4

I - AUDIT OF CASH AND CASH EQUIVALENTS
PROBLEM NO. 1 - Composition of Cash and Cash Equivalents
The following data pertain to PRTC Corporation at December 31, 2015:
Current account at Metrobank P

1,800,000
Current account at Allied Bank (100,000)
Payroll account 500,000
Foreign bank account (in equivalent pesos) 800,000
Savings deposit in a closed bank 150,000
Postage stamps 1,000
Employee's postdated check 4,000
IOUs from employees 10,000
Credit memo from a vendor for a purchase return 20,000
Traveler's check 50,000
Money order 30,000
Petty cash fund (P4,000 in currency and expense receipts for 10,000
P6,000)
Pension fund 2,000,000
DAIF check of customer 15,000
Customer's check dated 1/1/16 80,000
Time deposit - 30 days 200,000
Money market placement (due 6/30/16) 500,000
Treasury bills, due 3/31/16 (purchased 12/31/15) 200,000
Treasury bills, due 1/31/16 (purchased 2/1/15) 300,000
REQUIRED:
Determine the cash and cash equivalents to be reported on the entity's December 31, 2015
statement of financial position.
SOLUTION:
Items included:
Current account at Metrobank 1,800,000
Payroll account 500,000
Foreign bank account (in equivalent pesos) 800,000
Travelers check 50,000
Money order 30,000
Petty cash fund - currency 4,000
1
Time deposit 30 days 200,000
Treasury bills, due 3/31/13 (purchased
12/31/12) 200,000
3,584,000
Items not included:
Current account at Allied Bank (100,000) Short term borrowing

Savings deposit in a closed bank 150,000 Other noncurrent assets
Postage stamps 1,000 Unused supplies (Other CA)
Employees post dated check 4,000 Trade and other receivables
IOU from employees 10,000 Trade and other receivables

Credit memo from a vendor for a purchase Deduction from accounts
return 20,000 payable
Petty cash fund - expense receipts 6,000 Expenses
Pension fund 2,000,000 Noncurrent asset
DAIF check of customer 15,000 Trade and other receivables
Customers check dated 1/1/13 80,000 Trade and other receivables
Money market placement (due 6/30/13) 500,000 Short term investment
Treasury bills, due 1/31/13 (purchased 2/1/12) 300,000 Short term investment
PROBLEM NO.2 - Computation of adjusted cash and cash equivalents
You were able to gather the following from the December 31, 2015 trial balance of PRTC
Corporation in connection with your audit of the company:
Cash on hand P 372,000
Petty cash fund 10,000
BPI current account 950,000
Security Bank current account No.01 1,280,000
Security Bank current account No.02 (40,000)
2
PNB savings account 500,000
PNB time deposit 300,000
Cash on hand includes the following items:

a) Customer's check for P60,000 returned by bank on December 26, 2015 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2016.
b) Customer's check for P30,000 dated January 2, 2016, received on December 29, 2015.
c) Postal money orders received from customers, P36,000.
The petty cash fund consisted of the following items as of December 31, 2015:
Currency and coins P 2,100
Employees' vales 1,600
Currency in an envelope marked "collections for charity" with names 1,200

attached
Unreplenished petty cash vouchers 800
Check drawn by PRTC Corporation, payable to the petty cashier 4,600
P10,300
Included among the checks drawn by PRTC Corporation against the BPI current account and
recorded in December 2015 are the following:
a) Check written and dated December 29, 2015 and delivered to payee on January 2, 2016,
P50,000.
b) Check written on December 27, 2015dated January 2, 2016, delivered to payee on
December 29, 2015, P86,000.
The credit balance in the Security Bank current account No. 2 represents checks drawn in excess
of the deposit balance. These checks were still outstanding at December 31,2015.
The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance
sheet date.
REQUIRED:
1. Compute for the adjusted balances of following:
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a. Cash on hand
b. Petty cash fund
c. BPI current account
d. Cash and cash equivalents
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
Cash on hand, per trial balance 372,000
(a) NSF check (60,000)
(b) Postdated check received (30,000)
Cash on hand, as adjusted 282,000
Adjusting journal entries

Accounts receivable 60,000
Cash on hand 60,000
Cash on hand 30,000
Requirement No. 1.b

Petty cash fund per total 10,300
Employees' vales (1,600)
Currency in envelope marked "collections for charity" (1,200)
Unreplenished petty cash vouchers (800)

Petty cash fund, as adjusted 6,700
Alternative computation:
Currency and coins 2,100
Replenishment check 4,600
Petty cash fund, as adjusted 6,700
Adjusting journal entries:

Advances to officers and employees 1,600
Expenses 800
4
Cash short/over (balancing figure or see computation
below) 900
Petty cash fund (P10,000 - P6,700) 3,300
Computation of shortage:
Currency and coins 2,100
Employees' vales 1,600
Unreplenished petty cash vouchers 800
Replenishment check 4,600
Cash and cash items counted 9,100
Cash accountability 10,000
Unaccounted/Shortage (900)
Requirement No. 1.c
BPI current account, per trial balance 950,000

Unreleased check 50,000
Post dated check delivered 86,000
BPI current account, as adjusted 1,086,000

BPI current account 50,000
Accounts payable 50,000
Cash on hand 86,000
Requirement No. 1.d
Cash on hand (see no. 1.a) 282,000

Petty cash fund (see no. 1.b) 6,700
BPI current account (see no. 1.c) 1,086,000
Security Bank current account no. 1 1,280,000
Security Bank current account no. 2 (40,000) 1,240,000
PNB time deposit (cash equivalent) 300,000
Cash and cash equivalents, as adjusted 2,914,700
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Note: The P500,000 PNB savings account should be presented separately from
cash and cash equivalents since it has been earmarked for the acquisition
of a noncurrent asset.
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PROBLEM NO. 3 - Cash count and shortage computation
In connection with the audit of the financial statements of Rupee Company for the year ended
December 31, 2015,you performed a surprise count of the petty cash fund and undeposited
collections under the custody of Ms. Jessie at 8:15 a.m. on January 3, 2016. Your count disclosed
the following:
Bills and Coins
Bills Coins
P 100 10 pieces P 410 pieces
1.00
50 80 pieces 0.50 324 pieces
20 70 pieces 0.25 64 pieces
10 54 pieces
Unused postage stamps - P730
Checks
Date Payee Drawer Amount
Dec. 30 Cash Ms. Jessie P 2,400
Dec. 30 Rupee Company Robert 28,000
Dec. 31 Rupee Company Jay Ar, sales manager 3,360
Dec. 31 Rupee Company Francis 35,600
Dec. 31 Rupee Company Ryan 16,600
Dec. 31 German Corp. Rupee Company 54,000
Expense Vouchers
Date Payee Description Amount
Dec. 23 Jay Ar, sales Cash advance for trip to Baguio P 14,000
manager City
Dec. 27 Central Post Office Postage stamps 3,240
Dec. 29 Messengers Transportation 300
Dec. 29 PC Express Computer repair 1,600
Other items found inside the cash box:

a) Two pay envelopes which had been opened and the contents aggregating P15,000
representing unclaimed salaries had been removed.
b) The sales manager's liquidation report for his Baguio trip:
Cash advance received on Dec. 23 P 14,000
Less: Hotel accomodation P
9,000
Bus fare for two 800
Cash given to Roy, salesman 600 10,400
Balance P 3,600
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Accounted for as follows:
Cash returned by Roy to the sales manager P 240
Personal check of sales manager 3,360
Total P
3,600
Additional information:
a) The custodian is not authorized to cash checks.
b) The last official receipt included in the deposit on December 30 is No. 351 and the last
official receipt issued for the current year is No. 355. The following official receipts are all
dated December 31, 2015.
O.R. No. Amount Form of payment
352 P 27,200 Cash
353 35,600 Check
354 7,200 Cash
355 16,600 Check
c) The Petty Cash balance per general ledger is P20,000. The last replenishment of the fund
was made on December 22, 2015.
REQUIRED:
1. Determine shortage or overage, if any
SOLUTION:
Requirement No. 1
Bills and coins
Denomination Quantity Amount Total
P100.00 10 1,000
50.00 80 4,000
20.00 70 1,400
10.00 54 540
1.00 410 410
0.50 324 162
0.25 64 16 7,528
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Checks
Date Drawer Amount
Dec. 30 Ms. Jessie 2,400

28,000
Dec. 30 Robert
3,360
Dec. 31 Jay Ar
35,600
Dec. 31 Francis
16,600
Dec. 31 Ryan 85,960
Unreplenished vouchers
Date Account Amount

Dec. 23 14,000
Advances
Dec. 27 3,240
Postage
Dec. 29 300
Transportation
Dec. 29 Repairs 1,600 19,140 AJE 1&2
Total cash and cash items counted 112,628
Less accountabilities:
Petty cash 20,000

Undeposited collections - per
OR 86,600
Undeposited collections - without OR 28,000 AJE 4
Excess travel advance returned 3,360 AJE 3
Unclaimed salaries 15,000 152,960 AJE 5
Cash shortage (40,332) AJE 6
Requirement No. 2
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Advances to officers and
1 employees 14,000
Postage expense 3,240
Transportation expense 300
Repairs and maintenance 1,600
2 Unused postage 730
Postage expense 730
3 Travel expense [P9,000+P800+(P600-P240)] 10,160
Petty cash fund (personal check of sales manager) 3,360
Advances to officers and employees 13,520
4 Cash 28,000
5 Cash 15,000
Salaries payable 15,000
6 Cash short/over (Receivable from custodian) 40,332
Cash 40,332
7 Cash 54,000
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PROBLEM NO. 4 - Bank reconciliation
The Cash in Bank account of Dollar Company disclosed a balance of P203,000 as of December
31. The bank statement as of December 31 showed a balanced of P106,000. Upon comparing
the bank statement with cash records, the following facts were developed:
a. The company's account was charged on December 26 for a customer's uncollectible check
amounting to P30,000.
b. A two-month, 17% P60,000 customer's note dated October 25, discounted on November
25, was dishonored on December 25, and the bank charged the company P62,000, which
included a protest fee of P2,000.
c. A customer's check for P15,400 was entered as P14,500 by both the depositor and the bank
but was later corrected by the bank.
d. Check no. 142 for P12,425 was enter in the cash disbursement journal at P12, 245 and
check no. 156 for P3,290 was entered as P32,900.
e. Bank service charges of P1,830 for December were not yet recorded on the books.
f. A bank memo stated that a customer's note for P25,000 and interest of P1,000 had been
collected on December 28, and the bank charged P500 (No entry was made on the books when
the note was sent to the bank for reconciliation).
g. Receipts for December 31 for P24,000 were deposited on January 2.

