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PROBLEM NO. 1
The following are selected unadjusted account balances and adjusting information of
TANYING CORP. for the year ended December 31, 2015.
Adjusting information:
(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance ..................................................................................... 2%
(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in) ..................................................... 6%
(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day ................................................................................................ P9,180
Average sales commissions as a percent of sales ....................................................... 3%
(e) No accrual had been made for a freight bill received on January 2, 2016, for
goods received on December 29, 2015 ................................................................ P1,710
Page 1 of 25 Pages
AUDITING PROBLEMS
(f) An advertising campaign was initiated November 2, 2015. This amount was
recorded as Prepaid advertising and should be amortized over a six-month
period. No amortization was recorded ................................................................. P5,454
Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2015 ............................................................................ P10,500
(h) Depreciation expense on a new forklift purchased March 1, 2015, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price ................................................................................................. P23,400
Estimated life in years ............................................................................................... 10
(i) A real account is debited upon the receipt of office supplies. Office supplies on hand at
year-end ........................................................................................................... P3,675
1. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500
4. Distribution costs
A. P181,649 B. P167,513 C. P178,013 D. P176,453
5. Administrative expenses
A. P207,345 B. P193,785 C. P194,265 D. P194,595
7. Total income
A. P817,143 B. P811,653 C. P779,913 D. P822,153
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PROBLEM NO. 2
The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY
as of December 31, 2015:
During your audit, you noted that Bunching Company held its cash books open after year-end.
In addition, your audit revealed the following:
1. Receipts for January 2016 of P654,600 were recorded in the December 2015 cash receipts
book. The receipts of P360,100 represent cash sales and P294,500 represent collections
from customers, net of 5% cash discounts.
2. Accounts payable of P372,400 was paid in January 2016. The payments, on which
discounts of P12,400 were taken, were included in the December 2015 check register.
a. The invoice for goods costing P175,000 was received and recorded as a purchase on
December 31, 2015. The related goods, shipped FOB destination, were received on
January 4, 2016, and thus were not included in the physical inventory.
c. Goods costing P637,500 were shipped on December 31, 2015, and were delivered to the
customer on January 3, 2016. The terms of the invoice were FOB shipping point. The
goods were included in the 2015 ending inventory even though the sale was recorded in
2015.
d. Goods costing P217,500 were received from a vendor on January 4, 2016. The related
invoice was received and recorded on January 6, 2016. The goods were shipped on
December 31, 2015, terms FOB shipping point.
e. Goods valued at P275,000 are on consignment with a customer. These goods are not
included in the inventory figure.
f. Goods valued at P612,800 are on consignment from a vendor. These goods are not
included in the physical inventory.
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2015:
11. Cash
A. P963,200 B. P681,000 C. P668,600 D. P693,400
13. Inventory
A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000
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Page 3 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 3
The Machinery account of PAKO COMPANY contains the following entries during the year:
16. What is the correct balance of the Machinery account on December 31, 2015?
A. P3,162,000 B. P3,057,000 C. P3,048,000 D. P2,958,000
17. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the
depreciation charge for 2015?
A. P234,150 B. P300,000 C. P316,200 D. P227,400
On June 30, 2015, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines
expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton.
Production started immediately after some new machines costing P1,800,000 were bought on
June 30, 2015. These new machines had an estimated useful life of 15 years with a scrap value
of 10% of cost after the ore estimate has been extracted from the property, at which time the
machines will already be useless. Genlunas books show the following expenses for 2015:
BULKAN COMPANY purchased a machine for P300,000 on January 1, 2012, with the following
additional items paid or incurred:
Separation pay for laborer laid off upon acquisition of new machine .................... P3,600
Loss on sale of machine replaced ........................................................................ 3,900
Transportation in ............................................................................................... 3,000
Installation cost ............................................................................................... 12,000
The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
Page 4 of 25 Pages
AUDITING PROBLEMS
On January 1, 2015, new parts which cost P37,800 were added to the machine so as to reduce
its fuel consumption, but with no change in its estimated life or residual value.
20. The annual depreciation charge on the machine for 2015 was
A. P34,080 B. P35,494 C. P36,450 D. P35,700
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PROBLEM NO. 4
1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2016, Harlington Company purchased the following trading
securities:
Fair Value
Security Cost Dec. 31, 2016
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000
Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.
21. What is Harlingtons net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000
22. What would Harlingtons net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000
2. LABADA CO.s portfolio of trading securities includes the following on December 31, 2015:
All of the above securities have been purchased in 2015. In 2016, Labada Co. completed
the following securities transactions:
Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage
commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and
other transaction costs of P4,950.
The Labada Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,000 2
P1,885,950 P1,965,000
1 Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2 Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.
