BALIWAG POLYTECHNIC COLLEGE

PRE WEEK MATERIALS FOR AUDITING PROBLEMS

J. VILLENA, CPA

PROBLEM 1 RESA Anna Corp. uses the direct method to prepare its statement of cash flows. Anna Corp.s trial
balances at December 31, 2014 and 2013 are as follows:

Debits 12/31/14 12/31/13

Cash P 35,000 P 32,000
Accounts Receivable P 33,000 P 30,000
Inventory P 31,000 P 47,000
Property, plant and equipment P 100,000 P 95,000
Unamortized bond discount P 4,500 P 5,000
Cost of goods sold P 250,000 P 380,000
Selling expense P 141,500 P 172,000
General and Administrative expenses P 137,000 P 151,300
Interest expense P 4,300 P 2,600
Income tax expense P 20,400 P 61,200
P 756,700 P 976,100

Credits 12/31/14 12/31/13

Allowance for uncollectible accounts P1,300 P 1,100
Accumulated Depreciation P 16,500 P 15,000
Trade account payable P 25,000 P 17,500
Income taxes payable P 21,000 P 27,100
Deferred tax liability P 5,300 P 4,600
8% callable bonds payable P 45,000 P 20,000
Share capital P 50,000 P 40,000
Share premium P 9,100 P 7,500
Retained Earnings P 44,700 P 64,600
Sales P 538,800 P 778,700
P 756,700 P 976,100

Ford purchased P 5,000 in equipment during 2014.

Ford allocated one-third of its depreciation expenses to selling expenses and the remainder to general and
administrative expenses.

QUESTIONS:
1. Cash collected from customers?
2. Cash paid for goods to be sold?
3. Cash paid for interest?
4. Cash paid for income taxes?
5. Cash paid for selling expenses?

PROBLEM 2 RESA In connection with your audit of the financial statements of ALDUB COMPANY for the year ended
December 31, 2016, you gathered the following information.

1. The company maintains its current account with Tsunami Bank. The bank statement on December 31, 2016,
showed a balance of P 638,340.

Your audit of the companys account with Tsunami Bank disclosed the following:
A check for P 22,500 received from a customer whose account is current had been deposited
and then returned by the bank on December 28, 2016. No entry was made for the return of this
check. The customer replaced the check on January 15, 2017.
A check for P 5,720 was cleared by the bank as P 7,520. The bank made the correction on
January 2, 2017.
A check for P 3,500 representing payment of an employee advance was received and
deposited on December 27, 2016, but was not recorded until January 3, 2017.
Post-dated checks totalling P 67,300 were included in the deposits in transit. These represent
collections of current accounts receivable from customers. The checks were actually deposited
on January 5, 2017.
Various debit memos for drafts purchased for payment of importation of equipment totalling P
230,000 were not yet recorded. These purchases were previously set up as accounts payable.
Said equipment arrived in December 2016.
Interest earned on the bank balance for the 4 th quarter of 2016, amounting to P 1,950 was not
recorded.
Bank service charges totalling P 1,260 were not recorded.
Deposit in transit and outstanding checks at December 31, 2016, totalled P 136,250 and P
276,380, respectively.

2. Various expenses from the companys imprest petty cash fund dated December 2016 totalled P 16,250,
while those dated January 2017 amounted to P 5,903. Another disbursement from the fund dated December
2016 was a cash advance to an employee amounting to P 3,500. A replenishment of the petty cash fund was
made on January 8, 2017.

3. The companys trial balance on December 31, 2016, includes the following accounts:
Cash in bank-Tsunami Bank P 748,320
Cash in bank-Earthquake bank (restricted from plant
Expansion, disbursed in 2017) P 700,000
Petty cash fund P 30,000
Time deposit, placed December 20, 2016,
And Due March 20, 2017 P 1,000,000
Page 1 of 16 CPA, OCTOBER 2017
BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

Money market placement- BDO P 4,000,000

QUESTIONS:
1. What is the adjusted Petty cash fund balance on December 31, 2016?
2. The petty cash shortage on December 31, 2016, is
3. What is the adjusted Cash in bank- Tsunami Bank balance on December 31, 2016?
4. The entry to adjust the Cash in bank- Tsunami Bank account should include a debit to
5. The December 31, 2016, statement of financial position should show Cash and cash
equivalents at:

PROBLEM 3 The Valenzuela Corporation was organized on January 15, 2006 and started operation soon thereafter.
The Company cashier who acted also as the bookkeeper had kept the accounting records very haphazardly. The
manager suspects him of defalcation and engaged you to audit his account to find out the extent of the fraud, if there
is any.

On November 15, when you started the examination of the accounts, you find the cash on hand to be P25,700. From
inquiry at the bank, it was ascertained that the balance of the Companys bank deposit in current account on the same
date was P131,640. Verification revealed that the check issued for P9,260 is not yet paid by the bank. The corporation
sells at 40% above cost.