No. 123 P 3,000 No. 154 P
4,000
143 2,000 157 6,000
144 7,000 159 7,000
147 3,000 169 5,000
*Certified by the bank in December
i. A deposit of P20,000 was recorded by the bank on December 5, but it should have been
recorded for Dolor Company rather than Dollar Company.
j. Petty cash of P10,000 was included in the Cash in Bank balance.
k. Proceeds from cash sales of P60,000 for December 18 were stolen. The company expects
to recover this amount from insurance company. The cash receipts were recorded in the books,
but no entry was made for the loss.
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l. The December 21 deposit included a check for P20,000 that had been returned on
December 15 marked NSF. Dollar Company had made no entry upon return of the check. the
redeposit of the check on December 21 was recorded in the cash receipts journal of Dollar
Company as collection on account.
REQUIRED:
1. Bank reconciliation using:
a. Bank to book method;
b. Book to bank method; and
c. Adjusted balance method
2. Adjusting entries as of December 31, 2015.
SOLUTION:
DOLLAR COMPANY
Bank Reconciliation - Bank to Book Method
December 31, 2012
Balance per bank 106,000
Add (deduct):
a) Customer's uncollectible check (NSF) 30,000
b) Dishonored note receivable
(including P2,000 protest fee) 62,000
c) Book error in recording collection (P15,400 - P14,500) (900)
d) Book errors in recording disbursements
Check no. 142 (P12,425 - P12,245) - under 180
Check no. 156 (P3,290 - P32,900) - over (29,610)
e) December bank service charges 1,830
f) Note collected by bank (including interest income
of P1,000 and net of service charge of P500) (25,500)
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g) Deposits in transit 24,000
h) Outstanding checks (35,000)
I) Bank error in recording deposit (20,000)
j) Petty cash fund 10,000
k) Stolen cash sales to be recovered from insurance co. 60,000
l) Double counted deposit - NSF 20,000
Balance per books 203,000
DOLLAR COMPANY
Bank Reconciliation - Book to Bank Method
December 31, 2012
Balance per books 203,000
Add (deduct):
a) Customer's uncollectible check (NSF) (30,000)
(including P2,000 protest fee) (62,000)
c) Book error in recording collection (P15,400 - P14,500) 900
Check no. 142 (P12,425 - P12,245) - under (180)
Check no. 156 (P3,290 - P32,900) - over 29,610
e) December bank service charges (1,830)
of P1,000 and net of service charge of P500) 25,500
g) Deposits in transit (24,000)
h) Outstanding checks 35,000
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I) Bank error in recording deposit 20,000
j) Petty cash fund (10,000)
k) Stolen cash sales to be recovered from insurance co. (60,000)
l) Double counted deposit - NSF (20,000)
Balance per bank 106,000
DOLLAR COMPANY
Bank Reconciliation - Adjusted Balance Method
December 31, 2012
BANK BOOKS
Unadjusted balances, December 31 106,000 203,000
Add (deduct):
a) Customer's uncollectible check (NSF) (30,000) AJE No. 1
(including P2,000 protest fee) (62,000) AJE No. 2
c) Book error in recording collection (P15,400 - P14,500) 900 AJE No. 3
Check no. 142 (P12,425 - P12,245) - under (180) AJE No. 4
Check no. 156 (P3,290 - P32,900) - over 29,610 AJE No. 5
e) December bank service charges (1,830) AJE No. 6
of P1,000 and net of service charge of P500) 25,500 AJE No. 7
g) Deposits in transit 24,000
h) Outstanding checks (35,000)
I) Bank error in recording deposit (20,000)
j) Petty cash fund (10,000) AJE No. 8
k) Stolen cash sales to be recovered from insurance co. (60,000) AJE No. 9
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l) Double counted deposit - NSF (20,000) AJE No. 10
Adjusted balances, December 31 75,000 75,000
Adjusting Journal Entries
1) Accounts receivable 30,000
Cash in bank 30,000
2) Notes receivable - dishonored 62,000
Cash in bank 62,000
Notes receivable - discounted 60,000
Notes receivable 60,000
3) Cash in bank 900
Accounts receivable 900
4) Accounts payable 180
Cash in bank 180
5) Cash in bank 29,610
6) Bank service charge 1,830
Cash in bank 1,830
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Bank service charge 500
Interest income 1,000
8) Petty cash fund 10,000
Cash in bank 10,000
9) Claims from insurance co. 60,000
Cash in bank 60,000
Cash in bank 20,000
PROBLEM NO. 5 - Bank reconciliation and shortage computation
You are conducting an audit of the Swerte Company for the year ended December 31, 2015.
The internal control procedures surrounding cash transactions were not adequate. The
bookkeeper-cashier handles cash receipts, maintains accounting records, and prepares the
monthly bank reconciliations.
The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement P 350,000

Add: Deposit in transit P 175,250
Note collected by bank 15,000 190,250
Total 540,250
Less: Outstanding checks 246,750
Balance per general ledger 293,500
In the process of your audit, you gathered the following:
At December 31, 2015, the bank statements and general ledger showed balances of
P350,000 and P293,500, respectively.
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The cut-off bank statement showed a bank charge on January 2,2016 for P30,000
representing correction of an erroneous bank credit.
Included in the list of outstanding checks were the following:
a. A check payable to a supplier, dated December 29, 2015, in the amount of P14,750,
released on January 5,2016.
b. A check representing advance payment to a supplier in the amount of P37,210, the
date of which is January 4, 2016, and released in December, 2015.
On December 31, 2015, the company received and recorded customer's postdated
check amounting to P50,000.
REQUIRED
1. Compute for the following as at December 31, 2015:

a. Adjusted deposit in transit
b. Adjusted outstanding checks
c. Adjusted cash in bank
d. Cash shortage
SOLUTION:
Requirement No. 1.a
Unadjusted deposit in transit 175,250
Post dated check received (50,000)
Adjusted deposit in transit 125,250
Requirement No. 1.b
Unadjusted outstanding checks 246,750
Unreleased check (14,750)
Post dated check issued (37,210)
Adjusted outstanding checks 194,790
Requirement No. 1.c&d
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Bank Books
Unadjusted balances 350,000 293,500
Add (deduct) adjustments:
Post dated check received (50,000) AJE 1
Deposit in transit (see 1.a) 125,250
Unreleased check 14,750 AJE 2
Post dated check issued 37,210 AJE 3
Note collected by bank 15,000 AJE 4
Outstanding checks (see 1.b) (194,790)
Erroneous bank credit (30,000)
Balances 250,460 310,460
Shortage (60,000) AJE 5
Adjusted balances 250,460 250,460
Requirement No. 2
1 Accounts receivable 50,000
Cash 50,000
2 Cash 14,750
3 Cash 37,210
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4 Cash 15,000
Cash short/over (Receivable from

5 cashier) 60,000
Cash 60,000
PROBLEM NO. 6 - Cash shortage computation
You were engaged to audit the books of Davao Company. From the records of the company, you
gathered the following information:
Davao Company started operations on October 2, 2015 with the owners investing P150,000 cash.
Monthly bank reconciliation statements have not been prepared; however, bank statements for
October, November, and December were made available to you. Your analysis of these bank
statements showed total bank credits (deposits) of P575,000 including the owners' initial
investment and a bank loan, details of which are in additional data. The bank statement in
December, 2015 showed an ending balance of P91, 500.
Examination of the paid checks disclosed that checks totaling P4,500 were issued by the company
in December, 2015, and were presented for payment only in January, 2016. Cash count of the
cashier's accountability amounted to P5,000. You were told by the cashier that these were
collections from credit sales on December 30, 2015, deposited on January 2, 2016.
Additional information are as follows:
a. Accounts receivable subsidiary ledgers had a total balance of P70,000 at December 31,
2015. P5,000 of this was ascertained to be uncollectible.
b. Suppliers' unpaid invoices for merchandise totaled P15,000;while an account for store
fixtures bought for P50,000 had an unpaid balance of P5,000.
c. Merchandise inventory at December 31, 2015 amounted to P30,000 but P5,000 of these
were spoiled with no resale value.
d. The bank statement in October showed a bank credit for P98,000, dated October 2, 2015.
Inquiry from the cashier disclosed that the amount represents proceeds of a 90-day,
discounted bank note.P80,000 o this loan was paid by check in December, 2015.
e. Operating expenses paid during the period totaled P180,000; while merchandise purchase
amounted to P250,000.
f. The gross profit rate is 120% of cost.
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REQUIRED:
Determine the cash shortage as of December 31, 2015.
SOLUTION:
Unadjusted balance per bank, 12/31 91,500
Outstanding checks , 12/31 (4,500)
Undeposited collections, 12/31 5,000
Adjusted balance per bank, 12/31 (Cash accounted) 92,000

Cash balance per books, 12/31/Cash accountability (see computation
below) 122,000
Cash over (short) (30,000)
Computation of cash balance per books, 12/31
Cash receipts:
Owners' investment 150,000
Proceeds from loan 98,000
Collections from customers (see computation below) 414,000
Total 662,000
Cash disbursements:
Purchases (P250,000 - P15,000) 235,000
Store fixtures (P50,000 - P5,000) 45,000
Loan payment 80,000
Expenses paid 180,000 540,000
Cash balance per books, 12/31 122,000
20
Computation of collections from sales
Purchases/TGAS 250,000
Less merchandise inventory, 12/31 30,000
Cost of sales 220,000
Add gross profit (P220,000 x 120%) 264,000
Sales 484,000
Less accounts receivable, 12/31 70,000
Collections from sales 414,000
PROBLEM NO. 7 - Proof of cash
You were able to obtain the following information during your audit of Euro Company:
Reconciling Items:
Nov. 30 Dec. 31
Undeposited collections P 200,000 P 120,000
Outstanding checks 80,000 60,000
Customer's notes collected by the bank 100,000 120,000
Bank service charges 2,000 3,000
Erroneous bank debits 10,000 20,000
Erroneous bank credits 40,000 30,000
NSF checks not redeposited 5,000 7,000
Customer's check deposited December 10,
returned by bank on December 16 10,000
marked NSF, and redeposited
immediately; no entry made on books
for return or redeposit
Unadjusted balances:
Books ? 90,000
Bank 230,000 ?
December Transactions:
Bank Books
Receipts P 420,000 P270,000
Disbursements 500,000 407,000
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REQUIRED:
1. Prepare a 4-column bank reconciliation for the month of December

c. Adjusted balanced method
SOLUTION:
Euro Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
Beginning Receipts Disb Ending
Unadjusted bank balances 230,000 420,000 500,000 150,000
Undeposited collections
November 200,000 (200,000)
December 120,000 120,000
Outstanding checks
November (80,000) (80,000)
December 60,000 (60,000)
Customers' note collected by bank
November (100,000) 100,000
December (120,000) (120,000)
Bank service charges
22
November 2,000 2,000
December 3,000) 3,000
Erroneous bank debits
November 10,000 (10,000)
December 20,000) 20,000
Erroneous bank credits
November (40,000) 40,000)
December (30,000) (30,000)
NSF checks not redeposited
December (7,000) 7,000
NSF check redeposited (10,000) (10,000)
Unadjusted book balances 227,000 270,000 407,000 90,000
Euro Company
Proof of Cash - Book to Bank Method
November (200,000) 200,000
23
December (120,000) (120,000)
Outstanding checks
November 80,000 80,000
December (60,000) 60,000
November 100,000 (100,000)
December 120,000 120,000
November (2,000) (2,000)
December 3,000 (3,000)
November (10,000) 10,000
December 20,000 (20,000)
November 40,000 40,000
December 30,000 30,000
NSF checks not redeposited
November (5,000) (5,000)
December 7,000 (7,000)
NSF check redeposited 10,000 10,000
Euro Company
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Proof of Cash - Adjusted Balance Method
November 200,000 (200,000)
December 120,000 120,000
Outstanding checks
November (80,000) (80,000)
December 60,000 (60,000)
November 10,000 (10,000)
December (20,000) 20,000
November (40,000) (40,000)
December (30,000) (30,000)
NSF check redeposited (10,000) (10,000)
Adjusted bank balances 320,000 290,000 410,000 200,000
November 100,000 (100,000)
December 120,000 120,000 AJE 1

25
November (2,000) (2,000)
December 3,000 (3,000) AJE 2
NSF checks
November (5,000) (5,000)
December 7,000 (7,000) AJE 3
Adjusted book balances 320,000 290,000 410,000 200,000
Note receivable 120,000
Cash in bank 3,000
Cash in bank 7,000
PROBLEM NO. 8 - Proof of cash
In your audit of the cash account of Cebu Company, you were requested by the client to prepare a
four-column reconciliation of receipts, disbursements, and balances to reconstruct the balances per
books.
Nov. 30 Dec.31
a. Balances per bank P 14,010 P19,630
b. Deposits in transit 2,740 3,110
c. Outstanding checks 4,260 3,870
d. Bank collections not in books 1,200 1,600
e. Bank charges not in books 950 640
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f. Of the checks outstanding on December 31, one check for P700 was certified at the request
of the payee.
g. Receipts for December, per bank statements - P281,070.
h. DAIF check from customer was charged by the bank on December 28, and has not been
recorded - P800.
i. DAIF check returned in November and recorded in December, P1,050.
j. DAIF check returned and recorded in December, P900.
k. Check of Cibo Company charged by the bank in error, P2,010.
l. Receipt on December 6 paid out in cash for travel expenses, P750. Recorded as receipts
and disbursements per books.
m. Error in recording customer's check on December 20, P165 instead of P465.
n. Error in disbursements journal for December, P3,250 instead of P325.
You noted in your audit that the DAIF checks returned by the bank are recorded as a reduction on
the cash receipts journal instead of recording it at cash disbursement journal; redeposits are
recorded as regular cash receipts.
REQUIRED:

SOLUTION:
Cebu Company
11/30 Receipts Disb. 12/31
Balances per bank (a,g) 14,010 281,070 275,450 19,630
Deposits in transit (b)
November 30 2,740 (2,740)
December 31 3,110 3,110
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Outstanding checks (c,f)
November 30 (4,260) (4,260)
December 31 (P3,870 - P700) 3,170 (3,170)
Bank collections not in books (d)
November 30 (1,200) 1,200
December 31 (1,600) (1,600)
Bank service charges not in books (e)
November 30 950 950
December 31 (640) 640
DAIF checks
Returned in Dec., not recorded (h) (800) 800
Returned in Nov., recorded in Dec. (i) 1,050 (1,050)
Returned and recorded in Dec. (j) (900) (900)
Bank error - Check of Cibo Company (k) (2,010) 2,010
Cash receipts used for payment (l) 750 750
Book errors (m,n)
Customer check (P465-P165) (300) (300)
Disb check (P3,250-P325) 2,925 (2,925)
Balances per books 13,290 279,540 274,635 18,195
Cebu Company
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Balances per books (refer to requirement 1.a) 13,290 279,540 274,635 18,195
November 30 (2,740) 2,740
December 31 (3,110) (3,110)
November 30 4,260 4,260
December 31 (P3,870 - P700) (3,170) 3,170
November 30 1,200 (1,200)
December 31 1,600 1,600
November 30 (950) (950)
December 31 640 (640)
DAIF checks
Returned in Dec., not recorded (h) 800 (800)
Returned in Nov., recorded in Dec. (i) (1,050) 1,050
Returned and recorded in Dec. (j) 900 900
Bank error - Check of Cibo Company (k) 2,010 (2,010)
Cash receipts used for payment (l) (750) (750)
Book errors (m,n)
Customer check (P465-P165) 300 300
Disb check (P3,250-P325) (2,925) 2,925
Cebu Company
29
November 30 2,740 (2,740)
December 31 3,110 3,110
November 30 (4,260) (4,260)
December 31 (P3,870 - P700) 3,170 (3,170)
Bank error - Check of Cibo Company (k) (2,010) 2,010
Cash receipts used for payment (l) 750 750
12,490 282,190 273,100 21,580
Balances per books 13,290 279,540 274,635 18,195
November 30 1,200 (1,200)
December 31 1,600 1,600 AJE 1
November 30 (950) (950)
December 31 640 (640) AJE 2
DAIF checks
Returned in Dec., not recorded (h) 800 (800) AJE 3

Returned in Nov., recorded in Dec.
(i) (1,050) 1,050
Returned and recorded in Dec. (j) 900 900
Book errors (m,n)
Customer check (P465-P165) 300 300 AJE 4
30
Disb check (P3,250-P325) (2,925) 2,925 AJE 5
12,490 282,190 273,100 21,580
2) Bank service charge 640
Cash in bank 640
3) Accounts receivable 800
Cash in bank 800
4) Cash in bank 300
Accounts receivable 300
PROBLEM NO.9 Proof of cash
In connection with your examination, the MQM Company presented to you the following
information regarding its Cash in Bank account for the month of December 2015:
a) Balance per bank statements: November 30, P215,600, and December 31, P230,400.
b) Balances per bank statement account in the companys books: November 30, P 165,450
and December 31, P226,800.
31
c) Total receipts per books were P2, 221,900 of which P12,100was paid in cash to a creditor
on December 24.
d) Total charged in the bank statement during December were P2,189,700.
e) Undeposited receipt were: November 30, P90,600 and December 31, P101,200
f) Outstanding checks were: November 30, P26,750, and December 31, P19,100, of which a
check for P5,000 was certified by the bank on December 26.
g) NSF checks returned, recorded as reduction of cash receipts, were:
Returned by the bank on December, recorded also in December, P10,400
Returned by bank on December but recorded in January, P8,600
h) Collections by bank not recorded by Company were P121,500 in November and P116,400
in December.
i) Banks service charges not entered in the companys books were: November 30, P7,500 and
December 31, P4,200.
j) A check for P9,500 of QMQ Company was charged to MQM Company in error.
k) A check drawn for P8,400 was erroneously entered in the books as P4,800.
REQUIRED:
1. Prepare a 4-colunm bank reconciliation for the month of December

2. Adjusting entries as of December 31,2015.
SOLUTION:
MQM Company
32
December
Nov. 30 Receipts Disb. Dec. 31
Unadjusted bank balances 215,600 2,204,500 2,189,700 230,400
Undeposited receipts:
November 90,600 (90,600)
December 101,200 101,200
Outstanding checks:
November (26,750) (26,750)
December 14,300 (14,300)
Erroneous bank debit (9,500) 9,500
Payment to creditor in cash 12,100 12,100
NSF checks:
Returned, recorded in December (10,400) (10,400)
Returned, recorded in January (8,600) 8,600
Unrecorded bank collections:
November (121,500) 121,500
December (116,400) (116,400)
Bank service charges:
December (4,200) 4,200
Book error in December (3,600) 3,600
Unadjusted book balances 165,450 2,221,900 2,160,550 226,800
MQM Company
December
33
November (90,600) 90,600
December (101,200) (101,200)
Outstanding checks:
November 26,750 26,750
December (14,300) 14,300
Erroneous bank debit 9,500 (9,500)
Payment to creditor in cash (12,100) (12,100)
NSF checks:
Returned, recorded in December 10,400 10,400
Returned, recorded in January 8,600 (8,600)
November 121,500 (121,500)
December 116,400 116,400
November (7,500) (7,500)
December 4,200 (4,200)
Book error in December 3,600 (3,600)
MQM Company
December
34
November 90,600 (90,600)
December 101,200 101,200
Outstanding checks:
November (26,750) (26,750)
December 14,300 (14,300)
Payment to creditor in cash 12,100 12,100
Adjusted bank balances 279,450 2,227,200 2,179,850 326,800
NSF checks:
Returned, recorded in December 10,400 10,400
Returned, recorded in January 8,600 (8,600) AJE 1
November 121,500 (121,500)
December 116,400 116,400 AJE 2
November (7,500) (7,500)
December 4,200 (4,200) AJE 3
Book error in December 3,600 (3,600) AJE 4
Adjusted book balances 279,450 2,227,200 2,179,850 326,800
- - - -
35
Cash in bank 8,600
Cash in bank 4,200
4) Accounts payable 3,600
Cash in bank 3,600
PROBLEM NO.10- Proof of cash
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, 2015.
The bank statement on November 30, 2015 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
check books 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 book for December showed total receipts of P183,900 disbursements
of P101,800 and a balance of P121,400. Bank debits 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 31,2015 the company placed with the bank a customers promissory note with a
faced 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, 2016.
A check for P990 was recorded in the company cash payments books in December as P9,900.
36
REQUIRED:

SOLUTION:
Baht Company
December
November (25,000) 25,000
November 300 300
December (400) 400
Erroneous bank debit-November 10,000 (10,000) -
November 20,000 (20,000)
December 54,900 54,900
Outstanding checks
November (42,500) (42,500)
37
December 90,490 (90,490)
NSF checks
December (6,000) 6,000
Book errors in December
Uncollected customer's note treated as receipts 30,000 30,000

Error in recording a check (SB P990, AR
P9,900) 8,910 (8,910)
Computation of deposits in transit, December 31:
Deposit in transit, Nov. 30 20,000
Add collections in December:
December book receipts 183,900
Less receipts not representing collections in December:

Customers' note collected by bank, Nov.
30 25,000
Note with the bank treated as receipts 30,000 55,000 128,900
Total 148,900
Less deposits credited by the bank in December:
December bank receipts 104,000

Less receipts not representing
deposits:
Erroneous bank debit, Nov.; corrected
Dec. 10,000 94,000
54,900
Outstanding checks, December 31:
38
Outstanding checks, Nov. 30 42,500
Add checks issued in December:
December book disbursements 101,800
Less disbursements not representing checks for December:

Book error (SB P990, AR
P9,900) 8,910
Bank service charge, Nov.; recorded Dec. 300 9,210 92,590
Total 135,090
Less checks paid by the bank in
December:
December bank disbursements 51,000
Less disbursements not representing checks:
NSF checks, Dec. 6,000
Bank service charge, Dec. 400 6,400 44,600
90,490
Baht Company
December
November 25,000 (25,000)
November (300) (300)
December 400 (400)
39
Erroneous bank debit-November (10,000) 10,000 -
November (20,000) 20,000
December (54,900) (54,900)
Outstanding checks
November 42,500 42,500
December (90,490) 90,490
NSF checks
December 6,000 (6,000)
Uncollected customer's note treated as receipts (30,000) (30,000)

P9,900) (8,910) 8,910
Baht Company
December
Erroneous bank debit-November 10,000 (10,000) -
November 20,000 (20,000)
40
December 54,900 54,900
Outstanding checks
November (42,500) (42,500)
December 90,490 (90,490)
November 25,000 (25,000)
November (300) (300)
December 400 (400) AJE 1
NSF checks
December 6,000 (6,000) AJE 2

Uncollected customer's note treated as
receipts (30,000) (30,000) AJE 3
P9,900) (8,910) 8,910 AJE 4
- - - -
41
Cash in bank 400
Cash in bank 6,000
3) Notes receivable 30,000
Cash in bank 30,000
4) Accounts payable 8,910
Cash in bank 8,910
Hangover Company received the following bank statements on August 1, 2015:
DATE DEBITS CREDITS BALANCE

July 1 66,405
2 2,502 63,903
3 2,240 1,050 62,713
5 2,106 64,819
6 5,535 70,354
8 5,817 76,171
9 8,181 67,990
10 4,317 72,307
11 6,819 4,926 65,488
12 7,425 62,989
13 62,989
15 3,509 66,498
16 9,777 56,721
17 6,221 7,702 58,202
18 6,484 51,718
19 3,418 55,136
42
20 5,310 60,446
22 6,492 66,938
23 5,546 61,392
24 61,392
25 8,735 52,657
26 8,246 60,903
27 9,385 70,288
29 7,060 63,288
30 63,228
31 6,405 8,987 65,810
TOTALS P77,395 P76,800
Hangovers cash account shows the following information for the month of July, 2015:
The June 30, 2015 balance was P62, 150.
DATE DEBITS CREDITS

July 1 3,729 165
2 5,535
3 8,181
5 5,817
6 4,317
8 6,819
9 4,926 7,425
12 3,509
13 9,391
15 7,702
16 6,221
17 3,418 6,484
18 5,310
19 6,492
20 5,074
22 8,735
23 8,286
26 8,913 6,885
29 5,152 5,913
30 2,238
31 5,857
TOTALS P75,304 P77,150
1. Hangover makes a journal entry for service charges, direct deposits, and interest earned in
the month subsequent to the month the items are reflected on the bank statement.
43
2. Barek Co. Makes a direct deposit of P675 to Hangovers account at the bank on the 30th of
every month. This payment, which is rent revenue to Hangover, is not recorded by
Hangover until the bank statement is received.
3. In the 23th of July, an NSF check for P472 was returned by the bank. The check was
redeposited on July 27th, and no entry was made by Hangover.
4. Check No. 1145 dated July 29 was written for P1,492 of wages, but recorded by Hangover
on the books as P1,000.
5. On July 16, the bank recorded a withdrawal of P386 for Hangover that should have been
for Handover Company.
6. The bank service charge for June was P165 ND FOR July was P175.
7. The interest earned on June was P3,054 and in July was P3,160.
8. During June, Hangover wrote check no. 1095 for P9,850 for rent expense but recorded the
check on its books as P8,955. Hangover discovered the mistake in July, when the cancelled
checks were returned with the June bank statement but neglected to correct the error on the
books at that time.
9. At the end of June, Hangover had P3,156 of deposits in transit, and checks totalling P4,742
that had not cleared the bank. In addition, all of Hangovers transactions with the bank after
July 29 have not cleared the bank.
REQUIRED:
1. Prepare a 4-colunm bank reconciliation for the month of July

b. Book to bank method: and
SOLUTION:
Hangover Company
For the month of July, 2012
July
6/30 Receipts Disb 7/31
44
Direct deposits
June (675) 675
July (675) (675)
NSF check redeposited - July (472) (472)
Book error - July (SB P1,492, AR P1,000) (492) 492
Bank error - July (386) 386
June 165 165
July (175) 175
Interest earned
June (3,054) 3,054
July (3,160) (3,160)

Book error - June (SB P9,850, AR
P8,955) 895 895
Deposits in transit
June 3,156 (3,156)
July 2,238 2,238
Outstanding checks
June (4,742) (4,742)
July 5,857 (5,857)
Hangover Company
45
July
Direct deposits
June 675 (675)
July 675 675
NSF check redeposited - July 472 472
Book error - July (SB P1,492, AR P1,000) 492 (492)
Bank error - July 386 (386)
June (165) (165)
July 175 (175)
Interest earned
June 3,054 (3,054)
July 3,160 3,160

