SOLUTION

AUDITING PROBLEMS
PROBLEM 1 – TGR Company – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT (PPE)

1. D Trade-in – June 30, 2016

CostP157,200
Accum. depreciation, 1/1/14 – 6/30/16 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50,400
Sale – Jan. 1, 2017
CostP132,000
Accum. depreciation, 1/1/14 – 1/1/17 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2018
CostP120,000
Accum. depreciation, 1/1/14 – 10/1/18 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

2. C Machine acquired on Sept. 30, 2014 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2015 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2016 (list price) 279,000
Total P700,200

3. C Machine acquired on:

Sept. 30, 2014 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2015 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2016 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2018 P462,240

4. B
Date of
Acquisition Cost 2014 2015 2016 2017 2018 Total
1/1/14 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
9/30/14 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/15 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/16 279,000 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)statementP 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)

5. A Depreciation expense (2018) 75,807

Retained earnings (2014 – 2017) 61,215
Accumulated depreciation 137,022
 Page 2

PROBLEM 2 – NUNAL COMPANY – AUDIT OF CASH

1. 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

2. 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)
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
 Outstanding checks, November 30:
Check no. 792 P 7,500
799 21,150
Total P28,650

3. C

4. B

5. C

Page 3

PROBLEM 3 – LUKAS COMPANY – AUDIT OF ACCOUNTS RECEIVABLE (CONFIRMATION)

1. A Sales returns and allowance 90,000

Accounts receivable 90,000

Inventory 72,000
Cost of sales 72,000
(P90,000 x 80%)

Net decrease in income (P90,000 – P72,000) P18,000

2. A Sales 30,000
Accounts receivable 30,000

Income overstated by P30,000

3. D Overstatement of receivable Lazaro (P150 x 320 units) P48,000

4. A Correctly stated because the goods are considered sold in 2015.

5. D Accounts payable 135,000

Accounts receivable 135,000
 Page 4

PROBLEM 4 – HVR Company – AUDIT OF NOTES RECEIVABLE

1. 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

2. D Interest Principal Total PVF Present Value

12/31/18 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/19 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/20 (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
1/1/18 --- P2,181,960*
12/31/18 P218,196 2,400,156
12/31/19 239,844** 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
1/1/18 --- --- --- P3,152,520
12/31/18 P315,252 P180,000 P135,252 3,287,772
12/31/19 328,777 180,000 148,777 3,436,549
12/31/20 343,451** 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
1/1/18 --- --- --- ---- P6,037,258
12/31/18 P845,216 P288,000 P557,216 P2,400,0004,194,474
12/31/19 587,226 192,000 395,226 2,400,0002,189,700
12/31/20 306,300* 96,000 210,300 2,400,000---

* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300

3. C Note receivable from consultation P3,287,772

Note receivable from sale of equipment 2,189,700
Noncurrent notes receivable, Dec. 31, 2018 P5,477,472

4. 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, 2018 P4,404,930

5. 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 2018 P1,378,664

Page 5

PROBLEM NO. 5 – iBELIEVE, INC. – AUDIT OF SHAREHOLDERS’ EQUITY

JOURNAL ENTRIES

Jan. 1 Land 1,020,000

Organization expense 420,000
Ordinary shares (P10 x 3,000) 300,000
Share premium – ordinary 1,140,000

Feb. 23 Cash (P150 x 60,000) 9,000,000

Preference shares (P100 x 60,000) 6,000,000
Share premium – preference shares 3,000,000

Share premium – preference 450,000

Cash 450,000

Mar. 10 Cash (P390 x 18,000) 7,020,000

Ordinary shares (P10 x 18,000) 180,000
Share premium – ordinary 6,840,000
 Share premium – ordinary shares 150,000
Cash 150,000

April 10 Subscriptions receivable (P450 x 24,000) 10,800,000

Subscribed ordinary shares (P10 x 24,000) 240,000
Share premium – ordinary 10,560,000

