FOR NUMBERS 1-5 PROBLEM

The following are two (2) unrelated situations.

The December 31 year-end financial statements of SAMOA COMPANY contained the

following errors:
Dec. 31, 2016 Dec. 31, 2017
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2016 covering the years 2016, 2017, and
2018. The entire amount was charged to expense in 2016. In addition, on December 31,
2017, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded
until 2018. There were no other errors during 2016 and 2017, and no corrections have been
made for any of the errors. Ignore income tax effects.

QUESTION#1.What is the total effect of the errors on Samoa’s 2016 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement

QUESTION#2.What is the total effect of the errors on the amount of Samoa’s

working capital at December 31, 2017?
A. P75,500 overstatement
B. P40,500 overstatement
C. P225,500 understatement
D. P144,500 understatement

QUESTION#3.What is the total effect of the errors on the balance of Samoa’s

retained earnings at December 31, 2017?
A. P156,000 understatement
B. P87,000 overstatement
C. P133,000 understatement
D. P85,000 understatement

CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended December
31, 2016 and 2017, respectively. However, the auditor noted that the following errors had
been made:

a. Sales for 2016 included amounts of P191,000 which had been received in cash during 2016,
but for which the related goods were shipped in 2017. Title did not pass to the buyer until
2017.

b. The inventory on December 31, 2016 was understated by P43,200.

c. The company’s accountant, in recording interest expense for both 2016 and 2017 on bonds
payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2016, to yield an effective 7% rate.

d. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2016 and 2017. Repairs of P42,500 and P47,000 had been incurred in 2016 and
2017, respectively. In determining depreciation charges, Chile applies a rate of 10% to the
balance in the Equipment account at the end of the year.

QUESTION#4.What is the corrected pretax income for 2016?

 A. P303,200 B. P225,300 C. P311,700 D. P307,450

QUESTION#5.What is the corrected pretax income for 2017?

A. P480,042 B. P484,292 C. P575,392 D. P488,992

QUESTION#6. With regard to detecting fraud, auditing standards require auditors to

A. Perform procedures designed to detect all instances of fraud that might affect the financial statements.
B. Provide reasonable assurance that the financial statements are not materially misstated because of
fraud.
C. Issue an unmodified opinion only when the auditor is satisfied that no instances of fraud have
occurred.
D. Design the audit program to meet financial statement users' expectations concerning fraud.

QUESTION#7. Which of the following statements is not true?

A. Analytical procedures emphasize the overall reasonableness of transactions and balances.
B. Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify
reducing control risk and thereby reducing analytical procedures.
C. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and
then Posted in the general ledger.
D. Tests of details of balances emphasize the ending balances in the general ledger.

QUESTION#8. Which of the following procedures would yield the most competent evidence?
A. A scanning of trial balances.
B. An inquiry of client personnel.
C. A comparison of beginning and ending retained earnings.
D. A recalculation of bad debt expense.

QUESTION#9. Which of the following is a control weakness for a company whose inventory of
supplies consists of a large number of individual items?
A. Supplies of relatively little value are expensed when purchased.
B. The cycle basis is used for physical counts.
C. The storekeeper is responsible for maintenance of perpetual inventory records.
D. Perpetual inventory records are maintained only for items of significant value.

QUESTION#10. The auditor should perform tests of controls when the auditor's risk assessment
includes an expectation of the operating effectiveness of internal control or when
A. Substantive procedures alone do not provide sufficient appropriate audit evidence at the relevant
assertion level.
B. Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to
support the assertion being evaluated.
C. The auditor is not able to obtain an understanding of internal controls.
D. The owner-manager performs virtually all the functions of internal control.

FOR NUMBERS 11-15 PROBLEM

The following are two (2) unrelated situations.

OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged
a deposit for each container delivered and receives a refund for each container returned within
two years after the year of delivery. Omega accounts for the containers not returned within the
time limit as being sold at the deposit amount. Information for 2017 is as follows:

Containers held by customers at

December 31, 2016,
from deliveries in: 2015 85,000
2016 240,000 325,000
Containers delivered in 2017 430,000
Containers returned in 2017
from deliveries in: 2015 57,500
2016 140,000
2017 157,000 354,500
QUESTION#11.How much revenue from container sales should be recognized for
2017?
A. P127,500 B. P267,500 C. P27,500 D. P85,000

QUESTION#12.What is the total amount of Omega Company’s liability for returnable

containers at December 31, 2017?
A. P373,000 B. P400,500 C. P267,500 D. P430,000

DP, INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract for
P810 that requires the company to provide periodic maintenance services and to replace
defective parts. During 2017, DP sold 300 washing machines and 270 warranty contracts for
cash. The company estimates that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2017. DP’s policy is to recognize income from the
warranties on a straight-line basis. In 2018, DP incurred actual costs relative to 2017 warranty
sales of P18,000 for parts and P36,000 for labor.

QUESTION#13.What liability relative to these transactions would appear on the

December 31, 2017, statement of financial position and how would it be
classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P0 P218,700

QUESTION#14.What amount of warranty expense would be reported for 2017?

A. P18,000 B. P 0 C. P 36,000 D. P54,000

QUESTION#15.What liability relative to the 2017 warranties would be reported on

December 31, 2018, and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0

FOR NUMBERS 16-20 PROBLEM

The TGR Company commenced operations on January 1, 2013. The company’s machinery
account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2013 Purchase P157,200
120,000
132,000 P409,200
Sept. 30, 2013 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2013 Freight and installation 6,000 487,200
Dec. 31, 2013 Depreciation P97,440 389,760
2014 Installment payments for acquisition
on Sept. 30, 2013 144,000 533,760
June 30, 2014 Purchase 240,000 773,760
Dec. 31, 2014 Depreciation 154,752 619,008
June 30, 2015 Acquisition – trade in of old machine 150,000 769,008
Dec. 31, 2015 Depreciation 153,802 615,206
Jan. 1, 2016 Sale 71,250 543,956
Dec. 31, 2016 Depreciation 108,791 435,165
Oct. 1, 2017 Sale 24,000 411,165
Dec. 31, 2017 Depreciation 82,233 328,932

a) On September 30, 2013, a machine was purchased on an installment basis. The list price
was P180,000, but 12 payments of P18,000 each were made by the company. Only the
monthly payments were recorded in the machinery account starting with September 30,
2013. Freight and installation charges of P6,000 were paid and charged to the machinery
account on October 3, 2013.

b) On June 30, 2015, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2014.

c) On June 30, 2015, the machine acquired for P157,200 was traded for a larger one having a
list price of P279,000. Allowance of P129,000 was received on the old machine, the balance
of the list price being paid in cash and charged to the machinery account.

d) On January 1, 2016, the machine acquired on January 1, 2013 with cost of P132,000 was
sold for P75,000. The cost of removal and crating totaled P3,750.

e) On October 1, 2017, the machine purchased on January 1, 2013 was sold for P24,000 cash.

Assume a 5-year useful life for TGR Company’s machinery.

QUESTION#16.What is the total amount of gain on the sale/trade-in of the

machinery acquired on January 1, 2013?
A. P50,400 B. P40,200 C. P36,450 D. P86,850

QUESTION#17.What is the adjusted balance of the Machinery account on December

31, 2017?
A. P694,200 B. P705,000 C. P700,200 D. P703,950

QUESTION#18.What is the adjusted balance of the Accumulated depreciation on

December 31, 2017?
A. P465,600 B. P457,140 C. P462,240 D. P397,740

QUESTION#19.What is the correct total depreciation provision for the years 2013-
2017?
A. P737,400 B. P734,040 C. P728,940 D. P669,540

QUESTION#20.The entry to correct the depreciation provision for the years 2013-
2017 should include a debit (credit) to
 Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249

FOR NUMBERS 21-40 PROBLEM

You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2017. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the company’s
statement of financial position and statement of income as of and for the year ended December
31, 2017. Audit findings are as follows:

I. AUDIT OF CASH

A cash count was conducted by your staff on January 7, 2018. The petty cash fund of
P60,000 maintained by the company on an imprest basis relected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2018.