Book error - June (SB P9,850, AR
P8,955) (895) (895)
Deposits in transit
June (3,156) 3,156
July (2,238) (2,238)
Outstanding checks
June 4,742 4,742
July (5,857) 5,857
46
Hangover Company
July
Deposits in transit
June 3,156 (3,156)
July 2,238 2,238
Outstanding checks
June (4,742) (4,742)
July 5,857 (5,857)
NSF check redeposited - July (472) (472)
Bank error - July (386) 386
Direct deposits
June 675 (675)
July 675 675 AJE 1
June (165) (165)
July 175 (175) AJE 2
47
Interest earned
June 3,054 (3,054)
July 3,160 3,160 AJE 3
Book errors
June (SB P9,850, AR
P8,955) (895) (895) AJE 4
July (SB P1,492, AR P1,000) 492 (492) AJE 5
- - - -
1) Cash in bank 675
Rent income 675
Cash in bank 175
4) Rent expense 895
Cash in bank 895
5) Wages expense 492
Cash in bank 492
48
PROBLEM NO.12- Proof of cash
Celtics Company had the following bank reconciliation on June 30, 2015:
Balance per bank statement, June 30, 2015 P3,000,000

Add: Deposit in transit 400,000
Total 3,400,000
Less: Outstanding checks 900,000
Balance per book, June 30 P2,500,000
The bank statement for the month of July 2015 showed the following:
Deposits (including P200,000 note collected for Celtics) P9,000,000

Disbursements (including P140,000 NSF check and P10,000 service 7,000,000
charge)
All reconciling items on June 30,2015 cleared through the bank in july.
The outstanding checks totaled P600,000 and the deposits in transit
amounted to P1,000,000 on July 31, 2015.
REQUIRED:
Determine the following:
1. Cash receipts per books in July

2. Cash disbursement per books in July
3. Cash balance per books at July 31
4. Adjusted cash balance at July 31
SOLUTION:
Requirement No. 1
Total deposits per bank statement in June 9,000,000
Note collected by bank in July (200,000)
Deposits in transit, June 30 (400,000)
Deposits in transit, July 31 1,000,000
Cash receipts per books in July 9,400,000
49
Requirement No. 2
Total disbursements per bank statement in June 7,000,000
July NSF check (140,000)
July service charge (10,000)
Outstanding checks, June 30 (900,000)
Outstanding checks, July 31 600,000
Cash disbursements per books in July 6,550,000
Requirement No. 3
Balance per books, June 30, 2007 2,500,000
July receipts per books (see no. 21) 9,400,000
July disbursements per books (see no. 22) (6,550,000)
Balance per books, July 31, 2007 5,350,000
Requirement No. 4
Balance per bank statement, July 31 (P3M+P9M-P7M) 5,000,000
Deposits in transit, July 31 1,000,000
Outstanding checks, July 31 (600,000)
Adjusted bank balance, July 31 5,400,000
Balance per books, July 31 5,350,000
Note collected by bank in July 200,000
50
NSF check (140,000)
Bank service charges (10,000)
Adjusted book balance, July 31 5,400,000
You are able to obtain the following information in connection with your audit for the Cash account
of the Syria Company as of December 31, 2015:
November 30 December 31
a. Balance per book P480,000 P420,000
b. Undeposited 244,000 300,000
collections
c. Outstanding checks 150,000 120,000
d. The bank statement for the month of December showed total credits of P240,000
e. DAIF checks are recorded as a reduction of cash receipts. DAIF checks which are later
redeposited are then recorded as regular receipts. Data regarding DAIF checks are as
follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.
f. Check of Syria Company amounting to P90,000 was charged to the companys account by
the bank in error on December 31.
g. A bank memo stated that the companys account was credited for the net proceeds of a
customers note for P106,000.
h. The company has hypothecated its accounts receivable with the bank under an agreement
wherby the bank lends the company 80% of the hypothecated accounts receivable. The
company performs accounting and collection of the accounts. Adjustments of the loan are
made from daily sales reports and deposits.
i. The bank credits the company accounts and increases the amount of the for 80% of the
reported sales. The loan agreement states specifically that the sales report must be accepted
by the bank before the company is credited. Sales reports are forwarded by the company
to the bank on the first day following the date of sale. The bank allocates each deposit 80%
to the payment of the loan, and 20% to the company account. Thus, only 80% of each days
51
sales and 20% of each collection deposits are entered on the bank statement. The company
accountant records the hypothecation of new accounts receivables (80% of sales) as a debit
to Cash and a credit to the bank loan as of the date of the sales. One hundred percent of the
collection on accounts receivables is recorded as cash receipts: 80% of the collection is
recorded in the disbursements book as a payment on the loan. In connection with the
hypothecation, the following facts were determined:
Included in the undeposited collections is cash from the hypothecation of accounts

receivable. Sales were P 180,000 on November 30, and P200,000 at December 31. The
balance was made up from collections which were entered on the books in the manner
indicated above.
Collections on accounts receivable deposited in December, other than deposits in transit,
totalled P725,000.
j. Interest on the bank loan for the month of December charged by the bank nut not recorded
in the books, amounted to P38,000.
REQUIRED:
1. Unadjusted balance per books as of November 30

2. Unadjusted book receipts for December
3. Unadjusted book disbursements for December
4. Unadjusted balance per books as of December 31
SOLUTION:
Syria Company
December
Nov. 30 Receipts Disb Dec. 31
Undeposited collections:
November 30 100,000 (100,000)
December 31 140,000 140,000
52
Outstanding checks:
November 30 (150,000) (150,000)
December 31 120,000 (120,000)
DAIF checks:
Returned in Nov.,
recorded in Dec. 10,000 (10,000)
Returned and recorded
in Dec. (25,000) (25,000)
Returned in Dec., recorded in Jan. (29,000) 29,000

Unrecorded bank collection
in Dec. (106,000) (106,000)
Anticipated loan proceeds from AR
hypothecation
Nov. 30 sales (P180,000
x 80%) 144,000 (144,000)
Dec. 31 sales (P200,000 x 80%) 160,000 160,000
Deposits with loan payment (P725,000 x 80%) 580,000 580,000
Anticipated loan payment from undeposited collections

Nov. 30 (P100,000 x
80%) (80,000) (80,000)
Dec. 31 (P140,000 x
80%) 112,000 (112,000)
Interest charge for bank loan in Dec. (38,000) 38,000
Syria Company
December
Nov. 30 Receipts Disb Dec. 31
53
Undeposited collections:
November 30 100,000 (100,000)
December 31 140,000 140,000
Outstanding checks:
November 30 (150,000) (150,000)
December 31 120,000 (120,000)

Deposits with loan payment (P725,000 x
80%) 580,000 580,000
DAIF checks:
Returned in Nov.,
recorded in Dec. (10,000) 10,000
Returned and
recorded in Dec. 25,000 25,000
Returned in Dec., recorded in Jan. 29,000 (29,000)

Unrecorded bank
collection in Dec. 106,000 106,000
Anticipated loan proceeds from AR
hypothecation
Nov. 30 sales
(P180,000 x 80%) (144,000) 144,000
Dec. 31 sales (P200,000 x 80%) (160,000) (160,000)
Anticipated loan payment from undeposited collections

Nov. 30 (P100,000 x
80%) 80,000 80,000
Dec. 31 (P140,000 x
80%) (112,000) 112,000
Interest charge for bank loan in Dec. 38,000 (38,000)
54
PROBLEM NO.14 Three-dated bank reconciliation
The client, Noel Corporation, obtained bank statements for November 30 and December 31, 2015
and reconciled the balanced. You obtained directly the statements of January 12,2016 and obtained
the necessary confirmation. You have found that there are no errors in addition or subtraction in
the clients books.
11/30/15 12/31/15
Balance, bank statement P344,420 P275,020
Balance, company records 271,260 226,010
Deposits in transits 35,000 ?
Outstanding checks 88,240 ?
12/1-31/15 1/1-12/16
Receipts, cash records P963,230 P292,500
Credits, bank statement 941,010 321,490
Disbursements, cash records 1,008,480 177,570
Charges, bank statement 1,010,410 230,180
The following information also was obtained:
a) Check no. 804 for P340 cleared by the bank in December as P1,340. This was found in
proving the bank statement. The bank made the correction on January 8, 2016.
b) A note of P20,000, sent to the bank for collection on November 15,2015, was collected and
credited to the account on November 28, 2015, net of a collection fee of P80. The note was
recorded in the cash receipts on December 21, 2015, at which date the collection fee was
entered as a disbursement.
c) The client records returned checks in red in the cash receipts journal. The checks listed in
the table were returned by the bank.
Amount Returned Recorded Redeposited

Co. A P3,270 12/6/15 No entries 12/8/15
Co. B P6,730 12/27/15 1/3/16 1/15/16
d) Two payroll checks for employees vactions totalling P5,500 were drawn on January 3,
2016, and cleared the bank on January 8,2016. Those checks were not entered in the clients
records because semi-monthly payroll summaries are entered only on the 15th and the last
day of each month.
REQUIRED:
55
1. Compute for the following:
a. Deposits in transit as of December 31, 2015
b. Outstanding checks as of December 31,2015
c. Deposits in transits as of January 12, 2016
d. Outstanding checks as of January 12,2016
2. Prepare a 4-column bank reconciliation for the month of December 2015 and for the period
January 1 to 12, 2016 using the adjusted balance method.
SOLUTION:
Requirement 1.a
Deposits in transit, Nov.

30 35,000
Add collections in
December:
December book
receipts 963,230
Customers' note collected by bank in Nov. (20,000) 943,230
Total 978,230
Less deposits credited by the bank in December:

December bank
receipts 941,010
NSF check redeposited (Customer A) (3,270) 937,740

Deposits in transit, Dec.
31 40,490
Requirement 1.b
Outstanding checks, Nov.

30 88,240
Add checks issued in December:
December book disbursements 1,008,480
Collection fee for note collected in Nov. (80) 1,008,400
56
Total 1,096,640
Less checks paid by the bank in December:
December bank disbursements 1,010,410

Bank error in check payment (P1,340 -
P340) (1,000)
NSF check -
Customer A (3,270)
NSF check -
Customer B (6,730) 999,410
Outstanding checks, Dec.
31 97,230
Requirement 1.c
Deposits in transit, Dec. 31 (see Requirement

1.a) 40,490
Add collections, Jan. 1-
12:
Jan. 1-12 book
receipts 292,500
NSF check -
Customer B 6,730 299,230
Total 339,720
Less deposits credited by the bank, Jan. 1-12:

Jan. 1-12 bank
receipts 321,490
Correction of error in check payment in
Dec. (1,000) 320,490
Deposits in transit, Jan.
12 19,230
Requirement 1.d
Outstanding checks, Dec. 31 (see Requirement

1.b) 97,230
Add checks issued, Jan. 1-12:
Jan. 1-12 book disbursements 177,570
57
Unrecorded payroll checks 5,500 183,070
Total 280,300
Less checks paid by the bank, Jan. 1-12: 230,180

Outstanding checks, Jan.
12 50,120
December January 1-12
Nov. 30 Receipts Disb Dec. 31 Receipts Disb Jan. 12
Unadjusted bank balances 344,420 941,010 1,010,410 275,020 321,490 230,180 366,330
Deposits in transit:
eginning of period 35,000 (35,000) (40,490)
End of period 40,490 40,490 19,230 19,230
Outstanding checks:
Beginning of period (88,240) (88,240) (97,230)
End of period 97,230 (97,230) 50,120 (50,120)

Bank error in check
payment (1,000) 1,000 (1,000)
NSF check redeposited (Customer
A) (3,270) (3,270)
Adjusted bank balances 291,180 943,230 1,015,130 219,280 299,230 183,070 335,440
Unadjusted book
balances 271,260 963,230 1,008,480 226,010 292,500 177,570 340,940
Note collected by bank in
Nov. 19,920 (20,000) (80)
NSF check not redeposited (Customer B) 6,730 (6,730) 6,730

