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AUDITING PROBLEMS
AUDIT OF CASH AND CASH EQUIVALENTS

PROBLEM NO. 1
The following data were taken from your current working papers in connection with your
audit of the Rizal Company’s financial statements for the year ended December 31, 2006.

## Cash account consists of the following items:

Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
Total per GL P331,750

a. The count of the cashier’s accountability on January 2, 2007, revealed total bills and
coins of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of
which P3,000 pertains to January 2007.

b. On December 29, 2006, a check for P87,500 was drawn against Security Bank
current account resulting in bank overdraft of P37,500. The check was picked up by
the supplier on January 3, 2007.

c. Bank reconciliation statement prepared by the cashier for the Allied Bank account
follows:
Bank balance P310,500
Bank service charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check No. Amount
@
214 P 2,500
219 20,750
225 6,000
228 8,500 28,750
Book balance P344,250
@
Check certified by the bank in December 2006.

All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customer’s post-dated check amounting to P40,000.
The check represents a collection from account customer for sales made in the middle of
October 2006.

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above
data, you are to provide the answers to the following:

1. How much is the adjusted balance of petty cash fund as of December 31, 2006?
a. P12,000 b. P13,000 c. P9,000 d. P16,000
2. How much is the adjusted Allied Bank current account as of December 31, 2006?
a. P336,500 b. P305,500 c. P296,500 d. P330,250
3. How much is the cash shortage as of December 31, 2006?
a. P46,500 b. P6,500 c. P9,000 d. P0
4. How much is the adjusted cash as of December 31, 2006?
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## a. P355,500 b. P398,500 c. P367,500 d. P358,500

5. An auditor would consider a cashier’s job description to contain compatible duties if
the cashier receives remittance from the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.
b. Prelist of individual checks. d. Monthly bank reconciliation.

## PROBLEM NO. 2 (RPCPA 10.84)

You obtained the following information on the current account of Bonifacio Company
during your examination of its financial statements for the year ended December 31, 2006.

The bank statement on November 30, 2006 showed a balance of P114,750. Among the
bank credits in November was customer’s note for P37,500 collected for the account of the
company which the company recognized in December among its receipts. Included in the
bank debits were cost of checkbooks amounting to P450 and a P15,000 check which was
charged by the bank in error against Bonifacio Co. account. Also in November you
ascertained that there were deposits in transit amounting to P30,000 and outstanding
checks totaling P63,750.

The bank statement for the month of December showed total credits of P156,000 and total
charges of P76,500. The company’s books for December showed total receipts of
P275,850, disbursements of P152,700 and a balance of P182,100. Bank debit memos for
December were: No. 245 for service charges, P600 and No. 246 on a customer’s returned
check marked “DAIF” for P9,000.

On December 31, 2006 the company placed with the bank a customer’s promissory note
with a face value of P45,000 for collection. The company treated this note as part of its
receipts although the bank was able to collect on the note only in January, 2007.

A check for P1,485 was recorded in the company cash payments books in December as
P14,850.

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above
data, you are to provide the answers to the following:
1. How much is the undeposited collections as of December 31, 2006?
a. P127,350 b. P67,350 c. P82,350 d. P52,350
2. How much is the outstanding checks as of December 31, 2006?
a. P71,985 b. P135,735 c. P149,100 d. P136,185
3. How much is the adjusted bank receipts for December?
a. P238,350 b. P178,350 c. P163,350 d. P193,350
4. How much is the adjusted book disbursements for December?
a. P84,735 b. P148,485 c. P161,850 d. P148,935
5. How much is the adjusted cash balance as of December 31, 2006?
a. P234,615 b. P82,500 c. P140,865 d. P73,365

## PROBLEM NO. 3 (RPCPA 5.80)

On January 10, 2007, you started the audit of the financial records of the Del Pilar
Company for the year ended December 31, 2006. From your investigation, you
discovered the following:
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1. The bookkeeper also acts as the cashier. On December 31, 2006, the bookkeeper’s
year-end cash reconciliation contains the following items.
Cash per ledger, 12-31-06 P736,800
Cash per bank, 12-31-06 778,200
Outstanding checks 62,640
Joe Co. check charge by bank in error
12-20-06; corrected by bank on 1-5-07 1,800
Cash in transit, credited by bank on 1-2-07 8,640

2. The cash account balances per ledger as of 12-31-06 were: Cash - P736,800; petty
cash - P1,800

3. The count of the cash on hand at the close of business on January 10, 2007, including
the petty cash, was as follows:
Currency and coin P4,620
Expense vouchers 240
Employees’ IOU’s dated 1-5-07 660
Customers’ checks in payment of account 3,480
P9,000

4. From January 2, 2007 to January 10, 2007, the date of your cash count, total cash
receipts appearing in the cash records were P103,200. According to the bank
statement for the period from January 2, 2007 to January 10, 2007, total deposits were
P91,200.

5. On July 5, 2006, cash of P4,800 was received from an account customer; the
Allowance for Doubtful Accounts was charged and Accounts Receivable credited.

## 6. On December 5, 2006, cash of P3,600 was received from an account customer;

Inventory was charged and Accounts Receivable credited.

## 7. Cash of P8,760 received during 2006 was not recorded.

8. Checks received from customers from January 2, 2007 to January 10, 2007, totaling
P5,040, were not recorded but were deposited in bank.

9. On July 1, 2006, the bank refunded interest of P240 because a note of the Del Pilar
Company was paid before maturity. No entry had been made for the refund.