You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000

Your review of the reconciliation statement disclosed the following:

1. Postdated checks totaling P107,400 were included as part of the deposit in transit.
These represent collections from various customers whose accounts have been
outstanding for less than three months. These checks were actually deposited on
January 8, 2018.

2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2017 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2018.

3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2017. This was not recorded
as of year-end.

4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.

5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 It is the company’s policy to provide allowance for doubtful accounts as follows:

Less than 3 months P2,500,960 1%

3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660
An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.

III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:

Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180
The securities are listed in the stock exchange. The company follows the fair value
accounting.

IV. AUDIT OF NOTES RECEIVABLE

The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.

This is covered by a promissory note with interest at 15% per annum dated November 1,
2017. No interest has been accrued on the note as of December 31, 2017.

V. AUDIT OF PREPAYMENTS

Prepaid expenses account consists of the following:

Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion
as well as the regular advertisement of its products. It paid a total of P640,000, P100,000
of which is for the Christmas promotion while the balance is for the regular promotion and
which will run for one year starting on August 1, 2017. Payment was made on July 20,
2017, and the total amount was reflected as prepaid advertising.

The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2017, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2017. Rental
deposit remained at three months and is included under other assets.

The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1,
2018. No adjustment has been made as of December 31, 2017.

To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2017 and included the same in their office supplies inventory. As at year-end,
unused office supplies amount to P102,500.
VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on December 29

and 20, 2017. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 have not been invoiced and recorded as of
year-end. These items had a selling price of P146,940 with term of 15 days. The
corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the
inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January
4, 2018. The goods were shipped by the supplier on December 28, FOB shipping point.

VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT

The company purchased additional equipment worth P268,000 on June 30, 2017. At the
date of purchase, it incurred the following additional costs which were charged to repairs
and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original
cost.

The company discarded some store equipment on October 1, 2017, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 on December 31, 2017. Depreciation booked from October 1,
2017 to year-end was P10,480. No entry was made on the disposal of the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2017 were recorded when paid in January 2018 which
included the following:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2017. Accrued interest on this loan was
not taken up at year-end.

X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2017, payable on January 31, 2018.

Ayala Merchants Corporation

 UNADJUSTED TRIAL BALANCE
December 31, 2017

Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880

Determine the adjusted balances of the following: (Ignore tax implications)

QUESTION#21.Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

QUESTION#22.Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850

QUESTION#23.Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700

QUESTION#24.Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140

QUESTION#25.Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217

QUESTION#26.Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

QUESTION#27.Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

QUESTION#28.Prepaid insurance
 A. P449,167 B. P408,333 C. P490,000 D. P428,750

QUESTION#29.Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000

QUESTION#30.Prepaid advertising
A. P325,000 B. P640,000 C. P373,334 D. P315,000

QUESTION#31.Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

QUESTION#32.Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

QUESTION#33.Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

QUESTION#34.Accumulated depreciation
A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

QUESTION#35.Accounts payable
A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

QUESTION#36.Interest payable
A. P104,000 B. P16,178 C. P4,000 D. P27,644

QUESTION#37.Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

QUESTION#38.Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

QUESTION#39.Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

QUESTION#40.Operating expenses
A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

APAT SET 4
1. A
2. D
3. C
4. C
5. D
6. B
7. B
8. D
9. C
10. A
11. C
12. A
13. C
14. B
15. D
16. D
17. C
18. C
19. B
20. A
21. D
22. D
23. D
24. C
25. D
26. C
27. A
28. B
29. A
30. D
31. D
32. C
33. C
34. B
35. B
36. A
37. C
38. C
39. D
40. D