Unrecorded payroll in
Jan. 5,500 (5,500)
58
Adjusted book balances 291,180 943,230 1,015,130 219,280 299,230 183,070 335,440
PROBLEM NO.15- Theory
Select the best answer for each of the following:
1. Who is responsible, at all times, for the amount of petty cash fund?
a. General cashier
b. President of the company
c. Petty cash custodian
d. Chairman of the Board of Directors
2. What is the effect of not replenishing the petty cash fund at the year-end and not making
the appropriate adjusting entry?
a. A detailed audit is necessary.
b. The petty cash custodian should turn over the petty cash to the general cashier.
c. Cash will be overstated and expenses understated.
d. Expenses will be overstated and cash will be understated.
3. The primary purpose of sending a standard confirmation request to financial institutions

with which the client has done business during the year is to.
a. Detect kiting activities that may otherwise not be discovered.
b. Corroborate information regarding deposit and loan balances.
c. Provide the data necessary to prepare a proof of cash.
d. Request information about contingent liabilities and secured transactions.
4. The auditor should ordinarily mail confirmation request to all banks with which the client
has conducted any business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by GAAS.
d. This procedure relieves the auditor of any responsibility with respect to non-detection
of forged checks.
5. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of
cash?
a. The auditor test deposits-in-transit and outstanding items to other corroborating
evidence.
59
b. The auditor sends the reconciliation to the bank for independent verification.
c. The auditor performs the reconciliation for the client to record the proper cash balance.
d. The auditor traces the book balance of the reconciliation to the cut off bank statement.
6. The auditor will send a standard bank confirmation to which of the following?
a. Financial institutions for which the client has a balance greater than P0 at the end of the
year.
b. Financial institutions with which the client has transacted during the year.
c. Financial institutions of customers using the lockbox.
d. Financial institutions used by significant shareholders.
7. An auditor who is engaged to examine the financial statements of a business enterprise will
request cut-off bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the clients bank reconciliation.
c. Detect lapping.
d. Detect kiting.
8. Which of the following cash transfers would appear as a deposit in transit on the December
31, 2015 bank reconciliation?
Bank Account A Bank Account B
Disbursing Date (Month/Day Receiving Date (Month/Day)
Per Bank Per Books Per Bank Per Books
a. 12/31 12/30 12/31 12/30
b. 1/2 12/30 12/31 12/31
c. 1/3 12/31 1/2 1/2
d. 1/3 12/31 1/2 12/31
9. Which of the following transfers would not appear as an outstanding check on the
December 31, 2015 bank reconciliation?
Bank Account A Bank Account B
Disbursing Date (Month/Day) Receiving Date (Month/Day)
Per Bank Per Books Per Bank Per Books
a. 12/31 12/30 12/31 12/30
b. 1/2 12/30 12/31 12/31
c. 1/3 12/31 1/2 1/2
d. 1/3 12/31 1/2 12/31
60
Use the following information for the next two question.
The information below was taken from the bank transfer schedule prepared during the audit of
Khaye Ting Companys financial statements for the year ended December 31,2015. Assume all
checks are dated and issued on December 30, 2015.
Disbursements Receipts
No. From To Per Books Per Bank Per Books Per Bank
101 Pbcom HSBC 12/30 1/4 12/30 1/3
102 UCPB MBank 1/3 1/2 12/30 12/31
103 HSBC PSBank 12/31 1/3 1/2 1/2
104 MBank PNB 1/2 1/2 1/2 12/31
10. Which of the following checks might indicate kiting?

a. Check No. 101 and 103
b. Check No. 102 and 104
c. Check No. 101 and 104
d. Check No. 102 and 103
11. Which of the following checks illustrates deposits/transfers in transit at December 31?
a. Check No. 101 and 102
b. Check No. 101 and 103
c. Check No. 102 and 104
d. Check No. 102 and 104
12. Which of the following cash transfer results in a misstatement of cash at December 31?
Disbursements Receipts
From To Per Books Per Bank Per Books Per Bank
a. Pbcom HSBC 12/31/15 1/4/16 12/31/15 12/31/15
b. UCPB MB 1/4/16 1/5/16 12/31/15 1/4/16
c. HSBC PBank 12/31/15 1/5/16 12/31/15 1/4/16
d. MBank PNB 1/4/16 1/11/16 1/4/16 1/4/16
ANSWERS:
1. C 5. A 9. B
2. C 6. B 10. B
3. B 7. B 11. B
4. A 8. D 12. B
61
II AUDIT OF RECEIVABLES
PROBLEM NO. 1 Composition of trade and other receivables
On December 21, 2015 the accounts receivable control account of Ipil-ipil Co. had a balance of
P181,100. An analysis of the accounts receivable account showed the following:
Accounts known to be worthless P 2,500

Advance payments to creditors on purchase orders 10,000
Advances to affiliated companies 25,000
Customers accounts reporting credit balance arising from sales
return (15,000)
Interest receivable on bonds 10,000
Other trade accounts receivable unassigned 50,000
Subscriptions receivable for ordinary share capital due in 30 55,000
days
Trade accounts receivable assigned 15,000
Trade installment receivable due 1 18 months,
(including unearned finance charges, P2,000) 22,000
Trade receivables from officers, due currently 1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Total P181,000
REQUIRED:
62
Determine the trade and other receivables to be reported on the entitys December 31, 2015
statement of financial position.
SOLUTION:
Items included:
Trade accounts receivable (see computation below) 91,500
Advance payments to creditors on purchase orders 10,000
Interest receivable on bonds 10,000
Subscriptions receivable due in 30 days 55,000
Trade and other receivables 166,500
Composition of trade accounts receivable:
Other trade accounts receivable unassigned 50,000
Trade accounts receivable - assigned 15,000
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000 20,000
Trade receivables from officers due currently 1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Trade accounts receivable 91,500
Items not included:

Accounts known to be worthless 2,500 Write off
Advances to affiliated companies 25,000 Noncurrent investment
Customers' account with credit balance (15,000) Trade and other payables
PROBLEM NO. 2 Computation of adjusted accounts receivable
63
In the audit of Beatles Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:
Beatles Company
Accounts Receivable Schedule
December 31, 2015
Customer Balance Current Past Due

Love M. Do P92,000 P - P92,000
Strawberry Fields 420,000 248,000 172,000
This Boy Company 350,000 92,000 258,000
Girl Corporation 374,000 212,000 162,000
Ticket To Ride Transport Corp 160,000 - 160,000
Let It Be Corp 124,000 60,000 64,000
Hey Jude 4,000 4,000 -
Get Back Company 256,000 80,000 176,000
Yesterday Corp 240,000 240,000
Totals P2,020,000 P936,000 P1,084,000
The Accounts Receivable control account balance was determined to be P2,020,000.
The external auditor submitted the following audit comments for possible adjustments:
Love M. Do Merchandise found defective; returned by customer on October 31,

2015 for credit, but the credit memo was issued y Beatles only on
January 15, 2016.
Strawberry Fields Account is good but usually pays late.
This Boy Company Merchandise worth P160,000 was destroyed while in transit on May
31, 2015, terms FOB Destination. The carrier was billed on June 15,
2015. (See Ticket To Ride Corp. and Yesterday Corp.)
Girl Corporation Customer billed twice in error for P40,000. Balance is collectible.
Ticket To Ride Corp. Collected in full on January 31, 2016.
Let It Be Corp. Paid in full on December 30, 2015 but not recorded. Collections
were deposited on January 2, 2016.
Hey Jude Received account confirmation from customer for P44,000.

Investigation revealed an erroneous credit for P40,000. (See Get
Back Company)
64
Get Back Company Neglected to post P40,000 credit to customers account.
Yesterday Corp. Customer wants to know reason for receipt of P160,000 credit
memo as their accounts payable balance was P400,000.
REQUIRED:

2. Adjusted balance of Accounts Receivable Trade as of December 31, 2015.
SOLUTION:
Requirement No. 1
1) Love M. Do
Sales returns 92,000
Accounts receivable
2) Strawberry Fields
None
3) This Boy Company

None, this is misposting only in the SL. However, the customers' ledger should be
adjusted.
4) Girl Corporation
Sales 40,000
Accounts receivable
5) Ticket To Ride Corp.
Accounts receivable-Nontrade 160,000
Accounts receivable
65
6) Let It Be Corp
Cash 124,000
Accounts receivable
7) Hey Jude
adjusted.
8) Get Back Company

adjusted.
9) Yesterday Corp
adjusted.
Requirement No. 2
Unadjusted balance 2,020,000
Add (Deduct) adjustments:
No. 1 (92,000)
No. 4 (40,000)
No. 5 (160,000)
No. 6 (124,000)
Adjusted balance 1,604,000
PROBLEM NO. 3 Audit of accounts receivable and related accounts
66
In connection with the audit of the financial statements of Praktis Corporartion, your audit senior
instructed you to examine the companys accounts receivable.
Prior to any adjustments you were able t extract the following balances from Praktis trial balance
as of December 31, 2015:
Accounts receivable P442,500
Allowance for doubtful accounts 15,000
From the schedule of accounts receivable as of December 31, 2015, you determined that this
account includes the following:
Accounts with debit balances:
60 days old and below P 238,500
61 to 90 days 117,200
Over 90 days 85,400 P 441,100
Advances to officers 16,400
Accounts with credit balance (15,000)
Accounts receivable per GL P 442,500
The credit balance in customers account represents collection from a customer whose account had
been written-off as uncollectible in 2014.
Accounts receivable for more than a year totaling P21,000 should be written off.
Confirmation replies received directly from customers disclosed the following exceptions:
Customer Customers Comments Audit Findings

Jessie The goods sold on December 1 were The client failed to record credit
returned on December 16, 2015. memo no. 23 for P12,000. The
merchandise was included in the
ending inventory at cost.
67
Robert We do not owe this amount *%#@ Investigation revealed that goods
(bad word). We did not receive any sold for P16,000 were shipped to
merchandise form your company. Robert on December 29, 2015,
terms FOB shipping point. The
goods were lost in transit and the
shipping company has
acknowledged its responsibility for
the loss of merchandise.
Anne I am entitled to a 10% employee Anne is an employee of Praktis.
discount. Your bill should be Starting November 2015, all
reduced by P1,200. company employees were entitled
to a special discount.
Jay-ar We have not yet sold the goods. We Merchandise billed for P18,000
will remit the proceeds as soon as were consigned to Jay-ar on
the goods are sold. December 30, 2015. The goods cost
P13,000.
Roy We do not owe you P20,000. We The sale of merchandise on
already paid our accounts as December 18, 2015 was paid by
evidenced by OR # 1234. Roy on January 6, 2016.
Carla Reduce your bill by P1,500 This amount represents freight paid
by the customer for the
merchandise shipped on December
17, 2015, terms, FOB destination-
collect.
Based on your discussion with Praktis Credit Manager, you both agreed that an allowance for
doubtful accounts should be maintained using the following rates:
60 days old and below 1%
61 to 90 days 2%
Over 90 days 5%
REQUIRED:
1. Compute for the adjusted balances of the following:

a. Accounts receivable P387,400
b. Allowance for doubtful accounts P 7,622
SOLUTION:
68
Per Adjustment
Books s Per Audit
Accounts receivable 442,500 1 (16,400) 387,400
2 15,000
3 (21,000)
4 (12,000)
5 (1,200)
6 (18,000)
7 (1,500)
60 days old and below 238,500 4 (12,000) 205,800
5 (1,200)
6 (18,000)
7 (1,500)
61 to 90 days 117,200 117,200
Over 90 days 85,400 3 (21,000) 64,400
Allowance for doubtful accounts 15,000 2 15,000 7,622
3 (21,000)
8 (1,378)
Adjusting Journal Entries
1 Advances to officers and employees 16,400
69
2 Accounts receivable 15,000
Erroneous recording of recovery from written off account
3 Allowance for doubtful accounts 21,000
Accounts receivable (>90 days) 21,000
Accounts that should be written off
4 Net sales 12,000
Accounts receivable (<60 days) 12,000
Unrecorded credit memo
5 Net sales 1,200
Unrecorded employee discount
6 Net sales 18,000
Inventory 13,000

Goods out on consignment erroneously
billed
7 Freight out 1,500
Unrecorded freight-out
70
8 Allowance for doubtful accounts 1,378
Doubtful accounts expense 1,378
1
60 days old and below 205,800 % 2,058
2
61 to 90 days 117,200 % 2,344
5
Over 90 days 64,400 % 3,220
Required allowance 7,622

Balance per books before this adjustment (15,000+15,000-
21,000) 9,000
Adjustment 1,378
PROBLEM NO. 4 Audit of allowance for doubtful accounts
Professional company produces paints and revealed products for sale to the construction industry
throughout Metro Manila. While sales have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which the
companys customers are paying their bills.
The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the
credit customers have taken advantage of the discount by paying within 10 days of the invoice
date. During the year ended December 31, 2015, the number of customers taking the full 30 days
to pay has increased. Current indications are that less than 60% of the customers are now taking
the discount. Uncollectible accounts as a percentage of total credit sales have risen from the 1.5%
provided in the past years to 4% in the current year.
In response to your request for more information on the deterioration of accounts receivable
collections, the companys controller has prepared the following report:
Professional Company
Accounts Receivable Collections
December 31, 2015
The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-
offs had been 1.5% of total credit sales for many years. However, during the year 2015, this
percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of
this balance in terms of age and probability is shown below:
71
Proportion to total Age of Accounts Probability of collection
64% 1-10 days 99.0%

18% 11-30 days 97.5%
8% Past due 31-60 days 95.0%
5% Past due 61-120 80.0%
3% Past due 121-180 65.0%
2% Past due over 180 days 20.0%
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300.
The company has provided for a monthly bad debt expense accrual during the year based on the
assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2015
amounted to P8,000,000, and write-offs of uncollectible accounts during the year totaled P292,500.
REQUIRED:
1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015.
2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2015.
SOLUTION:
Requirement
No.1
Category Aging ratio AR Balance Rate Allowance

