a

AUDITING

PROBLEM 1:

Atom Corp. acquired a real property in early 2019 at a total purchase price of P6M.
A mortgage payable on the real property amounting to P2M was absorbed by Atom
Corp. The land was determined to have a fair market value of P2M while the Building
had a fair market value of 8M. The company also paid the following in relation to the
purchase:
Real property taxes (2017 to 2019) P900,000
Special assessment by the government for public 200,000
improvements
Payment to tenants of the building to vacate the 120,000
premises
Pavement of driveways and parking lot 400,000
Remodeling costs on the building prior to use 600,000

The building is depreciated using straight-line basis over a useful life of 10 years to
10% residual value based on initial cost. Depreciable land improvements on the other
hand are depreciated over 10 years to zero residual value. Full year’s depreciation is
recognized on the year of acquisition.

On December 31, 2023 the building is tested for possible impairment due to
government policies restricting the companies operations in the area. The projected
cash flows from the building for its remaining useful life is estimated as follows:
Year Cash Inflows Cash Outflows
2024 P3,400,000 P2,500,000
2025 3,200,000 2,400,000
2026 2,500,000 2,000,000
2027 1,900,000 1,600,000
2028 1,000,000 800,000

The revised salvage value of the asset was at P511,278. The fair value of the building
net of estimated disposition costs was determined to be P2.5M. The prevailing pre-
tax discount rate appropriate for this analysis is 6% while post-tax discount rate is
at 8%.

Requirements:
1. What is the correct initial cost of the Land?

2. What is the carrying value of the building as of December 31, 2023 before
impairment loss?
3. What is the recoverable amount of the building on December 31, 2023?
4. How much is the impairment loss on the Building in 2023?

PROBLEM 2:

The accountant of Tanjiro Corp. presented the following schedule of PPE balances as
at January 1, 2023:
Debit Credit
Land 2,000,000
Building 8,000,000

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 Accumulated Depreciation – Building ?
Factory Equipment 6,000,000
Accumulated Depreciation – Factory ?
Equipment
Office Equipment 4,000,000
Accumulated Depreciation – Office ?
Equipment

All assets were acquired at the beginning of 2020, when Tanjiro Corp.’s operation
started. The company had the following depreciation policies:
Building – Double declining balance method (20 years life)
Factory Equipment – SYD method (6 years life)
Office Equipment – Straight-line method (10 years life)
*All assets were estimated to have a 10% salvage value based on cost.

Your audit of the current year transactions revealed the following information:

a. On March 31, 2023 a factory equipment was rendered irreparable due to a

power surge. The equipment had an original cost of P1.5M. The estimated
scrap value of the said equipment was at P20,000. The company received
P220,000 from the insurance company as the factory equipment was insured
from such damage.

b. On June 1, 2023 an old factory equipment with an original cost of P2M was
traded in for a new factory equipment having a cash purchase price of P3M.
The company paid additional 2.5M in cash.

c. On September 30, 2023 an old office equipment with an original cost of P1.2M
was sold for P400,000. Transaction costs incurred in the sale was at P10,000.
.
d. On November 1, 2023 a replacement office equipment was purchased by
issuing a P3M non-interest bearing note. The note is payable in 3 equal
installments of 1M starting November 1, 2023. Freight and handling costs
amounted to P95,000 while installation cost was incurred at P75,000. Produce
from initial testing of the machinery were sold at P50,000. The company
estimates that it will incur dismantling and decommissioning costs at the assets
retirement date at P374,700. Market rate of interest prevailing on this date
was at 10%.

Requirements:
5. What is the correct carrying value of the building as of December 31, 2023?
6. What amount of impairment loss should be recognized on March 31?
7. What is the gain/loss on the trade in transaction on June 1?
8. What is the correct depreciation expense on factory equipment for 2023?
9. What is the correct initial cost of the office equipment acquired on November
1, 2023?
10.What is the correct depreciation expense on office equipment for 2023?

PROBLEM 3:

Nezuko Corp. constructs its own factory building in 2023. To finance the said
construction, Nezuko Corp. borrowed P2M from BPI Bank. The 10% loan was dated
January 1, 2023 and is payable after 3 years. The construction started on April 1
when the company incurred P600,000. Additional costs incurred were as follows:
June 1- P400,000
August 31 - 200,000
October 1 - 300,000
The construction was substantially completed by November 1.

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The company invested any portion of the loan proceeds that are still to be used in
the construction to earn 6% in interest per annum. Investments were done monthly
at the beginning of each month.