10. In the cashier’s petty cash, there were receipts for collections from customers on
January 9, 2007, totaling P10,200; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P600 made payable to a trade creditor;
investigation shows that this check had been returned by the creditor on June 14, 2006
and a new check for P1,200 was issued in its place; the original check for P600 was
made in error as to amount.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The correct bank balance as of December 31, 2006 is
a. P726,600 b. P754,800 c. P726,000 d. P724,800
2. The cash shortage as of December 31, 2006 is
a. P28,800 b. P28,200 c. P27,600 d. P 0
3. The cash shortage for the period January 1 to 10, 2007 is
a. P20,040 b. P30,480 c. P15,240 d. P 0
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4. Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from improper write-off of a trade account
receivable?
a. Write-offs must be approved by a responsible officer after review of credit
department recommendations and supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables
overdue for several months have been written off.
c. Write-offs must be approved by the cashier who is in a position to know if the
receivables have, in fact, been collected.
d. Write-offs must be authorized by company field sales employees who are in a
position to determine the financial standing of the customers.
5. As an in-charge auditor, you are reviewing a write-up of internal control in cash
receipt and disbursement procedures. Which of the following deficiencies alone
should cause you the least concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails to establish bona fide names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.

AUDIT OF RECEIVABLES

## PROBLEM NO. 4 (RPCPA 5.90)

The December 31, 2005 adjusted trial balance of Aguinaldo Company shows the following:
Debit Credit
Accounts receivable P50,000
Allowance for bad debts P 2,000

 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 P300 will be taken on accounts receivable
outstanding at December 31, 2006.
 Sales returns in 2006 amounted to P20,000. All returns were from charge sales.
 During 2006, accounts totaling to P2,200 were written off as uncollectible; bad debt
recoveries during the year amounted to P150.
 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, determine the following:
1. The accounts receivable as of December 31, 2006 is
a. P150,000 b. P16,667 c. P15,000 d. P122,200
2. The allowance for doubtful accounts as of December 31, 2006 is
a. P1,000 b. P9,000 c. P6,000 d. P7,332
3. The net realizable value of accounts receivable as of December 31, 2006 is
a. P15,367 b. P143,700 c. P140,700 d. P114,568
4. The doubtful account expense for the year 2006 is
a. P9,050 b. P1,050 c. P6,050 d. P7,382
5. A company uses the allowance method for recognizing doubtful accounts. The entry
to record the writeoff of a specific uncollectible account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
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## c. Decreases both net income and working capital

d. Decreases both net income and accounts receivable

## PROBLEM NO. 5 (RPCPA 10.79)

During your examination of the 2006 financial statements of the Mabini Company you find
that the company does not provide allowance for doubtful accounts ever since it started
operations in 2002. The company’s practice is to directly write-off as expense doubtful
accounts and credit recoveries to income. The company’s contracts are generally for two
years.
Upon your recommendation, the company agreed to change its accounts for 2006 to give
effect to doubtful treatment on the allowance basis. The allowance is to be based on a
percentage of sales which is derived from the experience of prior years. Statistics for 2002
to 2006 are shown as follows:
Year of Sale 2002 2003 2004 2005 2006
Charge Sales P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000

## Accounts Written off &

Year of Sale
2002 3,300
2003 9,000 6,000
2004 3,000 24,000 7,800
2005 7,200 27,000 9,000
2006 16,200 30,000 8,400
Recoveries & Year of Sale
2002
2003 600
2004 2,400
2005 3,000
2006 3,600

## Accounts receivable at December 31, 2005 were as follows:

From 2005 sales P90,000
From 2006 sales 810,000
Total P900,000
REQUIRED:
Based on the above and the result of your audit, you are to provide the answers to the
following:
1. The average percentage of net doubtful accounts to charge sales that should be used
in setting up the 2006 allowance is
a. 2.50% b. 2.05% c. 1.90% d. 1.77%
2. How much is the doubtful accounts expense for 2006?
a. P32,850 b. P54,600 c. P41,250 d. P43,800
3. The doubtful accounts expense for 2006 is over(under) stated by
a. P55,950 b. P13,350 c. (P32,850) d. (P41,250)
4. The net realizable value of accounts receivable that should be presented on the
December 31, 2006 balance sheet is
a. P831,600 b. P853,800 c. P868,650 d. P810,000
5. Which account balance is most likely to be misstated if an aging of accounts
receivable is not performed?
a. Allowance for bad debts. c. Accounts receivable.
b. Sales returns and allowances. d. Sales revenue.
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## PROBLEM NO. 6 (Stice, Stice and Skousen – 15th edition)

Presented below are independent situations related to the notes receivable of
GOMBURZA Company. Answer the following questions relating to each of the
independent situations as requested. (Round-off present value factors to four decimal
places)

1. GOMBURZA Company has P6,000,000 note receivable from sale of plant bearing
interest at 12% per annum. The note is dated April 1, 2005. The note is payable in 3
annual installments of P2,000,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1, 2006.
How much is the interest receivable as of December 31, 2006?
a. P360,000 b. P540,000 c. P180,000 d. P120,000

2. GOMBURZA Company sold a tract of land to RI Co. on July 1, 2006, for P4,000,000
under an installment sale contract. RI Co. signed a 4-year 11% note for P2,800,000
on July 1, 2006, in addition to the down payment of P1,200,000. The equal annual
payments of principal and interest on the note will be P902,500 payable on July 1,
2007, 2008, 2009,and 2010. The land had an established cash price of P4,000,000,
and its cost to the company was P3,000,000. The collection of the installments on
this note is reasonably assured.
How much is the noncurrent portion of the note receivable as of December 31, 2006?
a. P2,800,000 b. P1,897,500 c. P2,205,500 d. P2,051,500

