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1. During the year ended December 31, 2015, the following events occurred at Severus Company:
Sales revenue of P900,000 had been recorded twice in the journals of 2012.
Obsolete inventory aged three years originally costing P1,200,000 has to be written off.
What amount should be presented as prior period error (adjustment to the January 1, 2015 balance of
the retained earnings) for the year ended December 31, 2015?
a. 300,000
b. (800,000)
c. (900,000)
d. (2,100,000)
2. The draft financial statements for Snape Company for the year ended December 31, 2015 have been
accomplished. A final review of the draft reveals an undervaluation of the ending inventory of
P1,500,000 on December 31, 2012. It was discovered further that the ending inventory on December
31, 2013 was overvalued by P800,000.
What adjustment should be made to the profit for the year ended December 31, 2014 presented as the
comparative figure in the 2015 financial statements?
a. 2,300,000 decrease
b. 2,300,000 increase
c. 700,000 decrease
d. 700,000 increase
3. During the year ended December 31, 2015, the following events transpired in relation to Brie
Corporation;
The provision for doubtful accounts on December 31, 2014 was P450,000. During 2015, it was
decided that P500,000 worth of bad accounts should be written off the December 31, 2014
accounts receivable.
The discovery of a counting error relating to the December 31, 2014 inventory necessitates an
increase in the carrying amount of inventory at that date in the amount of P420,000.
What adjustment is required to restate the retained earnings in January 1, 2015?
a. 0
b. 120,000
c. (330,000)
d. 420,000
4. In connection with your examination of the financial statements of Hagrid Co. for the year ended
December 31, 2015, you discovered the following facts. A fire insurance premium of P120,000 was paid
and charged as insurance expense for 2015. The fire insurance policy covers one year from April 1,
2015. Inventory on January 1, 2015 was understated by P120,000. Inventory on December 31, 2015
was overstated by P90,000. Taxes of P60,000 for the fourth quarter of 2015 were paid on January 20,
2016 and charged as expense of 2016. On December 5, 2015, a cash advance of P100,000 by a
customer was received for goods to be delivered in January 2016. The amount of P300,000 was credited
to sales. The gross profit rate on sales is 40%. The net income for the year ended December 31, 2015
before any adjustments is P1,642,000. What is the corrected net income for 2015?
a. 1,282,000
b. 1,342,000
c. 1,162,000
d. 1,102,000
5. Quartz Business Products Inc. reported that assets decreased by P8,000,000 and liabilities decreased by
P14,000,000 in the current year. It was determined that financial asset at FVTOCI increased by
P400,000 and trading securities decreased by P800,000 all due to changes in fair value. During the year,
the entity received equipment valued at P500,000 from a shareholder as donation and corrected a prior
period error resulting from an overstatement of ending inventory for P2,000,000. What is the net
income for the current year?
a. 7,600,000
b. 7,100,000
c. 8,400,000
d. 7,900,000
6. The physical count of TORIKO on December 31, 2015 revealed merchandise with a total cost of
P5,000,000. Goods sold to a customer, which are being held for the customer to call at the customer's
convenience with a cost of P200,000 were excluded from the count. A packaging case containing a

product costing P500,000 was standing in the shipping room when the physical inventory was taken.
This was not included in the inventory because it was marked "hold for shipping instructions". An
investigation revealed that the customer's order was dated December 28, 2015, but that the case was
shipped and the customer billed on January 4, 2016. A special machine costing P250,000, fabricated to
order for a customer, was finished and specifically segregated at the shipping room on December 31,
2015. The customer was shipped on January 2, 2016. What is the correct amount of inventory that
should be reported on December 31, 2015?
a. 5,950,000
b. 5,750,000
c. 5,500,000
d. 5,700,000
7. Manuela Corporation provided the following statement of retained earnings for the year ended December
31, 2015:
Balance at beginning of the year
Additions:
Change in estimate of 2015 amortization expense
Gain on sale of land
Interest revenue
Profit and loss for 2015
Total
Deductions:
Increased depreciation due to change in estimated life
Dividends declared and paid
Loss on sale of equipment
Loss from major casualty
Balance at the end of the year