Requirements:
11.What is the capitalizable borrowing cost in 2023?
12.What is the interest expense in 2023?

PROBLEM 4:

A building constructed by an entity was financed by a 12%, P1M loan (specific

borrowing). The company also had two general borrowings: 12%, P3M loan and 10%,
P1M loan. All the borrowings were dated January 1, 2023, although the construction
of the building started only on March 1, 2023. The following expenditures were
incurred in relation to the construction: March 1 – P1,200,000; May 31 – P600,000;
August 31 – P800,000; November 1 – P500,000. The construction was completed by
the end of December. The building was immediately used after the construction was
substantially completed. The useful life of the building is 10 years without residual
value under straight -line method of depreciation. The fair market value of the
building was P3.8M and 4M on December 31, 2023 and December 31, 2024
respectively.

13.What is the carrying value of the building as of Dec. 31, 2024 under the cost
model?
14.Assuming that the company elected to use the revaluation model on December
31, 2024, what is balance of revaluation surplus(OCI) on December 31, 2025?

PROBLEM 5:

You are the senior auditor in charge for the annual audit of Samal Corp. for the year
ended December 31, 2020. You checked mostly the information in the financial
records for this small/medium entity and was highly satisfied.

You noticed however, that the property account consisted of land which was acquire
on January 1, 2018 together with eight identical buildings equally built on it. The
initial purchase price was P48,000,000, thirty percent of which is attributable to the
land. The eight buildings were estimated to have a 50 years as economic lives of
which two of them were used for general and administrative offices while the rest
were leased out to independent parties under operating lease arrangements.

The following costs were also incurred during acquisition:

Non-refundable transfer taxes paid to government 3,000,000
Title insurance and legal fees attributable to the acquisition 1,000,000
Actual borrowing costs 220,000
Marketing and advertisements 100,000
Office parties to celebrate new rental business 80,000
Reimbursement to previous owner of non-refundable real property 40,000
taxes for six-month period ending June 30, 2018

During 2018, Samal Corp. incurred repairs and maintenance costs of P46,000.
Additionally, it paid non-refundable real property taxes of P60,000 for the year ending
June 30, 2019.

On December 31, 2018, the fair value of each building was P4.9M measured reliably
on a going concern basis without undue cost or effort.

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Based on your audit of the property account:

15. What is the initial measurement amount of investment property

16. What is the depreciation expense on the building for the year 2018?

PROBLEM 6

NDC, Inc. had the following portfolio of financial assets as of December 31, 2025:

Investment Acquisition Cost

A Corp. stocks (20,000 shares) P605,000
B Inc. stocks (40,000 shares) 1,100,000
C Co. 10%, P2,000,000 bonds 1,973,008
D Corp. stocks (50,000 shares) 2,400,000

Audit notes:
a. The shares of A Corp. were acquired with an intention of generating short-term profits from the share
price’s fluctuations. The company paid P30.25 per share, which included the P1.25 per share broker’s
fees and commissions. The shares were acquired on February 20, 2025. A P2 per share cash dividends
were received on March 30. These dividends were declared by A Corp. on January 20, 2025 to
stockholders as of record date March 1, 2025.

b. The company paid P27.50 per share, including P0.50 per share broker’s fees and commissions on the
acquisition of B, Inc.’s stocks on March 1, 2025. These shares were classified as FVOCI. A P3 per share
dividends were received from the said shares on May 3, 2025. The dividends were declared on April 1 to
stockholders as of record date April 20, 2025.

c. C Co. bonds, which pay semi-annual interest every June 30 and December 31, were acquired on
October 1, 2025 at P1,973,008 when the prevailing market interest rate on similar instruments was at
12%. The bonds will mature on December 31, 2027. The company adopts a business model of holding
debt securities to collect contractual cash flows.

d. D Corp. stocks were acquired at P48 per share, including P3 per share broker’s fees and commissions
on June 30, 2025. D Corp. had a total of 200,000 shares outstanding on the same date. The company
received P5 dividends per share from D Corp. on December 20, 2025.

e. The following information are available at year-end:

A Corp. B, Inc. C Co. D Corp.
Net income P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair value P35/share P25/share 11% P52/share

Requirements:
17. The journal entry to record the acquisition of A Corp. stocks will include a:
a. Debit to Investment in A Corp. Stocks for P605,000 c. Credit to Dividend Income for P40,000
b. Debit to Expense for P65,000 d. Debit to Dividend Receivable for P40,000

18. At what amount should the B, Inc. stocks be recorded on its date of acquisition?

19. The journal entry to record the acquisition of C Co. bonds will include a:
a. Credit to Cash for P1,923,008
b. Debit to Interest Receivable for P50,000
c. Debit to Investment in C Co. bonds for P2,000,000
d. Credit to Interest Income for P50,000

20. At what amount should the D Corp. stocks be recorded on its date of acquisition?

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21. The net effect from the equity investments to be recorded in profit or loss for 2025 is:
22. The net investment income from the debt investments to be recorded in profit or loss for 2025 is:
23. What is the net effect of all the investments-related transactions on net income of NDC, Inc. in
2025?

