Name: ________________________________________Date: ________________________

Year, Section and Class Time: _____________________ Instructor: _____________________

ANSWER SUMMARY TABLE

1 11 21 31
2 12 22 32
3 13 23 33
4 14 24 34
5 15 25 35
6 16 26
7 17 27
8 18 28
9 19 29
10 20 30

REMINDERS:
1. Do not talk to your seatmates during examination. If you have any question or problem,
ask the teacher/proctor.
2. Use ball pens for your final answers and write legibly.
3. When you are finished, pass the test papers and leave the room quietly. Do not stay inside
the room.

PROBLEM NO. 1
A depreciation schedule for Semitrucks of Chris Manufacturing Company was requested by your
auditor soon after December 31, 2019, showing the additions, retirements, depreciation and other
data affecting the income of the Company in the 4-year period 2016 to 2019, inclusive. The following
data were ascertained:
Balance of Semitrucks account, Jan. 1, 2016:
Truck No. 1 purchased Jan. 1, 2000, cost P 180,000
Truck No. 2 purchased July 1, 2000, cost 220,000
Truck No. 3 purchased Jan. 1, 2015, cost 300,000
Truck No. 4 purchased July 1, 2015, cost 240,000
Balance, Jan. 1, 2016 P 940,000

The Semitrucks – Accumulated Depreciation account previously adjusted to January 1, 2016, 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, 2016.

Transactions between January 1, 2016, and December 31, 2019, and their record in the ledger were
as follows:

July 1, 2016 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was
P340,000. Chris Mfg. Co. paid the automobile dealer P150,000 cash on the
transaction. The entry was debit to Semitrucks and a credit to cash, P150,000.

Jan. 1, 2017 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Semitrucks,
P35,000.

July 1, 2018 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount
to Semitrucks account. (Assume truck No. 2 was not retired.)

July 1, 2018 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for
P7,000 cash. Chris Mfg. Co. received P25,000 from the insurance company. The entry
made by the bookkeeper was a debit to cash, P32,000, and credits to Miscellaneous
Income, P7,000 and Semitrucks P 25,000.

Entries for depreciation had been made for the close of each year as follows: 2016, P203,000; 2017,
P211,000; 2018, P244,500; 2019, P278,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Disregard tax implications)

1. The adjusted balance of Semitrucks as of December 31, 2019 is

a. P700,000 c. P730,000
b. P354,000 d. P920,000

2. The 2019 depreciation expense is overstated by

a. P138,000 c. P94,000
b. P174,000 d. P 0

3. The adjusted balance of Accumulated Depreciation - Semitrucks as of December 31, 2019 is

a. P34,600 c. P636,000
b. P416,000 d. P566,000

4. The 2018 net income is understated by

a. P23,500 c. P94,500
b. P64,500 d. P 0

5. Assuming the errors were not discovered and corrected, the December 31, 2019 retained earnings
would have been understated by
a. P64,500 c. P202,500
b. P64,500 d. P 0

PROBLEM NO. 2
Tristan Corp., organized on June 1, 2018, was authorized to issue stock as follows:
 800,000 shares of 9% Preference share capital, convertible, P100 par
 2,500,000 shares of Ordinary share capital, P2.50 stated value

During the remainder of the fiscal year ended May 31, 2019, the following transactions were completed
in the order given:
1) 300,000 shares of Preference share capital were subscribed for at P105, and 900,000 shares of
Ordinary share capital were subscribed for at P26. Both subscriptions were payable 30% upon
subscription, the balance in one payment.

2) The second subscription payment was received, except one subscriber for 60,000 shares of
Ordinary share capital defaulted on payment. The full amount paid by this subscriber was
returned, and all of the fully paid stock was issued.

3) 150,000 shares of Ordinary share capital were reacquired by purchase at P28.

4) Each share of Preference was converted into four shares of Ordinary share capital.

5) The treasury stock was exchanged for machinery with a fair market value of P4,300,000.

6) There was a 2-for-1 stock split, and the stated value of the new Ordinary share capital is P1.25.