1 10 days
64% 960,000 1.00% 9,600
11 30 days
18% 270,000 2.50% 6,750
31 60 days
8% 120,000 5.00% 6,000
61 120 days
5% 75,000 20.00% 15,000
121 180 days
3% 45,000 35.00% 15,750
over 180 days
2% 30,000 80.00% 24,000
100% 1,500,000 77,100
Requirement
No.2
72
Doubtful accounts expense 22,300 *
Allowance for doubtful accounts, 1/1 27,300
Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800

Required allowance (see no.
1) 77,100
Additional required allowance for doubtful accounts 22,300
PROBLEM NO. 5 Analysis of accounts receivable and related accounts

The poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an
allowance for bad debts are maintained separately for each division. On January 1, 2015 the
balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail
customers was a credit of P7,600.
The following summary pertains only to retail sales since 2012:
Credit Sales Bad Debts Written Off Bad Debts Recoveries
2012 P1,110,000 P26,000 P2,150
2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 4,200
Bad debts are provided for as a percentage of credit sales. The accountant calculates the percentage
annually by using the experience of the three years prior to the current year. The formula is bad
debts written off less recoveries expressed as a percentage of the credit sales for the same period.
Cash receipts in 2015 from credit sales to retail customers was P1,380,000.
REQUIRED:
1. Adjusted accounts receivable as of December 31, 2015
2. Adjusted allowance for doubtful accounts as of December 31, 2015
73
SOLUTION:
Requirement No. 1
Accounts receivable, 1/1/12 209,000
Credit sales for 2012 1,500,000
Collections during 2012 (1,380,200)
Accounts written off - 2012 (31,000)

Accounts receivable,
12/31/12 297,800
Requirement No. 2
Allowance for doubtful accounts, 1/1/12 7,600
Doubtful accounts expense - 2012 (see computation below) 30,000
Accounts written off - 2012 (31,000)
Recovery of accounts written off 2012 4,200
Allowance for doubtful accounts, 12/31/12 10,800
Computation of doubtful accounts expense - 2012:
Doubtful accounts expense for 2012 (P1,500,000 x 2%) 30,000
Computation of bad debt

rate:
Year Credit sales AR writen-off Recoveries Net
2009 1,110,000 26,000 2,150 23,850
2010 1,225,000 29,500 3,750 25,750
2011 1,465,000 30,000 3,600 26,400
74
3,800,000 85,500 9,500 76,000
Net accounts written off (2009 to 2011) 76,000
Divide by credit sales (2009 to 2011) 3,800,000
Percentage of uncollectible accounts to charge sales 2.00%
PROBLEM NO. 6 Audit of accounts receivable and related accounts

In connection with your examination of the financial statements of RIngo, Inc. for the year ended
December 31, 2015, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.
The December 31, 2015 balance in the Accounts Receivable control accounts is P837,900.
An aging schedule of the accounts receivable as of December 31, 2015 is presented below:
Age Net debit balance Percentage to be applied after corrections have

been made
60 days & under P387,800 1 percent
61 to 90 days 307,100 2 percent
91 to 120 days 89,800 5 percent
Over 120 days 53,200 Definitely uncollectible, P9,000; the remainder is
P837,900 estimated to be 25% uncollectible.
The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2015 P19,700
November 30, 2015 P6,100 13,600
December 31, 2015(P837,900 x 5%) P41,895 P55,495
Entries made to Doubtful Accounts Expense account were:

1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
2. A credit for P6,100 on November 30, 2015, and a debit to Allowance for Doubtful
Accounts because of a bankruptcy. The related sales took place on October 1, 2015.
There is a credit balance in one account receivable (61 to 90 days) of P11,000, it represents
an advance on a sales contract.
REQUIRED:
75
1. Determine the following as of and for the year ended December 31, 2015:
a. Accounts receivable
b. Allowance for doubtful accounts
c. Doubtful accounts expense
SOLUTION:
Requirement No. 1.a

GL/SL 60 61 to 90 91 to 120 over
120
Unadjusted balances
837,900 387,800 307,100 89,800 53,200
AJE No. 1
(9,000) (9,000)
AJE No. 2
(6,100) (6,100)
AJE No. 3
11,000 11,000
Adjusted balances 833,800 387,800 318,100 83,700 44,200
Requirement No. 1.b
Age of accounts balance Rate Allowance
60 387,800 1% 3,878
61 to 90 318,100 2% 6,362
91 to 120 83,700 5% 4,185
over 120 44,200 25% 11,050
833,800 25,475
Requirement No. 1.c
76
Unadjusted allowance for doubtful accounts
55,495
AJE no. 1
(9,000)
AJE no. 4 (squeeze)
(21,020) (30,020)
Required allowance (see no. 1.b)
25,475
Balance per books (P41,895 - P6,100)

35,795
AJE no. 2
6,100
AJE no. 4
(21,020) (14,920)
Doubtful accounts expense per audit
20,875
Requirement No. 2
1) Allowance for doubtful

accounts 9,000
Accounts receivable - over 120 days
9,000
To write off definitely uncollectible
accounts
2) Doubtful account expense

6,100
Accounts receivable - 91 to 120 days
6,100
To correct entry made in recording accounts written off
3) Accounts receivable - 61 to 90 days

11,000
Advances from
customers 11,000
77
To reclassify advances from customers
4) Allowance for doubtful

accounts 21,020
Doubtful account
expense 21,020
To adjust allowance to required balance
PROBLEM NO. 7 Analysis of notes receivable and related accounts

The balance sheet of Yoko Corporation reported the following long-term receivables as of
December 31, 2014:
Note receivable from sale of plant P6,000,000
Note receivable from officer 1,600,000
In connection with your audit, you were able to gather the following transactions during 2015 and
other information pertaining to the companys long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable
in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1, 2015.
b. The note receivable from officer is dated December 31,2014, earns interest at 10% per
annum, and is due on December 31,2017. The 2015 interest was received on December
31,2015.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in exchange for
an P800,000 non-interest bearing note due on April 1,2017. The note had no ready market,
and there was no established exchange price for the equipment. The prevailing interest rate
for a note of this type at April 1, 2015, was 12%. The present value factor of 1 for two
periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co. on July 1, 2015, for P4,000,000 under
an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on July
1,2015, in addition to the down payment of P1,200,000. The equal annual payments of
principal and interest on the note will be P902,500 payable on July 1, 2016, 2017, 2018
and 2019. The land had an established cash price of P4,000,000 and its cost to the
corporation was P3,000,000. The collection of the installments on this note is reasonable
assured.
REQUIRED:
Determine the following as of and for the year ended December 31,2015:
1. Noncurrent receivables
2. Current portion of long-term receivables
3. Accrued interest receivable
78
4. Interest income
5.
SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000)

4,000,000
Less installment due on April 1, 2013
2,000,000 2,000,000
Note receivable from officer, due 12/31/14
1,600,000
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797)

637,600
Discount amortization-2012 (P637,600 x 12% x 9/12)
57,384 694,984
Note receivable from sale of
land
Balance, 12/31/12
2,800,000
Less principal installment due on 7/1/13
Total amount to be received

902,500
Less interest (P2,800,000 x 11%)
308,000 594,500 2,205,500
Total noncurrent receivables, 12/31/12
6,500,484
Requirement No. 2
Note receivable from sale of plant due on 4/1/13

2,000,000
Note receivable from sale of land (see no. 1)
594,500
Current portion of long-term receivables
2,594,500
79
Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12)

360,000
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Accrued interest receivable, 12/31/12
514,000
Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12

180,000
P4,000,000 x 12% x 9/12
360,000 540,000
Note receivable from officer (P1,600,000 x
10%) 160,000
Note receivable from sale of equipment (P637,600 x 12% x
9/12) 57,384
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Total interest income for 2012
911,384
PROBLEM NO. 8 Audit of notes receivable and related accounts
On January 1, 2015, Pedro Company sold land that originally cost P400, 000 to Buyer Company.
As payment, Buyer gave Pedro Company a P600, 000 note. The note bears an interest rate of 4%
and is to be repaid in three annual installments of P200, 000 (plus interest on the outstanding
balance). The first payment is due on December 31, 2015. The market price of the land is not
reliably determinable =. The prevailing rate of interest for notes of this type is 14% on January 1,
2015 and 15% on December 31, 2015.
Pedro made the following journal entries in relation to the sale of land and the relate note
receivable.
January 1, 2015
Notes Receivable P600,000
Land P400,000
Gain on sale of Land 200,000
December 31, 2015

80
Cash P224,000
Notes receivable P200,000
Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as
part of trade and other receivables.
REQUIRED:
a. Correct gain on sale of land
b. Correct interest income
c. Overstatement of profit
d. Correct carrying amount of note receivable
e. Overstatement of working capital
SOLUTION:
Requirement No. 1.a
PV of consideration receivable (see computation

below) 503,105
Carrying amount of
land (400,000)
Correct gain on sale of
land 103,105
Present value of cash flows to determine initial CA:
Date Principal Interest (4%) Total PVF (14%) PV, 1/1/12 PV,
12/31/12
12/31/1 200,000 0.8772 196,493
2 24,000 224,000
12/31/1 200,000 0.7695 166,212 189,475
3 16,000 216,000
12/31/1 200,000 0.6750 140,400 160,056
4 8,000 208,000
600,000 503,105 349,531
81
Requirement No. 1.b
Amortization schedule using effective interest

method:
Date EI (14%) NI (4%) Disc. Repayment AC

Amort.
1/1/12
503,105
12/31/1 70,435
2 24,000 46,435 200,000 349,540
12/31/1 48,936
3 16,000 32,936 200,000 182,476
12/31/1 25,524
4 8,000 17,524 200,000 -
23
Interest income - 2012 (P503,105 x

.14) 70,435
Requirement No. 1.c
Gain on sale of land - overstated (P200,000 -

P103,105) 96,895
Interest income for 2012 - understated (P70,435 -
P24,000) (46,435)
Net overstatement of 2012 profit
50,460
Requirement No. 1.d
Carrying amount, 12/31/12 (see

schedule) 349,540
Requirement No. 1.e
Amount reported as notes receivable

400,000
Correct current portion of NR (P349,540 - P182,476)
167,064
Overstatement of CA/working capital
232,936
82
Requirement No. 2
Adjusting journal
entries:
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land

96,895
Discount on notes receivable (FV-PV)
96,895
To record amortization of discount on 12/31/12:
Discount on notes receivable

46,435
Interest income
46,435
PROBLEM NO. 9 Audit of notes receivable and related accounts
My Love Corporation is a local company engaged in buying and selling of manufacturing

equipment. On 1 January 2014, My Love Corporation sold equipment, with cash price of
P1,500,000, to Silly Love Corporation. The cost of the equipment is P750,000. Silly Love signed
a deferred payment contract that provides for a down payment of P300,000and a 5-year notes for
P1,705,900. The note is to be paid In 5 equal annual payments of P341,180. The payments include
interest and are made on December 31 of each year, beginning on December 31, 2014.
My Love Corporation made the following entries in relation to the sale of the equipment and the
related note receivable:
January 1, 2014
Cash P 300,000
Notes Receivable 1,705,900
Cost of goods sold 750,000
Sales P2,005,900
Inventory 750,000
December 31, 2014
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Cash P 341,180
Notes Receivable P 341,180
December 31, 2015
Cash P 341,180
Notes Receivable P 341,180
My Love Corporation reported the notes receivable in its statement of financial position at
December 31, 2014 and 2015 as part of trade and other receivables.
REQUIRED:

1. The effective interest rate
2. Overstatement of profit for 2014
3. Overstatement of retained earnings as of December 31,2015
4. Overstatement of working capital as of December 31,2015
SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172

Ordinary annuity factor at 13% for 5 periods 3.5172
Requirement No. 2 Profit
over (under)
Sales - over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income - under
Reported 0
Should be (refer to amortization schedule) 156,000 (156,000)
84
Net misstatement 349,900
Requirement No. 3 RE, 12/31/12
over (under)
2011 profit overstated (see no. 2) 349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927 (131,927)

Net misstatement 217,973
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
Should be (refer to amortization schedule) 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084
Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900
85
PROBLEM NO. 10 Analysis of notes receivable and related accounts
You are examining the financial statements of Merlyn, In., for the year ended December 31, 2015.
Your analysis of the 2015 entries in the Notes Receivable account follows:
Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31,2015
Date
2015 Debit Credit
Jan. 1 Balance Forwarded P118,000
Received P25,000 6% note due
10/29/15 from Anna whose trade
account was past due.
Feb. 28 Discounted Anna note P24,960
Mar. 31 Received non-interest-bearing demand 6,200

note from Julia, the corporations
treasurer for a loan
Aug. 30 Received principal and interest due from 34,200