## 3. On January 1, 2006, GOMBURZA Company sold a tract of land to three doctors as

an investment. The land, purchased 10 years ago, was carried on GOMBURZA
Company’s books at a value of P125,000. GOMBURZA received a noninterest-
bearing note for P220,000 from the doctors. The note is due on December 31, 2007.
There is no readily available market value for the land, but the current market rate of
interest for comparable notes is 10%.
The carrying amount of the note receivable on December 31, 2006 is
a. P220,000 b. P199,989 c. P181,819 d. P186,219

## 4. On December 31, 2005, GOMBURZA Company finished consultation services and

accepted in exchange a promissory note with a face value of P300,000, a due date of
December 31, 2008, and a stated rate of 5%, with interest receivable at the end of
each year. The fair value of the services is not readily determinable and the note is
not readily marketable. Under the circumstances, the note is considered to have an
appropriate imputed rate of interest of 10%.
How much is the interest income in 2006?
a. P26,269 b. P15,000 c. P22,539 d. P26,624

5. On January 1, 2006, GOMBURZA Company sold land that originally cost P400,000 to
X Company. As payment, X gave GOMBURZA Company a P600,000 note. The note
bears an interest rate of 4% and is to be repaid in three annual installments of
P200,000 (plus interest on the outstanding balance). The first payment is due on
December 31, 2006. The market price of the land is not reliably determinable. The
prevailing rate of interest for notes of this type is 14%.
The gain on sale of land is
a. P5,000 b. P64,320 c. P103,105 d. P82,893
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AUDIT OF INVENTORIES

## PROBLEM NO. 7 (Kieso, Weygandt and Warfield – 10th edition)

Luna Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2006:
Inventory at December 31, 2006 (based on physical count on
December 31, 2006) P1,520,000
Accounts payable at December 31, 2006 1,200,000
Net sales (sales less sales returns) 8,150,000

a. Included in the physical count were tools billed to a customer FOB shipping point on
December 31, 2006. These tools had a cost of P31,000 and were billed at P40,000.
The shipment was on Luna’s loading dock waiting to be picked up by the common
carrier.
b. Goods were in transit from a vendor to Luna on December 31, 2006. The invoice
cost was P71,000, and the goods were shipped FOB shipping point on December 29,
2006.
c. Work in process inventory costing P30,000 was sent to an outside processor for
plating on December 30, 2006.
d. Tools returned by customers and held pending inspection in the returned goods area
on December 31, 2006, were not included in the physical count. On January 8, 2007,
the tools costing P32,000 were inspected and returned to inventory. Credit memos
totaling P47,000 were issued to the customers on the same date.
e. Tools shipped to a customer FOB destination on December 26, 2006, were in transit
at December 31, 2006, and had a cost of P21,000. Upon notification of receipt by the
customer on January 2, 2007, Luna issued a sales invoice for P42,000.
f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on
December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but the invoice was included in
accounts payable at December 31, 2006.
g. Goods received from a vendor on December 26, 2006, were included in the physical
count. However, the related P56,000 vendor invoice was not included in accounts
payable at December 31, 2006, because the accounts payable copy of the receiving
report was lost.
h. On January 3, 2007, a monthly freight bill in the amount of P6,000 was received. The
bill specifically related to merchandise purchased in December 2006, one-half of
which was still in the inventory at December 31, 2006. The freight charges were not
included in either the inventory or accounts payable at December 31, 2006.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The adjusted balance of Inventory as of December 31, 2006 is
a. P1,673,000 b. P1,672,000 c. P1,704,000 d. P1,670,000
2. The adjusted balance of Accounts Payable as of December 31, 2006 is
a. P1,333,000 b. P1,262,000 c. P1,327,000 d. P1,330,000
3. The adjusted Net Sales fro the year ended December 31, 2006 is
a. P8,103,000 b. P8,110,000 c. P8,150,000 d. P8,063,000
4. When auditing merchandise inventory at year end, the auditor performs a purchase
cutoff test to obtain evidence that
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a. All goods purchased before year end are received before the physical inventory
count.
b. All goods owned at year end are included in the inventory balance.
c. No goods held on consignment for customers are included in the inventory
balance.
d. No goods observed during the physical count are pledged or sold.

5. Which of the following audit procedures would provide the least reliable evidence that
the client has legal title to inventories?
a. Confirmation of inventories at locations outside the client's facilities.
b. Observation of physical inventory counts.
c. Examination of paid vendors' invoices.
d. Analytical review of inventory balances compared to purchasing and sales
activities.