7) Net income was P830,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of May 31, 2019:

6. Ordinary share capital

a. P2,550,000 c. P2,100,000
b. P5,100,000 d. P4,200,000

7. Total Share premium

a. P50,890,000 c. P48,808,000
b. P48,340,000 d. P48,240,000

8. Total contributed capital

a. P53,908,000 c. P55,990,000
b. P53,440,000 d. P53,340,000

9. Total stockholders’ equity

a. P54,270,000 c. P54,738,000
b. P56,820,000 d. P54,170,000

10. When a client company does not maintain its own stock records, the auditor most likely will
 a. Inspect the stock book at year-end and accounting for all certificate numbers.
b. Review of the corporate minutes for information as to shares outstanding.
c. Confirm the number of shares outstanding at year-end with the appropriate state official.
d. Obtain written confirmation from the transfer agent and registrar concerning the number of
shares issued and outstanding.

PROBLEM NO. 3
The Davao Company engaged you in 2019 to examine its books and records and to make whatever
adjustments are necessary.

Your examination disclosed following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:
RETAINED EARNINGS

Date Particulars Debit Credit Balance

2017
Jan. 1 Balance P580,000
Dec. 31 Net income for the year 310,000 890,000
2018
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of 90,000 840,000
par
Aug. 30 Gain on retirement of
Preference share capital
at less than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500
2019
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 P434,000

b. The company failed to properly recognize accruals and prepayments. Selected accounts revealed
the following information:

2016 2017 2018 2019

1. Prepaid expenses P8,500 P6,200 P7,400 P9,500
2. Accrued expenses 5,400 7,300 8,700 9,000
3. Unearned income 6,900 7,800 8,900 9,600
4. Accrued income 4,700 5,600 6,200 7,800

c. Dividends had been declared on December 31 in 2017 and 2018 but had not been entered in the
books until paid.

d. The company purchased a machine worth P270,000 on April 30, 2016. The company charged the
purchase to expense. The machine has an estimated useful life of 3 years. The company uses
the straight line method and residual values are deemed immaterial.

e. The company received a transportation equipment as donation from one of its stockholders on
September 30, 2018. The equipment was used to deliver goods to customers. The equipment
costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a
fair value of P240,000 and P30,000 was incurred for registering the transfer of ownership. The
company did not record the donation on its books. The expenses paid related to the donated
equipment were charged to expense.

f. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the
end of 2017 and 2019, respectively.

g. The merchandise inventories at the end of 2018 and 2019 did not include merchandise that was
then in transit shipped FOB shipping point. These shipments of P43,400 and P32,600 were
recorded as purchases in January 2019 and 2020, respectively.

QUESTIONS:

Based on the above audit findings, the adjusted balances of the following are: (Disregard tax
implications)

11. Retained earnings, 12/31/16

a. P580,900 c. P790,900
 b. P850,900 d. P760,900

12. Net income for 2017

a. P369,800 c. P279,800
b. P215,800 d. P373,100

33. Retained earnings, 12/31/17

a. P976,700 c. P930,700
b. P860,700 d. P720,700

14. Net loss for 2018

a. P269,700 c. P349,700
b. P379,700 d. P359,700

15. Retained earnings, 12/31/18

a. P481,000 c. P341,000
b. P411,000 d. P241,000

16. Net loss for 2019

a. P118,300 c. P148,300
b. P228,300 d. P178,300

17. Retained earnings, 12/31/19

a. P302,700 c. P252,700
b. P362,700 d. P332,700

Suggested Solution:

Questions No. 1 to 7
RE NI NL NL
2016 2017 2018 2019
Unadjusted balances P580,000 P310,000 (P205,000) (P165,500)
(b.1) Prepaid expense
2016 8,500 (8,500)
2017 6,200 (6,200)
2018 7,400 (7,400)
2019 9,500
(b.2) Accrued expense
2016 (5,400) 5,400
2017 (7,300) 7,300
2018 (8,700) 8,700
2019 (9,000)
(b.3) Unearned income
2016 (6,900) 6,900
2017 (7,800) 7,800
2018 (8,900) 8,900
2019 (9,600)

(b.4) Accrued income

2016 4,700 (4,700)
2017 5,600 (5,600)
2018 6,200 (6,200)
2019 7,800
(d) Purchase of
machinery, expensed
on April 30, 2016 270,000
Unrecorded depr. (60,000) (90,000) (90,000) (30,000)
(e) Unrecorded transpo
equipm't. received as
donation on 9/30/05
Expenses paid 30,000
Unrecorded depr. (20,000) (80,000)
(f) Understatement of
inventory
2017 64,000 (64,000)
2019 44,500
Understatement of
inventory and
purchases
2018 43,400 (43,400)
 RE NI NL NL
2016 2017 2018 2019
(43,400) 43,400
2019 32,600
. . . (32,600)
Adjusted balances P790,900 P279,800 (P349,700) (P228,300)