23. What amount of unrealized gain on these securities should be reported in the 2016
income statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000
Page 5 of 25 Pages
AUDITING PROBLEMS
24. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016?
A. P144,000 B. P27,000 C. P130,500 D. P13,500
25. What amount should be reported as trading securities in Labadas statement of financial
position on December 31, 2016?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950
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PROBLEM NO. 5
On January 1, 2014, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2015.
On January 3, 2014, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2014 and 2015. The companys other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2014 and 2015. The companys fiscal year-end is December 31.
30. What is the total cost of the building (including the interest capitalized in 2014 and 2015)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625
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PROBLEM NO. 6
At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The
grant is conditional upon the executive remaining in the entitys employ until the end of year 3.
The share options can be exercised if the entitys share price increases from P20 at the
beginning of year 1 to above P30 at the end of year 3. If the share price is above P30 at the
end of year 3, the share options can be exercised at any time during the next five years, i.e., by
the end of year 8.
The entity estimates the fair value of the share options on grant date to be P5 per option. This
estimate takes into account the following market condition:
Page 6 of 25 Pages
AUDITING PROBLEMS
The possibility that the share price will exceed P30 at the end of year 3, i.e., the share
options become exercisable; and
The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share
options will be forfeited.
Year 1
Year 2
The share price has decreased to P22. However, the entity remains optimistic that the
share price target will be met by the end of year 3.
The estimated fair value of the share options is P3. Again, this estimate takes into account
the market condition noted above.
Year 3
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PROBLEM NO. 7
The following independent situations relate to the audit of shareholders equity. Answer the
questions at the end of each situation.
BRANDY CO. was organized at the beginning of the current year. The following shareholders
equity accounts are included in the entitys year-end trial balance.
Page 7 of 25 Pages
AUDITING PROBLEMS
The following current year transactions relate to Brandy Co.s shareholders equity:
Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference
shares. Subscriptions to ordinary shares were also received on the same date.
During the year, subscriptions were received for an additional 12,000 preference shares at a
price of P120 per share.
Cash payments were received from subscribers at frequent intervals for several months
after subscription. The companys policy is to issue share certificates only upon full
payment of the share subscription.
Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a
tract of land with a fair value of P690,000.
36. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000
37. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000
38. The companys statement of financial position at the end of the current year should report
contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000
The following shareholders equity accounts are included in the statement of financial position
of CONDESSA CO. on December 31, 2014.
During 2015, Condessa took part in the following transactions concerning equity.
1. Paid the annual 2014 P8 per share dividend on preference shares and a P2 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2014.
2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are
selling for P45 per share.
Page 8 of 25 Pages
AUDITING PROBLEMS
7. Declared the annual 2015 P8 per share dividend on preference shares and the P2 per
share dividend on ordinary shares. These dividends are payable in 2016.
39. What is the retained earnings balance (before appropriation for treasury shares) on
December 31, 2015?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000
40. What amount should be reported as total shareholders equity on December 31, 2015?
A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000
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PROBLEM NO. 8
The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents
certain types of air pollution. Caboom does not manufacture or sell the products and processes
it develops; it conducts research and develops products which it patents, and then assigns the
patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2013, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year
if the cost is incurred after June 30. Cabooms reporting date is December 31, 2015.
Compute the carrying value of Patent No. 112170 on each of the following dates:
A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
Page 9 of 25 Pages
AUDITING PROBLEMS
During 2015, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2015 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2018. The materials
and equipment purchased have no alternative uses.
On January 1, 2015, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2014 is only 5 years from January 1,
2015.
44. What is the total carrying value of Bartolos intangible assets on December 31, 2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
45. As a result of the facts above, compute the total amount of charges against income for
the year ended December 31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000
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PROBLEM NO. 9
The following are two (2) unrelated situations. Answer the questions at the end of each
situation.
An insurance premium of P330,000 was prepaid in 2014 covering the years 2014, 2015, and
2016. The entire amount was charged to expense in 2014. In addition, on December 31,
2015, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded
until 2016. There were no other errors during 2014 and 2015, and no corrections have been
made for any of the errors. Ignore income tax effects.
46. What is the total effect of the errors on Samoas 2015 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement
47. What is the total effect of the errors on the amount of Samoas working capital at
December 31, 2015?
A. P75,500 overstatement
B. P40,500 overstatement
C. P225,500 understatement
D. P144,500 understatement
Page 10 of 25 Pages
AUDITING PROBLEMS
48. What is the total effect of the errors on the balance of Samoas retained earnings at
December 31, 2015?