PROBLEM 7
Liberty Company presented to you the following Property, Plant and Equipment schedule at the
beginning of the year in line with your audit for the calendar year 2025:
Cost Accumulated Useful Life Depreciation
Depreciation Method
Land P 4,200,000 - - -
Building P 9,000,000 P 3,095,100 20 years Double declining
balance
Machinery & P15,000,000 P 6,000,000 10 years Straight line
Equipment
Furniture & P 6,000,000 P 3.709,091 10 years Sum-of-years-digit
Fixtures

Audit notes:
a. The PPE were acquired at the beginning of 2021 when the company started its operations.
b. On January 1, 2025, Liberty incurred P230,000 in minor repairs on various parts of the building.
c. On June 30, 2025, an old machinery with an original cost of P2,400,000 was exchanged for a
machinery of NDC Company. The fair value of Liberty’s machinery was at P1,250,000 while the fair value
of NDC’s machinery was at P1,400,000 on the date of exchange. Liberty paid additional cash at P200,000
on the exchanged which was deemed to have commercial substance.
d. On March 1, 2025, some furniture and fixtures were sold for P400,000. These furniture and fixtures
were originally acquired at P1,800,000.
e. New furniture and fixtures were acquired on June 30, 2025 at a price of P2,400,000, payable in 3
equal installments starting June 30, 2026. Liberty incurred freight and handling costs of P138,320. The
prevailing market rate of interest on this date was 8%. The present value factor of an ordinary annuity of
1 at 8% for 3 periods is 2.5771.
Requirements:
24. How much is the gain or loss to be recognized on the exchange of machinery on June 30, 2025?

25. How much is the gain or loss to be recognized on the sale of furniture and fixtures on March 1,
2025?

26. The new furniture acquired on June 30, 2025 should be recorded at a cost of

27. What is the carrying value of the building on December 31, 2025?

28. What is the carrying value of the machinery and equipment on December 31, 2025?

29. What is the carrying value of the furniture and fixtures on December 31, 2025?

Problem No. 8

The following data pertain to Apollo Corporation’s property, plant and equipment for 2019.

Audited balances at December 31, 2018:

DEBIT CREDIT
Land P 7,500,000

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Buildings 30,000,000
Accumulated depreciation – Buildings 6,557,500
Machinery and equipment 22,500,000
Accumulated depreciation – Machinery and Equipment
6,250,000
Delivery equipment 5,750,000
Accumulated depreciation – Delivery Equipment
4,230,000

Depreciable 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 2019 and other information are as follows:

a) On January 2, 2019, Apollo 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, 2019, a machine purchased for P575,000 on April 1, 2014 was stolen. Apollo
recovered P387,500 from its insurance company.

c) On May 1, 2019, 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, 2025.

d) On July 1, 2019, 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) Apollo determined that the delivery equipment comprising the P5,750,000 balance at January
1, 2019 would have been depreciated at a total amount of P900,000 for the year ended
December 31, 2019.

The salvage values of the depreciable assets are immaterial. The policy of Apollo Corporation
is to compute depreciation to the nearest month.

Based on the preceding information, compute the following:

30. Depreciation expense for 2019 on Buildings

31. Depreciation expense for 2019 on Machinery and Equipment

32. Depreciation expense for 2019 on Delivery Equipment

33. Depreciation expense for 2019 on Leasehold Improvements

34. Accumulated Depreciation – Buildings, December 31, 2019

35. Accumulated depreciation – Machinery and equipment, December 31, 2019

36. Accumulated depreciation – Delivery equipment, December 31, 2019

37. Gain (loss) on trade in of truck on January 2, 2019

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Problem No. 9

In the audit of the books of TWIN Corporation for the year 2019, the following items and
information appeared in the Production Machine account of the client:

Date Particulars Debit Credit

2019
01/01 Balance–Machine 1, 2, 3, and 4 at
P180,000 each P 720,000
02/28 Machine 5 396,000
Machine 1 P 6,000
09/01 Machine 6 192,000
12/01 Machine 7 432,000

The Accumulated Depreciation account contained no entries for the year 2019. The balance on
January 1, 2019 per your audit, was as follows:

Machine 1 P168,750
Machine 2 79,470
Machine 3 67,500
Machine 4 45,000

Based on your further inquiry and verification, you noted the following:

1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for
P6,000.