Your examination of the available records disclosed the following information:

Capital stock issued at par for cash P1,600,000

Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which there
is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780

QUESTIONS:

Based on the above and the result of your audit, compute for the following as of November 15, 2006:
1. Collections from sales
2. Payments for purchases
3. Total cash disbursements
4. Unadjusted cash balance
5. Cash Shortage

PROBLEM 4 You obtained the following information on the current account of Baht Company during your examination
of its financial statements for the year ended December 31, 2005.

The bank statement on November 30, 2005 showed a balance of P76,500. Among the bank credits in November was
customers note for P25,000 collected for the account of the company which the company recognized in December
among its receipts. Included in the bank debits were cost of checkbooks amounting to P300 and a P10,000 check
which was charged by the bank in error against Baht Co. account. Also in November, you ascertained that there were
deposits in transit amounting to P20,000 and outstanding checks totaling P42,500.

The bank statement for the month of December showed total credits of P104,000 and total charges of P51,000. The
companys books for December showed total receipts of

P183,900, disbursements of P101,800 and a balance of P121,400. Bank debit memos for

December were: No. 143 for service charges, P400 and No. 145 on a customers returned check marked DAIF for
P6,000.

On December 31, 2005, the company placed with the bank a customers promissory note with a face value of
P30,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on
the note only in January, 2006.

A check for P990 was recorded in the company cash payments books in December as P9,900.

QUESTIONS:

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

1. How much is the undeposited collections as of December 31, 2005?

2. How much is the outstanding checks as of December 31, 2005?
3. How much is the adjusted cash balance as of November 30, 2005?
4. How much is the adjusted bank receipts for December?
5. How much is the adjusted book disbursements for December?
6. How much is the adjusted cash balance as of December 31, 2005?

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BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

PROBLEM 5
The following balances are excerpt from Mall Company.
Cash collected from customers 685,300
Cash Payments for:
Inventory purchases 300,000
General Expenses 102,000
Wages Expenses 150,000
Interest Expenses 11,000
Income tax expense 23,900

Sale of property, plant and equipment 27,200

Purchase of property, plant and equipment 60,000

Retirement of bonds payable 23,000

Payment of dividends 42,000
Cash beginning of the year 3,400

2014 2013
Cash 4,000 3,400
Accounts Receivable 25,000 18,000
Inventory 30,000 34,000
Prepaid, general expense 5,700 5,000
Property, plant and equipment 305,000 320,000
Accumulated Depreciation 103,500 128,900
Patent 36,000 40,000
Accounts Payable 25,000 22,000
Wages Payable 12,000 13,200
Interest Payable 2,800 4,000
Dividends Payable 14,000 0
Income taxes Payable 1,600 1,200
Bonds Payable 100,000 120,000
Share Capital 50,000 50,000
Retained Earnings 96,800 84,000
Consider the following additional data:
a. All accounts payable relate to inventory purchase
b. PPE sold had an original cost of 75,000 and a carrying amount of 22,000.

Determine the following for the year ended December 31, 2014:
1. Cost of Goods Sold
2. Depreciation Expense
3. Total Operating expense
4. Loss on retirement of bonds payable
5. Net Income

PROBLEM 6 Loren Company, a public entity, assesses performance and makes operating decisions using the
following information for the reportable segments: Total revenue 7,680,000 and Total profit 500,000. The total profit
included intersegment profit of 61,000. In addition the entity has 5,000 common costs for the reportable segments that
are not allocated in reports provided by the chief operating decision maker. For purposes of segment reporting, what
amount should be reported as segment profit?

Presented below are the condensed income statements of ALBUD CORPORATION for the years ended
December 31, 2014 and 2013.
2014 2013
Sales 5,000,000 4,900,000
Cost of Goods sold 3,350,000 3,300,000
Operating expense 675,000 650,000
Gain on sale of division 200,000 0

Income tax rate is 30%.

On October 10, 2014, ALDUB entered into an agreement to sell the assets of one of its geographical segments.
The geographical segment comprises operations and cash flows that can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the company. The segment was sold on December 31, 2014
for 1,750,000. The book value of segments assets was 1,550,000. The segments asset was 1,550,000. The
segments contribution to ALDUB operating income before tax for each year was as follows: 2014 (113,750 loss);
2013 (81,250 income)
Based on the above data, calculate the following:
1. Income from continuing operations in 2013
2. Income from continuing operations in 2014
3. Net Income 2013
4. Net Income 2014
5. Assume that by December 31, 2014, the segment has not yet been sold but was considered held for
sale. The fair value of the segments assets on December 31 was 1,750,000. The post-tax income (loss)
from discontinued operations for 2014 should be:
6. Assume that by December 31, 2014, the segment has not yet been sold but was considered held for
sale. The fair value of the segments assets on December 31 was 1,250,000. The post-tax income (loss)
from discontinued operations for 2014 should be:

Page 3 of 16 CPA, OCTOBER 2017

BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

PROBLEM 7 In connection with your examination of the financial statements of Nagbukel, Inc. for the year ended
December 31, 2006, you were able to obtain certain information during your audit of the accounts receivable and
related accounts.

