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Auditing Problem – Cash

Case 1

The trial balance of SORI POSIR Co., prior to the closing of is accounts for the fiscal year-ended
September 30, 2016 follows:
DEBIT CREDIT
Cash 225,000
Accounts receivable 936,000
Allowance for doubtful accounts 31,900
Notes receivable 155,000
Merchandise inventory, Sept. 30, 2005 568,900
Furniture and Equipment 618,000
Acc. Depreciation – Furniture & Equipment 187,500
Goodwill 300,000
Accounts payable 536,000
Notes payable 100,000
Capital stock 1,000,000
Retained earnings 552,500
Sales 3,728,200
Sales returns and allowances 47,600
Purchases 2,159,300
Purchase returns and allowances 36,500
Advertising 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expenses 29,900
Rent expense 130,000
Office salaries 197,200
Light and water 15,000
Insurance expense 10,800
Taxes and licenses 47,800
Miscellaneous general expenses 163,400
Interest expense 41,200
Interest income ________ 9,100
6,181,700 6,181,700

Your examination of the company’s accounts had indicated the need for adjustments based on the
following information:

1. The Cash account include a customers’ check for P15,000 deposited on September 25, 2016,
but returned by the bank on September 29, 2016 for lack of countersignature. No entry was
made by the company for the return of the check or for its redeposit on October 5, 2016.

2. The Allowance for Doubtful Accounts should be adjusted to 5% of the customers’ outstanding
balances on September 30, 2016.

3. A physical inventory taken of the merchandise stock as of the end of the fiscal year amounted
to P601,200.

4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were still in
transit on September 30, 2016 was neither taken as a liability nor included in the inventory on
that date.
5. Goods received on consignment, still unsold, were included in the inventory at the agreed
selling price of P24,000.

6. The merchandise inventory at September 30, 2015 was correctly stated.

7. On July 1, 2016, equipment acquired on October 1, 2013 with a book value of P32,000 on
September 30, 2015 was sold for P35,000 in cash. The sales proceeds were credited to the
Furniture and Equipment account.

8. Depreciation for the fiscal year 2015-2016 has not been recorded. Depreciation rate being
used is 10% annually.

9. An insurance policy was taken on the inventory and equipment on April 1, 2016 with the annual
premium of P10,800 paid on that date.

10. Rent expense account consisted of rent paid for stock and office space for thirteen (13) months
ending October 31, 2016.

11. The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the bank on
September 1, 2016.

12. The Goodwill account was set-up by a credit to Retained Earnings under a resolution of the
Board of Directors.

Questions
1. Cash for the fiscal year-ended September 30, 2016 is:
a. P 195,000 b. P 210,000 c. P 225,000 d. P 240,000

2. Accounts receivable for the fiscal year-ended September 30, 2016 is:
a. P 906,000 b. P 921,000 c. P 951,000 d. P 936,000

3. Allowance for doubtful accounts for the fiscal year-ended September 30, 2016 is:
a. P 15,650 b. P 46,800 c. P 45,300 d. P 47,550

4. Merchandise inventory for the fiscal year-ended September 30, 2016 is:
a. P 617,200 b. P 641,200 c. P 677,200 d. P 561,200

5. Book value of the Furniture and Equipment for the fiscal year-ended September 30, 2016 is:
a. P 360,200 b. P 372,200 c. P 375,200 d. P 489,800

6. Goodwill for the fiscal year-ended September 30, 2016 is:


a. P 300,000 b. P 292,500 c. P 285,000 d. P 0

7. Accounts payable for the fiscal year-ended September 30, 2016 is:
a. P 496,000 b. P 536,000 c. P 552,000 d. P 576,000

8. Net income for the fiscal year-ended September 30, 2016 is:
a. P 326,750 b. P 332,750 c. P 346,750 d. P 347,750

9. Retained earnings for the fiscal year-ended September 30, 2016 is:
a. P 252,500 b. P 600,250 c. P 885,250 d. P 900,250
10. Insurance expense for the fiscal year-ended September 30, 2016 is:
a. P 5,400 b. P 9,200 c. P 10,800 d. P 16,200

Solution

1. Accounts Receivable 15,000


Cash 15,000

2. Doubtful Accounts Expense 15,650


Allowance for doubtful accounts 15,650
{5% x (936,000 + 15,000) = 47,550 - 31,900}

3. Merchandise Inventory 601,200


Income Summary 601,200

4. Purchases 40,000
Merchandise Inventory 40,000
Accounts Payable 40,000
Income Summary 40,000

5. Income Summary 24,000


Merchandise Inventory 24,000

6. Income Summary 568,900


Merchandise Inventory 568,900

7. Accumulated Depreciation – Fur. & Eqpt. 11,000


Gain on sale of equipment 6,000
Furniture & Equipment 5,000

Cost (P32,000 / 80%) P40,000


Less acc. depr. to date of sale 11,000
(P40,000 x 10% x 2 + (40,000 x 10% x
9/12)
Book value P29,000
Selling price 35,000
Gain on sale of equipment P 6,000

8. Depreciation expense 64,300


Acc. Depr. – Fur. & Equip 64,300

Depr. for year ended 9.30.13


On eqpt sold (40,000 x 10% x 9/12) P 3,000
On remaining eqpt. (613,000 x 10%) 61,300
P64,300

9. Prepaid Insurance 5,400


Insurance expense 5,400

10. Prepaid rent 10,000


Rent expense 10,000

11. Discount on notes payable 3,000


Interest expense 3,000

Total discount P4,000


(100,000 x 12% x 120/360)
Less portion applicable to year ended 9.30. 1,000
Unamortized, 9.30. P3,000

12. Retained Earnings 300,000


Goodwill 300,000

SORI POSIR CORPORATION


WORKING TRIAL BALANCE
September 30, 2016

Trial Balance Adjustments Income Statement Balance Sheet


Debit Credit Debit Credit Debit Credit Debit Credit
Cash 225,000 15,000 210,000
AR 936,000 15,000 951,000
All. for DA 31,900 15,650 47,550
NR 155,000 155,000
MI 568,900 568,900 617,200 617,200*
F/E 618,000 5,000 613,000
AD– F/E. 187,500 11,000 64,300 240,800
Goodwill 300,000 300,000 -0-
AP 536,000 40,000 576,000
NP 100,000 100,000
CS 1,000,000 1,000,000
RE 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales R& A 47,600 47,600
Purchases 2,159,300 40,000 2,199,300
Purch R&A. 36,500 36,500
Adv 96,100 96,100
Sales sal 288,500 288,500
Com. exp 152,000 152,000
Misc.sell 29,900 29,900
Rent exp 130,000 10,000 120,000
Office sal 197,200 197,200
Light & W 15,000 15,000
Ins. exp 10,800 5,400 5,400
Tax & licen 47,800 47,800
Misc. Ge 163,400 163,400
Int. exp 41,200 3,000 38,200
Int inc 9,100 9,100
6,181,700 6,181,700

