Auditing Problems Test Bank Adjustments

AUDITING PROBLEMS TEST BANK - 1
PROBLEM NO. 1
The following are selected unadjusted account balances and adjusting information of
TANYING CORP. for the year ended December 31, 2017.
Retained earnings, January 1 P 1,322,010

Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense – sales representatives 13,680
Depreciation expense – sales/delivery equipment 18,300
Depreciation expense – office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers’ salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1 269,100
Inventory, December 31 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000
Adjusting information:
(a) Cost of inventory in the possession of consignees as of December 31, 2017,

was not included in the ending inventory balance.................................................P55,800
(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance.......................................................................................2%
(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in).......................................................6%
(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day...................................................................................................P9,180
Average sales commissions as a percent of sales.........................................................3%
(e) No accrual had been made for a freight bill received on January 2, 2018, for
goods received on December 29, 2017..................................................................P1,710
Page 2
(f) An advertising campaign was initiated November 2, 2017. This amount was
recorded as “Prepaid advertising” and should be amortized over a six-month
period. No amortization was recorded...................................................................P5,454
Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2017..............................................................................P10,500
(g) Interest earned but not accrued............................................................................P1,680
(h) Depreciation expense on a new forklift purchased March 1, 2017, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price....................................................................................................P23,400
Estimated life in years.................................................................................................10
(i) A “real” account is debited upon the receipt of office supplies. Office supplies on hand at
year-end..............................................................................................................P3,675
(j) Income tax rate (on all items)..................................................................................30%
Compute the adjusted balances of the following:
1. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500
2. Cost of goods available for sale

A. P684,900 B. P824,697 C. P686,697 D. P779,913
3. Inventory, December 31, 2015

A. P61,500 B. P61,350 C. P56,250 D. P117,450
4. Distribution costs
A. P181,649 B. P167,513 C. P178,013 D. P176,453
5. Administrative expenses
A. P207,345 B. P193,785 C. P194,265 D. P194,595
6. Allowance for doubtful accounts

A. P15,660 B. P16,140 C. P15,180 D. P480
7. Total income
A. P817,143 B. P811,653 C. P779,913 D. P822,153
8. Income from continuing operations before taxes

A. P231,360 B. P436,795 C. P218,995 D. P239,695
9. Office supplies inventory

A. P6,540 B. P3,675 C. P2,865 D. P 0
10. Net income

A. P237,296 B. P210,299 C. P250,289 D. P216,296
Page 3
PROBLEM NO. 2
The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY
as of December 31, 2017:
Cash......................................................................................P 963,200
Accounts receivable.................................................................2,254,000
Inventory................................................................................6,050,000
Accounts payable....................................................................4,201,000
Accrued expenses......................................................................431,000
During your audit, you noted that Bunching Company held its cash books open after year-end.
In addition, your audit revealed the following:
1. Receipts for January 2018 of P654,600 were recorded in the December 2017 cash receipts
book. The receipts of P360,100 represent cash sales and P294,500 represent collections
from customers, net of 5% cash discounts.
2. Accounts payable of P372,400 was paid in January 2018. The payments, on which
discounts of P12,400 were taken, were included in the December 2017 check register.
3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following

information has been found relating to certain inventory transactions:
a. The invoice for goods costing P175,000 was received and recorded as a purchase on
December 31, 2017. The related goods, shipped FOB destination, were received on
January 4, 2018, and thus were not included in the physical inventory.
b. A P182,000 shipment of goods to a customer on December 30, 2017, terms FOB

destination, are not included in the year-end inventory. The goods cost P130,000 and
were delivered to the customer on January 3, 2018. The sale was properly recorded in
2018.
c. Goods costing P637,500 were shipped on December 31, 2017, and were delivered to the
customer on January 3, 2018. The terms of the invoice were FOB shipping point. The
goods were included in the 2017 ending inventory even though the sale was recorded in
2017.
d. Goods costing P217,500 were received from a vendor on January 4, 2018. The related
invoice was received and recorded on January 6, 2018. The goods were shipped on
December 31, 2017, terms FOB shipping point.
e. Goods valued at P275,000 are on consignment with a customer. These goods are not
included in the inventory figure.
f. Goods valued at P612,800 are on consignment from a vendor. These goods are not
included in the physical inventory.
Determine the adjusted balances of the following on December 31, 2017:
11. Cash
A. P963,200 B. P681,000 C. P668,600 D. P693,400
12. Accounts receivable

A. P2,908,600 B. P2,564,000 C. P2,254,000 D. P2,548,500
13. Inventory
A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000
14. Accounts payable

A. P4,790,900 B. P4,615,900 C. P4,573,000 D. P4,603,500
15. Current ratio

A. 2.00 B. 1.83 C. 1.84 D. 2.01
Page 4
PROBLEM NO. 3
The following are independent situations:
The Machinery account of PAKO COMPANY contains the following entries during the year:
Date Item Debit Credit

2017
Jan. 1 Balance P1,800,000
June 30 Purchased four new machines 1,080,000
Installation cost of new machines 48,000
Sept. 30 Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,000 P 66,000
Oct. 31 Repairs of machinery 75,000
Dec. 1 Cash paid for trade-in of old machines—cost,
P90,000; accumulated depreciation, P36,000.
Cash price of new machine, P270,000 225,000
Dec. 31 Balance 3,162,000
Total P3,228,000 P3,228,000
16. What is the correct balance of the Machinery account on December 31, 2017?
A. P3,162,000 B. P3,057,000 C. P3,048,000 D. P2,958,000
17. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the
depreciation charge for 2017?
A. P234,150 B. P300,000 C. P316,200 D. P227,400
On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines
expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton.
Production started immediately after some new machines costing P1,800,000 were bought on
June 30, 2017. These new machines had an estimated useful life of 15 years with a scrap value
of 10% of cost after the ore estimate has been extracted from the property, at which time the
machines will already be useless. Genluna’s books show the following expenses for 2017:
Depletion expense...........................................P1,215,000
Depreciation—Machinery......................................120,000
18. Recorded depletion expense was

A. Overstated by P270,000.
B. Understated by P270,000.
C. Overstated by P405,000
D. Understated by P405,000.
19. Recorded depreciation expense was

A. Understated by P60,000.
B. Overstated by P60,000.
C. Understated by P30,000.
D. Overstated by P30,000.
BULKAN COMPANY purchased a machine for P300,000 on January 1, 2014, with the following
additional items paid or incurred:
Separation pay for laborer laid off upon acquisition of new machine.....................P3,600
Loss on sale of machine replaced.........................................................................3,900
Transportation in.................................................................................................3,000
Installation cost.................................................................................................12,000
The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
On January 1, 2017, new parts which cost P37,800 were added to the machine so as to reduce
its fuel consumption, but with no change in its estimated life or residual value.
20. The annual depreciation charge on the machine for 2015 was
A. P34,080 B. P35,494 C. P36,450 D. P35,700
Page 5
PROBLEM NO. 4
Presented below are unrelated situations.
1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2017, Harlington Company purchased the following trading
securities:
Fair Value
Security Cost Dec. 31, 2017
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000
Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.
21. What is Harlington’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000
22. What would Harlington’s net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000
2. LABADA CO.’s portfolio of trading securities includes the following on December 31, 2016:
Cost Fair Value