8,500,000
250,000
1,800,000
450,000
1,300,000

500,000
1,100,000
300,000
700,000

3,800,000
12,300,000

2,600,000
9,700,000

What amount of net income should have been reported for 2015?
a. 2,300,000
b. 1,300,000
c. 1,200,000
d. 2,550,000
8. An examination of the accounts of Bourgeois Company discloses the following:
Improvements in buildings and equipment of P32,400 had been debited to expense at the end of
April 2012. Improvements are estimated to have 12-year life. The company uses the straightline method in recording depreciation and computes depreciation to the nearest month.
The physical inventory of merchandise had been understated by P9,600 at the end of 2013 and
by P14,250 at the end of 2014.
The merchandise inventories at the end of 2014 and 2015 did not include merchandise that was
then in transit and to which the company had title. These shipments of P6,300 and P8,700 were
recorded as purchases in January of 2015 and 2016, respectively.
The company had failed to record sales commissions payable of P10,800 and P3,300 at the end
of 2014 and 2015, respectively.
The company had failed to recognize supplies on hand of P2,550 and P5,160 at the end of 2014
and 2015, respectively.
If no correcting entries are made, the net income (loss) for 2014 must be
a. Correctly stated, net effect of errors is zero
b. Overstated by P12,600
c. Understated by P900
d. Overstated by P6,300
9. Miramed Company provided the following data for the current year:
Cash sales
Sales on account
Cash purchases
Credit purchases
Expenses paid
Accounts receivable January 1
Accounts receivable December 31
Accounts payable January 1
Accounts payable December 31
Inventory January 1
Inventory December 31
Accrued expenses December 31
Prepaid expenses December 31
Equipment December 31
Interest received
Interest receivable January 1
Interest receivable December 31

2,500,000
850,000
1,700,000
400,000
750,000
250,000
300,000
150,000
200,000
500,000
600,000
20,000
30,000
40,000
40,000
10,000
20,000

On July 1 of the current year, an equipment was acquired for P200,000. The terms are P50,000 down
and the balance to be paid after one year. The useful life of equipment is 10 years with no residual
value. What is the net income under the cash basis of accounting?
a. 550,000
b. 570,000
c. 540,000
d. 640,000
10. Echostars records all transactions on the cash basis. The entitys accountant prepared the
following income statement at the end of 2015, the entitys first year of operations:
Sales
252,000
Selling and administrative expenses:
Salaries expense
78,000
Rent expense
45,000
Commission expense
37,800
Equipment
30,000
Utilities expense
29,000
Insurance expense
6,000
Interest expense
3,000 228,800
Net income
23,200
An income statement should be prepared on the accrual basis. The following information is made
available:
a) Amounts due from customers at year-end were P28,000. Of this amount, P3,000 will
probably not be collected.
b) Salaries of P11,000 for December 2015 were paid on January 2016.
c) Echostar rents it building for P3,000 per month, payable quarterly in advance. The
contract was signed on January 1, 2015.
d) The bill for Decembers utility costs of P2,700 was paid on January 10, 2016.
e) Equipment of P30,000 was purchased on January 1, 2015. The expected life if five years
with no residual value. Straight-line depreciation is used.
f) Commissions of 15% of sales are paid on the same day cash is received from customers.
g) A one-year insurance policy was issued on the entitys assets on July 1, 2015. Premiums
are paid annually in advance.
h) Echostar borrowed P50,000 for one year on May 1, 2015. Interest payments based on
annual rate of 12% are made quarterly, beginning with the first payment on August 1,
2015.
i) The income tax rate is 30%. No prepayments of income taxes were made during 2015.
What is the adjusting entry for accrued expenses except interest on December 31, 2015?
a. Debit salaries expense for P11,000, utilities expense for P2,700 and credit accrued
expenses for P13,700
b. Debit salaries expense and credit accrued expenses for P11,000
c. Debit salaries expense for P11,000, utilities expense for P2,700, commission expense for
P4,200 and credit accrued expenses for P17,900
d. Debit salaries expense for P11,000, utilities expense for P2,700, commission expense for
P3,750 and credit accrued expenses for P17,450
Items 11 to 15. You were engaged by Arinso Corporation to audit its financial statements for the first
time. In examining the books, you noted that certain adjustments had been overlooked at the end of
2012 and 2013. You also discovered that other items had been improperly recorded. These omissions
and other errors for each year were summarized:
12-31-13
12-31-12
Salaries payable
780,000
873,600
Interest receivable
213,000
259,200
Prepaid insurance
307,800
384,000
Advances from customers
561,000
470,400
(Collections from customers had been recorded as sales but
should have been recognized as advances from customers
because goods were not shipped until the following year)
Machinery
522,000
564,000
(Capital expenditures had been recorded as repairs but
should have been charged to Machinery; the depreciation
rate is 10% per year, but depreciation in the year of
expenditure is to be recognized at 5%)
Based on the foregoing and the result of your audit, determine the following:
11. What is the total effect of the errors on the 2012 net income?
a. Understated by 1,236,600
b. Understated by 775,800
c. Overstated by 80,400
d. Overstated by 165,000

12. What
a.
b.
c.
d.

is the total effect of the errors on the 2013 net income?