## PROBLEM NO. 8 (Stice, Stice and Skousen – 15th edition)

Jaena Sales Company uses the first-in, first-out method in calculating cost of goods sold
for the three products that the company handles. Inventories and purchase information
concerning the three products are given for the month of December.
Product G Product L Product J
Dec. 1 Inventory 100,000 units 60,000 units 130,000 units
at P6.00 at P10.00 at P0.90
Dec. 1-15 Purchases 140,000 units 90,000 units 60,000 units
at P6.50 at P10.50 at P1.25
Dec. 16-31 Purchases 60,000 units
at P8.00
Dec. 1-31 Sales 210,000 units 100,000 units 90,000 units
Dec. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On December 31, the company’s suppliers reduced their prices from the most recent
purchase prices by the following percentages: product G, 20%; product L, 10%; product J,
8%. Accordingly, Jaena decided to reduce its sales prices on all items by 10%, effective
November 1. Jaena’s selling cost is 10% of sales price. Products G and L have a normal
profit (after selling costs) of 30% on sales prices, while the normal profit on product J (after
selling cost) is 15% of sales price.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total cost of Inventory at December 31 is
a. P1,130,000 b. P1,114,620 c. P1,311,000 d. P1,235,000
2. The amount of Inventory to be reported on the company’s balance sheet at
December 31 is
a. P1,139,700 b. P1,118,700 c. P1,087,620 d. P1,190,700
3. The Allowance for inventory write down at December 31 is
a. P11,300 b. P171,300 c. P27,000 d. P120,300
4. The cost of sales, before loss on inventory writedown, for the month of December is
a. P2,597,000 b. P2,044,520 c. P2,587,300 d. P2,416,000
5. If the perpetual inventory records show lower quantities of inventory that the physical
count an explanation of the difference might be unrecorded
a. Sales. c. Purchases.
b. Purchase returns. d. Purchase discounts.
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## PROBLEM NO. 9 (AICPA/Kieso, Weygandt and Warfield – 10th edition)

On April 21, 2006, a fire damaged the office and warehouse of Jacinto Company. The only
accounting record saved was the general ledger, from which the trial balance below was
prepared.
Jacinto Company
Trial Balance
March 31, 2006
DEBIT CREDIT
Cash P 324,000
Accounts receivable 720,000
Inventory, December 31, 2005 1,350,000
Land 630,000
Building 1,980,000
Accumulated depreciation P 743,400
Other assets 100,800
Accounts payable 426,600
Accrued expenses 324,000
Common stock, P100 par 1,800,000
Retained earnings 936,000
Sales 2,430,000
Purchases 936,000
Operating expenses 619,200 .
Totals P6,660,000 P6,660,000
The following data and information have been gathered:
a. The company’s year-end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that
checks written during the period April 1 to 21 totaled P234,000: P102,600 paid to
accounts payable as of March 31, P61,200 for April merchandise purchases, and
P70,200 paid for other expenses. Deposits during the same period amounted to
P233,100, which consisted of receipts on account from customers with the exception
of a P17,100 refund from a vendor for merchandise returned in April.
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of
P190,800 for April merchandise purchases, including P41,400 for shipments in transit
on that date.
d. Customers acknowledged indebtedness of P648,000 at April 21, 2006. It was also
estimated that customers owed another P144,000 that will never be acknowledged or
recovered. Of the acknowledged indebtedness, P10,800 will probably be
uncollectible.
e. The insurance company agreed that the fire loss claim should be based on the
assumption that the overall gross profit ratio for the past two years was in effect
during the current year. The company’s audited financial statements disclosed the
following information:
2005 2004
Net sales P9,540,000 P7,020,000
Net purchases 5,040,000 4,230,000
Beginning inventory 900,000 1,188,000
Ending inventory 1,350,000 900,000
f. Inventory with a cost of P126,000 was salvaged and sold for P63,000. The balance
of the inventory was a total loss.

QUESTIONS:
Page 10 of 21

Based on the above and the result of your audit, answer the following:
1. How much is the sales for the period January 1 to April 21, 2006?
a. P2,574,000 b. P2,735,100 c. P2,710,800 d. P2,718,000
2. How much is the net purchases for the period January 1 to April 21, 2006?
a. P1,188,000 b. P1,212,300 c. P1,170,900 d. P1,229,400
3. How much is the cost of sales for the period January 1 to April 21, 2006?
a. P1,494,900 b. P1,415,700 c. P1,504,305 d. P1,490,940
4. How much is the estimated inventory on April 21, 2006?
a. P1,026,000 b. P1,122,300 c. P1,057,995 d. P1,043,100
5. How much is the estimated inventory fire loss?
a. P1,043,100 b. P963,000 c. P921,600 d. P858,600

AUDIT OF INVESTMENTS

## PROBLEM NO. 10 (Stice, Stice and Skousen – 15th edition)

On December 31, 2005, Dagohoy Company’s balance sheet showed the following
balances related to its securities accounts:
Available-for-sale securities (AFS) 1,416,000
Interest receivable-Balicasag water bonds 15,000
Unrealized gain – AFS 120,000

Dagohoy’s securities portfolio on December 31, 2005, was made up of the following
securities:

## Security Classification Cost Market

12,000 shares Bohol Corp. stock Trading P900,000 P915,000
9,600 shares Panglao Inc. stock Trading 660,000 633,900
10% Balicasag water bonds (interest payable
semiannually on Jan. 1 and Jul. 1) Trading 300,000 224,100
12,000 shares Pamilacan Inc. stock Available for 708,000 756,000
sale
24,000 shares Loboc Unlimited Inc. stock Available for 588,000 660,000
sale

## Jan. 2 Receive interest on the Balicasag water bonds.

Mar. 1 Purchased 3,600 additional shares of Bohol Corp. stock for P275,400,
Apr. 15 Sold 4,800 shares of the Panglao Inc. stock for P69 per share.
May 4 Sold 4,800 shares of the Pamilacan Inc. stock for P62 per share.
July 1 Received interest on the Balicasag water bonds.
Oct. 30 Purchased 18,000 shares of Dauis Co. stock for P999,000, classified as a

The market values of the stocks and bonds on December 31, 2006, are as follows:
Bohol Corp. stock P76.60 per share
Panglao Inc. stock P68.50 per share
Page 11 of 21

## Dauis Co. stock P55.25 per share

Balicasag water bonds P246,660
Pamilacan Inc. stock P61.00 per share
Loboc Unlimited Inc. stock P27.00 per share