15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069,000 P2,961,000
All of the above securities have been purchased in 2016. In 2017, Labada Co. completed
the following securities transactions:
Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage
commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and
other transaction costs of P4,950.
The Labada Co. portfolio of trading securities appeared as follows on December 31, 2017:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,0002
P1,885,950 P1,965,000
1
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.
23. What amount of unrealized gain on these securities should be reported in the 2017
income statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000
24. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2017?
A. P144,000 B. P27,000 C. P130,500 D. P13,500
25. What amount should be reported as trading securities in Labada’s statement of financial
position on December 31, 2017?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950
Page 6
PROBLEM NO. 5
On January 1, 2016, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2017.
Expenditures on the project were as follows:
January 3, 2016 P2,500,000

March 31, 2016 3,000,000
June 30, 2016 4,000,000
October 31, 2017 3,000,000
January 31, 2017 1,500,000
March 31, 2017 2,500,000
May 31, 2017 3,000,000
On January 3, 2016, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2016 and 2017. The company’s fiscal year-end is December 31.
26. What is the amount of capitalizable interest in 2016?

A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000
27. What is the amount of capitalizable interest in 2017?

A. P630,625 B. P654,663 C. P361,707 D. P799,663
28. What amount of interest should be expensed in 2016?

A. P2,736,875 B. P2,356,250 C. P2,900,000 D. P 0
29. What amount of interest should be expensed in 2017?

A. P2,769,375 B. P3,038,293 C. P2,600,337 D. P2,745,337
30. What is the total cost of the building (including the interest capitalized in 2016 and 2017)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625
Page 7
PROBLEM NO. 6
At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The
grant is conditional upon the executive remaining in the entity’s employ until the end of year 3.
The share options can be exercised if the entity’s share price increases from P20 at the
beginning of year 1 to above P30 at the end of year 3. If the share price is above P30 at the
end of year 3, the share options can be exercised at any time during the next five years, i.e., by
the end of year 8.
The entity estimates the fair value of the share options on grant date to be P5 per option. This
estimate takes into account the following market condition:
The possibility that the share price will exceed P30 at the end of year 3, i.e., the share
options become exercisable; and
The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share
options will be forfeited.
The following actual events occurred in years 1 to 3:
Year 1
The share price has increased to P24.

The entity’s estimate of the fair value of the options is P4 at the end of year 1. This takes
into account whether the market condition will be satisfied by the end of year 3.
Year 2
The share price has decreased to P22. However, the entity remains optimistic that the
share price target will be met by the end of year 3.
The estimated fair value of the share options is P3. Again, this estimate takes into account
the market condition noted above.
Year 3
The share price only reaches P28 by the end of year 3.

The estimated fair value of the share options is zero, as the market condition has not been
satisfied.
31. Compensation expense for year 1

A. P30,000 B. P40,000 C. P50,000 D. P60,000

A. P30,000 B. P40,000 C. P50,000 D. P60,000

A. P 0 B. P30,000 C. P40,000 D. P50,000
34. Share options outstanding at the end of year 2

A. P70,000 B. P80,000 C. P90,000 D. P100,000
35. Cumulative compensation expense for the three-year period

A. P 0 B. P70,000 C. P100,000 D. P150,000
Page 8
PROBLEM NO. 7
The following independent situations relate to the audit of shareholders’ equity. Answer the
questions at the end of each situation.
BRANDY CO. was organized at the beginning of the current year. The following shareholders’
equity accounts are included in the entity’s year-end trial balance.
Preference share capital, P100 par, authorized 100,000 shares,

issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares,
issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000
The following current year transactions relate to Brandy Co.’s shareholders’ equity:
 Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference
shares. Subscriptions to ordinary shares were also received on the same date.
 During the year, subscriptions were received for an additional 12,000 preference shares at a
price of P120 per share.
 Cash payments were received from subscribers at frequent intervals for several months
after subscription. The company’s policy is to issue share certificates only upon full
payment of the share subscription.
 Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a
tract of land with a fair value of P690,000.
36. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000
37. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000
38. The company’s statement of financial position at the end of the current year should report
contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000
Page 9
The following shareholders’ equity accounts are included in the statement of financial position
of CONDESSA CO. on December 31, 2016.
Preference share capital, 8%, P100 par (200,000 shares authorized,

60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share premium 3,750,000
Retained earnings 3,500,000
Total P16,250,000
During 2017, Condessa took part in the following transactions concerning equity.
1. Paid the annual 2016 P8 per share dividend on preference shares and a P2 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2016.
2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
3. Reissued 21,000 treasury shares for land valued at P900,000.
4. Issued 15,000 preference shares at P105 per share.
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are
selling for P45 per share.
6. Issued the stock dividend.
7. Declared the annual 2017 P8 per share dividend on preference shares and the P2 per
share dividend on ordinary shares. These dividends are payable in 2018.
8. Reported net income of P9,900,000 for the current year.
39. What is the retained earnings balance (before appropriation for treasury shares) on
December 31, 2017?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000
40. What amount should be reported as total shareholders’ equity on December 31, 2017?
A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000
Page 10
PROBLEM NO. 8
The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents
certain types of air pollution. Caboom does not manufacture or sell the products and processes
it develops; it conducts research and develops products which it patents, and then assigns the
patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Date Activity Cost
2007-2008 Research conducted to develop device P1,259,100
Jan. 2009 Design and construction of a prototype 262,800
Mar. 2010 Testing of models 126,000
Jan. 2010 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2011 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2013 Research aimed at modifying the design of the patented device 129,000
May 2017 Legal fees paid in a successful patent infringement suit against a
competitor 102,000
Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2015, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year
if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2017.
Compute the carrying value of Patent No. 112170 on each of the following dates:
41. December 31, 2010

A. P180,675 B. P186,150 C. P293,788 D. P175,200
42. December 31, 2014
A. P223,200 B. P52,560 C. P131,400 D. P122,640
43. December 31, 2017
A. P120,560 B. P78,840 C. P52,560 D. P98,550
BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2016.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of P4,000,000 when
Valenzuela sold it to Bartolo.
 During 2017, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2017 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
 The following research and development costs were incurred by Bartolo in 2017:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2020. The materials
and equipment purchased have no alternative uses.
 On January 1, 2017, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2016 is only 5 years from January 1,
2017.
44. What is the total carrying value of Bartolo’s intangible assets on December 31, 2017?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
45. What is the total amount of charges against income for 2017?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000
Page 11
PROBLEM NO. 9
The following are two (2) unrelated situations.
1. 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.
46. 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
47. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2017?
A. P75,500 overstatement
48. What is the total effect of the errors on the balance of Samoa’s retained earnings at
December 31, 2017?
A. P156,000 understatement
2. 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.
49. What is the corrected pretax income for 2016?

A. P303,200 B. P225,300 C. P311,700 D. P307,450
50. What is the corrected pretax income for 2017?

A. P480,042 B. P484,292 C. P575,392 D. P488,992
Page 12
PROBLEM NO. 10
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
51. How much revenue from container sales should be recognized for 2017?
A. P127,500 B. P267,500 C. P27,500 D. P85,000
52. 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.
53. 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
54. What amount of warranty expense would be reported for 2017?