Understated by 320,100
Understated by 376,500
Overstated by 324,300
Overstated by 380,700

13. What is the total effect of the errors on the companys working capital at 12-31-13?
a. Understated by 265,800
b. Understated by 301,800
c. Overstated by 820,200
d. Overstated by 119,400
14. What is the total effect of the errors on the balance of the companys retained earnings at
December 31, 2013?
a. Overstated by 855,900
b. Overstated by 930,900
c. Understated by 155,100
d. Understated by 265,800
15. The necessary adjusting journal entry for the error in recording capital expenditures on
Machinery as of December 31, 2013 would include
a. A credit to Retained Earnings of 535,800
b. A credit to Accumulated Depreciation of 82,500
c. A debit to Depreciation Expense of P54,300
d. A debit to Machinery of 522,000
16. Hypercom Inc. frequently borrows from the bank in order to maintain sufficient operating cash.
The following loans were at a 12% interest rate, with interest payable at maturity. Cecilia repaid
each loan on its scheduled maturity date.
Date of loan
11/1/2002
2/1/2003
5/1/2003

Amount
20,000,000
30,000,000
50,000,000

Maturity date
10/31/2003
7/31/2003
1/31/2004

Term of loan
1 year
6 months
9 months

Hypercom records interest expense when the loans are repaid. As a result, interest expense of
P4,200,000 was recorded in 2003. If no correction is made, by what amount would be 2003
interest expense be understated?
a. 7,800,000
b. 3,600,000
c. 4,200,000
d. 4,500,000
17. The following figures have been extracted from the accounting records of Verifone Corporation,
an SME, on December 31, 2014.
Cost
Accumulated Depreciation
25-year leasehold factory P50,000,000
P10,000,000
15-year leasehold factory
30,000,000
10,000,000
On January 1, 2014 Verifone has its two leasehold factories revalued (for the first time) by an
independent surveyor as follows:
25-year leasehold factory
P52,000,000
15-year leasehold factory
18,000,000
Verifone depreciates its leaseholds on a straight-line basis over the life of the lease.
The directors of Verifone are disappointed in the value placed on the 15-year leasehold. The
surveyor has said that the fall in its value is due mainly to its unfavourable location, but in time
the surveyor expects its value to increase. The 15-year leasehold is not considered to be
impaired. The directors are committed to incorporating the revalued amount of the 25-year
leasehold into the financial statements, but wish to retain the historical cost basis for the 15-year
leasehold. The revaluation surplus as of December 31, 2014, under PFRS for SMEs, should be
a. 12,000,000
b. 11,400,000
c. 10,000,000
d. Nil

18. Golden Arches Development Corporation, an SME, purchased land as a factory site for P600,000.
Golden Arches paid P60,000 to tear down two buildings on the land. Salvage was sold for
P5,400. Legal fees of P3,480 were paid for title investigation and making the purchase.
Architect's fees were P31,200. Title insurance cost of P2,400, and liability insurance during
construction cost P2,600 were also paid. Excavation cost was P10,440. The contractor was paid
P2,200,000. An assessment made by the city for pavement was P6,400. Interest costs during
construction were P170,000. How much is the total cost of the new building?
a. 2,244,240
b. 2,233,800
c. 2,414,240
d. 2,412,200

19. Smart Communications, Inc.s income statement for the year ended December 31, 2011
reported income before tax of P5,000,000. The auditor questioned the following amounts that
had been included in income before tax:
Equity in earnings of Philippine Long Distance Telephone Company
Dividend received from Philippine Long Distance Telephone Company
Adjustment of profit of prior year for arithmetical error in depreciation

1,600,000
320,000
(1,400,000)

Smart Communications, Inc owns 20% of Philippine Long Distance Telephone Companys share
capital. What amount should be reported by Smart Communications, Inc as income before tax?
a. 3,400,000
b. 4,680,000
c. 4,800,000
d. 6,080,000

Items 20 to 24. The cost of goods sold section of the statement of comprehensive income prepared by
your client, West Contact Company, for the year ended December 31, 2015 appears as follows:
Inventory, January 1
Purchases
Cost of goods available for sale
Inventory, December 31
Cost of goods sold

80,000
1,600,000
P 1,680,000
100,000
P 1,580,000

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 year your auditing 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 these dates and no reconciling items were considered. All purchases are FOB shipping
point.
In the course of your examination of the inventory cut-off, 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, 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.

20. What adjusting journal entry should be made at the end of the current year for item No. 1?
25,000
A. Purchases
Retained earnings
25,000
B. Retained earnings
25,000
Purchases
25,000
C. Inventory, beginning
25,000
Purchases
25,000
D. No adjusting entry is necessary
21. The adjusting journal entry to correct the error described in item No. 3 should 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
22. The companys statement of financial position as of the end of the current year should show
inventory of
a. 130,000
b. 100,000
c. 93,200
d. 117,100
23. What is the net adjustment to purchases of the current year?
a. 27,000 increase
b. 25,000 decrease
c. 2,000 increase
d. 2,000 decrease
24. The cost of goods sold for the current year is
a. 1,561,200
b. 1,553,200
c. 1,580,000
d. 1,565,200

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