Retained earnings, 1/1/04, as adjusted P 790,900 (1)

Net income for 2017 279,800 (2)
Dividends declared ( 140,000)
Retained earnings, 12/31/04 930,700 (3)
Net loss for 2018 ( 349,700) (4)
Dividends declared ( 100,000)
Retained earnings, 12/31/05 481,000 (5)
Net loss for 2019 ( 228,300) (6)
Retained earnings, 12/31/06 P 252,700 (7)

Answers: 1) C; 2) C; 3) C; 4) C, 5) A; 6) B; 7) C

PROBLEM NO. 4
Rico Corporation manufactures television components and sells them with 6-month warranty under
which defective components will be replaced without charge. On December 31, 2018, Estimated
Liability for Product Warranty had a balance of P765,000. By June 30, 2019, this balance had been
reduced to P120,375 by debits for estimated net cost of components returned that had been sold in
2018.

The company started out in 2019 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 2019:
Month Amount
January P5,400,000
February 4,950,000
March 6,150,000
April 4,275,000
May 3,000,000
June 2,700,000

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, 2018, 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
18. The total estimated returns for the six-month period ended June 30, 2019 is
a. P2,232,000 c. P2,118,000
b. P2,647,500 d. P2,382,750

19. The warranty expense for the six-month period ended June 30, 2019 is
a. P1,985,625 c. P2,057,400
b. P1,674,000 d. P1,588,500

20. The Estimated Liability for Product Warranty as of June 30, 2019 should have a
 balance of
a. P956,400 c. P713,250
b. P795,938 d. P636,750

21. The adjusting entry on June 30, 2019 will include a debit to Warranty Expense of
a. P592,875 c. P675,563
b. P740,385 d. P516,375

22. Which of the following procedures would an auditor ordinarily perform first in
evaluating management’s accounting estimates for reasonableness?
a. Develop independent expectations of management’s estimates.
b. Obtain an understanding of how management developed its estimates.
c. Consider the appropriateness of the key factors or assumptions used in preparing the
estimates.
d. Test the calculations used by management in developing the estimates.

PROBLEM NO. 5
The following information relates to Candelaria Company’s obligations as of December 31, 2006. For
each of the numbered items, determine the amount if any, that should be reported as current liability
in Candelaria’s December 31, 2006 balance sheet.

23. Accounts payable:

Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that not
had been recorded as of December 31, 2006:
a) A Company – P224,000 merchandise shipped on December 31, 2006, FOB destination;
received on January 10, 2007.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2006, FOB shipping point; received
on January 16, 2007.
c) C Super Services – P144,000 janitorial services for the three-month period ending January
31, 2007.
d) MERALCO – P67,200 electric bill covering the period December 16, 2006 to January 15, 2007.

On December 28, 2006, a supplier authorized Candelaria to return goods billed at P160,000 and
shipped on December 20, 2006. The goods were returned by Candelaria on December 28, 2006,
but the P160,000 credit memo was not received until January 6, 2007.
a. P5,923,200 c. P5,712,000
b. P5,601,600 d. P5,841,600

24. Payroll:
Items related to Candelaria’s payroll as of December 31, 2006 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 c. P992,000
b. P832,000 d. P912,000

25. Litigation:
In May, 2006, Candelaria became involved in a litigation. The suit being contested, but
Candelaria’s lawyer believes there is probable that Candelaria may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a better estimate
of potential liability than any other amount.
a. P 0 c. P2,000,000
b. P3,000,000 d. P2,500,000

26. Bonus obligation:

Candelaria Company’s president gets an annual bonus of 10% of net income after bonus and
income tax. Assume the tax rate of 30% and the correct income before bonus and tax is
P9,600,000. (Ignore the effects of other given items on net income.)

a. P722,600 c. P395,000
b. P2,240,000 d. P628,000
27. Note payable:
A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December
31, 2006. The note is dated October 1, 2005, bears interest at 18%, and is payable in three equal
annual installment of P800,000. The first interest and principal payment was made on October
1, 2006.
a. P800,000 c. P908,000
b. P 72,000 d. P872,000

28. Purchase commitment:

During 2006, Candelaria entered in a noncancellable commitment to purchase 320,000 units of
inventory at fixed price of P5 per unit, delivery to be made in 2007. On December 31, 2006, the
purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the
purchase contract were delivered on January 28, 2007.
a. P0 c. P1,600,000
b. P1,408,000 d. P 192,000