A. P18,000 B. P 0 C. P 36,000 D. P54,000
55. 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
Page 13
PROBLEM NO. 11
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
Jan. 1, 2016 Sale 71,250 543,956
Oct. 1, 2017 Sale 24,000 411,165
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.
56. 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
57. 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
58. 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
59. What is the correct total depreciation provision for the years 2013-2017?
A. P737,400 B. P734,040 C. P728,940 D. P669,540
60. 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
-END-
AUDITING PROBLEMS TEST BANK 2
PROBLEM NO. 1
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.
Page 2
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.
Page 3
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.
Page 4
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
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)

1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
5. Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217
Page 5
6. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000
7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000
10. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000
11. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500
12. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666
13. Property, plant, and equipment

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

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672
15. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320
16. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644
17. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798
18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
19. Cost of goods sold

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

A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514
Page 6
PROBLEM NO. 2
To substantiate the existence of the accounts receivable balances as at December 31, 2017 of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross
profit on sales is 20%. The company is under the perpetual inventory method.
Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2017. Correct balance as is P60,000. received December 31, 2017.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2017 cancels this. Lukas Company in 2018.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping point.
2018. Shipped in 2017.
Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.
21. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.
22. The effect on 2017 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.
23. The overstatement of receivable from Lazaro is

A. P96,000 B. P24,000 C. P72,000 D. P48,000
24. The accounts receivable from Silang is

A. Correctly stated. C. P112,500 under.
B. P112,500 over. D. P225,000 under.
25. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Page 7
PROBLEM NO. 3
Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile,
Inc. for the year ending December 31, 2017. After obtaining an understanding of the client’s
design of the accounting and internal control systems and their operation, he then proceeded in
performing test of controls related to production cycle.
The following questions related to test of controls of the production cycle:
26. Which of the following auditing procedures probably would provide the most reliable
evidence concerning the entity’s assertion of rights and obligations related to inventories:
A. Trace the test counts noted during the entity’s physical count to the entity’s
summarization of quantities.
B. Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
C. Select the last few shipping documents used before the physical count and determine
whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.
27. Which of the following internal control activities most likely addresses the completeness
assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary inventory
records.
B. Employees responsible for custody of finished goods do not perform the receiving
function
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and inventory
accounting personnel.
28. From the auditor’s point of view, inventory counts are more acceptable prior to the year-
end when
A. Internal control is weak.
B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.
29. A retailer’s physical count of inventory was higher than that shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
30. An auditor will usually trace the details of the test counts made during the observation of
physical inventory counts to a final inventory compilation. This audit procedure is
undertaken to provide evidence that items physically present and observed by the auditor
at the time of the physical inventory count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory schedule.
D. Included in the final inventory schedule.
Page 8
PROBLEM NO. 4
A portion of the SPARK COMPANY’s statement of financial position appears as follows:
December 31, 2017 December 31, 2016

Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000
Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2017, cash totaling P471,700 was paid on accounts payable. Operating expenses for
2017 totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing
1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was
P32.60 during January 2017 and increased P0.10 per month during the year. Spark sells only
one product. All sales are made for P50 per unit. The ending inventory for 2016 was valued at
P32.50 per unit.
31. Number of units sold during 2017

A. 7,066 B. 18,400 C. 4,268 D. 13,400
32. Accounts payable balance at December 31, 2017

A. P190,100 B. P50,000 C. P199,100 D. P200,000
33. Inventory quantity on December 31, 2017

A. 5,750 B. 2,750 C. 17,084 D. 10,750
34. Cost of inventory on December 31, 2017

A. P187,450 B. P186,875 C. P192,950 D. P189,660
35. Cost of goods sold for the year ended December 31, 2017
A. P609,125 B. P609,700 C. P606,915 D. P603,625
Page 9
PROBLEM NO. 5
A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested

by your auditor soon after December 31, 2017, showing the additions, retirements,
depreciation, and other data affecting the income of the company in the 4-year period 2014 to
2017, inclusive.
The following data were ascertained.

Balance of Trucks account, Jan. 1, 2014
Truck No. 1 purchased Jan. 1, 2011, cost P180,000
Truck No. 2 purchased July 1, 2011, cost 220,000
Truck No. 3 purchased Jan. 1, 2013, cost 300,000
Truck No. 4 purchased July 1, 2013, cost 240,000
Balance, Jan. 1, 2014 P940,000
The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2014, and

entered in the ledger, had a balance on that date of P302,000 (depreciation on the four trucks
from the respective dates of purchase, based on a 5-year life, no salvage value). No charges
had been made against the account before January 1, 2014.
Transactions between January 1, 2014, and December 31, 2017, which were recorded in the
ledger, are as follows.
July 1, 2014 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of
which was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash
on the transaction. The entry was a debit to Trucks and a credit to Cash,
P220,000. The transaction has commercial substance.
Jan. 1, 2015 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.
July 1, 2016 A new truck (No. 6) was acquired for P420,000 cash and was charged at that
amount to the Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2016 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk
for P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company.
The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.
Page 10
Entries for depreciation had been made at the close of each year as follows: 2014, P210,000;
2015, P225,000; 2016, P250,500; 2017, P304,000.
36. What is the total depreciation expense for the year ended December 31, 2014?
A. P180,000 B. P198,000 C. P172,000 D. P228,000
37. What is the gain (loss) on trade in of Truck #3 on July 1, 2014?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000
38. What is the net book value of the Trucks on December 31, 2017?
A. P414,000 B. P348,000 C. P228,500 D. P894,000
39. The total depreciation expense recorded for the 4-year period (2014-2017) is overstated
by
A. P185,500 B. P265,500 C. P287,500 D. P275,500
40. The books have not been closed for 2017. What is the compound journal entry on
December 31, 2017 to correct the company’s errors for the 4-year period (2014-2017)?
A. Accumulated depreciation 629,500
Trucks 480,000
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
D. Accumulated depreciation 665,500
Trucks 665,500
Page 11
PROBLEM NO. 6
The cash account of NUNAL COMPANY shows the following activities:
Date Debit Credit Balance

Nov. 30 Balance P345,000
Dec. 2 November bank charges P 150 344,850
4 November bank credit for notes
receivable collected P 30,000 374,850
15 NSF check 3,900 370,950
20 Loan proceeds 145,500 516,450
21 December bank charges 180 516,270
31 Cash receipts book 2,121,900 2,638,170
31 Cash disbursements book 1,224,000 1,414,170
CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000
Page 12
BANK STATEMENT
Date Check Charges Credits
Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900
Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810
Page 13
Based on the preceding information, determine the following:
41. Outstanding checks at November 30