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,800 Panglao Inc. shares on April 15, 2006
a. P14,250 loss b. P1,200 gain c. P1,200 loss d. P14,250 gain
2. Net realized gain or loss on sale of 4,000 Pamilacan Inc. shares on May 4, 2006
a. P14,400 loss b. P4,800 gain c. P14,400 gain d. P4,800 loss
3. Carrying value of Trading Securities as of December 31, 2006
a. P2,764,920 b. P2,804,400 c. P2,745,360 d. P2,756,880
4. Carrying value of Available for Sale Securities as of December 31, 2006
a. P1,012,800 b. P967,200 c. P1,087,200 d. P1,132,800
5. In 2006, what amount of unrealized gain or loss should be shown as component of
income and stockholders’ equity?
Income Stockholders’ equity
a. P39,480 loss P146,400 loss
b. P34,470 gain P74,400 gain
c. P34,470 gain P26,400 loss
d. P47,520 gain P93,600 gain

## PROBLEM NO. 11 (Stice, Stice and Skousen – 15th edition)

Your audit of the Diego Silang Corporation disclosed that the company owned the
following securities on December 31, 2005:

Security Shares Cost Market
Vigan, Inc. 9,600 P144,000 P184,000
Laoag, Inc. 16,000 432,000 288,000
10% , P200,000 face value , Santiago bonds
(interest payable every Jan. 1 and Jul. 1) 158,400 163,440
Total P734,400 P635,440

Available-for-sale securities:
Security Shares Cost Market
Candon Products 32,000 P1,376,000 P1,440,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000
Batac, Inc. 80,000 960,000 1,280,000
Total P8,576,000 P8,560,000

Held to maturity:
Cost Book value
12%, 2,000,000 face value, Ilocos bonds (interest
payable annually every Dec. 31) P1,900,000 P1,926,000

## During 2006, the following transactions occurred:

Jan. 1 Receive interest on the Santiago bonds.
Mar. 1 Sold 8,000 shares of Laoag Inc. stock for P152,000.
May 15 Sold 3,200 shares of Batac, Inc. for P15 per share.
July 1 Received interest on the Santiago bonds.
Page 12 of 21

## Dec. 31 Received interest on the Ilocos bonds.

31 Transferred the Ilocos bonds to the available-for-sale portfolio. The bonds
were selling at 101 on this date. The bonds were purchased on January 2,
2005. The discount was amortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2006, are as follows:
Vigan, Inc. P22 per share
Laoag, Inc. P15 per share
10% Santiago bonds P151,200
Candon Products P42 per share
Pagudpud, Inc. P28 per share
Batac, 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 8,000 Laoag, Inc. shares on March 1, 2006
a. P8,000 gain b. P8,000 loss c. P64,000 loss d. P64,000 gain
2. Realized gain or loss on sale of 3,200 Batac, Inc. shares on May 15, 2006
a. P9,600 loss b. P3,200 loss c. P9,600 gain d. P3,200 gain
3. Total interest income for the year 2006?
a. P260,000 b. P289,640 c. P251,120 d. P286,000
4. The amount that should be reported as unrealized gain in the statement of changes in
equity regarding transfer of Ilocos bonds to available-for-sale?
a. P94,000 b. P123,640 c. P64,360 d. P 0
5. Carrying value of Trading Securities and Available-for-sale securities as of December
31, 2006 should be
a. P602,400 P 9,446,400
b. P482,400 P11,524,000
c. P602,400 P11,441,600
d. P482,400 P11,466,400

## PROBLEM NO. 12 (Stice, Stice and Skousen – 15th edition)

On June 1, 2005, Panday Corporation purchased as a long term investment 6,000 of the
P1,000 face value, 8% bonds of Pira Corporation. Panday Corporation has the positive
intention and ability to hold these bonds to maturity. The bonds were purchased to yield
10% interest. Interest is payable semi-annually on December 1 and June 1. The bonds
mature on June 1, 2011. On November 1, 2006, Panday Corporation sold the bonds for a
total consideration of P5,887,500.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off
present value factors to four decimal places)
1. The purchase price of the bonds on June 1, 2005 is
a. P5,467,992 b. P5,545,104 c. P5,536,698 d. P5,436,894
2. The carrying value of the investment in bonds as of December 31, 2005 is
a. P5,588,878 b. P5,579,979 c. P5,474,311 d. P5,507,237
3. The interest income for the year 2006 is
a. P459,911 b. P466,827 c. P466,073 d. P457,122
4. The gain on sale of investment in bonds on November 1, 2006 is
a. P31,794 b. P41,448 c. P120,352 d. P156,068
Page 13 of 21

## 5. An auditor most likely to verify the interest earned on bond investment by

a. Verifying the receipt and deposit of interest checks.
b. Confirming the bond interest rate with the issuer of the bonds.
c. Recomputing the interest earned on the basis of face amount, interest rate, and
period held.
d. Testing controls relevant to cash receipts.

## PROBLEM NO. 13 (Kieso, Weygandt and Warfield – 10th edition)

You requested a depreciation schedule for Semitrucks of Tandang Sora Manufacturing
Company showing the additions, retirements, depreciation and other data affecting the
income of the Company in the 4-year period 2003 to 2006, inclusive. The Semitrucks
account consists of the following as of January 1, 2003:
Truck No. 1 purchased Jan. 1, 2000, cost P 216,000
Truck No. 2 purchased July 1, 2000, cost 264,000
Truck No. 3 purchased Jan. 1, 2002, cost 360,000
Truck No. 4 purchased July 1, 2002, cost 288,000
P1,128,000

## The Semitrucks – Accumulated Depreciation account previously adjusted to January 1,

2003, and duly entered to the ledger, had a balance on that date of P302,000 (depreciation
on the 4 trucks from respective date of purchase, based on five-year life, no salvage
value). No charges have been made against the account before January 1, 2003.