2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on
December 1, 2019. Machine 7 was to replace Machine 2.

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

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

QUESTIONS:

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

38. The gain or loss on sale of Machine 1 is

39. The loss on trade in of Machine 3 is

40. The Production Machine account is overstated by
41. The total depreciation for the year ended December 31, 2019 is
42. The carrying amount of production machine as of December 31, 2019 is

Problem No 10

The APOLLO COMPANY completed the following transactions during 2019:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000 representing
property tax for March 1 – June 30 which was prepaid by the vendor. Of the purchase
price, 25% is deemed applicable to land and the remaining 75% to buildings. The
APOLLO COMPANY assumed a mortgage of P4,600,000 on the purchase and paid
cash for the balance.

30 The building acquired necessitates current reconditioning at a cost of P342,000

because previous owners had failed to take care of normal maintenance and repair
requirements on it.

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May 15 Garages in the rear of the building were demolished. The APOLLO COMPANY
recovered P66,000 on the lumber salvage. It then proceeded to construct a
warehouse at P1,013,000, which was almost exactly the same as bids made by
construction companies. Upon completion of construction, city inspectors ordered
extensive modifications to the warehouse as a result of failure on the part of the
company to comply with building safety code. Such modifications, which could have
been avoided, cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market value of
P640,000 (par, P40,000) for a patent and new toy-making machine. The machine has
a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the machinery, a new
franchise was acquired from the manufacturer of the machinery to produce toy robots.
Payment was made by issuing the company’s own ordinary shares (par, P1,000,000).
The value of the franchise is set at P500,000, while the machine’s fair value is
P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of P420,000 and
P89,000, respectively. The work was completed and paid for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time,
required redecorating and repairs were completed at a cost of P64,000.

After considering the preceding transactions, compute the year-end balances of the following:

43.Buildings

44.Land

45.Machinery

46.Share premium

47.Intangibles

Problem No. 11

In connection with your audit of the Titan Corporation’s financial statements for the year 2020 you
noted the following items relative to the company’s Intangible assets.

 A patent was purchased from Proton Company for P4,000,000 on January 2, 2019. Titan
estimated that the remaining useful life of the patent to be 10 years. The patent was carried
in Proton’s accounting records at a carrying value of P4,000,000 when Proton sold it to Titan.

 During 2020, a franchise was purchased from Soyuz Company for P960,000. In addition, 5%
of the revenue from the franchise must be paid to Soyuz. Revenue from the franchise for
2020 was P5,000,000. Titan estimates the useful life of the franchise to be 10 years and takes
full year’s amortization in the year of purchase.

 Titan incurred research and development costs of P866,000 in 2020. Titan estimates that
these costs will be recouped by December 31, 2023.

 On January 1, 2020, Titan, because of the recent events in the industry, estimates that the
remaining life of the patent purchased on January 2, 2019, is only 5 years from January 1,
2020.

QUESTIONS:

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

48. Amortization of patent for 2020

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 49. Carrying amount of patent as of December 31, 2020

50. Carrying amount of intangible assets as of December 31, 2020

51. An auditor would most likely be concerned with controls that provide reasonable
assurance about the
a. Efficiency of management’s decision-making process
b. Appropriate prices the entity should charge for its products
c. Decision to make expenditures for certain advertising activities
d. Entity’s ability to initiate, record, process and report financial data

52.PSA 315 (Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment) requires the auditor to perform
risk assessment procedures at
a. The financial statement level only
b. The assertion level only
c. The financial statement level and the assertion level for classes of transactions,
account balances and disclosures
d. Either the financial statement or assertion level

53. The auditor’s risk assessment procedures should always include the following, except
a. Inquiries of management and of others within the entity
b. Analytical procedures
c. Observation and inspection
d. Substantive test procedures and tests of controls

54.The auditor’s risk assessment procedures

a. By themselves, do not provide sufficient appropriate audit evidence on which to base
the audit opinion
b. Should not consider information obtained from the auditor’s previous experience with
the entity
c. Are designed to detect material misstatements at the assertion level for classes of
transactions, account balances and disclosures
d. Are designed to test the effectiveness of the entity’s controls