A. P39,150 B. P28,650 C. P21,150 D. P46,650
42. Outstanding checks at December 31

A. P459,000 B. P477,000 C. P441,000 D. P487,650
43. Deposit in transit at November 30

A. P58,500 B. P145,500 C. P 0 D. P25,500
44. Deposit in transit at December 31

A. P114,000 B. P139,500 C. P132,000 D. P 0
45. Adjusted book balance at November 30

A. P410,850 B. P345,000 C. P375,000 D. P374,850
46. Adjusted bank receipts for the month of December

A. P2,297,400 B. P2,291,400 C. P2,303,400 D. P2,321,400
47. Adjusted book disbursements for the month of December

A. P1,228,440 B. P1,246,440 C. P1,210,440 D. P1,246,620
48. Adjusted bank balance at December 31

A. P1,449,810 B. P1,674,810 C. P1,431,810 D. P1,776,810
49. Unadjusted bank balance at November 30

A. P555,060 B. P94,560 C. P1,776,810 D. P342,000
50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
C. Interbank transfer schedule.
D. Bank deposit lead schedule.
Page 14
PROBLEM NO. 7
MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates
that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the
first and last year and 15,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P1,550,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000.
The company estimates that these structures can be used for 15 years but, because they must
be dismantled if they are to be moved, they have no residual value. Mina Mining does not
intend to use the buildings elsewhere.
Mining machinery installed at the mine was purchased secondhand at a total cost of
P3,600,000. The machinery cost the former owner P9,000,000 and was 50% depreciated when
purchased. Mina Mining estimates that about half of this machinery will still be useful when the
present mineral resources have been exhausted but that dismantling and removal costs will just
about offset its value at that time. The company does not intend to use the machinery
elsewhere. The remaining machinery will last until about one-half the present estimated
mineral ore has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.
51. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000
52. What are the estimated depletion and depreciation charges for the 5th year?
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000
Page 15
PROBLEM NO. 8
The HVR Company included the following in its notes receivable on December 31, 2017:
Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000
The following transactions during 2017 and other information relate to the company’s notes
receceivable:
a) On January 1, 2017, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s books at P1,500,000. HVR received a
noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31,
2018. There was no established exchange price for the land. The prevailing interest rate
for this note on January 1, 2017 was 10%.
b) On January 1, 2017, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2019, with
interest receivable every December 31. The fair value of the services rendered is not
readily determinable. The prevailing rate of interest for a note of this type was 10% on
January 1, 2017.
c) On January 1, 2017, HVR Company sold an old equipment with a carrying amount of
P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be
repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance).
HVR received the first payment on December 31, 2017. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January 1,
2017.
Note: Round off present value factors to four decimal places and final answers to the nearest
hundred.
56. What amount of consultation fee revenue should be recognized in 2017?

A. P3,600,000 B. P2,705,000 C. P4,047,500 D. P3,152,500
57. What amount should be reported as gain on sale of equipment?

A. P994,800 B. P2,400,000 C. P1,162,700 D. P1,237,300
58. The amount to be reported as noncurrent notes receivable on December 31, 2017 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600
59. The amount to be reported as current notes receivable on December 31, 2017 is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000
60. How much interest income should be recognized in 2017?

A. P974,200 B. P756,000 C. P1,378,700 D. P1,160,500
--- END ---

AUDITING PROBLEMS CPA Review
FIRST SET OF PROBLEMS
PROBLEM 1 – TANYING CORP.
1. B Sales (P1,353,000 + P10,500 Freight) P1,363,500

Sales returns and allowances (11,700)
Sales discounts (2,640)
Net sales P1,349,160
2. C Inventory, Jan. 1 P269,100

Purchases P424,800
Purchase returns and allowances (P424,800 x 6%) (25,488)
Freight in (P16,575 + P1,710) 18,285 417,597
Cost of goods available for sale P686,697
3. D Inventory, Dec. 31, 2015

Per books P 61,650
Goods out on consignment 55,800
Per audit P117,450
4. C Distribution costs:
Sales salaries and commissions (P75,000 + [P9,180 x 3%]) P75,275
Advertising expense (P48,270 + [P5,454 x 2/6]) 50,088
Depreciation expense – Sales/delivery equipment (P18,300 + [P23,400 x 10% x 10/12]) 20,250
Freight expense 10,500
Travel expense – sales representatives 13,680
Miscellaneous selling expenses 8,220
Total P178,013
5. B Administrative expenses:
Legal services P 6,675
Insurance and licenses 23,040
Depreciation expense – office equipment 12,600
Utilities 19,200
Telephone and postage 4,425
Office supplies expense (P6,540 – P3,675) 2,865
Officers’ salaries 109,800
Doubtful accounts expense (P783,000 x 2% = P15,660 – P480) 15,180
Total P193,785
6. A Allowance for doubtful accounts (P783,000 x 2%) P15,660
7. D Net sales P1,349,160

Cost of goods sold (P686,697 – P117,450) (569,247)
Gross income 779,913
Interest revenue (P1,650 + P1,680) 3,330
Dividend revenue 15,450
Gain on sale of assets 23,460
Total income P822,153
8. C Total income P822,153

Distribution costs (178,013)
Administrative expenses (193,785)
Interest expense (13,560)
Loss on sale of equipment (217,800)
Income from continuing operations before tax P218,995
9. B Office supplies inventory P3,675
10. A Income before tax P218,995

Income tax (P218,995 x 30) (65,669)
Income from continuing operations 153,296
Income from discontinued operations, net of tax (P120,000 x 70%) 84,000
Net income P237,296
Page 1 of 15 Pages
AUDITING PROBLEMS
PROBLEM 2 – BUNCHING COMPANY

Accounts Accounts
Cash Receivable Inventory Payable
Per books P963,200 P2,254,000 P6,050,000 P4,201,000
AJE 1 (654,600) 310,000 --- ---
2 360,000 --- --- 372,400
3 a --- --- --- (175,000)
b --- --- 130,000 ---
c --- --- (637,500) ---
d --- --- 217,500 217,500
e --- --- 275,000 ---
Per audit P668,600 P2,564,000 P6,035,000 P4,615,900
(11 – C) (12 – B) (13 – A) (14 – B)
AJES
1. Sales 360,100
Accounts receivable (P294,500 / 95%) 310,000
Sales discounts (P310,000 x 5%) 15,500
Cash 654,600
2. Cash (P372,400 – P12,400) 360,000
Purchase discounts 12,400
3. a Accounts payable 175,000
Purchases 175,000
b Inventory 130,000
Cost of sales 130,000
c Cost of sales 637,500
Inventory 637,500
d Purchases 217,500
Inventory 217,500
e Inventory 275,000
f No adjusting entry
15. C Current ratio:

Current assets:
Cash P 668,600
Accounts receivable 2,564,000
Inventory 6,035,000 P9,267,600
Current liabilities:
Accounts payable P4,615,900
Accrued expenses 431,000 5,046,900
1.84
PROBLEM 3 – PAKO COMPANY
16. D Balance, Jan. 1 P1,800,000

June 30 acquisition (P1,080,000 + P48,000) 1,128,000
Sept. 30 sale (150,000)
Dec. 1 trade in: old machine (90,000)
new machine 270,000
Balance, Dec. 31 P2,958,000
17. A Remainder of beginning balance (P1,800,000 – P150,000 – P90,000 =