Transactions between January 1, 2003, and December 31, 2006, and their record in the
ledger were as follows:

July 1, 2003 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of
which was P408,000. Tandang Sora Mfg. Co. paid the automobile dealer
P180,000 cash on the transaction. The entry was debit to Semitrucks and a
credit to cash, P180,000.

Jan. 1, 2004 Truck No. 1 was sold for P42,000 cash; entry debited Cash and credited
Semitrucks, P42,000.

July 1, 2005 A new truck (No. 6) was acquired for P432,000 cash and was charged at that
amount to Semitrucks account. (Assume truck No. 2 was not retired.)

July 1, 2005 Truck No. 4 was damaged in a wreck to such an extent that it was sold as
junk for P8,400 cash. Tandang Sora Mfg. Co. received P30,000 from the
insurance company. The entry made by the bookkeeper was a debit to cash,
P38,400, and credits to Miscellaneous Income, P8,400 and Semitrucks P
30,000.

Entries for depreciation had been made for the close of each year as follows: 2003,
P243,600; 2004, P253,200; 2005, P293,400; 2006, P333,600.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Disregard tax
implications)
1. The 2006 depreciation expense is overstated by
a. P165,600 b. P108,300 c. P208,800 d. P168,000
2. The carrying amount of Semitrucks as of December 31, 2006 is
a. P1,062,480 b. P340,800 c. P604,800 d. P424,800
Page 14 of 21

## 3. The 2003 net income is overstated by

a. P10,800 b. P24,000 c. P37,200 d. P0
4. The 2004 net income is understated by
a. P19,200 b. P60,000 c. P61,200 d. P0
5. Assuming the errors were not discovered and corrected, the December 31, 2006
retained earnings would have been understated by
a. P77,400 b. P243,000 c. P77,400 d. P0

## PROBLEM NO. 14 (Stice, Stice and Skousen – 15th edition)

In connection with your audit of the Ponce Mining Corporation for the year ended
December 31, 2006, you noted that the company purchased for P16,640,000 mining
property estimated to contain 12,800,000 tons of ore. The residual value of the property is
P1,280,000.

Building used in mine operations costs P1,280,000 and have estimated life of fifteen years
with no residual value. Mine machinery costs P2,560,000 with an estimated residual value
P512,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.
Tons mined 1,280,000 tons
Tons sold 1,024,000 tons
Unit selling price per ton P4.40
Direct labor 1,024,000
Operating expenses (excluding depreciation) 921,600

## Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be

allocated as follows: 20% to operating expenses, 80% to production. Depreciation on
machinery is chargeable to production.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Disregard tax
implications)
1. How much is the depletion for 2006?
a. P1,228,800 b. P1,536,000 c. P307,200 d. P1,664,000
2. Total inventoriable depreciation for 2006?
a. P640,000 b. P580,267 c. P614,400 d. P0
3. How much is the Inventory as of December 31, 2006?
a. P701,440 b. P675,840 c. P680,960 d. P669,013
4. How much is the cost of sales for the year ended December 31, 2006?
a. P2,703,360 b. P2,805,760 c. P2,723,840 d. P2,676,053
5. How much is the maximum amount that may be declared as dividends at the end of
the company’s first year of operations?
a. P2,391,040 b. P2,063,360 c. P2,083,840 d. P2,111,147
Page 15 of 21

## PROBLEM NO. 15 (Stice, Stice and Skousen – 15th edition)

Transactions during 2006 of the newly organized Agoncillo Corporation included the
following:
Jan. 2 Paid legal fees of P270,000 and stock certificate costs of P149,400 to
complete organization of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and
hound out pamphlets and candy to create goodwill for the new
enterprise. Clown cost, P18,000; pamphlets and candy, P9,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 772,200
Patent application and licensing fees 114,300
Total P 886,500
It is estimated that in 6 years other companies will have developed
improved processes, making the Agoncillo Corporation process
obsolete.
May 1 Acquired both a license to use a special type of container and a
distinctive trademark to be printed on the container in exchange for
10,800 shares of Agoncillo’s no-par common stock selling for P50 per
share. The license is worth twice as much as the trademark, both of
which may be used for 6 years.
July 1 Constructed a shed for P2,358,000 to house prototypes of experimental
models to be developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product
development totaling P3,150,000 in 2006.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P886,500 b. P772,200 c. P114,300 d. P0
a. P270,000 b. P360,000 c. P180,000 d. P0
a. P270,000 b. P360,000 c. P180,000 d. P0
4. Carrying amount of Intangible Assets as of December 31, 2006
a. P1,282,688 b. P4,459,688 c. P1,255,688 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when
incurred
a. P7,380,900 b. P3,569,400 c. P3,596,400 d. P0

## PROBLEM NO. 16 (Stice, Stice and Skousen – 15th edition)

On December 31, 2005, Gregoria Corporation acquired the following three intangible
assets:
 A trademark for P540,000. The trademark has 7 years remaining legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without
problem.
Page 16 of 21

##  Goodwill for P2,700,000. The goodwill is associated with Gregoria’s De Jesus

Manufacturing reporting unit.
 A customer list for P396,000. By contract, Gregoria has exclusive use of the list for 5
years. Because of market conditions, it is expected that the list will have economic
value for just 3 years.