July 14 Cash 1,440,000

Ordinary shares (P10 x 3,600) 36,000
Share premium – ordinary 1,404,000

14 Building 3,060,000
Ordinary shares (P10 x 4,200) 42,000
Share premium – ordinary (P400 – P10 = P390 x 4,200) 1,638,000
Preference shares (P100 x 8,400) 840,000
Share premium – preference (P1,380,000 – P840,000) 540,000

Fair value of building P3,060,000

MV of ordinary shares (P1,440,000/3,600 =
P400 x 4,200) 1,680,000
Assumed MV of preference shares P1,380,000

Aug. 3 Cash 8,400,000

Subscriptions receivable 8,400,000

3 Subscribed ordinary shares 120,000

Ordinary shares (P10 x 12,000) 120,000

Dec. 31 Income summary 3,600,000

Retained earnings 3,600,000

31 Retained earnings 2,280,000

Dividends payable 2,280,000

Preference (60,000 + 8,400 = 68,400 x P10) P 684,000

Ordinary (30,000 + 18,000 + 3,600 + 4,200 +
12,000 + 12,000 subscribed = 79,800 x P20) 1,596,000
P2,280,000

Page 6

Preference Share premium - Ordinary Share premium - Retained

shares preference shares shares ordinary shares Earnings
Jan 1 P 300,000 P1,140,000
Feb 23 P6,000,000 3,000,000
23 (450,000)
Mar 10 180,000 6,840,000
(150,000)
Apr 10 10,560,000
July 14 840,000 540,000 36,000 1,404,000
 42,000 1,638,000
Aug. 3 120,000
Dec. 31 (2,280,000)
Net income 3,600,000
P6,840,000 P3,090,000 P678,000 P21,432,000 P1,320,000
(1-C) (2-B) (3-D) (4-A)

5. Preference shares P6,840,000

Share premium – preference shares 3,090,000
Ordinary shares 678,000
Share premium – ordinary shares 21,432,000
Subscribed ordinary shares (P240,000 – P120,000) 120,000
Subscriptions receivable (P10,800,000 – P8,400,000) (2,400,000)
Retained earnings 1,320,000
Total shareholders’ equity (D) P31,080,000
 Page 7

PROBLEM 6 – MAYON CORPORATION – AUDIT OF TRADING SECURITIES

1. Interest income:
Tipo Co. bonds, Jan. 1 – July 1
(P800,000 x 7% x 6/12) P28,000
Turkey Co. bonds:
Jan. 1 – April 1 (P1,200,000 x 7 ½% x 3/12) 22,500
April 1 – Dec. 31 (P600,000 x 7 ½% x 9/12) 33,750
Toll Co. bonds (P500,000 x 8% x 2/12) 6,667
Dividend income 500
Total P91,417

Answer: C

2. Gain on sale of Turkey bonds:

Sales price (P600,000 x 102%) P612,000

Carrying amount (P1,218,900 x ½) 609,450 P 2,550

Gain on sale of Tipo bonds:

Sales price (P800,000 x 97 ½%) P780,000

Carrying amount 774,000 6,000
Total P8,550

Answer: C

3. Carrying Fair Increase

Security Amount Value (Decrease)
Concave Co. ordinary P243,000 P220,000 P(23,000)
Turkey bonds 609,450 610,500 1,050
Newman, Inc. ordinary 116,000 116,750 750
Toll Co. bonds 505,000 505,000 --
Totals P1,473,450 P1,452,250 P(21,200)

Unrealized loss on trading securities P21,200

Answer: B

4. Trading securities, at fair value P1,452,250

Answer: D

5. Sales price (P600,000 x 101%) P606,000

Carrying amount 610,500
Loss on sale of Turkey Bonds P 4,500

Answer: A
 Page 8

PROBLEM 7 – BANAWE COMPANY – AUDIT OF INTANGIBLE ASSETS

1. C PATENTS
Balance per books, Dec. 31, 2018 P1,650,000
Unamortized balance of P225,000 erroneously charged to account
in January 2015 (P225,000 x 7/10) (157,500
Corrected balance before 2018 amortization 1,492,500
2018 amortization:
Patent with 2 years remaining life (P630,000 x 7/14 = P315,000/2 years) (157,500)
Remaining patent (P1,492,500 – P315,000 = P1,177,500/7 years) (168,214
Carrying value, December 31, 2018 P1,166,786