P1,560,000 x 10%) P156,000
June 30 acquisition (P1,128,000 x 10% x 6/12) 56,400
Sept. 30 sale (P150,000 x 10% x 9/12) 11,250
Dec. 1 trade in: old machine (P90,000 x 10% x 11/12) 8,250
new machine (P270,000 x 10% x 1/12) 2,250
Depreciation expense for 2015 P234,150
Page 2 of 15 Pages
AUDITING PROBLEMS
GENLUNA COPPERMINES, INC.
18. C Depletion rate per ton (P14,580,000 / 1,620,000) P9

Copper ore mined in 2015 (15,000 x 6 months) x 90,000
Depletion for 2015 P 810,000
Depletion per books 1,215,000
Overstatement of depletion expense P405,000
19. D Depreciable cost of machinery (P1,800,000 x 90%) P1,620,000

Estimated copper ore reserve 1,620,000
Depreciation rate per ton P1
Copper ore mined in 2015 90,000
Depreciation expense for 2015 P 90,000
Depreciation per books 120,000
Overstatement of depreciation expense P 30,000
20. D January 1, 2012

Total cost of machine (P300,000 + P3,000 + P12,000) P315,000
Residual value (12,000)
Depreciable cost P303,000
Estimated useful life 10 years
Annual depreciation P30,300
Depreciable cost P303,000

Depreciation, 2012 – 2014 (P30,300 x 3 years) (90,000)
Remaining depreciable cost, Jan. 1, 2015 P212,100
Cost of new parts 37,800
Total P249,900
Remaining useful life (10 years – 3 years) 7 years
Revised annual depreciation P35,700
PROBLEM 4 – HARLINGTON COMPANY
21. A Net income before trading security adjustment P2,700,000

Unrealized loss (P3,465,000 cost – P3,195,000 market value) (270,000)
Net income, as adjusted P2,430,000
22. B Net income before trading security adjustment P2,700,000

Unrealized gain (P3,465,000 cost – P3,564,000 market value) 99,000
Net income, as adjusted P2,799,000
LABADA CO.
23. D Carrying Value Market Value

Ganda Co. P1,710,000 P1,759,500
Waston, Inc. (P135 x 1,800) 243,000 229,500
P1,953,000 P1,989,000
Unrealized gain (P1,989,000 – P1,953,000) P36,000
24. C Net proceeds (P93 x 15,000 = P1,395,000 – P13,500) P1,381,500

Carrying value (1,251,000)
Gain on sale P 130,500
25. B Trading securities at fair value P1,989,000
PROBLEM 5 – SAMSON MFG. CO.
26. C Actual borrowing cost:

Specific borrowing (P5 million x 10%) P500,000
General borrowings:
P25 million x 8% P2,000,000
P15 million x 6% 900,000 2,900,000
Total P3,400,000
Capitalization rate (P2,900,000/P40 million) 7.25%
Page 3 of 15 Pages
AUDITING PROBLEMS
Average expenditures – 2014 P7,250,000

Capitalizable interest – 2014:
Specific borrowing (P5 million x 10%) P500,000
General borrowings (P7,250,000 – P5,000,000 = P2,250,000 x 7.25%) 163,125
Total P663,125
27. B Average expenditures – 2015 P16,163,125

Capitalizable interest – 2015:
Specific borrowing (P5 million 10% x 6/12) P250,000
General borrowings (P16,163,125 – P5,000,000 = P11,163,125 x 7.25% x 6/12) 404,663
Total P654,663
28. A 2014 interest expense (P3,400,000 – P663,125) P2,736,875
29. D 2015 interest expense (P3,400,000 – P654,663) P2,745,337
30. B Accumulated expenditures before interest P19,500,000

Interest capitalized in 2014 and 2015 (P663,125 + P654,663) 1,317,788
Total cost of building P20,817,788
PROBLEM 6
Compensation Cumulative
Expense Compensation
Year Calculation for Period Expense
1 30,000 options x P5 fair value x 1�3 P 50,000 P 50,000
2 30,000 options x P5 fair value x 1�3 50,000 100,000
3 30,000 options x P5 fair value x 1�3 50,000 150,000
31. C 32. C 33. D 34. D 35. D
PROBLEM 7 – BRANDY CO.
36. C Ordinary shares issued and outstanding 72,000

Ordinary shares subscribed 72,000
Total 144,000
Ordinary shares issued to acquire land (24,000)
Ordinary shares originally subscribed 120,000
Par value/share x P10
Total par value P1,200,000
Share premium (P2,850,000 – P450,000) 2,400,000
Total subscription price P3,600,000
* P690,000 FV of land – P240,000 PV
37. D Subscription of 12,000 preference shares @ P120/share P1,440,000

Subscription of 60,000 preference shares @ P100/share 6,000,000
Total 7,440,000
Year-end balance of subscriptions receivable – preference (360,000)
Amount collected from subscribers P7,080,000
38. B Preference Ordinary

Issued P6,600,000 P 720,000
Subscribed 600,000 720,000
Share premium 240,000 2,850,000
Subscriptions receivable (360,000) (1,080,000)
Contributed capital P7,080,000 P3,210,000
CONDESSA CO.
1. Dividends payable – preference (P8 x 60,000) 480,000

Dividends payable – ordinary (P2 x 600,000) 1,200,000
Cash 1,680,000
2. Treasury shares 3,240,000

Cash (P40 x 81,000) 3,240,000
Page 4 of 15 Pages
AUDITING PROBLEMS
3. Land 900,000
Treasury shares (P40 x 21,000) 840,000
Share premium – treasury 60,000
4. Cash (P105 x 15,000) 1,575,000

Preference share capital (P100 x 15,000) 1,500,000
Share premium – preference 75,000
5. Retained earnings (P45 x 54,000*) 2,430,000

Stock dividends payable (P5 x 54,000) 270,000
Share premium – ordinary 2,160,000
* 600,000 – 60,000 treasury shares = 540,000 x 10%
6. Stock dividends payable 270,000

Ordinary share capital 270,000
7. Retained earnings 1,788,000

Dividends payable – preference (P8 x 75,000) 600,000
Dividends payable – ordinary (P2 x 594,000*) 1,188,000
* 540,000 + 54,000
8. Income summary 9,900,000

Retained earnings 9,900,000
Preference share capital (P6,000,000 + P1,500,000) P7,500,000

Ordinary share capital (P3,000,000 + P270,000) 3,270,000
Share premium (P3,750,000 + P60,000 + P75,000 + P2,160,000) 6,045,000
Retained earnings (P3,500,000 – P2,430,000 – P1,788,000 + P9,900,000) (39 – A) 9,182,000
Treasury shares (P3,240,000 – P840,000) (2,400,000)
Total (40 – B) P23,597,000
PROBLEM 8 – CABOOM LABORATORIES
41. D Cost to obtain patent (January 2008) P186,150

2008 amortization (P186,150/17) (10,950)
Carrying value, Dec. 31, 2008 P175,200
42. C Carrying value, Jan. 1, 2009 P175,200

Amortization, 2009-2012 (P10,950 x 4 years) (43,800)
Carrying value, Dec. 31, 2012 P131,400
43. C Carrying value, Jan. 1, 2013 P131,400

Amortization, 2013-2015 (P131,400 x 3/5) (78,840)
Carrying value, Dec. 31, 2015 P 52,560
BARTOLO COMPANY
44. A Cost of patent purchased on Jan. 1, 2014 P4,000,000