The December 31, 2006 balance in the Accounts Receivable control accounts is P788,000.

The only entries in the Doubtful Accounts Expense account were:

A credit for P1,296 on December 2, 2006 because Company A remitted in full for the accounts charged off on
October 31, 2006; and
A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is follows:

Debit Credit Balance

January 1, 2006 P14,632

October 31, 2006

Uncollectible accounts:

Company A P1,296

Company B P3,280

Company C P2,256 P6,032 8,600

December 31, 2006 P39,400 P48,000

An aging schedule of the accounts receivable as of December 31, 2006 is presented below:

Amount to which the Allowance is

Net debit to be adjusted after adjustments

Age balance and corrections have been made

0 to 1 month P372,960 1 percent

1 to 3 months 307,280 2 percent

3 to 6 months 88,720 3 percent

Over 6 months 24,000 Definitely uncollectible, P4,000;

P8,000 is considered 50%

uncollectible; the remainder is

estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an advance on a sales
contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of P2,000 for which
merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable control account is not
in agreement with the subsidiary ledger. The difference cannot be located, and you decided to adjust the control
account to the sum of the subsidiaries after corrections are made.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of Accounts Receivable as of December 31, 2006?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2006?
3. How much is the net adjustment to the Allowance for Doubtful Accounts?
4. How much is the Doubtful Accounts expense for the year 2006?
5. How much is the net adjustment to the Doubtful Accounts expense account?

PROBLEM 8 Unless otherwise identified, the notes receivable of the Quirino Company on December 31, 2006, were
trade notes receivable. On this date the balance of the account, P3,036,915, consisted of the following notes all
received during the calendar year under audit:

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BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

Maker Date Term Rate Amount Remarks

A Co. Oct. 1 6 mos. 18% P 57,416 Four notes to settle

Oct. 1 12 mos. 18% 100,000 past due account.

Oct. 1 18 mos. 18% 100,000 Current billings are

Oct. 1 24 mos. 18% 100,000 on a 10 day credit

basis.

B Co. July 1 36 mos. 18% 500,000 This note is for a

cash loan made to

this customer. No

interest has been

collected to date.

C Co. Oct. 1 4 mos. 15% 251,636 All interest collected

on Oct. 1.

Mr. Pogi Feb. 1 Demand 18% 1,000,000 Loan approved in

(Company minutes book, Jan.

President) 20. On Aug. 1 this

note was pledged as

collateral for a bank

loan P500,000.

D Co. Nov. 1 12 mos. 15% 546,387 Interest payable at

maturity

E, Inc. Dec. 90 days 18% Interest payable at

10 381,476 maturity

P3,036,915

All of the above notes are considered good except that of A Company which is somewhat doubtful. An allowance of
25% should be established against the notes receivable of this company.

QUESTIONS:

Based on the above and the result of your audit, compute the following:

1. Adjusted balance of Trade Notes Receivable as of December 31, 2006

2. Net realizable value of Trade Notes Receivable as of December 31, 2006
3. Interest income for the year ended December 31, 2006
4. Accrued interest income as of December 31, 2006

PROBLEM 9

INVENTORY

A physical count of inventory at December 31, 2016, revealed that Bagsak had inventory on hand at that date with a
cost of P 1,400,000. The annual audit disclosed that the following items were excluded from this amount and the
related transactions were not recorded.

Merchandise of P 183,000 is held by Bagsak on consignment.

Merchandise costing P 119,000 was shipped by Bagsak, FOB shipping point, to a customer on December
31, 2016. The customer was expected to receive the goods on January 6, 2017.
Merchandise costing P 138,000 was shipped by Bagsak, FOB shipping point, to a customer on December
29, 2016. The customer was scheduled to receive the goods on January 2, 2017.

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 BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

Merchandise costing P 249,000 shipped by the vendor, FOB destination, on December 31, 2016, was
received by Bagsak on January 4, 2017.
Merchandise costing P 163,000 purchased under FOB shipping point term was shipped by the supplier on
December 31, 2016, and received by Bagsak on January 5, 2017.