29. Deferred taxes:

On December 31, 2006, Candelaria’s deferred income tax account has a 2006 ending credit
balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr
a. P772,800 c. P952,000
b. P196,800 d. P 0

30. Product warranty:

Candelaria has a one year product warranty on selected items in its product line. The estimated
warranty liability on sales made during 2005, which was outstanding as of December 31, 2005,
amounted to P416,000. The warranty costs on sales made in 2006 are estimated at P1,504,000.
Actual warranty costs incurred during the current 2006 fiscal year are as follows:
Warranty claims honored on 2005 sales P 416,000
Warranty claims honored on 2006 sales 992,000
Total warranty claims honored P1,408,000
a. P 0 c. P1,504,000
b. P96,000 d. P 512,000

31. Premiums:
To increase sales, Candelaria Company inaugurated a promotional campaign on June 30, 2006.
Candelaria placed a coupon redeemable for a premium in each package of product sold. Each
premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance
of P30. The distribution cost per premium is P20. Candelaria estimated that only 60% of the
coupons issued will be redeemed. For the six months ended December 31, 2006, the following is
available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 c. P1,152,000
b. P1,600,000 d. P 576,000

32. Due to Five Six Finance company:

Candelaria’s accounting records show that as of December 31, 2006, P1,280,000 was due to Five
Six Finance Company for advances made against P1,600,000 of trade accounts receivable
assigned to the finance company with recourse.
a. P 0 c. P1,600,000
b. P320,000 d. P1,280,000

Suggested Solution:

Question No. 1
Accounts payable per general ledger P5,440,000
 Debit balances in suppliers' accounts 240,000
Goods in transit on 12/31/06, FOB shipping point 192,000
Unrecorded purchase return (160,000)
Accounts payable, as adjusted 5,712,000
Accrued janitorial expenses (P144,000 x 2/3) 96,000
Accrued utilities (P67,200 x 15/30) 33,600
Total P5,841,600

Question No. 2
Accrued salaries and wages P776,000
Income taxes withheld 56,000
SSS contributions payable 64,000
Philhealth contributions 16,000
Total P912,000

Question No. 3
Midpoint of the range [(P2,000,000 + P3,000,000)/2] P2,500,000

PAS 37 par. 36 states that the amount recognized as a provision should be the best estimate of the
expenditure required to settle the present obligation at the balance sheet date. Par. 39 further states
that where there is a continuous range of possible outcomes, and each point in that range is a likely
as any other, the mid-point of the range is used.

Question No. 4
B = 10% (P9,600,000 - B - T)
T = 30% (P9,600,000 - B)
T = P2,880,000 - .3B
B = 10% [P9,600,000 - B - (P2,880,000 - .3B)]
B = 10% (P9,600,000 - B - P2,880,000 + .3B)
B = 10% (P6,720,000 - .7B)
B = P672,000 - .07B
1.07B = P672,000
B = P628,000 (rounded off)

Question No. 5
Principal amount due, 10/1/07 P800,000
Accrued interest payable (P1,600,000 x 18% x 3/12) 72,000
Total P872,000

Question No. 6
Estimated liability for purchase commitment
[320,000 x (P5 - P4.40)] P192,000

Question No. 7
PAS 1 par. 70 states that when an entity presents current and non-current assets, and current and
non-current liabilities, as separate classifications on the face of the balance sheet, it shall not
classify deferred tax assets (liabilities) as current assets (liabilities).

Question No. 8
Warranty payable, 12/31/05 P 416,000
Add warranty expense accrued during 2006 1,504,000
Total 1,920,000
Less payments during 2006 1,408,000
Warranty payable, 12/31/06 P 512,000

Question No. 9
Estimated coupons to be redeemed (160,000 x 60%) 96,000
Less coupons redeemed 64,000
Coupons outstanding 32,000
Divide by exchange rate 5
Premiums to be issued 6,400
 Multiply by net premium cost (P100+P20-P30) P90
Estimated liability for coupons, 12/31/06 P576,000

Question No. 10
This transaction involves assignment of accounts receivable, wherein the company obtained a loan
using the receivables as security. Accounts receivable – assigned will be included in trade and other
receivables, while the related loan will be reported under current liabilities.

Answers: 1) D; 2) D; 3) D; 4) D, 5) D; 6) D; 7) D; 8) D; 9) D; 10) D