A. P156,000 understatement
B. P87,000 overstatement
C. P133,000 understatement
D. P85,000 understatement
2. CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended
December 31, 2014 and 2015, respectively. However, the auditor noted that the following
errors had been made:
a. Sales for 2014 included amounts of P191,000 which had been received in cash during 2014,
but for which the related goods were shipped in 2015. Title did not pass to the buyer until
2015.
c. The companys accountant, in recording interest expense for both 2014 and 2015 on bonds
payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000
The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2014, to yield an effective interest rate
of 7%.
d. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2014 and 2015. Repairs of P42,500 and P47,000 had been incurred in 2014 and
2015, respectively. In determining depreciation charges, Chile applies a rate of 10% to the
balance in the Equipment account at the end of the year.
-----------------------------oooOOOooo-----------------------------
PROBLEM NO. 10
The following are two (2) unrelated situations. Answer the questions at the end of each
situation.
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 2015 is as follows:
Page 11 of 25 Pages
AUDITING PROBLEMS
51. How much revenue from container sales should be recognized for 2015?
A. P127,500 B. P267,500 C. P27,500 D. P85,000
52. What is the total amount of Omega Companys liability for returnable containers at
December 31, 2015?
A. P373,000 B. P400,500 C. P267,500 D. P430,000
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 2015, 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, 2015. DPs policy is to recognize income from the
warranties on a straight-line basis. In 2016, DP incurred actual costs relative to 2015 warranty
sales of P18,000 for parts and P36,000 for labor.
53. What liability relative to these transactions would appear on the December 31, 2015,
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
54. What amount of warranty expense would be shown on the income statement for the year
ended December 31, 2015?
A. P18,000 B. P 0 C. P 36,000 D. P54,000
55. What liability relative to the 2015 warranties would appear on the December 31, 2016,
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
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PROBLEM NO. 11
The TGR Company commenced operations on January 1, 2011. The companys machinery
account is shown below.
Page 12 of 25 Pages
AUDITING PROBLEMS
a) On September 30, 2011, 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,
2011. Freight and installation charges of P6,000 were paid and charged to the machinery
account on October 3, 2011.
b) On June 30, 2012, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2012.
c) On June 30, 2013, 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, 2014, the machine acquired on January 1, 2011 with cost of P132,000 was
sold for P75,000. The cost of removal and crating totaled P3,750.
e) On October 1, 2015, the machine purchased on January 1, 2011 was sold for P24,000 cash.
56. What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2011?
A. P50,400 B. P40,200 C. P36,450 D. P86,850
57. What is the adjusted balance of the Machinery account on December 31, 2015?
A. P694,200 B. P705,000 C. P700,200 D. P703,950
58. What is the adjusted balance of the Accumulated depreciation account on December 31,
2015?
A. P465,600 B. P457,140 C. P462,240 D. P397,740
59. What is the correct total depreciation provision for the years 2011-2015?
A. P737,400 B. P734,040 C. P728,940 D. P669,540
60. The entry to correct the depreciation provision for the years 2011-2015 should include a
debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249
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Page 13 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 1
You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2015. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the companys
statement of financial position and statement of income as of and for the year ended December
31, 2015. Audit findings are as follows:
I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2016. The petty cash fund of
P60,000 maintained by the company on an imprest basis relected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2016.
You were furnished a copy of the companys bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000
1. Postdated checks totaling P107,400 were included as part of the deposit in transit.
These represent collections from various customers whose accounts have been
outstanding for less than three months. These checks were actually deposited on
January 8, 2016.
2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2015 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2016.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2015. This was not recorded
as of year-end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.
Page 14 of 25 Pages
AUDITING PROBLEMS
V. AUDIT OF PREPAYMENTS
The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2015, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2015. Rental
deposit remained at three months and is included under other assets.
The companys delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2015 for the renewal
amounted to P490,000 which covers the period from November 1, 2015 to November 1,
2016. No adjustment has been made as of December 31, 2015.
To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2015 and included the same in their office supplies inventory. As at year-end,
unused office supplies amount to P102,500.
Page 15 of 25 Pages
AUDITING PROBLEMS
The company purchased additional equipment worth P268,000 on June 30, 2015. At the
date of purchase, it incurred the following additional costs which were charged to repairs
and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400
The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original
cost.
The company discarded some store equipment on October 1, 2015, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 as of December 31, 2015. Depreciation booked from October 1,
2015 to year-end was P10,480. No entry was made on the disposal of the property.
Some expenses for December 2015 were recorded when paid in January 2016. These are
as follows:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000
Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2015. Accrued interest on this loan was
not taken up at year-end.
A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2015, payable on January 31, 2016.
Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Page 16 of 25 Pages
AUDITING PROBLEMS
Based on the above information, determine the adjusted balances of the following: (Ignore tax
implications.)