ACCOUNTS RECEIVABLE

The account receivable consists of the following:

Trade account receivable P 2,950,000

Allowance for uncollectible accounts (160,000)
Claims against shipper for goods lost in transit 190,000
Selling price of unsold goods sent by Bagsak on
consignment at 130% of cost
(included in Bagsak physical count) 780,000
Security deposit on lease of warehouse used
for storing some inventories 900,000
Total P 4,660,000

CASH
The sales book was left open up to January 5, 2017, and cash sales totaling P 550,000 were considered as
sales in December.
Checks of P 179,000 in payment of liabilities were prepared before December 31, 2016, recorded in the
books, but not mailed or delivered to payees.
Post-dated checks totaling P 334,000 are being held by the cashier as part of cash. The companys
experience shows that post-dated checks are eventually realized.
Customers check for P 45,000 deposited but returned by bank, NSF on December 27, 2016. The return
was recorded on the company books.
The cash account includes P 1,500,000 of compensating balance against a short-term bank loan. The
compensating balance is legally restricted as to withdrawal.

DEFFERED TAX ASSET

Expected to be reverse next year.

The general ledger trial balance of BAGSAK COMPANY includes the following statement of financial statement
accounts at December 31, 2016:
Cash P 4,168,000
Accounts Receivable 4,660,000
Inventory 2,323,000
Listed invested held for trading purposes at fair value 600,000
Prepaid insurance 150,000
Deferred tax asset 450,000
Bank overdraft 300,000

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted amounts of the following:

1. Cash
2. Net account receivable
3. Trade and other receivable, net
4. Inventory
5. Current Asset

PROBLEM 10 On January 1, 2015, the shareholders equity section of DIPAPASA, INC.s statement of financial
position disclosed the following information:
12.5% Convertible preference shares (P40 par value;
150,000 shares authorized, 60,000 shares issued
and outstanding) P 3,400,000
Ordinary shares P40 par value; 150,000 shares
authorized, 60,000 shares issued
and outstanding) 2,800,000
Share Premium 10,000,000
Retained Earnings 14,500,000
Total shareholders equity P 30,700,000

The following equity transactions occurred during 2015 and 2016.

On February 2, 2016, 45,000 ordinary shares were acquired by the company for P 33 per share.
On September 30, 2015, 15,000 preference shares were converted to ordinary shares. One preference
shares is convertible into one ordinary share. At the time of conversion, the ordinary shares had a market
value of P 42,000 per share.
On December 21, 2015, the company placed a share subscription of 30,000 ordinary shares at a
subscription price of P 33 per share. The subscription contract required a cash down payment equal to 60%
of the subscription price, with the balance due on February 1, 2016.
On February 1, 2016, 25,500 ordinary shares were issued according to the subscription contract. Because of
default by a subscriber, 4,500 shares were not issued. The subscription contract requires the subscriber to
forfeit all cash advances.
On April 15, 2016, 30,000 shares held as treasury were reissued at P 50 per share.

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BALIWAG POLYTECHNIC COLLEGE
PRE WEEK MATERIALS FOR AUDITING PROBLEMS
J. VILLENA, CPA

On May 16, 2016, a special dividend of preference shares was distributed to ordinary shareholders. One
hundred ordinary shares entitled a shareholder to one preference share. The market price of preference
share was P 40 per share at all time.
Cash dividends are declared for preference and ordinary shares on October 31 and April 30 of each year.
Semiannual cash dividends for ordinary shares are P 0.50 per share.

DIPAPASA, INC. reported net income of P 1,980,000 in 2015 and P 2,670,000 in 2016.

QUESTIONS:

What are the balances of the following accounts on December 31, 2015?
Share Premium
Retained earnings (before appropriation)

What are the balances of the following accounts on December 31, 2016?
Share Premium
Retained earnings (before appropriation)
Ordinary Shares and Preference Shares

PROBLEM 11
In line with your audit of KAWAWAKA Corp.s investment account as of December 31, 2014, you ascertained the
following information:

Investment Type CV per books

Investment in Bonds P 4,000,000
Investment in stocks 6,200,000
Investment property 3,500,000

Audit Notes:

A. The investment in bonds which shall mature on December 31, 2016 were acquired in January 1, 2013 when
the prevailing market rate of interest was at 10%. Interest at 12% is collectible from the bonds every
December 31. The acquisition was recorded by the client as a debit to Investment in bonds at face value with
the difference between the face value and the total consideration given up to interest income. Interest
collected in 2013 and 2014 were appropriately recorded. No other entry relating to the investment was made
by the client. Further investigation revealed that the company business model with regard debt security
investment has an objective collecting contractual cash flows. The prevailing market rate of interest was at
11% and 9% at the end of 2013 and 2014 respectively.
B. The investment in stocks is for 40,000 shares of PLDT Corps ordinary shares acquired in September 30,
2013. The shares were originally acquired at P 145 per share. The book value of the net assets of PLDT
Corp. on this date was at P25M and its total outstanding shares were at 200,000. PLDTs depreciable assets
with average remaining life of 10 years were understated on this date.
The fair values of PLDTs shares were at P 155 per share at the end of 2013. The company recorded the re-
measurement (from the acquisition cost to fair value) of the investment at the end of 2013 and recognized
the same as unrealized holding gain in the 2014 profit/loss. The only other entry made by the client related to
the investment was the receipt of P2 per share dividend by the end of 2013 and P4 per share dividend in
2014 as dividend income.