55.The auditor should obtain an understanding of the entity’s objectives and strategies,
and those business risks that may result in risks of material misstatement. Which of
the following statements concerning the entity’s business risk is incorrect?
a. Business risk is broader than the risk of material misstatement of the financial
statements, though it includes the latter
b. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatement
c. The auditor has a responsibility to identify or assess all business risks
d. Business risk may arise from the development of new products or services that may
fail

56. When obtaining an understanding of controls that are relevant to the audit, the auditor
is required to
a. Evaluate the design of those controls
b. Determine whether those controls have been implemented
c. Evaluate the design of those controls and determine whether they have been
implemented
d. Evaluate the design of those controls and determine whether they have been
implemented by performing tests of controls

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57. This internal control component is the foundation for all other components. It sets the
tone of the organization, provides discipline and structure, and influences the control
consciousness of employees
a. Control activities
b. Monitoring of controls
c. Control environment
d. The entity’s risk assessment process

58. An entity’s business processes are the activities designed to

a. Develop, purchase, produce , sell and distribute an entity’s products and services
b. Ensure compliance with laws and regulations
c. Record information, including accounting and financial reporting information
d. Assess the effectiveness of internal control performance over time

59. The auditor uses the understanding of internal control to

I. Identify types of potential misstatements
II. Consider factors that affect the risks of material misstatement
III.Design the nature, timing and extent of further audit procedures
a. I and II only
b. I and III only
c. II and III only
d. I, II and III

60. Which of the following is a management control method that most likely could improve
management’s ability to supervise company’s activities effectively?
a. Monitoring compliance with internal control requirements imposed by regulatory
bodies
b. Limiting direct access to assets by physical segregation and protective devices
c. Establishing budgets and forecasts to identify variances from expectations
d. Supporting employees with the resources necessary to discharge their
responsibilities

61. Which of the following are considered control environment factors?

Detection Risk Commitment to Competence
a. Yes Yes
b. Yes No
c. No Yes
d. No No

62. Which of the following is not a component of internal control?

a. Control risk
b. Monitoring
c. Information and communication
d. The control environment

63. Which of the following factors are included in an entity’s control environment?
Audit Committee Participation Integrity and ethical values Organizational
Structure
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

64. In determining the adequacy of the allowance for uncollectible accounts, the least
reliance should be placed upon which of the following?
a. The credit manager’s opinion
b. An aging schedule of past due accounts
c. Collection experience of the client’s collection agency

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 d. Ratios collected showing the past relationship of the valuation allowance to net credit
sales

65. Once a CPA has determined that accounts receivable have increased due to slow
collection in a “tight money” environment, the CPA would be likely to
a. Increase the balance in the allowance for bad debts account
b. Review the going concern ramifications
c. Review the credit and collection policy
d. Expand tests of collectibility

66. Which of the following is the best argument against the use of negative accounts
receivable confirmations?
a. The cost-per-response is excessively high
b. There is no way of knowing if the intended recipients received them
c. Recipients are likely to feel that in reality the confirmation is a subtle request for
payment
d. The inference drawn from receiving no reply may not be correct

67. Customers having substantial year-end past due balances fail to reply after second
request forms have been mailed directly to them. Which of the following is the most
appropriate audit procedure?
a. Examine shipping documents
b. Review collections during the year being examined
c. Intensify the study of the client’s system of internal control with respect to
receivables
d. Increase the balance in the allowance for uncollectible accounts

68. In connection with the examination of financial statements by an independent auditor,

the client suggests that members of the internal audit staff be utilized to minimize audit
costs. Which of the following tasks could most appropriately be delegated to the internal
audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal auditor’s
judgment as to how many accounts and which accounts will provide sufficient
coverage
b. Preparation of schedules for negative accounts receivable responses
c. Evaluation of the internal control for accounts receivables and sales
d. Determination of the adequacy of the allowance for doubtful accounts

69. An auditor confirms a representative number of open accounts receivable as of

December 31, 2010, and investigates respondents’ exceptions and comments. By this
procedure, the auditor would be most likely to learn of which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping
b. One of the sales clerks has not been preparing charge slips for credit sales to family
and friends
c. One of the EDP control clerks has been removing all sales invoices applicable to his
account from the data file
d. The credit manager has misappropriated remittances from customers whose
accounts have been written off

70. In the confirmation of accounts receivable, the auditor would most likely
a. Request confirmation of a sample of the inactive accounts
b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of
the receivables
c. Require confirmation of all receivables from agencies of the federal government
d. Require that confirmation requests be sent within one month of the fiscal year-end

End

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