DA 15,650 15,650
Gain 6,000 6,000
Depren 64,300 64,300
Pre ins 5,400 5,400
Pre rent 10,000 10,000
Disc on NP 3,000 3,000
464,350 464,350 4,049,250 4,397,00 2,564,600 2,216,850
0
NET INC 347,750 347,750
4,397,000 4,397,000 2,564,600 2,564,600

ANSWER:
1. B 2. C 3. D 4. A 5. B 6. D 7. D 8. D 9. B 10. A

Case 2
Shown below is the bank reconciliation for Babawi Pokami Co. Company for November
2017:
P150,00
Balance per bank, Nov. 30, 2017 0
Add: Deposits in transit 24,000
174,00
Total 0
P28,00
Less: Outstanding checks 0
Bank credit recorded in error 10,000 38,000
P136,00
Cash balance per books, Nov. 30, 2017 0

The bank statement for December 2017 contains the following data:
Total deposits P110,000
Total charges, including an NSF check of P8,000
and a
service charge of P400 96,000

All outstanding checks on November 30, 2017, including the bank credit, were cleared in
the bank 1n December 2017.

There were outstanding checks of P30,000 and deposits in transit of P38,000 on December
31, 2017.

Questions:
Based on the above and the result of your audit, answer the following:
How much is the cash balance per bank on December
1. 31, 2017?
a. P154,000 c. P164,000
b. P150,000 d. P172,400
2. How much is the December receipts per books?
a. P124,000 c. P110,000
b. P 96,000 d. P148,000

3. How much is the December disbursements per books?


a. P96,000 c. P89,600
b. P79,600 d. P98,000
How much is the cash balance per books on December
4. 31, 2017?
a. P150,000 c. P180,400
b. P170,400 d. P162,000
Solution:
Question No. 1. C
Balance per bank, Nov. 30, 2017
Add: Total deposits per bank statement Total
Less: Total charges per bank statement Balance per bank, Dec. 31, 2017

Question No. 2. A
Total deposits per bank statement Less deposits in transit, Nov. 30
Dec. receipts cleared through the bank
Add deposits in transit, Dec. 31
December receipts per books
Question No. 3. B
P96,00
Total charges per bank statement 0
P28,00
Less: Outstanding checks, Nov. 30 0
Correction of erroneous bank credit 10,000
December NSF check 8,000
December bank service charge 400 46,400
Dec. disb. cleared through the bank 49,600
Add outstanding checks, Dec. 31 30,000
P79,60
December disbursements per books 0

Question No. 4. C
P136,00
Balance per books, Nov. 30, 2017 0
124,00
Add December receipts per books 0
260,00
Total 0
Less December disbursements per books 79,600
P180,40
Balance per books, Dec. 31, 2017 0

Auditing Problem – Receivables and Related Revenues

Case 1
Your new audit client, Papagbutihan Naponamin Company, prepared the trial balance below as of
December 31, 2016. The company started its operations on January 1, 2015. Your examination
resulted in the necessity of applying the adjusting entries indicated in the additional data below.

Papagbutihan Naponamin Company


TRIAL BALANCE
December 31, 2016

Debits Credits
Cash P510,000
Accounts receivable, net allowance of P20,000 600,000
Inventories, December 31, 2015 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discounts 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000
Retained earnings, December 31, 2015 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000 _________
P6,000,000 P6,000,000
Additional data are as follows:

(1) The 1,500,000 common stock was issued at a 10 percent premium to the owners of the land
and buildings on December 31, 2014, the date of organization. Stock with a par value of
P180,000 was donated back by the vendors. The following entry was made:

(Debit) Treasury stock P180,000


(Credit) Stock donation P180,000

The stock was donated because the proceeds from its subsequent sale were to be considered as
an allowance on the purchase price of land and buildings in proportion to their values as first
recorded. The treasury stock was sold in 2006 for P75,000, which was credited to treasury
Stock.

(2) On December 31, 2016, a machine costing P15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The only entry
made was one crediting the Machinery account with its sales price of P6,000.

(3) Depreciation is to be provided on the straight-line basis, as follows: buildings, 2 percent of


cost; machinery, 10 percent of cost. Ignore salvage values.

(4) The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten years
from January 1, 2015, interest payable April 1 and October 1. The bonds were sold on January
1, 2015, at 90; the discount is to be amortized over the life of the bonds on straight-line basis.

(5) A sinking fund is built up on the straight-line basis, with a provision that each installment
after the first shall be decreased y the amount of the annual 6 percent interest, which interest
is to be added to the fund. The audit disclosed that the proper installment to the sinking fund
was paid by the company on December 31, 2016, but that the amount was charged in error o
the firs Mortgage, 6% Sinking Fund Bonds account.
(6) The trustee of the sinking fund reported an addition of P4,500 interest to the fund on
December 31, 2016. this had not been recorded by the company.

(7) Inventories at December 31, 2016, were P525,000.

Questions
Based on the above and the result of your audit, you are to provide the answers to the following:

1. The correct balance of Land account as of December 31, 2016 was


a. P660,000 b. P630,000 c. P588,000 d. P0

2. The adjusted net book value of the Building as of December 31, 2016 was
a. P 907,200 b. P905,400 c. P950,400 d. P945,000

3. The correct net book value of the machinery as of December 31, 2016 was
a. P399,000 b. P354,000 c. P345,000 d. P348,000

4. The correct amount of total depreciation expense for 2016 was


a. P648,000 b. P63,900 c. P62,400 d. P63,000

5. How much was the gain or loss on sale of machinery on December 31, 2016?
a. P6,000 loss b. P6,000 gain c. P7,500 loss d. P7,500 gain

6. The adjusted net carrying amount of 6% sinking fund bonds as of December 31, 2016 was
a. P675,000 b. P679,500 c. P690,000 d. P735,000