Further investigation revealed the following information:

PLDT Corp. 2013 2014
Net income P 3,800,000 P 5,200,000
Foreign exchange loss - 400,000
Unrealized holding gain-OCI - 300,000
Fair Value 155/share 169/share

C. The investment property was a building-factory converted on June 30, 2014 as a property for lease since the
company decided to discontinue its production segment. The factory was originally acquired at P5M on
January 1, 2011 and was depreciated using SLM over 10 years useful life. The company elected to use the
fair value method in measuring its investment property. The fair value of the building on June 30, 2014 was
at P 3,600,000. On December 31, 2014, the fair value of the building as at P 3,200,000.

QUESTIONS:
1. What is the correct initial cost of the investment in bonds?
2. What is the correct carrying value of the investment in stocks as of December 31, 2014?
3. What is the correct carrying value of the investment in bonds as of December 31, 2014?
4. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of the
investment in stocks?
5. How much should be recognized in the statement of comprehensive income upon the reclassification of the
building from PPE to investment?

PROBLEM 12 You have been assigned to audit the financial statements of WAGUMASA COMPANY for the year
ended December 31, 2016. You discovered the following situations.

Merchandise inventory costing P 14,600 was in warehouse at December 31, 2015, but was incorrectly from
the physical count at that date. The company uses the periodic inventory method.
The company received P 108,000 from a customer at the beginning of 2015 for services that it is to perform
evenly over a 3-year period beginning in 2015. None of the amount received was reported as unearned
revenue at the end of 2015.
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J. VILLENA, CPA

On January 4, 2015, WAGUMASA COMPANY leased the building for a 5 year at a monthly rental of P
24,000. On that date, the company paid the following amounts, which were expensed when paid.
Security Deposit P 60,000
First months rent 24,000
Second months rent 24,000
P 108,000
Research cost of P 120,000 was incurred early in 2015. They were capitalized and were to be amortized
over a 4-year period. Amortization of P 30,000 was recorded in 2015 and 30,000 for 2016.
A computer costing P 65,000 was expensed when purchased on July 1, 2015. It is expected to have a 5-year
life with no residual value. The company typically uses SLM for PPE.
Interest income of P 46,500 was not accrued at the end of 2015. It was recorded when received in February
2016.

Assume all amounts are material and ignore the tax effects.

QUESTIONS:

1. WAGUMASA COMPANY net income in 2015 is understated/overstated by

2. WAGUMASA COMPANY net income in 2016 understated/overstated is by
3. The retained earnings reported on WAGUMASA COMPANY statement of financial position at December 31,
2016 is understated/overstated by

CONDITIONAL, INC. has used the accrual basis of accounting for several years. A review of the records, however,
indicates that some expenses and revenues have been handled on a cash basis because of errors made by an
inexperienced bookkeeper. Income statements prepared by the bookkeeper reported P 530,000 net income for 2015
and P 999,000 net income for 2016. Further examination of the records reveals that the following items were handled
improperly.

Invoices for office supplies purchased have been charged to expense accounts when received. Inventories
of supplies on hand at the end of each year have been ignored, and no entry has been made for them
December 31, 2014 P 39,000
December 31, 2015 P 28,200
December 31, 2016 P 42,600
Wages Payable on December 31 has been consistently omitted from the records of that date and has been
entered as expenses when paid in the following year. The amounts of accruals recorded in this manner were:
December 31, 2014 P 33,000
December 31, 2015 P 36,000
December 31, 2016 P 28,200
Rent was received from a tenant in December 2015. The amount P 120,000, was recorded as income at that
time even though the rental pertained to 2016.

QUESTIONS:

1. What is the corrected net income for the year 2015?

2. What is the corrected net income for the year 2016?

PROBLEM 13 A portion of PASSED COMPANYs statement of financial position appears as follows.

December 31, 2015 December 31, 2016

Assets:
Cash P 100,000 P 353,300
Notes Receivable 25,000 0
Inventory 199,875 ?
Liabilities:
Accounts payable 75,000 ?

Passed Company pays for all operating expenses with cash and purchases all inventory on credit. During 2016, cash
totaling P 471,700 was paid on accounts payable. Operating expenses for 2016 totaled P 220,000. All sales are cash.
The inventory was restocked by purchasing 1,500 units per month and valued using periodic FIFO. The unit cost of
inventory was P 32.60 during 1st month and increased by P 0.10 monthly during the year. Passed sells only one
product. All sales are made for P 50 per unit. The ending inventory for 2015 was valued at P 32.50 per unit.