On December 31, 2006, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P18,000 per year. The useful life of trademark still extends beyond the
foreseeable horizon.

b) The cash flows expected to be generated by the De Jesus Manufacturing reporting unit
is P450,000 per year for the next 22 years. Book values and fair values of the assets
and liabilities of the De Jesus Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P4,860,000 P5,400,000
Goodwill 2,700,000 ?
Liabilities 3,240,000 3,240,000

c) The cash flows expected to be generated by the customer list are P216,000 in 2007
and P144,000 in 2008.

REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
1. Total amortization for the year 2006
a. P132,000 b. P254,727 c. P209,142 d. P156,343
2. Impairment loss for the year 2006
a. P162,857 b. P240,000 c. P323,251 d. P0
3. Carrying value of Trademark as of December 31, 2006
a. P540,000 b. P462,857 c. P300,000 d. P216,749
4. Carrying value of Goodwill as of December 31, 2006
a. P2,700,000 b. P2,577,272 c. P2,565,000 d. P2,632,500
5. Carrying value of Customer list as of December 31, 2006
a. P396,000 b. P264,000 c. P316,800 d. P0

AUDIT OF LIABILITIES

## PROBLEM NO. 17 (Stice, Stice and Skousen – 15th edition)

You were able to obtain the following from the accountant for Paterno Corp. related to the
company’s liabilities as of December 31, 2006.
Accounts payable P 650,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000

## The following additional information pertains to these liabilities.

Page 17 of 21

a. All trade notes payable are due within six months of the balance sheet date.
b. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A P300,000, 8% note issued March 1, 2004, payable on demand. Interest is
payable every six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2006. On December 30,
2006, Paterno negotiated a written agreement with Allied Bank to replace the note
with a 2-year, P500,000, 10% note to be issued January 2, 2007. The interest
was paid on December 31, 2006.
c. The 10% mortgage note was issued October 1, 2003, with a term of 10 years. Terms
of the note give the holder the right to demand immediate payment if the company fails
to make a monthly interest payment within 10 days of the date the payment is due. As
of December 31, 2006, Paterno is three months behind in paying its required interest
payment.
d. The 12% mortgage note was issued May 1, 2000, with a term of 20 years. The current
principal amount due is P1,500,000. Principal and interest payable annually on April
30. A payment of P220,000 is due April 30, 2007. The payment includes interest of
P180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 1997. Interest is payable
semi-annually every June 30 and December 31.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2006 is
a. P155,000 b. P143,000 c. P203,000 d. P215,000
2. The portion of the Note Payable-bank to be reported under current liabilities as of
December 31, 2006 is
a. P300,000 b. P500,000 c. P800,000 d. P0
3. Total current liabilities as of December 31, 2006 is
a. P3,950,000 b. P4,138,000 c. P3,938,000 d. P3,998,000
4. Total noncurrent liabilities as of December 31, 2006 is
a. P1,760,000 b. P2,560,000 c. P3,960,000 d. P1,960,000
5. Which of the following is incorrect regarding the classification of financial liabilities?
a. An entity classifies financial liabilities as current when they are due to be settled
within 12 months after the balance sheet date.
b. If the entity expects, and has the discretion, to refinance or roll over an obligation
for at least 12 months after the balance sheet date under an existing loan facility, it
classifies obligation as non-current, even if it would be otherwise due within a
shorter period.
c. When refinancing or rolling over is not at the discretion of the entity, the potential
to refinance is not considered and the obligation is classified as current.
d. When an entity breaches an undertaking under a long-term loan agreement on or
before the BS date with the effect that the liability becomes payable on demand,
the liability is classified as non-current, if, after the BS date, and before the FS are
authorized for issue, the lender has agreed not to demand payment as a
consequence of the breach.

## PROBLEM NO. 18 (Stice, Stice and Skousen – 15th edition)

Ricarte Corporation manufactures television components and sells them with 6-month
warranty under which defective components will be replaced without charge. On
December 31, 2005, Estimated Liability for Product Warranty had a balance of P918,000.
By June 30, 2006, this balance had been reduced to P144,450 by debits for estimated net
cost of components returned that had been sold in 2005.
Page 18 of 21

The company started out in 2006 expecting 8% of the peso volume of sales to be returned.
However, due to the introduction of new models during the year, this estimated percentage
of returns was increased to 10% on May 1. It is assumed that no components sold during
a given month are returned in that month. Each component is stamped with a date at time
of sale so that the warranty may be properly administered. The following table of
percentages indicates the like pattern of sales return during the 6-month period of the
warranty, starting with the month following the sale of components.
Percentage of Total
Month Following Sale Returns Expected
First 20%
Second 30
Third 20
Fourth through sixth – 10% each month 30
100%

Gross sales of components were as follows for the first 6 months of 2006:
Month Amount
January P6,480,000
February 5,940,000
March 7,380,000
April 5,130,000
May 3,600,000
June 3,240,000

The company’s warranty also covers the payment of freight cost on defective components
returned and on the new components sent out as replacements. This freight cost runs
approximately 10% of the sales price of the components returned. The manufacturing cost
of the components is roughly 80% of the sales price, and the salvage value of returned
components averages 15% of their sales price. Returned components on hand at
December 31, 2005, were thus valued in inventory at 15% of their original sales price.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The total estimated returns for the six-month period ended June 30, 2006 is
a. P2,678,400 b. P2,541,600 c. P3,177,000 d. P2,859,300
2. The warranty expense for the six-month period ended June 30, 2006 is
a. P2,382,750 b. P2,468,880 c. P2,008,800 d. P1,906,200
3. The Estimated Liability for Product Warranty as of June 30, 2006 should have a
balance of
a. P1,147,680 b. P855,900 c. P955,126 d. P764,100
4. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of
a. P711,450 b. P810,676 c. P888,462 d. P619,650
5. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to
determine whether the estimates are
a. Not subject to bias.
b. Based on objective assumptions.
c. Consistent with industry guidelines.
d. Reasonable in the circumstances.
Page 19 of 21

## PROBLEM NO. 19 (Stice, Stice and Skousen – 15th edition)

On January 2, 2005, the Delos Santos, Inc. issued P3,000,000 of 8% convertible bonds at
par. The bonds will mature on January 1, 2009 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, 2006, the holders of the bonds with total face value of P1,500,000
exercised their conversion privilege. In addition, the company reacquired at 110, bonds
with a face value of P750,000.