7. The correct balance of sinking fund assets as of December 31, 2016 was:
a. P75,000 b. P79,500 c. P150,000 d. P154,500

8. The correct balance of Treasury Stock as of December 31, 2016 was:


a. P0 b. P105,000 c. P180,000 d. P75,000

9. The correct balance of Common Stock as of December 31, 2016 was:


a. P1,320,000 b. P1,500,000 c. P1,650,000 d. P1,395,000

10. The correct balance of stock donation as of December 31, 2016 was:
a. P180,000 b. P105,000 c. P0 d. P75,000

Solution
1. OE: Treasury stock 180,000
Stock donation 180,000
CE: Memo entry
Adj: Stock donation 180,000
Treasury stock 180,000
---------------------------------------------------------
OE: Cash 75,000
Treasury stock 75,000
CE: Cash 75,000
Land 30,000
Building 45,000
Adj: Treasury stock 75,000
Land 30,000
Building 45,000
2. OE: Cash 6,000
Machinery 6,000
CE: Cash 6,000
Accum. Dep’n 3,000
Loss on sale 6,000
Machinery 15,000
Adj: Accum. Dep’n: mach 3,000
Loss on sale 6,000
Machinery 9,000
3. Depreciation 63,900
Accum. Dep’n – Mach 45,000 *
Accum. dep’n - bldg 18,900
* 444,000 + 6,000 – 15,000 x 10% = 45,000
** 990,000 – 45,000 = 945,000 x 2% = 18,900
Accum. Dep’n – bldg 900
Retained earnings 900
4. Discount on bonds 75,000
Sinking fund bonds 75,000
Retained earnings 7,500
Interest expense 7,500
Discount on bonds 15,000
P 75,000/10 yrs = P7,500 – 2002
7,500 – 2003
5. OE: Sinking fund bond 70,500
Cash 70,500
CE: Sinking fund 70,500
Cash 70,500
Adj: Sinking fund 70,500
Sinking fund bond 70,500
6. Sinking fund 4,500
Interest income 4,500
Answer:
1. B 2. A 3. D 4. B 5. A 6. C 7. C 8. A 9. B 10. C

Case 2
The adjusted trial balance of Galimuyod Company as of December 31, 2005 shows the following:
Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
 Cash sales of the company represents 10% of gross sales.
 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
 It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2006.
 Sales returns in 2006 amounted to P400,000. All returns were from charge sales.
 During 2006, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries during
the year amounted to P3,000.
 The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate
used on December 31, 2005.

Questions:
Based on the above and the result of your audit, answer the following:
1. The accounts receivable as of December 31, 2006 is
a. P3,000,000 c. P 333,333
b. P 300,000 d. P2,444,000
2. The allowance for doubtful accounts as of December 31, 2006 is
a. P 20,000 c. P180,000
b. P120,000 d. P146,640
3. The net realizable value of accounts receivable as of December 31, 2006 is
a. P 307,340 c. P2,874,000
b. P2,814,000 d. P2,291,360
4. The doubtful account expense for the year 2006 is
a. P181,000 c. P 21,000
b. P121,000 d. P147,640

Suggested Solution:

Question No. 1
Expected cash discounts P 6,000
Divide by percentage of cash discount 0.02
Portion of AR that will be granted cash discounts 300,000
Divide by percentage of total AR estimated to take
advantage of the discount 0.10
Accounts receivable, 12/31/06 P3,000,000

Question No. 2
Accounts receivable, 12/31/06 P3,000,000
Multiply by bad debt rate
[(P40,000/P1,000,000) x 1.5] 0.06
Allowance for doubtful accounts, 12/31/06 P 180,000
Question No. 3
Accounts receivable, 12/31/06 P3,000,000
Less: Allowance for doubtful accounts P180,000
Allowance for sales discounts 6,000 186,000
Net realizable value, 12/31/06 P2,814,000
Question No. 4
Allow. for doubtful accounts, 12/31/06 P180,000
Add accounts written off 44,000
Total 224,000
Less: Allow. for doubtful accounts, 12/31/05 P40,000
Bad debt recoveries 3,000 43,000
Doubtful accounts expense for 2006 P181,000

Answers: 1) A; 2) C; 3) B; 4) A

Auditing Problem – Inventories and Related Expense

Case 1
The Big Mom Company is on a calendar year basis. The following data were found during
your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had
been excluded from the inventory, and further testing revealed that the purchase had
been recorded.
b. Goods costing P50,000 had been received, included in inventory, and recorded as a
purchase. However, upon your inspection the goods were found to be defective and
would be immediately returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000,


had been segregated in the warehouse for shipment to a customer. The materials had
been excluded from inventory as a signed purchase order had been received from the
customer. Terms, FOB destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the
monthly statement from Hermie Company listed those materials as on hand, the items
had been excluded from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB
point of shipment on December 31. However, this inventory was found to be included
in the final inventory. The sale was properly recorded in 2016.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not
shipped at December 31, and were not included in the inventory. A review of the
customer’s purchase order set forth terms as FOB destination. The sale had not been
recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had
not arrived as yet. However, these materials costing P170,000 had been included in the
inventory count, but no entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as
inventory. Terms of sale are FOB shipping point according to the supplier’s invoice
which had arrived at December 31.
Further inspection of the client’s records revealed the following December 31, 2017
balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable,
P690,000; Net sales, P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

Questions:
Based on the above and the result of your audit, determine the adjusted balances of
following as of
December 31, 2017:
1. Inventory
P1,550,0
a. P1,230,000 c. 00
P1,480,0
b. P1,650,000 d. 00
2. Accounts payable
a. P710,000 c. P810,000
b. P540,000 d. P760,000
3. Net sales
P4,730,0
a. P4,550,000 c. 00
P4,970,0
b. P4,650,000 d. 00
4. Net purchases
P2,150,0
a. P2,370,000 c. 00
P2,320,0
b. P2,420,000 d. 00
5. Net income
a. P220,000 c. P540,000
b. P290,000 d. P550,000

Solutions:
Questions No. 1 to 5
Account
s Net Net
Payab Net Purchas Inco
Inventory le Sales es me
Unadjust
ed
P1,100,0 P690,0 P5,050,0 P2,300,0 P510,0
balances 00 00 00 00 00
(100,000 (100,000 100,00
(a) - ) - ) 0
(b) (50,000) (50,000) - (50,000) -
(320,000 (70,00
(c) 250,000 - ) - 0)
(10,00
(d) 70,000 - (80,000) - 0)
(120,000 (120,00
(e) ) - - - 0)
100,00
(f) 100,000 - - - 0
(170,00
(g) - 170,000 - 170,000 0)
200,00
(h) 200,000 - - - 0
Adjusted
P1,550,0 P710,0 P4,650,0 P2,320,0 P540,0
balances 00 00 00 00 00

Case 2
In conducting your audit of Dogtooth Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2017, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2017 instead of at June 30, 2017.
You obtained the following information from the company’s general ledger.
Sales for eleven months ended May 31, 2017 P1,344,000
Sales for the fiscal year ended June 30, 2017 1,536,000
Purchases for eleven months ended May 31,
2017
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30,
2017 1,280,000
Inventory, July 1, 2016 140,000
Physical inventory, May 31, 2017 220,000

Your audit disclosed the following additional information.


2. Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
3. Deposit of P4,000 made with vendor and charged to purchases in April 2017. Product
was shipped in July 2017.
4. A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its cost of P16,000.
Questions:
In audit engagements in which interim physical inventories are observed, a frequently
used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratio. Based on the above and the result of your audit, you are
to provide the answers to the following:
1. The gross profit ratio for eleven months ended May 31, 2017 is
a. 20% c. 30%
b. 35% d. 25%
The cost of goods sold during the month of June, 2017 using the gross profit ratio
2. method is
a. P132,000 c. P148,000
b. P144,000 d. P160,000

Solutions:
Question No. 1. D
Sales for 11
months
ended 5/31/06 P1,344,000
Less cost of sales for 11
months ended 5/31/06:
P
Inventory, July 1, 2016 140,000
Add adjusted purchases:
Unadjusted P1,080,000
Item no. 1 12,000
1,088,0
Item no. 2 (4,000) 00
Goods available for sale 1,228,000
1,008,0
Less inventory, 5/31/06 220,000 00
Gross profit 336,000
Divide by sales for 11 months
ended 5/31/06 1,344,000
Gross profit rate for 11
months ended 5/31/06 25%

Question No. 2. C
Sales for the fiscal year ended June 30, P1,536,00
2017 0
Less sales for 11 months ended May 31, 1,344,00
2017 0
192,00
Sales for June, 2017 0
Less sales without profit 16,000
Sales with 176,00
profit 0
Multiply by cost ratio (100% -
25%) 75%
Cost of sales with profit 132,0000
Add cost of sales without
profit 16,000
Total cost of sales for June, 148,00
2017 P 0

Auditing Problem – Investments in Financial Instruments

Case 1
Paramore Company’s accounting records showed the following investments at
January 1, 2017:

Common stock:
P
Heyley Company (1,000 shares) 500,000
William Company (5,000 shares) 5,000,000
Parking lot (leased to Jewel Company) 2,500,000
Trademark 2,000,000
P10,000,0
Total investments 00

Additional information:

2. Paramore owns 1% of Heyley and 30% of William. During the year ended December
31, 2017, Paramore received cash dividends of P350,000 from Heyley and P750,000
from William, whose 2017 net earnings were P4,000,000 and P10,000,000
respectively.

3. The Jewel lease which commenced on January 1, 2016 is for 5 years at an annual
rental of P1,250,000. In addition, on January 1, 2016, Jewel paid a nonrefundable
deposit of P400,000 as well as a security deposit of P250,000, to be refunded upon
expiration of lease. Paramore received P1,250,000 rent from Jewel in 2017.

4. The trademark was licensed to Palace Company for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1, for sales in July
through December of the prior year, and on September 1, for sales in January
through June of same year. On March 1, 2016 and 2017, Paramore received
royalties of P500,000 and P750,000, respectively. On September 1, 2016 and 2017,
Paramore received royalties of P1,000,000 and P1,500,000 respectively. Palace
Company’s sales of the trademarked items totaled P4,000,000 for the last half of
2017.

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

Total income from investments in equity


1. securities
P3,350,00 P4,100,0
a. 0 c. 00
P3,000,0
b. P1,100,000 d. 00

2. Rent income for 2017


P1,250,00 P1,650,0
a. 0 c. 00
P1,380,0
b. P1,330,000 d. 00

3. Royalty income for 2017


P1,500,00
a. 0 c. P2,500,000
b. P2,000,000 d. P1,900,000

Solution:
Question No. 1. A
P
Dividend income from Heyley 350,000
Investment income from William (P10,000,000 x 3,000,00
30%) 0
Total income from investments in equity P3,350,0
securities 00

Question No. 2. B
P1,250,0
Annual rental 00
Amortization of lease bonus (P400,000/5) 80,000
P1,330,0
Rent income for 2017 00
Question No. 3.
D
P1,500,0
January to June 2017 00
July to December 2017 (P4,000,000 x 10%) 400,000
P1,900,0
Royalty income for 2017 00
Case 2
Your audit of the Jimbei Corporation disclosed that the company owned the following
securities on December 31, 2016:

Trading securities:
Cos Marke
Security Shares t t
4,80 P
Sputnik, Inc. 0 72,000 P92,000
8,00 144,00
Explorer, Inc. 0 216,000 0
10% , P100,000 face
value ,
Vanguard bonds (interest
payable
semiannually on Jan. 1 and Jul.
1) 79,200 81,720
P367,20 P317,72
Total 0 0
Available-for-sale
securities:
Share Cos Marke
Security s t t
720,00
Score Products 16,000 P 688,000 P 0
3,120,0 2,920,00
Tiros, Inc. 120,000 00 0
640,00
Midas, Inc. 40,000 480,000 0
P4,288,0 P4,280,0
Total 00 00
Held to maturity:
Cos Book
t value
12%, 1,000,000 face value, Discoverer
bonds
(interest payable annually every Dec. P950,00 P963,00
31) 0 0
During 2017, the following transactions occurred:
Jan. 1 Receive interest on the Vanguard bonds.
Mar. 1 Sold 4,000 shares of Explorer Inc. stock for P76,000.
May 15 Sold 1,600 shares of Midas, Inc. for P15 per share.
July 1 Received interest on the Vanguard bonds.
Dec
. 31 Received interest on the Discoverer bonds.
Transferred the Discoverer bonds to the
31 available-for-sale
portfolio. The bonds were selling at 101 on this
date. The
bonds were purchased on January 2, 2016. The
discount was
amortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2017, are as follows:
Sputnik, Inc. P22 per share
Explorer, Inc. P15 per share
10% Vanguard bonds P75,600
Score Products P42 per share
Tiros, Inc. P28 per share
Midas, Inc. P18 per share

Questions:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2017
a. P4,000 loss c. P32,000 loss
b. P4,000 gain d. P32,000 gain
b. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15, 2017
P1,600
a. P4,800 loss c. loss
P1,600
b. P4,800 gain d. gain
3. Total interest income for the year
2017?
a. P130,000 c. P144,820
b. P125,560 d. P143,000
4. The amount that should be reported as unrealized gain in the statement of changes in
equity regarding transfer of Discoverer bonds
to AFS?
P61,82
a. P47,000 c. 0
b. P32,180 d. P 0

Solution:
Question No. 1. A
P76,00
Sales proceeds 0
Less CV of shares sold (P144,000 x 4/8) 72,000
P
Loss on sale of 4,000 Explorer, Inc. shares 4,000