Based on preceding information compute the following:

1. Number of units sold during 2016

2. Accounts payable balance at December 31, 2016
3. Inventory quantity on December 31, 2016
4. Cost of inventory on December 31, 2016
5. Cost of goods sold for the year ended December 31, 2016

PROBLEM 14 In 2011, Kieso Corporation acquired a silver mine in Benguet. Because the mine is located deep in the
Benguet mountains, Kieso was able to acquire the mine for the low price of P50,000. In 2002, Kieso constructed a
road to the silver mine costing P5,000,000. Improvements to the mine made in 2002 cost P750,000. Because of the
improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the
mining activities are complete.

During 2003, five buildings were constructed near the mine site to house the mine workers and their families. The
total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2001, geologists estimated 4

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J. VILLENA, CPA

million tons of silver ore could be removed from the mine for refining. During 2004, the first year of operations, only
5,000 tons of silver ore were removed from the mine. However, in 2005, workers mined 1 million tons of silver. During
that same year, geologists discovered that the mine contained 3 million tons of silver ore in addition to the original 4
million tons. Improvements of P275,000 were made to the mine early in 2005 to facilitate the removal of the additional
silver. Early in 2005, an additional building was constructed at a cost of P225,000 to house the additional workers
needed to excavate the added silver. This building is not expected to have any residual value.

In 2006, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at the beginning of the year for
improvements to the mine.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off depletion and depreciation rates
to two decimal places)
Depletion for 2004, 2005, 2006
Depreciation for 2005 and 2006

PROBLEM 15
Cavaliers Corporation is selling audio and video appliances. The companys fiscal year ends on March 31. The
following information relates to the obligations of the company as of March 31, 2005:

Notes payable
Cavaliers has signed several long-term notes with financial institutions. The maturities of these notes are given below.
The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2005.
Due date Amount
April 31, 2005 P 600,000
July 31, 2005 900,000
September 1, 2005 450,000
February 1, 2006 450,000
April 1, 2006 March 31, 2007 2,700,000
P 5,100,000

Estimated warranties
Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made
during the 2003 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty
costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs
incurred during 2004 2005 fiscal year are as follows:
Warranty claims honored on 2003 2004 sales P 252,000
Warranty claims honored on 2004 2005 sales 285,000
Total P 537,000

Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of March 31,
2005.

Dividends
On March 10, 2005, Cavaliers board of directors declared a cash dividend of P0.30 per common share and a 10%
common stock dividend. Both dividends were to be distributed on April 5, 2005 to common stockholders on record at
the close of business on March 31, 2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common
shares issued and outstanding.

Bonds payable
Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will mature on October 1, 2009.
Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight line method to amortize bond
discount.

QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2005:

1. 31. Estimated warranty payable

2. 32. Unamortized bond discount
3. 33. Bond interest payable
4. 34. Total current liabilities
5. 35. Total noncurrent liabilities

PROBLEM 16

Aliaga Corporation was incorporated on January 2, 2016. The following items relate to the Aliagas property and
equipment transactions:

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Cost of land, which included an old apartment building

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appraised at P300,000 P3,000,000

Apartment building mortgage assumed, including related
interest due at the time of purchase 80,000
Deliquent property taxes assumed by the Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building
more energy efficient 90,000
Interest cost on specific borrowing incurred during
construction 360,000
Payment of medical bills of employees accidentally injured
while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new
building 50,000
Cost of windows broken by vandals distracted by the
celebration 12,000

QUESTIONS:

Based on the above and the result of your audit, determine the cost of the following
1. Land
2. Building
3. Land improvement
4. Expenses
5. Depreciable PPE

PROBLEM 17 In conducting your audit of Mangatarem Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2006, you determined that its internal control system was good.
Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at June 30, 2006.

You obtained the following information from the companys general ledger.

Sales for eleven months ended May 31, 2006 P1,344,000

Sales for the fiscal year ended June 30, 2006 1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2006 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2006 220,000

Your audit disclosed the following additional information.

Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June
purchases.

Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product was shipped in July 2006.

A shipment in June was damaged through the carelessness of the receiving department. This shipment was later sold
in June at its cost of P16,000.

QUESTIONS:

In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to
test the reasonableness of the year-end inventory by the application of gross profit ratio. Based on the above and the
result of your audit, you are to provide the answers to the following:
The gross profit ratio for eleven months ended May 31, 2006 is
The cost of goods sold during the month of June, 2006 using the gross profit ratio method is
The June 30, 2006 inventory using the gross profit method is

PROBLEM 18 In connection with your audit of the Miriam Manufacturing Company, you reviewed its inventory as of
December 31, 2016 and found the following items:

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A packing case containing a product costing P 100,000 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked

Hold for shipping instructions. The customers order was dated December 18, but the case was shipped and the
costumer billed on January 10, 2017.