1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000
Page 17 of 25 Pages
AUDITING PROBLEMS
18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
PROBLEM NO. 2
To substantiate the existence of the accounts receivable balances as at December 31, 2015 of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross
profit on sales is 20%. The company is under the perpetual inventory method.
21. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.
22. The effect on 2015 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.
Page 18 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 3
Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile,
Inc. for the year ending December 31, 2015. After obtaining an understanding of the clients
design of the accounting and internal control systems and their operation, he then proceeded in
performing test of controls related to production cycle.
26. Which of the following auditing procedures probably would provide the most reliable
evidence concerning the entitys assertion of rights and obligations related to inventories:
A. Trace the test counts noted during the entitys physical count to the entitys
summarization of quantities.
B. Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
C. Select the last few shipping documents used before the physical count and determine
whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.
27. Which of the following internal control activities most likely addresses the completeness
assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary inventory
records.
B. Employees responsible for custody of finished goods do not perform the receiving
function
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and inventory
accounting personnel.
28. From the auditors point of view, inventory counts are more acceptable prior to the year-
end when
A. Internal control is weak.
B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.
29. A retailers physical count of inventory was higher than that 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 and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
Page 19 of 25 Pages
AUDITING PROBLEMS
C. No journal entry had been made on the retailers 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.
30. An auditor will usually trace the details of the test counts made during the observation of
physical inventory counts to a final inventory compilation. This audit procedure is
undertaken to provide evidence that items physically present and observed by the auditor
at the time of the physical inventory count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory schedule.
D. Included in the final inventory schedule.
-----------------------------oooOOOooo-----------------------------
PROBLEM NO. 4
Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2015, cash totaling P471,700 was paid on accounts payable. Operating expenses for
2015 totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing
1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was
P32.60 during January 2015 and increased P0.10 per month during the year. Spark sells only
one product. All sales are made for P50 per unit. The ending inventory for 2014 was valued at
P32.50 per unit.
35. Cost of goods sold for the year ended December 31, 2015
A. P609,125 B. P609,700 C. P606,915 D. P603,625
-----------------------------oooOOOooo-----------------------------
PROBLEM NO. 5
Transactions between January 1, 2012, and December 31, 2015, which were recorded in the
ledger, are as follows.
July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of
which was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash
on the transaction. The entry was a debit to Trucks and a credit to Cash,
P220,000. The transaction has commercial substance.
Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.
July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged at that
amount to the Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk
for P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company.
The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.
Entries for depreciation had been made at the close of each year as follows: 2012, P210,000;
2013, P225,000; 2014, P250,500; 2015, P304,000.
36. What is the total depreciation expense for the year ended December 31, 2012?
A. P180,000 B. P198,000 C. P172,000 D. P228,000
38. What is the net book value of the Trucks on December 31, 2015?
A. P414,000 B. P348,000 C. P228,500 D. P894,000
39. The total depreciation expense recorded for the 4-year period (2012-2015) is overstated
by
A. P185,500 B. P265,500 C. P287,500 D. P275,500
40. Assuming that the books have not been closed for 2015, what is the compound journal
entry on December 31, 2015 to correct the companys errors for the 4-year period (2012-
2015)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
Page 21 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 6
CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000
BANK STATEMENT
Date Check Charges Credits
Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
Page 22 of 25 Pages
AUDITING PROBLEMS
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900
Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810
50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
Page 23 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 7
MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates
that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the
first and last year and 15,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P1,550,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000.
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.
Mining machinery installed at the mine was purchased secondhand at a total cost of
P3,600,000. The machinery cost the former owner P9,000,000 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.
51. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000
52. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
53. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
54. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000
55. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000
-----------------------------oooOOOooo-----------------------------
Page 24 of 25 Pages
AUDITING PROBLEMS
PROBLEM NO. 8
The HVR Company included the following in its notes receivable as of December 31, 2015:
The following transactions during 2015 and other information relate to the companys notes
receceivable:
a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVRs books at P1,500,000. HVR received a
noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31,
2016. There was no established exchange price for the land. The prevailing interest rate
for this note on January 1, 2015 was 10%.
b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2017, with
interest receivable every December 31. The fair value of the services rendered is not
readily determinable. The prevailing rate of interest for a note of this type was 10% on
January 1, 2015.
c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of
P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be
repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance).
HVR received the first payment on December 31, 2015. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January 1,
2015.
Note: Round off present value factors to four decimal places and final answers to the nearest
hundred.
58. The amount to be reported as noncurrent notes receivable on December 31, 2015 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600
59. The amount to be reported as current notes receivable on December 31, 2015 is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000
Page 25 of 25 Pages