Question No. 2. B
P24,00
Sales proceeds (1,600 shares x P15) 0
Unrealized gain on the shares sold(P160,000 x
1.6/40) 6,400
Total 30,400
Less CV of shares sold (P640,000 x 1.6/40) 25,600
P
Realized gain on sale of 1,600 Midas, Inc. shares 4,800
Question No. 3. C
P
Vanguard bonds (P100,000 x 10%) 10,000
134,82
Discoverer bonds (P963,000 x 14%*)
Question No.0 4. B
P144,82value, 12/31/05
Carrying P
Total interest income for 2017 0
963,000
*Computation of effective interest rate:Add discount amortization in 2017:
P963,00
Effective interest (P963,000 x
Carrying value, 12/31/05 14%)0 P134,820
950,00
Nominal interest (P1,000,000 x (120,00 14,
Less carrying value, 1/2/05 (Cost) 12%)0 0) 820
Discount amortization for 2016 13,000
Carrying value, 12/31/06 977,82
Add nominal interest (P1,000,000 x 120,00 0
12%) 0 of Discoverer bonds on
Fair value
133,00
12/31/06 (P1,000,000 x 1.01) 1,010,000
Effective interest 0
Unrealized
950,00 gain on transfer of
Divide by carrying value, 1/2/05 securities
0
Effective interest rate to 14%
be reported under SHE P 32,180

Auditing Problem – Non-current Operating Assets

Case 1
On January 1, 2016, Cong Corporation purchased a tract of land (site number 101) with a
building for P1,800,000. Additionally, Cong paid a real state broker’s commission of
P108,000, legal fees of P18,000 and title guarantee insurance of P54,000. The closing
statement indicated that the land value was P1,500,000 and the building value was
P300,000. Shortly after acquisition, the building was razed at a cost of P225,000.

Cong entered into a P9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on
March 1, 2016 for the construction of an office building on the land site 101. The building
was completed and occupied on September 30, 2017. Additional construction costs were
incurred as follows:
Plans, specifications and blueprints P 36,000
Architect’s fees for design and
supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.

To finance the construction cost, Cong borrowed P9,000,000 on March 1, 2016. The loan is
payable in ten annual installments of P900,000 plus interest at the rate of 14%. Cong used
part of the loan proceeds for working capital requirements. Cong’s average amounts of
accumulated building construction expenditures were as follows:
For the period March 1 to December 31, P2,700,00
2016 0
For the period January 1 to September
31, 2017 6,900,000
Cong is using the allowed alternative treatment for borrowing cost.

Questions:
Based on the above and the result of your audit, determine the following:
Cost of land site number
1. 101
P2,205,00
a. P1,905,000 c. 0
P2,151,00
b. P1,800,000 d. 0
2. Cost of office building
P10,329,0
a. P10,581,000 c. 00
P10,960,5
b. P10,360,500 d. 00
Depreciation of office building for
3. 2017
a. P96,800 c. P102,800
b. P97,130 d. P 99,197

Solutions:
Question No. 1. C
P1,800,0
Acquisition cost 00
Real estate broker's commission 108,000
Legal fees 18,000
Title guarantee insurance 54,000
Cost of razing the existing building 225,000
P2,205,0
Total cost of land site 101 00
Question No. 2. B
P
Fixed-price contract cost 9,000,000
Plans, specifications and blueprints 36,000
Architect's fees and design
supervision 285,000
Capitalizable borrowing cost:
Mar. 1 to Dec. 31, 2016
P315,00
(P2,700,000 x 14% x 10/12) 0
Jan. 1 to Sept. 30, 2017
(P6,900,000 x 14% x 9/12) 724,500 1,039,500
P10,360,5
Total cost of office building 00
Question No. 3. B
Depreciation expense [P10,360,500 x P97,13
(1/40x1.5) x 3/12] 0

Case 2
Your audit of Junie Boy Corporation for the year 2017 disclosed the following property
dispositions:
Cos Acc. Procee Fair
t Dep. ds value
Land P4,800,000 - 3,720,000 3,720,000
Building 1,800,000 - 288,000 -

Cos Acc. Procee Fair


t Dep. ds value
Warehouse 8,400,000 1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000
Land
On January 15, a condemnation award was received as consideration for the forced sale of
the company’s land and building, which stood in the path of a new highway.

Building
On March 12, land and building were purchased at a total cost of P6,000,000, of which
30% was allocated to the building on the corporate books. The real estate was acquired
with the intention of demolishing the building, and this was accomplished during the
month of August. Cash proceeds received in September represent the net proceeds from
demolition of building.

Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January
2, 2011. On December 12, the insurance proceeds and other funds were used to purchase
a replacement warehouse at a cost of P7,200,000.

Machine
On December 15, the machine was exchanged for a machine having a fair value of
P756,000 and cash of P108,000 was received.

Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss to be
recognized for each of the following dispositions:
1. Land
P4,800,000
a. P3,720,000 gain c. loss
b. P1,080,000 loss d. P 0
2. Building
P1,368,000
a. P 432,000 gain c. loss
b. P2,232,000 loss d. P 0
3. Warehouse
P5,400,000
a. P1,800,000 gain c. loss
b. P 480,000 gain d. P 0
4. Machine
P288,000
a. P36,000 gain c. gain
b. P27,000 gain d. P 0
5. Delivery truck
a. P636,000 loss c. P66,000 loss
b. P636,000 gain d. P66,000 gain

Solutions:
Question No. 1. B
P3,720,0
Cash received 00
4,800,00
Cost of land 0
P1,080,0
Loss on condemnation of land 00

Question No. 2. D
None. The proceeds from demolition of building will be deducted from the cost of the
land.

Question No. 3. A
P8,880,0
Insurance proceeds 00
Carrying value (P8,400,000 - 7,080,00
P1,320,000) 0
P1,800,0
Gain on insurance policy settlement 00

Question No. 4. C
P864,00
Fair value of old machine 0
Carrying value (P960,000 - P384,000) 576,000
P288,00
Gain on exchange 0

Question No. 5. C
P564,00
Sales proceeds 0
Carrying value (P1,200,000 -
P570,000) 630,000
P
Loss on sale 66,000
Auditing Problem – Liabilities

Case 1
In connection with your audit of Lambanog Corporation’s financial statements for the year
2017, you noted the following liability account balances as of December 31, 2016:

Note payable, bank P 5,600,000


Liability under finance lease 430,000
Deferred income taxes 700,000

Transactions during 2017 and other information relating to Lambanog’s liabilities were as
follows:

a. The principal amount of the note payable is P5,600,000 and bears interest at 12%.
The note is dated April 1, 2016 and is payable in four equal annual installments of
P1,400,000 beginning April 1, 2017. The first principal and interest payment was
made on April 1, 2017.
b. The capitalized lease is for a ten-year period beginning December 31, 2002. Equal
annual payments of P100,000 are due on December 31 of each year, and the 14%
interest rate implicit in the lease known by Lambanog. The present value at
December 31, 2016 of the seven remaining lease payments (due December 31,
2017 through December 31, 2011) discounted at 14% was P430,000.
c. Deferred income taxes are provided in recognition of timing differences between
financial and income tax reporting of depreciation. For the year ended December
31, 2017, depreciation per tax return exceeded book depreciation by P312,500.
Lambanog’s effective income tax rate for 2016 was 32%.
d. On July 1, 2017, Lambanog issued for P1,774,000, P2,000,000 face amount of its
10%, P1,000 bonds. The Bonds were issued to yield 12%. The bonds are dated July
1, 2016 and will mature on July 1, 2014. Interest is payable annually on July 1.
Lambanog uses the interest method to amortize bond discount.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Liability under finance lease as of December 31, 2017
a. P381,600 b. P390,200 c. P344,828 d. P330,000
1. Total noncurrent liabilities as of December 31, 2017
a. P5,610,440 b. P5,770,640 c. P5,931,328 d. P5,725,268
3. Current portion of long-term liabilities as of December 31, 2017
a. P1,445,372 b. P1,400,000 c. P1,500,000 d. P1,446,576
4. Accrued interest payable as of December 31, 2017
a. P484,440 b. P432,628 c. P532,628 d. P478,000
5. Total interest expense for the year 2017
a. P652,440 b. P707,068 c. P712,640 d. P699,760
Solutions:
Question No. 1 - B
Liability under capital lease
Balance, 1/1/05 430,00
0
Less principal payment on
12/31/05:
Total payment 100,0
00
Applicable to interest (P430,000 x 60,20 39,800
14%) 0
Balance, 12/31/05 390,20
0
Question No. 2 - D

15% Note payable, bank


Balance, 12/31/05 (P5,600,000 - 4,200,0
P1,400,000) 00
Less installment due on April 1, 1,400,0 2,800,0
2006 00 00
Liability under capital lease
Balance, 1/1/05 430,00
0
Less principal payment on
12/31/05:
Total payment 100,0
00
Applicable to interest (P430,000 x 60,20 39,800
14%) 0
Balance, 12/31/05 390,20
0
Less principal payment due on
12/31/06:
Total payment 100,0
00
Applicable to interest (P390,200 x 54,62 45,372 344,82
14%) 8 8
10% bonds payable due 7/1/2014
Carrying value, 7/1/05 1,774,0
00
Add discount amortization:
Effective interest (1,774,000 x 106,4
12% x 6/12) 40
Nominal interest (2,000,000 x 100,0 6,440 1,780,4
10% x 6/12) 00 40
Deferred income tax liability
Balance, 1/1/05 700,00
0
Provision for deferred income tax 100,00 800,00
(P312,500 x 32%) 0 0
Total noncurrent liabilities, 12/31/05 5,725,2
68
Question No. 3 - A
Note payable, bank - due 4/1/06 1,400,0
00
Capital lease liability - principal payment due on 12/31/06 45,372
(see no. 1)
Current portion of long-term liabilities, 1,445,3
12/31/05 72
Question No. 4 - D
Note payable, bank (P4,200,000 x 378,00
12% x 9/12) 0
Bonds payable (P2,000,000 x 10% x 100,00
6/12) 0
Accrued interest payable, 12/31/05 478,00
0
Question No. 5 - C
Note payable, bank
(P5,600,000 x 12% x 3/12) 168,0
00
(P4,200,000 x 12% x 9/12) 378,0 546,00
00 0
Liability under capital lease (see no. 60,20
1) 0
Bonds payable
Nominal (P2,000,000 x 10% x 6/12) 100,0
00
Discount amortization (see no. 2) 6,440 106,44
0
Total interest expense for 2017 712,64
0

Case 2
On January 2, 2016, the Comet, Inc. issued P2,000,000 of 8% convertible bonds at par. The
bonds will mature on January 1, 2008 and interest is payable annually every January 1.
The bond contract entitles the bondholders to receive 6 shares of P100 par value common
stock in exchange for each P1,000 bond. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 10%.

On December 31, 2017, the holders of the bonds with total face value of P1,000,000
exercised their conversion privilege. In addition, the company reacquired at 110, bonds
with a face value of P500,000.
The balances in the capital accounts as of December 31, 2016 were:

Common stock, P100 par, authorized 50,000


shares, issued
P3,000,0
and outstanding, 30,000 shares 00
Premium on common stock 500,000

Market value of the common stock and bonds were as follows:

Dat Common
e Bonds stock
December 31,
2016 118 40
December 31,
2017 110 42

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much of the proceeds from the issuance of convertible bonds should be
allocated to equity?
a. P634,000 b. P126,816 c. P221,664 d. P0

2. How much is the carrying value of the bonds payable as of December 31, 2016?
a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502

3. How much is the interest expense for the year 2017?


a. P160,000 b. P138,940 c. P179,617 d. P190,050

4. The entry to record the conversion on December 31, 2017 will include a credit to
APIC of
a. P365,276 b. P400,000 c. P307,893 d. P0

5. How much is the loss on bond reacquisition on December 31, 2017?


a. P50,000 b. P96,053 c. P67,362 d. P0

Auditing Problem – Shareholder’s Equity

Case 1
The year-end audit of the records of Carrot Farms disclosed a shortage in cash amounting
to P600,000. The treasurer had concealed the fraud by increasing inventories by
P300,000, land by P100,000 and accounts receivable by P200,000.
Faced with prosecution, the treasurer offered to surrender 6,000 Carrot Farms shares
owned by him. The board of directors accepted the offer, with the agreement that the
treasurer would pay any deficiency between the shortage and the book value of the
shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any,
of the book value over the shortage.

As of December 31, 2017, there were 40,000 common shares issued and outstanding with
a par value of P100; Retained earnings as of January 1, 2017 was P1,600,000 and net
income from 2017 operations was P1,400,000.
Questions:
Considering the above information, answer the following:

1. What would be the book value per share for purposes of the agreement?
a. P175 b. P206 c. P150 d. None of these

2. How much would the company pay the treasurer, if any?


a. P450,000 b. P300,000 c. P636,000 d. None of these

3. Assuming further the company distributes the 6,000 shares as dividend to the
remaining stockholders, what would be the balance of the Retained earnings as of
December 31, 2017?
a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these

Solutions:
Requirement No. 1. A
Capital stock (40,000 x P100) 4,000,000
1,600,00
Retained earnings: 0
1,400,00
Beginning 0
3,000,00
Net income for 2017 0
7,000,00
Total stockholders equity 0
Divide by number of shares outstanding 40,000
Book value per share 175

Requirement No. 2. A
Value of the shares to be surrendered (6,000 x
P175) 1,050,000
Amount of cash shortage 600,000
Amount to be paid to the treasurer 450,000
Requirement No. 3. A
Retained earnings before dividends 3,000,000
Dividends to remaining stockholders (value of
shares surrendered) (1,050,000)
1,950,00
Retained earnings after dividends 0

Case 2
On November 20, 2016 you have substantially completed your fieldwork relative to your audit of
TUPONPAY ABLANGPO Corporation, engaged in the sale of rechargeable lamps. Its rented store and
office is located in Davao City.