2014 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2014 3,600,000
2015 amortization (P3,600,000/5) (720,000) P2,880,000
Cost of franchise P960,000
2015 amortization (P960,000/10) (96,000) 864,000
Total carrying value of intangibles P3,744,000
45. B Amortization of patent – 2015 P720,000

Amortization of franchise – 2015 96,000
Payment to Delco (P5,000,000 x 5%) 250,000
Research and development costs 866,000
Total charges against 2015 income P1,932,000
PROBLEM NO. 9 – SAMOA COMPANY/CHILE CO.
46. A Over- (Under-)statement

Understatement of 2016 ending inventory P 48,000
Overstatement of 2017 ending inventory 40,500
Prepaid insurance charged to expense in 2016 (P330,000 ÷ 3) 110,000
Page 5 of 15 Pages
AUDITING PROBLEMS
Unrecorded sale of fully depreciated machinery in 2017 (75,000)

Total effect of errors on net income P123,500
47. D Over- (Under-)statement
Overstatement of 2015 ending inventory P 40,500
Prepaid insurance charged to expense in 2016 (110,000)
Total effect on working capital (P144,500)
48. C Over- (Under-)statement
Overstatement of 2017 ending inventory P 40,500
Understatement of depreciation expense in 2016 11,500
Prepaid insurance charged to expense in 2016 (110,000)
Total effect on retained earnings (P133,000)
2016 2017
Pretax income P505,000 P387,000
Sales revenue erroneously recognized in 2017 (191,000) 191,000
Understatement of 2016 ending inventory 43,200 (43,200)
Understatement of bond interest expense (1) (7,250) (7,758)
Ordinary repairs erroneously capitalized (42,500) (47,000)
Overstatement of depreciation (2) 4,250 8,950
Corrected pretax income P311,700 P488,992
(1)
Book Value Nominal Effective Discount
Year of Bonds Interest Interest Amortization
2016 P1,175,000 P75,000 P82,250 P7,250
2017 1,182,250 75,000 82,758 7,758
(2)
2016 (P42,500 ÷ 10) P4,250

2017 (P42,500 ÷ 10) P4,250
(P47,000 ÷ 10) 4,700 P8,950
49. C 50. D
PROBLEM NO. 10 – OMEGA COMPANY/DP, INC.
51. C Containers held by customers at Dec. 31, 2014 from deliveries in 2013 P85,000
Containers returned in 2015 from deliveries in 2013 (57,500)
Revenue from container sales P27,500
52. A Liability for returnable containers, Dec. 31, 2014 P325,000

Deliveries in 2015 430,000
Total 755,000
2015 container returns P354,500
2015 container sales 27,500 (382,000)
Liability for returnable containers P373,000
53. C Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 2/3) P145,800
54. D Parts P18,000

Labor 36,000
Total warranty expense P54,000
55. B Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 1/3) P72,900
PROBLEM 11 – TGR Company
56. D Trade-in – June 30, 2013

Cost P157,200
Accum. depreciation, 1/1/11 – 6/30/13 (P157,200 x 20% x 2.5 yrs.) 78,600
Page 6 of 15 Pages
AUDITING PROBLEMS
Carrying value 78,600

Trade-in value 129,000 P50,400
Sale – Jan. 1, 2014
Cost P132,000
Accum. depreciation, 1/1/11 – 1/1/14 (P132,000 x 20% x 3 yrs.) 79,200
Net proceeds 71,250 18,450
Sale – October 1, 2015
Cost P120,000
Accum. depreciation, 1/1/11 – 10/1/15 (P120,000 x 20% x 4 9/12) 114,000
Proceeds 24,000 18,000
Total gain P86,850
57. C Machine acquired on Sept. 30, 2011 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2012 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2014 (list price) 279,000
Total P700,200
58. C Machine acquired on:

Sept. 30, 2011 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2012 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2013 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2015 P462,240
59. B
Date of
Acquisition Cost 2011 2012 2013 2014 2015 Total
1/1/11 P157,200 P31,440 P31,440 P15,720 P0 P0 P 78,600
120,000 24,000 24,000 24,000 24,000 18,000 114,000
132,000 26,400 26,400 26,400 0 0 79,200
9/30/11 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/12 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/13 279,000 0 0 27,900 55,800 55,800 139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040 P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233 597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)
60. A Depreciation expense (2015) 75,807

Retained earnings (2011 – 2014) 61,215
Accumulated depreciation 137,022
---END---
Page 7 of 15 Pages
AUDITING PROBLEMS
SECOND SET OF PROBLEMS
PROBLEM 1 – AYALA MERCHANTS CORPORATION
ADJUSTING JOURNAL ENRIES

December 31, 2015
1. Operating expenses 27,740

Petty cash fund 27,740
(P37,250 – P9,510)
2. Accounts receivable (P107,400 + P63,000) 170,400

Notes payable 700,000
Finance cost (Interest expense) 10,000
Other charges (Bank service charges) 2,750
Cash in bank 811,150
3. Allowance for doubtful accounts 152,640

Accounts receivable (write-off) 152,640
4. Other charges (Unrealized loss – Trading securities) 10,940

Bacnotan Cement (P16, 7,000) P112,000
Fil-Estate (P19.75 x 10,000) 197,500
Ionics (P24 x 2,400) 57,600
La Tondena (P26 x 2,000) 52,000
Selecta (P1.20 x 8,000) 9,600
Union Bank (P27.50 x 1,600) 44,000
Total market value, Dec. 21, 2015 P472,700
Carrying value, Dec. 31, 2015 483,640
Unrealized loss – trading securities P 10,940
5. Interest receivable 32,500

Other income (Interest income) 32,500
(P1,300,000 x 15% 2/12)
6. Operating expenses (Advertising expense) 325,000

Christmas promotion P100,000
Regular promotion (P640,000 – P100,000 = P540,000 x 5/12) 225,000
Total P325,000
7. Operating expenses (Rent expense) 280,000

(P420,000 x 2/3 or P140,000 x 2)
8. Operating expenses (Insurance expense) 81,667

(P490,000 x 2/12)
9. Operating expenses (Office supplies expense) 258,500

(P361,000 – P102,500)
10. Accounts receivable 146,940

Sales 146,940
11. Cost of goods sold 356,000

Inventories 356,000
12. Cost of goods sold 138,500

Inventories 138,500
Page 8 of 15 Pages
AUDITING PROBLEMS
13. Inventories 153,800

Cost of goods sold 153,800
14. Delivery equipment 43,400

Operating expenses 43,400
15. Operating expenses (Depreciation expense) 2,170

Accumulated depreciation 2,170
(P43,400/10 x 6/12)
16. Accumulated depreciation 10,480

Operating expenses (Depreciation expense) 10,480
17. Accumulated depreciation (P138,620 – P10,480) 128,140

Other charges (Loss) 37,380
Delivery equipment 165,520
18. Operating expenses 213,000

19. Finance cost (Interest expense) 104,000

Interest payable 104,000
(P2.6 million x 16% 3/12)
20. Retained earnings 540,000

Dividends payable 540,000
(P5,400,000 x 10%)
21. Operating expenses (Doubtful accounts expense) 130,317