Merchandise costing P 1600,000 was received on December 28, 2016, and the invoice was recorded. The invoice
was in the hands of the purchasing agent; it was marked On consignment.

Merchandise received on January 6, 2007, costing P 700,000 was entered in purchase register on January 7. The
invoice showed shipment was made FOB shipping point on December 31, 2016. Because it was not on hand during
the inventory count, it was not included.

A special machine costing P 200,000, fabricated to order for a particular customer, was finished in the shipping room
on December 30. The customer was billed for P 300,000 on that date and the machine was excluded from inventory
although it was shipped January 4, 2017.

Merchandise costing P 200,000 was received on January 6, 2017, and the related purchase invoice was recorded
January 5. The invoice showed the shipment was made on December 29, 2016, FOB destination.

Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of
the goods on that date. The merchandise was included in inventory because Alcala still holds legal title. Historical
experience suggests that full payment on installment sale is received approximately 99% of the time.

Goods costing P 500,000 were sold and delivered on December 20. The goods were included in the inventory
because the sale was accompanied by a purchase agreement requiring Alcala to buy back the inventory in February
2017.

Question:
1. Based on the above and the result of your audit, how much of these items should be included in the inventory
balance at December 31, 2006?
A. P 1,300,000 C. P 1,650,000
B. P 800,000 D. P 1,050,000

PROBLEM 19 You were engaged by Grace Corporation for the audit of the companys financial statements for the
year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales at 25% over
cost.
The following were gathered from the clients accounting records:

SALE S P U R C HAS E S
Date Reference Amount Date Reference Amount
Balance forwarded P5,200,000 Balance forwarded P2,800,000
Dec. 27 SI No. 965 40,000 Dec. 28 RR No. 1059 24,000
Dec. 28 SI No. 966 150,000 Dec. 30 RR No. 1061 70,000
Dec. 28 SI No. 967 10,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 969 46,000 Dec. 31 RR No. 1063 64,000
Dec. 31 SI No. 970 68,000 Dec. 31 Closing entry (3,000,000)
Dec. 31 SI No. 971 16,000 P -

Dec. 31 Closing entry (5,530,000)

P -

Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P500,000

Inventory 600,000
Accounts payable 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving
Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices
whose number is larger than No. 968. You also obtained the following additional information:
Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year.
Cost was P 18,000.

On the evening of December 31, there were two trucks in the company siding:

Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving
Report No. 1063. The freight was paid by the vendor.

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Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for P 100,000 per Sales Invoice No. 968.

Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks
Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB
Destination, the next day.

Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report
No. 1064. The goods were shipped FOB Destination, and freight of P 2,000 was paid by the client. However,
the freight was deducted from the purchase price of P 800,000.

Based on the above and the result of your audit, determine the following:
Sales for the year ended December 31, 2015
Purchases for the year ended December 31, 2015
Inventory as of December 31, 2015
Accounts receivable as of December 31, 2015
Accounts payable as of December 31, 2015

PROBLEM 20 Information concerning HATHORIA Corporations intangible assets is as follows:

A. On January 1, 2016, Hathoria signed an agreement to operate as franchisee of ADAMYA Copy Service,
Inc. for an initial franchise fee of P 255,000. Of this amount, P 75,000 was paid when the agreement
was signed, and the balance is payable in four annual payments of P45,000 each beginning January 1,
2017. The agreement provides that the down payment is not refundable and no future services are
required of the franchisor. The present value at January 2, 2016 of the four annual payments discounted
at 14% (The implicit rate for a loan of this type) is P 131,100. The agreement also provides that 5% of
the revenue from the franchise must be paid to the franchisor annually. Hathorias revenue from the
franchise for 2016 was P 2,700,000. Hathoria estimates the useful life of the franchise to be 10 years.

B. Hathoria incurred P 234,000 of experimental and development cost in its laboratory to develop a patent,
which was granted on January 2, 2016. Legal fees and other costs associated with registration of the
patent totalled P 49,200. Hathoria estimates that the useful life of the patent will be 8 years.

C. A trademark was purchased from Sapiro Company for P 120,000 on July 1, 2013. Expenditures for
successful litigation in defense of the trademark totalling P 30,000 were paid on July 1, 2016. Hathoria
estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Questions:

1. What is the patents carrying value on December 31, 2016?

2. What is the franchises carrying value on December 31, 2016?
3. What is the trademarks carrying value on December 31, 2016?
4. What is the total franchise-related expense for the year ended December 31, 2016?
5. What is the total expenses resulting from the intangibles transactions for the year ended December
31, 2016?