Robinson in accordance with agreement,
two principal payments in advance.
Sept. 4 Paid protest fee on note dishonored 500

by Pepper.
Nov. 1 Received check dated 2/1/16 in 8,120

settlement of Tripper note. The check
was included in cash on hand 12/31/15
Nov. 4 Paid protest fee and maturity value of 26,031

Anna note to bank. Note discounted
2/28/15 was dishonored.
86
Dec. 27 Accepted equipment with a fair market 24,000
value of P24,000 in full settlement
from Anna
Dec. 31 Received check dated 1/2/16 from 6,200

Julia in payment of 3/31/15 note. (The
Cash was included in petty cash until
1/2/16 when it was returned to Julia in
exchange for new demand note for the
same amount.)
Dec. 31 Received principal and interest on

Pepper note 42,437
Dec. 31 Accrued interest on Robinson note 1,200

P151,931 P139,917
The following information is available:
(1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable
account and accredit of P400 in the Unearned Interest Income account. The P118,000 debit
in the Note Receivable account consisted the following three notes:
Robinson note of 8/31/08 payable in annual

installments of P10,000 principal plus accrued P70,000
interest at 6% each August 31
Tripper note discounted to Merlyn, Inc. at 6%

11/1/14 due 11/1/15 8,000
Pepper note for P40,000 plus 6% interest dated

12/31/14 due on 9/1/15 40,000
(2) No entries were made during 2015 to the Accrued Interest Receivable of the Unearned
Interest Income account and only one entry for a credit of P1,200 on December 31,
appeared in the Interest Income account.
(3) All notes were from the trade customers unless otherwise indicated.
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(4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts
indicate otherwise.
REQUIRED:
1. Determine the following as of and for the year ended December 31,2015:
a. Notes receivable- trade
b. Interest income
2. Adjusting entries as of December 31,2015
SOLUTION:.
Requirement No. 2
1/1 Notes receivable 25,000
Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12) 250
3/29 Notes receivable - Officers 6,200
Interest receivable 1,400
88
9/4 Notes receivable dishonored 500
Notes receivable 500
Notes receivable dishonored 40,000
Cash 8,120
11/4 Notes receivable dishonored 26,031
Notes receivable discounted 25,000
Loss on settlement of NR 2,031
89
12/31 Interest receivable (P40,000 x 6% x 4/12) 800
Interest income 400
12/31 Interest receivable (P8,000 x 6% x 2/12) 80
Interest income 80
12/31 Unearned interest income 400
Interest income 400
Requirement No. 1.a
Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
(25,000)
12/27 24,000
12/31 6,200
90
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000
Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 48,000
Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12

3) NR from Julia - non-trade
Requirement No. 1.b
Robinson:
Jan. to Aug. (P70,000 x .06 x 8/12) 2,800
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600

Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937
Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267
PROBLEM NO. 11 Loan impairment
Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1,2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in
91
five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination cost
and P50,000 of indirect loan origination cost. In addition, Bahrain Banks charges the borrower a
5-point nonrefundable loan origination fee.
The borrower paid the interred due on December 31, 2014. However during 2015 the borrower
began to experience financial difficulties, requiring the bank to reassess the collectability of the
loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be
recovered. The P8,000,000 principal amount is expected to be collected in two equal installments
on December 31,2017 and December 31,2019. The prevailing interest rates for similar type of note
as of December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED:

1. Interest income to be recognized in 2014
2. Carrying amount of the loan as of December 31, 2014
3. Loan impairment loss to be recognized in 2015
SOLUTION:
Requirement No.s 1 & 2
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900
Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.

1/1/11 9,630,900
12/31/11 1,059,399 1,000,000 59,399 9,690,299
12/31/12 1,065,933 1,000,000 65,933 9,756,232
12/31/13 1,073,186 1,000,000 73,186 9,829,418
92
12/31/14 1,081,236 1,000,000 81,236 9,910,654
12/31/15 1,089,346 1,000,000 89,346 10,000,000
826
Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032
PROBLEM NO. 12 Theory
1. In the audit of which of the following general ledger accounts will tests of controls be
particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
2. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit approved before goods are shipped.
3. The purpose of tests of controls over billing is to determine whether

a. Billed goods have been shipped
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
93
4. An auditor most likely would review an entitys periodic accounting for the numerical
sequence of shipping documents and invoices to support managements financial statement
assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation
d. Completeness
5. Which of the following might be detected by an auditors review of clients sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
6. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year-end if
a. Positive confirmation sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
7. The auditor finds situation in which one person has the ability to collect receivables, make
deposits, issue credit memos and record receipt of payments. The auditor suspects the
individual may be stealing from cash receipts. Which of the following audit procedures
would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform, a detailed review of debits to customer discounts, sales returns, or other
debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to the
entry in the cash receipts journal.
8. All of the following are examples of substantive tests to verify valuation of net accounts
receivable except the
a. Re-computation of the allowance for bad debts
b. Inspection of accounts for current versus non-current status in the statement of
financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.
94
9. Confirmation, which is a specific type of inquiry, is the process of obtaining a presentation
of information or of an existing condition directly from a third party. Two assertions for
which confirmation of accounts receivable balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligation
d. Existence and completeness
10. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Number of Consideration by
Level of Inherent Small Business the Recipient is
and Control Risk is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely
11. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second
requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existences assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.
ANSWERS:
1. D 5. D 9. B
2. B 6. D 10. A
3. A 7. C 11. D
4. D 8. B 12. B
95
III AUDIT OF INVENTORIES
PROBLEM NO. 1 Computation of adjusted inventory
Ovation Company asks you to review its December 31, 2015 inventory values and prepare the
necessary adjustments to the books. The following information is given to you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals
P2,348,900 inventory on hand at December 31, 2015.
96
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on
December 15 from Standing. This merchandise was shipped F.O.B shipping point on
December 29 and arrived in January. The invoice arrived and was recorded on December
31.
c. Included in inventory is merchandise sold to Oval on December 30, F.O.B destination. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as
a sale on account for P128,000 on December 31. The merchandise cost P73,500 and Oval
received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice
price of P156,300. The merchandise was shipped FOB. destination. The invoice, which has
not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries.

The merchandise was received on December 31 after the inventory had been counted. The
invoice was received and recorded on December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from

Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp FOB. shipping point. This merchandise
was shipped after it was counted. The invoice was prepared and recorded as a sale for
P189,000 on December 31. The cost of this merchandise was P105,200 and Kemp received
the merchandise on January 5.
h. Excluded from inventory was carton labeled, Please accept for credit. This carton
contains merchandise costing P15,000 which had been sold to a customer for P25,000. No
entry had been made to the books to reflect the return, but none of the returned merchandise
seemed damaged.
REQUIRED:
Determine the adjusted balance of Inventory.
SOLUTION:
Unadjusted inventory 2,348,900

b) Goods in-transit purchased FOB shipping - not
included 134,200
c) Goods in-transit sold FOB destination - included -
d) Goods purchased and received already - included -
97
e) Goods purchased and received already - not included 85,400
f) Goods held on consignment - included (104,380)
g) Goods in-transit sold FOB shipping point - included (105,200)

e) Goods returned by customers, received already - not
included 15,000
Adjusted inventory 2,373,920
PROBLEM NO. 2 Computation of adjusted inventory and related accounts

Bulls Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2015:
Inventory at December 31, 2015

(based on physical count on Dec. 31, 2015) P 980,000
Accounts Payable at December 31, 2015 586,000
Net Sales (sales less sales returns) 10,048,000
Additional information follows:
a. Goods held on consignment from Chicago to Bulls amounting to P9,000 were included in
the physical count of goods in Bulls warehouse on December 31, 2015, and in accounts
payable at December 31, 2015.
b. Retailers were holding P50,000, at cost, of goods on consignment from Bulls, at their stores
on December 31, 2015.
c. Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2015. These goods had a cost of P31,000 and were billed at P40,000. The
shipment was on Bulls loading dock waiting to be picked up by the common carrier.
d. P15,000 worth of parts which were purchased from Deng Co. and paid for in December
2015 were sold in the last week of 2015 and appropriately recorded as sales of P21,000.
The parts were included in the physical count on December 31, 2015 because the parts
were on the loading dock waiting to be picked up by the customer.
e. Goods were in transit from a vendor to Bulls on December 31, 2015. The invoice cost was
P71,000 and the goods were shipped FOB shipping point on December 29, 2015.
f. Work in process inventory costing P30,000 was sent to an outside processor for plating on
December 30, 2015.
98
g. Goods returned by customers and held pending inspection in the returned goods area on
December 31, 2015 were not included in the physical count. On January 8, 2016, the tools
costing P32,000 were inspected and returned to inventory. Credit memos totaling P47,000
were issued to the customers on the same date.
h. Goods shipped to a customer FOB destination on December 26, 2015 were in transit at
December 31, 2015, and had a cost of P21,000. Upon notification of receipt by the
customer on January 2, 2016, Bulls issued a sales invoice for P42,000.
i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December
31, 2015, were recorded on a receiving report dated January 2, 2016. The goods were not
included in the physical count, but the invoice was included in accounts payable at
December 31, 2015.
j. Goods received from a vendor on December 26, 2015 were included in the physical count.
However, the related P56,000 vendor invoice was not included in accounts payable at
December 31, 2015, because the accounts payable copy of the receiving report was lost.
k. On January 3, 2016, a monthly freight bill in the amount of P6,000 was received. The bill
specifically related to merchandise purchased in December 2015, one-half of which was
still in the inventory at December 31, 2015. The freight charges were not included in either
the inventory or accounts payable at December 31, 2015.
REQUIRED:
a. Inventory
b. Net Sales
c. Accounts Payable
SOLUTION:
Requirement No. 1
Accts.
Inventory Payable Sales, net
Unadjusted balances 980,000 586,000 10,048,000

a - Goods held on consignment (9,000) (9,000) -
b - Goods out on consignment 50,000 - -
99
c - Unshipped goods, erroneously
billed - - (40,000)
d - Goods with constructive
delivery (15,000) - -
e - Goods purchased FOB shipping
point 71,000 71,000 -
f - WIP sent to outside processor 30,000 - -
g - Goods returned by customers 32,000 - (47,000)
h - Goods sold FOB destination 21,000 - -

i - Goods excluded from physical
count 27,000 - -
j - Unrecorded purchases - 56,000 -
k - Unrecorded freight-in 3,000 6,000
Adjusted balances 1,190,000 710,000 9,961,000
Requirement No. 2
a) Accounts payable 9,000

Inventory 9,000
b) Inventory 50,000
P/L summary (Cost of sales) 50,000
c) Sales 40,000
Acccounts receivable 40,000
d) P/L summary (Cost of sales) 15,000

Inventory 15,000
e) Inventory 71,000
f) Inventory 30,000
100
g) Inventory 32,000

Acccounts receivable 47,000
h) Inventory 21,000
i) Inventory 27,000
j) P/L summary (Cost of sales) 56,000

k) Inventory 3,000

PROBLEM NO. 3 Computation of adjusted inventory and related accounts
You were engaged by Quezon 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:
SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded P5,200,000 Balance forwarded P2,700,000
Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000
Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000
Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000
Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000
Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000)
P - P -
101
Note: SI = Sales Invoice RR = Receiving Report
Inventory P600,000
Accounts Receivable 500,000
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 in any
Sales Invoices whose number is larger than No. 968. You also obtained the following additional
information:
a) 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 P18,000.
b) 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.
Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises
on January 2. This order was sold for P100,000 per Sales Invoice No. 968.
c) 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.
d) 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
P2,000 was paid by the client. However, the freight was deducted from the purchase price
of P800,000.
REQUIRED:
a. Sales
b. Accounts Receivable
c. Inventory
d. Accounts Payable
e. Purchases
102
SOLUTION:
Adjustments
Per books Inc.(Dec.) Per audit
Sales 5,530,000 1 (130,000) 5,250,000
5 (150,000)
Accounts receivable 500,000 1 (130,000) 220,000
5 (150,000)
Inventory 600,000 3 64,000 864,000
4 80,000
6 120,000
Accounts payable 400,000 2 18,000 418,000
Purchases 3,000,000 2 18,000 3,018,000
Note : Prepare "T" accounts then post identified adjustments.
Adjusting entries
1 Sales (P46,000+P68,000+P16,000) 130,000

To adjust unshipped goods recorded as sales (SI No. 969, 970 and
971)
2 Purchases 18,000