2. A FRANCHISE AGREEMENT
Balance per books, December 31, 2018 P285,000
Annual payment charged to account (135,000
Corrected balance before 2018 amortization 150,000
2018 amortization (P150,000/5 years) (30,000
Carrying value, December 31, 2018 P120,000

3. B Organization costs, December 31, 2018 P0

4. D Goodwill, December 31, 2018 P600,000

5. D Patent amortization for 2018 (P157,500 + P168,214) P325,714

 Page 9

PROBLEM NO. 8 – SANDOVAL COMPANY – COMPUTATION OF CASH SHORTAGE

Nov. 30 Receipts Disb. Dec. 31

Bank balances P 16,500 P173,700 P 65,200 P125,000
Undeposited collections:
Nov. 30 500 (500)
Dec. 31 6,300 6,300
Outstanding checks:
Nov. 30 (5,300) (5,300)
Dec. 31 46,300 (46,300)
Erroneous bank charges:
Nov. 30 2,000 (2,000)
Dec. 31 (3,000) 3,000
Erroneous bank credits
Nov. 30 (500) (500)
Dec. 31 (600) (600)
Adjusted bank balances P 13,200 P176,900 P102,700 P 87,400

Nov. 30 Receipts Disb. Dec. 31

Book balances P 20,200 P178,000 P 95,800 P102,400
Underfooting of receipts 9,000 9,000
Overfooting of disbursements (4,000) 4,000
Bank collection 5,000 5,000
Corrected book balances P 20,200 P192,000 P 91,800 P120,400
Adjusted bank balances 13,200 176,900 102,700 87,400
Shortage as of Nov. 30 P 7,000
Unaccounted receipts P 15,100
Unsupported/unrecorded disbursements P 10,900
Shortage as of December 31 P 33,000
1.B

2.D

3.B

4.C

5. C

Page 10

PROBLEM 9 – AUDIT OF INVENTORIES

SUMMARY OF WORKING PAPER ADJUSTMENTS

Debi t ( Credit )
Retained Beginning Accounts Accounts Ending
No. Earnings Purchases Inventory Receivable Sales Payable Inventory

1 P75,000 (P75,000) - - - - -
2 (39,600) - P39,600 - - - -
3 - - - P129,000 (P129,000) - -
4 - 45,000 - - - (P45,000) -
5 - - - - - - P54,000
6 - 36,000
- - - (36,000) 36,000
P35,400 P 6,000 P39,600 P129,000 (P129,000) (P81,000) P90,000

1. Retained earnings 75,000

Purchases 75,000

Answer: B
2. Accounts receivable 129,000
Sales 129,000

Answer: A

3. Inventory per client-prepared income statement P300,000

Add: Item no. 5 P54,000
Item no. 6 36,000 90,000
Adjusted inventory, December 31 P390,000

Answer: A

4. Net adjustment to purchases – increase P6,000

Answer: C

5. Inventory, Jan. 1 (P240,000 + P39,600) P 279,600

Add: Purchases (P4,800,000 + P6,000) 4,806,000
Cost of goods available for sale P5,085,600
Less: Inventory, Dec. 31 (P300,000 + P90,000) 390,000
Cost of goods sold P4,695,600

Answer: D

Page 11

PROBLEM 10 – BUNCHING COMPANY – AUDIT OF VARIOUS WORKING CAPITAL ACCOUNTS

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

(1 – C) (2 – B) (3 – A) (4 – 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
Accounts payable 372,400

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
Accounts payable 217,500
Inventory 217,500
Cost of sales 217,500

e Inventory 275,000
Cost of sales 275,000

f No adjusting entry

5. 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

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