaled P3,240,000. Of this amount,
P180,000 may prove uncollectible.

8. Unpaid supplier invoices for merchandise purchased amounted to P1,260,000 at the

end of the year.

9. Equipment with a cash purchase price of P1,440,000 was purchased on January 2,

2019, on an installment basis. During the year, the total checks issued for the total
installment price of the equipment totaled P1,602,000, which all cleared the bank
during the year. The equipment has a useful life of 10 years and is being depreciated
under the straight-line method.

Compute for the profit under the accrual basis for the year ended December 31,
2019.

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 ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 42 Ÿ October 2021 CPA Licensure Exam Ÿ Solution to Quiz2

AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla

AP-200S: ERROR CORRECTION, ACCOUNTING CHANGES,

CASH/ACCRUAL; SINGLE ENTRY

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200S
Solution to Quiz2: ERROR CORRECTION, ACCOUNTING CHANGES,
CASH/ACCRUAL; SINGLE ENTRY

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200S
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CASH/ACCRUAL; SINGLE ENTRY

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200S
Solution to Quiz2: ERROR CORRECTION, ACCOUNTING CHANGES,
CASH/ACCRUAL; SINGLE ENTRY

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200S
Solution to Quiz2: ERROR CORRECTION, ACCOUNTING CHANGES,
CASH/ACCRUAL; SINGLE ENTRY

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