Allowance for doubtful accounts 130,317
Required
Per Books Adjustments Per Audit % Allowance
Less than 3 months P2,500,960 P146,940
107,400 P2,755,300 1 P27,553
3 to 6 months 843,200 843,200 5 42,160
Over 6 months 274,500 63,000
(152,460) 185,040 10 18,504
P3,618,660 P3,783,540 P88,217
Allowance before adjustment (P110,360 – P152,460) P 42,100 debit

Required allowance 88,217
Adjustment P130,317
1. D Petty cash fund

Per books P60,000
AJE 1 (27,740)
Per audit P32,260
2. D Cash in bank
Per books P1,056,000
AJE 2 (811,150)
Per audit P 244,850
3. D Trading securities
Per books P483,640
AJE 4 (10,940)
Per audit P472,700
4. C Accounts receivable
AJE 2 170,400
3 (152,460)
10 146,940
Per audit P3,783,540
Page 9 of 15 Pages
AUDITING PROBLEMS
5. D Allowance for doubtful accounts

Per books P110,360
AJE 3 (152,460)
21 130,317
Per audit P 88,217
6. C Notes and interest receivable

AJE 5 32,500
7. A Inventories
AJE 11 (356,000)
12 (138,500)
13 153,800
8. B Prepaid insurance
Per books P490,000
AJE 8 (81,667)
Per audit P408,333
9. A Prepaid rent
Per books P420,000
AJE 7 (280,000)
Per audit P140,000
10. D Prepaid advertising

Per books P640,000
AJE 6 (325,000)
Per audit P315,000
11. D Office supplies inventory

Per books P361,000
AJE 9 (258,500)
Per audit P102,500
12. C Petty cash fund P 32,260

Cash in bank 244,850
Accounts receivable (P3,783,540 – P88,217) 3,695,323
Notes and interest receivable 1,332,500
Inventories 6,934,200
Total current assets P13,677,666
13. C Property, plant, and equipment (PPE)

AJE 14 43,400
17 (165,520)
14. B Accumulated depreciation

AJE 15 2,170
16 (10,480)
17 (128,140)
15. B Accounts payable

AJE 2 72,000
Page 10 of 15 Pages
AUDITING PROBLEMS
16. A Interest payable

Per books P0
AJE 19 104,000
Per audit P104,000
17. C Accounts payable – trade P2,428,320

Notes payable 2,600,000
Interest payable 104,000
Dividends payable 540,000
Total current liabilities P6,054,360
18. C Sales
AJE 10 146,940
19. C Cost of goods sold

AJE 11 356,000
12 138,500
13, (153,800)
20. D Operating expenses

AJE 1 27,740
6 325,000
7 280,000
8 81,667
9 258,500
14 (43,400)
15 2,170
16 (10,480)
18 213,000
21 130,317
PROBLEM 2 – LUKAS COMPANY
21. A Sales returns and allowance 90,000

Inventory 72,000
(P90,000 x 80%)
Net decrease in income (P90,000 – P72,000) P18,000
22. A Sales 30,000

Income overstated by P30,000
23. D Overstatement of receivable Lazaro (P150 x 320 units) P48,000
24. A Correctly stated because the goods are considered sold in 2015.
25. D Accounts payable 135,000

PROBLEM 3 – CROCODILE, INC.
26. B 27. C 28. B 29. B 30. D
Page 11 of 15 Pages
AUDITING PROBLEMS
PROBLEM 4 – SPARK COMPANY
31. B Cash balance, Dec. 31, 2014 P100,000

Sales (SQUEEZE) 920,000
Cash paid for operating expenses (220,000)
Cash paid on accounts payable (471,700)
Collections on notes receivable 25,000
Cash balance, Dec. 31, 2015 P353,300
Units sold (P920,000/P50) 18,400
32. D Accounts payable:
Balance, Dec. 31, 2014 P75,000
Purchases 596,700*
Cash payments on accounts payable (471,700)
Balance, Dec. 31, 2015 P200,000
*Purchases:
Month Unit Cost Units Total Cost
January P32.60 1,500 P48,900
February 32.70 1,500 49,050
March 32.80 1,500 49,200
April 32.90 1,500 49,350
May 33.00 1,500 49,500
June 33.10 1,500 49,650
July 33.20 1,500 49,800
August 33.30 1,500 49,950
September 33.40 1,500 50,100
October 33.50 1,500 50,250
November 33.60 1,500 50,400
December 33.70 1,500 50,550
Total purchases 18,000 P596,700
Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700
33. A Inventory, Dec. 31, 2014 (P199,875/P32.50) 6,150

Purchases 18,000
Units sold (18,400)
Inventory, Dec. 31, 2015 5,750
34. C FIFO cost of inventory, Dec. 31, 2015:
December purchases 1,500 x P33.70 P 50,550
November purchase 1,500 x P33.60 50,400
October purchase 1,500 x P33.50 50,250
September purchase 1,250 x P33.40 41,750
5,750 P192,950
35. D Inventory, Jan. 1, 2015 P199,875
Purchases 596,700
Goods available for sale 796,575
Inventory, Dec. 31, 2015 (192,950)
Cost of goods sold P603,625
PROBLEM 5 – ISIDRO MANUFACTURING COMPANY
36. B Depreciation expense for 2012:

Truck #1 (P180,000/5) P 36,000
Truck #2 (P220,000/5) 44,000
Truck #3 (P300,000/5 x ½) 30,000
Truck #4 (P240,000/5) 48,000
Truck #5 (P400,000/5 x ½) 40,000
Total P198,000
37. A Trade-in value of Truck #3 (P400,000-P220,000) P180,000

Book value of Truck #3:
Cost P300,000
A/D, 1/1/11 -0 7/1/12 (P300,000/5 x1.5) (90,000) 210,000
Loss on trade-in P 30,000
Page 12 of 15 Pages
AUDITING PROBLEMS
38. A Truck #2 P220,000

Truck #5 400,000
Truck #6 420,000 P1,040,000
Accumulated depreciation:
Truck #2 (fully depreciated 7/1/14) P220,000
Truck #5, 7/1/12 – 12/31/15 (P400,000/5 x 3.5) 280,000
Truck #6, 7/1/14 – 12/31/15 (P420,000/5 x 1.5) 126,000 626,000
Book value, 12/31/15 P414,000
39. C 2012 2013 2014 2015 Total

Truck #1 P36,000 -- -- -- P 36,000
Truck #2 44,000 P44,000 P22,000 -- 110,000
Truck #3 30,000 -- -- -- 30,000
Truck #4 48,000 48,000 24,000 -- 120,000
Truck #5 40,000 80,000 80,000 P80,000 280,000
Truck #6 -- -- 42,000 84,000 126,000
Correct P198,000 P172,000 P168,000 P164,000 P702,000
Per client 210,000 225,000 250,500 304,000 989,500
Over P 12,000 P 53,000 P82,500 P140,000 P287,500
40. B
PROBLEM 6 – NUNAL COMPANY
41. B Outstanding checks, November 30:

Check no. 792 P 7,500
799 21,150
Total P28,650
42. A Outstanding checks, December 31:

Check no. 806 P 57,000
807 78,000
810 21,000
812 48,000
817 33,000
819 21,000
822 36,000
823 39,000
824 87,000
825 6,000
826 33,000
Total P459,000
43. D Deposit in transit, November 30 P25,500
44. A Deposit in transit, November 30 P 25,500

Collections 2,121,900
Total 2,147,400
Deposits 2,033,400
Deposit in transit, December 31 P 114,000
Nov. 30 Receipts Disbursements Dec. 31

Unadjusted book balances P345,000 P2,297,400 P1,228,230 P1,414,170
Bank service charges:
November 30 (150) (150)
December 31 360 (360)
Notes collected by bank:
November 30 30,000 (30,000)
December 31 36,000 36,000
Unrecorded disbursement (815) 18,000 (18,000)
Adjusted book balances P374,850 P2,303,400 P1,246,400 P1,431,810
Nov. 30 Receipts Disbursements Dec. 31

Unadjusted bank balances P342,000 P2,493,900 P1,059,090 P1,776,810
Outstanding checks:
November 30 (28,650) (28,650)
Page 13 of 15 Pages
AUDITING PROBLEMS
December 31 459,000 (459,000)

Deposits in transit:
November 30 25,500 (25,500)
December 31 114,000 114,000
Error corrected (243,000) (243,000)
Erroneous bank charge 36,000 (36,000)
Adjusted bank balances P374,850 P2,303,400 P1,246,440 P1,431,810
45. D 46. C 47. B 48. C 49. D 50. B
PROBLEM 7 – MINA MINING CO.
Depletable/Depreciable Cost Estimated Reserves Depletion/Depreciation

Mineral property P48,450,000 1 150,000 P323
Building 12,000,000 150,000 80
Machinery (1/2) 1,800,000 150,000 12
Machinery (1/2) 1,800,000 150,000 24 2
1
P50,000,000 – P1,550,000
2 (P1,800,000/150,000) x2
51. C Year 1
Mineral property (P323 x 7,500) P2,422,500
Building (P80 x 7,500) P600,000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) (P24 x 7,500) 180,000
P2,422,500 P870,000
52. D Year 5
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 15,000) 360,000
P4,845,000 P1,740,000
53. C Year 6
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 7,500) 180,000
P4,845,000 P1,560,000
54. C Year 7
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) --
P4,845,000 P1,380,000
55. D Year 11
Building (P80 x 7,500) P600,000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) ---
P2,422,500 P690,000
PROBLEM 8 – HVR Company
56. D Present value of principal (P3,600,000 x 0.7514) P2,705,040

Present value of interest (P3,600,000 x 5% x 2.4860) 447,480
Consultation service fee revenue P3,152,520
Page 14 of 15 Pages
AUDITING PROBLEMS
57. D Interest Principal Total PVF Present Value

12/31/15 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/16 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/17 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 1,684,800
Present value of note P6,037,258
Carrying amount of equipment 4,800,000
Gain on sale of equipment P1,237,258
Note receivable from sale of land:

Date Interest Income Carrying Amount
1/1/15 --- P2,181,960*
12/31/15 P218,196 2,400,156
12/31/16 239,844** 2,640,000
* P2,640,000 principal x 0.8265 PVF at 10% for 2 periods.
** P2,640,000 - P2,400,156
Note receivable from consultation:

Effective Nominal Discount Carrying
Date Interest Interest Amortization Amount
1/1/15 --- --- --- P3,152,520
12/31/15 P315,252 P180,000 P135,252 3,287,772
12/31/16 328,777 180,000 148,777 3,436,549
12/31/17 343,451** 180,000 163,451* 3,600,000
* P3,600,000 – P3,436,549 = P163,451

** P163,451 + P180,000 = P343,451
Note receivable from sale of equipment:

Effective Nominal Principal Carrying
Date Interest Interest Amortization Collection Amount
1/1/15 --- --- --- ---- P6,037,258
12/31/15 P845,216 P288,000 P557,216 P2,400,000 4,194,474
12/31/16 587,226 192,000 395,226 2,400,000 2,189,700
12/31/17 306,300* 96,000 210,300 2,400,000 ---
* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300
58. C Note receivable from consultation P3,287,772

Note receivable from sale of equipment 2,189,700
Noncurrent notes receivable, Dec. 31, 2015 P5,477,472
59. C Note receivable from sale of land P2,400,156

Note receivable from sale of equipment (P4,194,474 – P2,189,700) 2,004,774
Total current notes receivable, Dec. 31, 2015 P4,404,930
60. C Note receivable from sale of land P218,196

Note receivable from consultation 315,252
Note receivable from sale of equipment 845,216
Total interest income on notes receivable for 2015 P1,378,664
---END---
Page 15 of 15 Pages

Auditing Problems Test Bank Adjustments

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Auditing Problems Test Bank Adjustments

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AUDITING PROBLEMS TEST BANK - 1

Retained earnings, January 1 P 1,322,010

(a) Cost of inventory in the possession of consignees as of December 31, 2017,

(g) Interest earned but not accrued............................................................................P1,680

(j) Income tax rate (on all items)..................................................................................30%

Compute the adjusted balances of the following:

2. Cost of goods available for sale

3. Inventory, December 31, 2015

6. Allowance for doubtful accounts

8. Income from continuing operations before taxes

9. Office supplies inventory

10. Net income

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following

b. A P182,000 shipment of goods to a customer on December 30, 2017, terms FOB

Determine the adjusted balances of the following on December 31, 2017:

12. Accounts receivable

14. Accounts payable

15. Current ratio

The following are independent situations:

Date Item Debit Credit

18. Recorded depletion expense was

19. Recorded depreciation expense was

Presented below are unrelated situations.

Cost Fair Value

Expenditures on the project were as follows:

January 3, 2016 P2,500,000

26. What is the amount of capitalizable interest in 2016?

27. What is the amount of capitalizable interest in 2017?

28. What amount of interest should be expensed in 2016?

29. What amount of interest should be expensed in 2017?

The following actual events occurred in years 1 to 3:

The share price has increased to P24.

The share price only reaches P28 by the end of year 3.

31. Compensation expense for year 1

32. Compensation expense for year 2

33. Compensation expense for year 3

34. Share options outstanding at the end of year 2

35. Cumulative compensation expense for the three-year period

Preference share capital, P100 par, authorized 100,000 shares,

Preference share capital, 8%, P100 par (200,000 shares authorized,

3. Reissued 21,000 treasury shares for land valued at P900,000.

4. Issued 15,000 preference shares at P105 per share.

8. Reported net income of P9,900,000 for the current year.

41. December 31, 2010

BARTOLO COMPANY has provided information on intangible assets as follows:

The following are two (2) unrelated situations.

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

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

49. What is the corrected pretax income for 2016?

50. What is the corrected pretax income for 2017?

The following are two (2) unrelated situations.

Containers held by customers at

54. What amount of warranty expense would be reported for 2017?

Date Particulars Debit Credit Balance

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

Your review of the reconciliation statement disclosed the following:

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%

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

IV. AUDIT OF NOTES RECEIVABLE