Based on your review of the records you have found out that the company’s financial statements at
the end of its fiscal year September 30, 2016 submitted by their account is subject to the
adjustments you noted in your audit.

Audit finding No. 1


Included in the Cash account is a customer’s check for P1,100 deposited on September 30, 2016
but returned by the bank on September 30, 2016 for insufficiency of drawer’s funds. The check was
redeposited on October 3, 2016. No entry was made by the company for the return nor the
redeposit of the check.

Audit finding No. 2


The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of uncollectible
accounts in excess of the beginning balance of the allowance. Further analysis of the customer’s
accounts disclosed the need for setting up an allowance as at September 30, 2016 to 5% of
outstanding balance as of date.

Audit finding No. 3


Goods shipped out on consignment basis in September 2016, still unsold as at the end of the
month, were recorded as sales for P4,900 which included 40% gross profit on cost. This was not
included in the physical inventory.

Audit finding No. 4


A physical inventory taken of the merchandise on September 30, 2016 amounted to P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 2016 from J. Ramos, interest due
on maturity date (assume 30 days per month).

Audit finding No. 6


Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of P2,400
at September 30, 2015, was sold for P2,000 cash on October 1, 2006. The sales price was credited
to Furniture and Equipment.

Audit finding No. 7


Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and
equipment is 10 years.
Audit finding No. 8
A one-year insurance policy was taken by the company on June 30, 2016 and paid the annual of
P1,200.

Audit finding No. 9


The company paid P11,700 representing rent for 13 months ending on October 31, 2016.

Audit finding No. 10


The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on
August 15, 2016. Interest expense was debited.

Audit finding No. 11


The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited to
retained earnings.

Audit finding No. 12


Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution of the
Board of Directors.

Audit finding No. 13


Office salaries unpaid as of September 30, 2016, P1,200, were not taken up as accrued expense.

Audit finding No. 14


Patents were acquired by purchase on September 30, 2015 for P20,000. It has as estimated useful
life of 4 years.

Audit finding No. 15


An analysis of the investment account shows that on September 2016 25 shares were sold for P200
per share. This was recorded as a debit balance to Cash, P5,000 and a credit to Investments in A
Co., P5,000.

Audit finding No. 16


A repayment of non-interest bearing note payable for P5,000 was erroneously debited to
Advertising.

Audit finding No. 17


A payment of P1,000 for Taxes on September 29, 2016 was not recorded in the books.

Audit finding No. 18


On September 30, 2016 TUPONPAY ABLANGPO Company declared a 10% stock dividend
distributable on October 21, 2016. The market value per share is P120 at the time of declaration.
This has not been taken up in the books.

Audit finding No. 19


On September 30, 2016 a Land was donated by a stockholder. The stockholder bought the Land in
1998 for P26,000. The appraised value of the land at present is P50,000.
Audit finding No. 20
Marketable Securities which cost P15,000 has a market value of P16,000.

Audit finding No. 21


A payment to supplier within the discount period was made on June 20, 2016. The discount of P20
was credited to Sales discounts instead of purchase discounts.

Audit finding No. 22


TUPONPAY ABLANGPO Corporation has a pending lawsuit from a customer, asking for a P100,000
damages. The lawyers of the company believe that it is remote that the case of the
customer will prosper in court.

TUPONPAY ABLANGPO Corporation


Working Balance Sheet
September 30, 2016

PER AUDIT FINAL


BOOK ADJUSTMENT BALANCES
Current
Cash 10,500
Marketable Securities 15,000
Account Receivable – trade 57,200
Allowance for doubtful accounts 1,500 dr.
Notes Receivable 21,500
Inventories 39,500
Investment in A, Co. –100 shares 25,000
Interest Receivable -
Prepayments 1,750
TOTAL 171,950

Land
Furniture & Equipment 50,850
Accumulated Depreciation (12,170)
TOTAL 38,680

Goodwill 10,000
Patents 20,000
TOTAL 30,000
Total Assets 240,630

Liabilities
Accounts payable 35,420
Accrued expenses -
Notes payable 31,000
Stockholders’ equity
Capital Stock, P100 75,000
Additional paid in capital -
Stock dividend distributable -
Donated capital -
Retained Earnings 99,210
Total Liab. & S. E 240,630

TUPONPAY ABLANGPO CORPORATION


Working Profit and Loss
Year Ended September 30, 2016
PER AUDIT FINAL
BOOKS ADJUSTMENT BALANCES

Sales 269,810
Sales returns ( 1,950)
Sales discounts ( 1,700)
Net sales 266,160

Cost of sales
Inventory, beg. 39,500
Purchases 189,360
Purchase returns ( 3,700)
Purchase discounts ( 1,970)
Inventory, end (41,500)
181,690
Gross Profit 84,470
Advertising ( 7,210)
Doubtful Accounts -
Salesman’s Salaries (21,650)
Miscellaneous Selling expenses ( 1,940)
Rent expense (11,700)
Insurance expense ( 1,200)
Light and water ( 300)
Taxes ( 1,510)
Office salaries ( 3,330)
Miscellaneous office expense ( 1,560)
Loss on sale -
Amortization of Intangibles -
Interest Expense ( 4,060)
Other Income 430
Net Income 30,440

Questions

1. Cash
a. P 9,500 b. P8,400 c. P10,600 d. P5,800

2. Accounts receivable – trade


a. P57,200 b. P53,400 c. P50,000 d. P58,300

3. Allowance for doubtful accounts


a. P1,500 b. P2,670 c. P2.860 d. P4,115
4. Interest Receivable
a. P60 b. P180 c. P240 d. 90

5. Inventories
a. P41,500 b. P46,400 c. P45,000 d. 40,000
6. Doubtful accounts
a. P2,980 b. P2,670 c. P4,170 d. P4,000

7. Prepayments
a. P2,980 b. P3,700 c. p2,050 d. P2,650

8. Furniture and Equipment


a. P57,850 b. P62,850 c. P60,850 d. P50,850

9. Depreciation
a. P5,085 b. P6,285 c. P6,085 d. P4.985

10. Accounts payable


a. P35,420 b. P34,420 c. P36,000 d. P32,988

11. Capital Stock


a. P75,000 b. P77,000 c. P0 d. P73,000

12. Sales
a. P269,810 b. P274,710 c. P264,910 d. P260,100

13. Purchases
a. P189,360 b. P187,360 c. P180,000 d. P200,160

14. Interest expense


a. P4,030 b. P4.060 c. P4,090 d. P3,910

15. Other Income


P430 b. P610 c. P400 d. 0

16. Goodwill
a. P0 b. P10,000 c. P5,000 d. P6,000

17. Office salaries


a. P2,130 b. P22,850 c. P4,530 d. P1,200

18. Patents
a. P0 b. P10,000 c. P15,000 d. P5,000

19. Additional Paid in Capital


a. P3,500 b. P500 c. P2,000 d. P200

20. Investment in a Co.


a. P0 b. P26,000 c. P24,000 d. P25,000

21. Advertising
a. P7,210 b. P5,210 c. P2,210 d. P5,000
22. Light and Power
a. P500 b. P5,300 c. P300 d. P0

23. Taxes
a. P1,970 b. P2,510 c. P1,000 d. P300
24. TUPONPAY ABLANGPO Company should record stock dividend payable at
a. P7,500 b. P9,000 c. P0 d. P1,500