PROBLEM 21 The Anda Company is on a calendar year basis. The following data were found during your
audit:

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a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been excluded
from the inventory, and further testing revealed that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly statement
from Hermie Company listed those materials as on hand, the items had been excluded from the final
inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final inventory. The
sale was properly recorded in 2005.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December
31, and were not included in the inventory. A review of the customers purchase order set forth terms as
FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as
yet. However, these materials costing P170,000 had been included in the inventory count, but no entry
had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms
of sale are FOB shipping point according to the suppliers invoice which had arrived at December 31.

Further inspection of the clients records revealed the following December 31, 2006 balances: Inventory,
P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, P5,050,000; Net
purchases, P2,300,000; Net income, P510,000.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balances of following as of December
31, 2006:

Inventory, Accounts Payable, Net sales, Net Purchases, Net Income

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PROBLEM 22 Nasaktan Sya Company has the following selected accounts in its shareholders equity
section as of December 31, 2015:

Preference Shares, P100 par, 10 percent cumulative,

100,000 shares issued and outstanding P10,000,000
Ordinary Shares, P20 par, 1,000,000 shares authorized,
700,000 shares issued and outstanding P14,000,000
Share Premium P 8,000,000
Accumulated Profits P30,000,000

There are no dividends in arrears on the preference shares. During 2016, the following transactions
occurred:

A. The board of directors declared a cash dividend totaling to P2,800,000 to be paid to preference
and ordinary shareholders. Later a share dividend of 100,000 ordinary shares were declared on
ordinary shares. The market capitalization is P68 per share on the date the share dividends were
declared.

B. Sometime after the above dividends were declared and settled, the BOD declared a dividends
one share of its investment in Nabigo Corp. stocks being held by the company as financial asset
at fair market value through profit or losses for every two-ordinary share outstanding. Nabigo
Corp. stocks were originally purchased by the company at P12 per share and have a carrying
value based on their fair value as per the last balance sheet date, at P20 per share. Nabigo Corp.
shares were selling at P24 when the property dividends were declared and were selling at P25
when the property dividends were settled. The company had a total of 600,000 shares of Nabigo
Corp. shares.

C. At the end of 2016, the board declares a four-for-one share split. With the split, the number of
ordinary shares authorized to be issued increased to 4,000,000. At the date of the share split, the
market value of ordinary shares is P75 per share.

D. Net earnings during 2016 total P6,000,000.

Required:

1. What is the correct debit to the accumulated profits as a result of the stock dividends declared?
2. What is the total debit to the accumulated profits account as a result of the declaration and
distribution of a dividend in item B?
3. What is the adjusted balance of the companys Accumulated profit account for the end of year?
4. What is the balance of the ordinary shares account as of December 31, 2016?

PROBLEM 22 You are auditing the accounts receivable and the related allowance for bad debts account
of DOG EYE INC. The control account of the aforementioned accounts had the following balances:
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Accounts Receivable P 1,270,000
Less: Allowance of bad debt (78,000)
Net Book Value P 1,192,000

Upon your investigation, you found out the following information:

a. The companys normal sales term is n/30.

b. The allowance for bad debt account had the following details in the general ledger:

Allowance for Bad Debts

July 31 Write off24,000 Jan 1 Balance 30,000

Dec. 31 Provision 72,000

c. The subsidiary ledger balances of the companys account receivable as of December 31, 2014
contained the following information.

Debit Balances Credit Balances

Under one month P 540,000 Venus Co. P 12,000

One to six months P 552,000 Adhara Corp. P 21,000
Over six months P 228,000 Lira Inc.P 27,000
P 1,320,000 P 60,000

Additional Information:
The credit balance with Venus Co. was for an overpayment from the
customer. The company delivered the additional merchandise to Venus
Co. on January 3, 2015 to cover such overstatement.
The credit balance of Adhara Corp. was due to a posting error, the
amount should have been credited to Megan Inc. for a 60 day
outstanding receivable.
The credit balance from Lira Inc. was a cash advance for a delivery to be
made on January 15, 2015.

d. It was estimated that 1 percent of account under one month is doubtful of collection while 2
percent of accounts one to six month are expected to require an allowance for doubtful of
collection. The accounts over six months are analyze as follows:

Definitely Uncollectible P 72,000

Doubtful (estimated to be 50% collectible) P 36,000
Apparently good, but slow (estimated to be
90% collectible) P 120,000
TOTAL P 228,000

REQUIRED: Based on your audit, answer the following:

1. What is the entry to adjust any unallocated difference between the control account and the
subsidiary ledger?
2. The adjusted accounts receivable balance on December 31, 2014, should be
3. The required balance of allowance for bad debts account on December 31, 2014 is
4. The entry to adjust the allowance for bad debts account is

KNOWLEDGE EARNS YOU POWER

CHARACTER EARNS YOU RESPECT.
ALWAYS BE HUMBLE.