## Common stock, P100 par, authorized 75,000 shares, issued

and outstanding, 45,000 shares P4,500,000

## Date Bonds Common stock

December 31, 2005 118 40
December 31, 2006 110 42

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round-off present
value factors to four decimal places)
1. How much of the proceeds from the issuance of convertible bonds should be allocated
to equity?
a. P951,000 b. P190,224 c. P332,496 d. P0
2. How much is the carrying value of the bonds payable as of December 31, 2005?
a. P3,000,000 b. P2,084,100 c. P2,694,255 d. P2,850,754
3. How much is the interest expense for the year 2006?
a. P240,000 b. P208,410 c. P269,426 d. P285,075
4. The entry to record the conversion on December 31, 2006 will increase APIC by
a. P547,915 b. P600,000 c. P461,840 d. P0
5. How much is the loss on bond reacquisition on December 31, 2006?
a. P75,000 b. P144,080 c. P101,043 d. P0

## PROBLEM NO. 20 (Stice, Stice and Skousen – 15th edition)

Baltazar Inc. was organized on January 2, 2005, with authorized capital stock of 50,000
shares of 10%, P200 par value preferred, and 200,000 shares of no-par, no stated value
common. During the first 2 years of the company's existence, the following selected
transactions took place:

2005
Jan. 2 Sold 10,000 shares of common stock at P16.
2 Sold 3,000 shares of preferred stock at P216.
Mar. 2 Sold common stock as follows: 10,800 shares at P22; 2,700 shares at P25.
Jul. 10 Acquired a nearby piece of land, appraised at P400,000, for 600 shares of
preferred stock and 27,000 shares of common. (Preferred stock was recorded at
P216, the balance being assigned to common.)
Page 20 of 21

Dec. 16 Declared the regular preferred dividend and a P1.50 common dividend.
28 Paid dividends declared on December 16.
31 The Income Summary account showed a credit balance of P450,000.

2006
Feb. 27 Reacquired 12,000 shares of common stock at P19.
Jun. 17 Resold 10,000 shares of the treasury stock at P23.
Jul. 31 Resold all of the remaining treasury stock at P18.
Sep. 30 Sold 11,000 additional shares of common stock at P21.
Dec. 16 Declared the regular preferred dividend and a P0.80 common dividend.
28 Dividends declared on December 16 were paid.
31 The income summary account showed a credit balance of P425,000.

QUESTIONS:
Based on the above and the result of your audit, determine the balances of the following
as of December 31, 2006:
1. Preferred stock
a. P777,600 b. P600,000 c. P720,000 d. P729,600
2. Common stock
a. P615,000 b. P966,500 c. P735,500 d. P696,100
a. P38,000 b. P93,600 c. P57,600 d. P95,600
4. Total stockholders’ equity
a. P2,498,150 b. P2,388,150 c. P1,892,100 d. P2,376,630
5. An auditor usually obtains evidence of shareholders’ equity transactions by reviewing
the entity’s
a. Minutes of board of directors meetings. c. Canceled stock certificates.
b. Transfer agent’s records. d. Treasury stock certificate book.

## PROBLEM NO. 21 (RPCPA 11.84)

Lapu-Lapu Corporation was authorized at the beginning of 2004 with 300,000 authorized
shares of P100, par value common stock. At December 31, 2004, the stockholders’ equity
section of Lapu-Lapu was as follows:
Common stock, par value P100 per share; authorized
300,000 shares; issued 30,000 shares P3,000,000
Retained earnings 450,000
Total stockholders’ equity P3,750,000

On June 15, 2005, Lapu-Lapu issued 50,000 shares of its common stock for P6,000,000.
A 5% stock dividend was declared on September 30, 2005 and issued on November 10,
2005 to stockholders of record on October 31, 2005. Market value of common stock was
P110 per share on declaration date. The net income of Lapu-Lapu for the year ended
December 31, 2005 was P475,000.

## During 2006, Lapu-Lapu had the following transactions;

March 1 Lapu-Lapu reacquired 3,000 shares of its common stock for P95 per
share.
May 31 Lapu-Lapu sold 1,500 shares of its treasury stock for P120 per share.
August 10 Issued to stockholders one stock right for each share held to purchase two
additional shares of common stock for P125 per share. The rights expire
on December 31, 2006.
September 15 25,000 stock rights were exercised when the market value of common
Page 21 of 21

## stock was P130 per share.

October 31 40,000 stock rights were exercised when the market value of the common
stock was P140 per share.
December 10 Lapu-Lapu declared a cash dividend of P2 per share payable on January
5, 2007 to stockholders of record on December 31, 2006.
December 20 Lapu-Lapu retired 1,000 shares of its treasury stock and reverted them to
an unused basis. On this date, the market value of the common stock
was P150 per share.
December 31 Net income for 2006 was P500,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2006:
1. Common stock
a. P21,400,000 b. P21,300,000 c. P14,800,000 d. P21,250,000