25. Land
a. P0 b. P50,000 c. p26,000 d. P24,000

26. The appropriate account to be credited for the donation is


a. Retained Earnings c. Donated Capital
b. Capital Stock d. Other Income

27. Marketable securities, net of any allowance for decline


a. P14,000 b. P15,000 c. P16,000 d. P0

28. Sales discount


a. P1,680 b. P1,720 c. P1,200 d. P1,500

29. Salesman’s salaries


a. P21,650 b. P22,850 c. P20,000 d. P25,000

30. TUPONPAY ABLANGPO Company should recognize liability from damages for
a. P0 b. P100,000 c. P50,000 d.P200,000

Answer:
1. B 2. B 3. B 4. B 5. C 6. C 7. B 8. D 9. A 10. A
11. A 12. C 13. A 14. D 15. B 16. A 17. C 18. C 19. A 20. C
21. C 22. C 23. B 24. A 25. B 26. C 27. B 28. B 29. A 30. A

Entries:
Finding 1 Finding 8
Accounts receivable 1,100 Prepayments 900
Cash 1,100 Insurance expense 900
Finding 2 Finding 9
Bad debts 4,170 Prepayments 900
Allow. For BD 4,170 Rent expense 900
Finding 3 Finding 10
Sales 4,900 Prepayment 150
Accounts receivable 4,900 Interest expense 150
Inventory 3,500 Finding 11
COS 3,500 Retained earnings 2,000
Finding 4 APIC 2,000
COS 39,500 Finding 12
Inventory 39,500 Retained earnings 10,000
Inventory 41,500 Goodwill 10,000
COS 41,500 Finding 13
Finding 5 Office salaries 1,200
Interest receivable 180 Accrued expenses 1,200
Interest income 180 Finding 14
Finding 6 Amortization 5,000
No adjustments Patents 5,000
Finding 7
Depreciation 5,085
AD 5,085

Finding 15 Finding 18
Loss on sale 1,000 Retained earnings 9,000
Investment 1,000 Stock div. distr. 7,500
Finding 16 APIC 1,500
Note payable 5,000 Finding 19
Advertising 5,000 Land 50,000
Donated capital 50,000
Finding 17
Taxes 1,000 Finding 20
Cash 1,000 No adjustment
Finding 21
Sales discount 20
Purchase discount 20

WORKING PAPER
Per books Per audit
2,100.0
Cash 10,500.00 0 8,400.00
Marketable securities 15,000.00 15,000.00
1,100.0 4,900.0
Accounts receivable - trade 57,200.00 0 0 53,400.00
4,170.0 (2,670.0
Allow.for bd - debit balance 1,500.00 0 0)
Notes receivable 21,500.00 21,500.00
45,000.0 39,500.0
Inventories 39,500.00 0 0 45,000.00
1,000.0
Investment in A. Co. - 100 shares 25,000.00 0 24,000.00
Interest receivable - 180.00 180.00
1,950.0
Prepayments 1,750.00 0 3,700.00
50,000.0
Land - 0 50,000.00
Furniture & Equipment 50,850.00 50,850.00
(12,170.0 5,085.0 (17,255.0
Accumulated depreciation 0) 0 0)
10,000.0
Goodwill 10,000.00 0 -
5,000.0
Patents 20,000.00 0 15,000.00
240,630.0 267,105.0
0 0

Accounts payable 35,420.00 35,420.00


1,200.0
Accrued expenses - 0 1,200.00
5,000.0
Notes payable 31,000.00 0 26,000.00
Capital stock, P100 75,000.00 75,000.00
3,500.0
Additional paid in capital - 0 3,500.00
7,500.0
Stock dividend distributable - 0 7,500.00
50,000.0
Donated capital - 0 50,000.00
Retained earnings 99,210.00 68,485.00
240,630.0 267,105.0
0 0

4,900.0
Sales 269,810.00 0 264,910.00
(1,950.0 (1,950.0
Sales returns 0) 0)
(1,700.0 (1,720.0
Sales discounts 0) 20.00 0)
Net sales 266,160.00 261,240.00
39,500.0
Cost of sales *** 181,690.00 0 20.00
41,500.0
0
3,500.0
0 176,170.00
Gross profit 84,470.00 85,070.00
Other income 430.00 180.00 610.00
TOTAL 84,900.00 85,680.00
Operating expenses
(7,210.0 5,000.0 (2,210.0
Advertising 0) 0 0)
4,170.0 (4,170.0
Doubtful accounts - 0 0)
(21,650.0 (21,650.0
Salesmen's salaries 0) 0)
(1,940.0 (1,940.0
Miscellaneous selling expenses 0) 0)
(11,700.0 (10,800.0
Rent expenses 0) 900.00 0)
(1,200.0 (300.00
Insurance expense 0) 900.00 )
(300.00 (300.00
Light and water ) )
(1,510.0 1,000.0 (2,510.0
Taxes 0) 0 0)
(3,330.0 1,200.0 (4,530.0
Office salaries 0) 0 0)
(1,560.0 (1,560.0
Miscellaneous office expenses 0) 0)
1,000.0 (1,000.0
Loss on sale - 0 0)
5,085.0 (5,085.0
Depreciation - 0 0)
5,000.0 (5,000.0
Amortization of intangibles - 0 0)
Income from operations 34,500.00 24,625.00
(4,060.0 (3,910.0
Interest expense 0) 150.00 0)
Net income 30,440.00 20,715.00
12,000.0
Retained beginning 68,770.00 0 56,770.00
9,000.0 (9,000.0
Dividends - 0 0)
Retained end 99,210.00 68,485.00
186,105.0
186,105.00 0
*** COS
Inventory - beg. 39,500.00
Purchases 189,360.00
(3,700.0
Purchase returns 0)
(1,970.0
Purchase discounts 0)
TGAS 223,190.00
(41,500.0
Inventory - end 0)
COS 181,690.00