To take up unrecorded purchases (RR No. 1060)
3 Inventory 64,000
P/L summary (Cost of
sales) 64,000
To take up goods under RR No. 1063
103
4 Inventory (P100,000/1.25) 80,000
sales) 80,000
To take up unshipped goods under SI No.
968
5 Sales 150,000

To reverse enrty made to record SI
No. 966
6 Inventory (P150,000/1.25) 120,000

sales) 120,000
To take up goods under SI No. 966
PROBLEM NO. 4 Effect of inventory errors
During your audit of the Makati Corporation for the year ended December 31, 2015, you found
the following information relating to certain inventory transactions from your observation of the
clients physical count and review of sales and purchases cutoff:
a. Goods costing P180,000 were received from a vendor on January 3, 2016. The goods were
not included in the physical count. The related invoice was received and recorded on
December 30, 2015. The goods were shipped on December 31, 2015, terms FOB Shipping
Point.
b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2015, and were
received by the customer on January 2, 2016. The terms of the invoice were FOB Shipping
Point. The goods were included in the ending inventory for 2015 and the sale was recorded
in 2016.
c. The invoice for goods costing P150,000 was received and recorded as a purchase on
December 31, 2015. The related goods, shipped FOB Destination, were received on
January 2, 2016, but were included in the physical inventory as goods in transit.
d. A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB

Destination, was recorded as a sale upon shipment. The goods, costing P400,000 and
delivered to the customer on January 6, 2016, were not included in the 2015 ending
inventory.
104
e. Goods valued at P250,000 are on consignment from a vendor. These goods are included in
the physical inventory.
f. Goods valued at P160,000 are on consignment with a customer. These goods are not
included in the physical inventory.
REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the year ended
December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Cost of Sales
c. Profit
d. Working Capital
SOLUTION:
Effect on Effect on
Sales Purchases Inventory COS Profit WC
over over over over over
over (under) (under) (under) (under) (under) (under)
a - - (180,000) 180,000 (180,000) (180,000)
b (300,000) - 200,000 (200,000) (100,000) (100,000)
c - 150,000 150,000 - - -
d 600,000 (400,000) 400,000 200,000 200,000
e 250,000 (250,000) 250,000 250,000
f (160,000) 160,000 (160,000) (160,000)
300,000 150,000 (140,000) 290,000 10,000 10,000
Requirement No. 2
a) Inventory 180,000
105
b) Accounts receivable 300,000
Sales 300,000
Inventory 200,000
c) Accounts payable 150,000
Inventory 150,000
d) Sales 600,000
Inventory 400,000
e) Cost of sales 250,000
Inventory 250,000
f) Inventory 160,000
PROBLEM NO. 5 Effect of inventory errors
You were engaged to perform an audit of the accounts of the Oh! Darling Corporation for the year
ended December 31, 2015, and you observed the taking of the physical inventory of the company
on December 30, 2015. Only merchandise shipped by the company to customers up to and
including December 30, 2015 have been eliminated from inventory. The inventory as determined
by physical inventory count has been recorded on the books by the companys controller. No
106
perpetual inventory records are maintained. All sales are made on an FOB Shipping Point basis.
You are to assume that all purchase invoices have been correctly recorded. The inventory was
recorded through the cost of sales method.
The following lists of sales invoices are entered in the sales books for the month of December
2015 and January 2016, respectively.
DECEMBER 2015
Sales Invoice Amount Sales Invoice Date Cost Date Shipped
a) P150,000 Dec. 21 P100,000 Dec. 31, 2015
b) 100,000 Dec. 31 40,000 Nov. 03, 2015
c) 50,000 Dec. 29 30,000 Dec. 30, 2015
d) 200,000 Dec. 31 120,000 Jan. 03, 2016
e) 500,000 Dec. 30 280,000 Dec. 29, 2015
(shipped to
consignee)
JANUARY 2016
f) P300,000 Dec. 31 P200,000 Dec. 30, 2015
g) 200,000 Jan. 02 115,000 Jan. 02, 2016
h) 600,000 Jan. 03 475,000 Dec. 31, 2015
REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the year ended
December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Sales
c. Profit
d. Working Capital
PROBLEM NO. 5 - Oh! Darling

Corporation
Adjusting journal entries Inventory Sales COS Profit AR WC

over over over over over over
(under) (under) (under) (under) (under) (under)
a) Cost of sales 100,000 (100,000) 100,000
Inventory 100,000 100,000 100,000

b) None
c) None
d) Sales 200,000 200,000 200,000

Accounts
receivable 200,000 200,000 200,000
107
e) Sales 500,000 500,000 500,000
Accounts
receivable 500,000 500,000 500,000
Inventory 280,000 (280,000) (280,000)
Cost of sales 280,000 280,000 (280,000)
f) Accounts receivable 300,000 (300,000) (300,000)
Sales 300,000 (300,000) (300,000)

g) None
h) Accounts receivable 600,000 (600,000) (600,000)
Sales 600,000 (600,000) (600,000)
Cost of sales 475,000 (475,000) 475,000
Inventory 475,000 475,000 475,000
295,000 (200,000) (295,000) 95,000 (200,000) 95,000
PROBLEM NO. 6 Cost flow assumptions
Orang Dampuan Co. wholesales bicycles. It uses the perpetual inventory system. The companys
reporting date is 31 December. At 1 December 2015, inventory on hand consisted of 350 bicycles
at P820 each and 43 bicycles at P850 each. During the month ended 31 December 2015, the
following inventory transactions took place (all purchase and sales transactions are on credit)
December:
02 Sold 300 bicycles forP1, 200 each.
03 Five bicycles were returned by a customer. They had originally cost P820 each and were
sold for P1, 200 each.
09 Purchase 55 bicycles at P910 each.
13 Purchased 76 bicycles at P960 each.
15 Sold 86 bicycles for P1, 350 each.
16 Returned one damaged bicycles to the supplier. This bicycle had been purchased on 9
December.
22 Sold 60 bicycles for P1, 250 each
26 Purchased 72 bicycles at P980 each
29 Two bicycles, sold on 22 December, were returned by a customer. The bicycles were badly
damages so it was decided to write them off. They had originally cost P910 each.
108
REQUIRED:
Determine the cost of inventory as of Dec 31, 3015 and the cost of sales for the month of December
31, 2015.
1. First in, first out (FIFO) method
2. Moving average method
SOLUTION:
Units UC TC
Dec. 1 350 820 287,000
43 850 36,550
Dec. 2 (300)
Dec. 3 5
Dec. 9 55 910 50,050
Dec. 13 76 960 72,960
Dec. 15 (86)
Dec. 16 (1) 910 (910)
Dec. 22 (60)
Dec. 26 72 980 70,560
154 516,210
FIFO
Composition of inventory, 12/31
Date Units UC TC
Dec. 26 72 980 70,560
Dec. 10 76 960 72,960
109
Dec. 9 6 910 5,460
Total 154 148,980
Inventory, 12/1 323,550
Net Purchases 192,660

Total goods available for
sale 516,210
Inventory, 12/31 (148,980)
Moving average
Purchased COS Balance

Date Units UC TC Units UC TC Units UC TC
Dec. 1 350 820 287,000
43 850 36,550
393 823 323,550
Dec. 2 300 823 246,900 93 823 76,650
Dec. 3 (5) 823 (4,115) 98 823 80,765
Dec. 9 55 910 50,050 98 823 80,765
55 910 50,050
153 855 130,815

Dec.
13 76 960 72,960 153 855 130,815
76 960 72,960
229 890 203,775
110
Dec.
15 86 890 76,540 143 890 127,235
Dec.
16 (1) 910 (910) 142 890 126,325
Dec.
22 60 890 53,400 82 890 72,925
Dec.
26 72 980 70,560 82 890 72,925
72 980 70,560
192,660 372,725 154 932 143,485
PROBLEM NO. 7 Measurement of inventory and inventory shortage
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company
operates a perpetual inventory system, the first in first out method used to assign costs to inventory
items. Transactions and other related information regarding two of the items (baked beans and
plain flour) are given below for June 2015 the last month of the companys reporting period.
Unit packaging Baked beans Plain Flour

Case containing 25 x Box containing 12 x
410g cans 4kg bags
Inventory @ 1 June 2015 35,000 cases @P19.60 62,500 boxes @38.40
Purchases 1. 10 June: 20,000 cases @ 1. 3 June: 15,000 boxes

P19.50 per case @ P38.45
2. 19 June: 47,000 cases 2. 15 June: 20,000 boxes
@19.70 per case @ P38.45
3. 29 June: 24,000 boxes
@ P39
Purchase Items 2/10, n/30, FOB n/30, FOB destination

destination
June sales 73,000 cases @P28.50 95,000 boxes @ P40
Returns and Allowances A customer returned 5,000 As June 15 purchase was

Cases that had been shipped unloaded, 1000 boxes were
in error. Customers account discovered damaged. Credit
Credited for P142, 500 of P38, 450 was received by
111
Jay Roy retailing ltd.
Physical count at 30 32,600 cases on hand 1,500 boxes on hand

June 2015
Explanation of variance No explanation found assumed Boxes purchased on 29

stolen June still in transit on 30
June
Net Realizable Value at P29 per case P38.50 per box

30 June 2015
REQUIRED:
1. Inventory shortage
2. Inventory to be reported at June 30, 2015 balance sheet
SOLUTION:
Requirement No. 1
Baked beans Quantity Price Amount
Balance, June 1 35,000 19.60 686,000
Purchase 10 June 20,000 19.50 390,000
Purchase 19 June 47,000 19.70 925,900
Sales (73,000 cases) (35,000) 19.60 (686,000)
(20,000) 19.50 (390,000)
(18,000) 19.70 (354,600)
Sales returns 5,000 19.70 98,500
Perpetual balance 34,000 19.70 669,800
Inventory shortage (squeeze) (1,400) 19.70 (27,580)
112
Physical count 32,600 19.70 642,220
Plain flour Quantity Price Amount
Balance, June 1 62,500 38.40 2,400,000
Purchase 03 June 15,000 38.45 576,750
Purchase 15 June 20,000 38.45 769,000
Purchase 29 June 24,000 39.00 936,000
Sales (95,000 boxes) (62,500) 38.40 (2,400,000)
(15,000) 38.45 (576,750)
(17,500) 38.45 (672,875)
Perpetual balance 26,500 38.45 1,032,125
Damaged goods (1,000) 38.45 (38,450)
Goods in transit (24,000) 39.00 (936,000)
Physical count 1,500 38.45 57,675
Requirement No. 2
Quantity Cost NRV LCN
Baked beans 32,600 642,220 945,400 642,220
Plain flour 1,500 57,675 57,750 57,675
Total 699,895
PROBLEM NO. 8 - Write down of inventory to net realizable value
Banger sales company uses FIFO method in calculation cost of goods sold for the three products
that the company sells. At July 1, the balance of inventory account was P658, 500, and the
113
allowance for inventory write down was P3, 000. Inventories and purchase information concerning
the three products are given for the month of July.
Date Particulars C P A
July 1 Inventory 50,000 units 30,000 units 65, 000 units
at P6 at P10 at P.09
July 1-15 Purchases 70, 000 units 45, 000 units 30,000 units
At P6.50 at P10.50 at P1.25
July 16-31 Purchases 30, 000 units at

P8
July 1-31 Sales 105,000 units 50, 000 units 45, 000 units
July 31 Sales price per P8 P11 P2

unit
On July 31, the companys suppliers reduced their prices from the most recent purchase prices by
the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Bangar
decided to reduce its sales price on all items by 10%, effective August 1. Bangar selling cost is
10% of sales price. Products C and P have a normal profit (after selling cost) of 30% on sales
prices, while the normal profit on product A ( after selling cost) is 15% of sales price.
REQUIRED
1. Inventory to be reported at July, 31, 2015 statement of financial position
2. Loss on inventory write down for the month of July 2015
3. Cost of sales including loss on inventory write down for the month of July 2015
114
SOLUTION:
Computation of units on hand, 7/31:

C P A
Inventory, 7/1 50,000 30,000 65,000
Purchases, 7/1-15 70,000 45,000 30,000
Purchases, 7/16-31 30,000
TGAS 150,000 75,000 95,000
Sales (105,000) (50,000) (45,000)
Inventory, 7/31 45,000 25,000 50,000
Requirement No. 1
Units in Ending
Inventory Est. Selling
Item (FIFO) Unit cost Total cost Price (a)
Product C 30,000 8.00 240,000 7.20
15,000 6.50 97,500 7.20
45,000 337,500
Product P 25,000 10.50 262,500 9.90
Product A 30,000 1.25 37,500 1.80
20,000 0.90 18,000 1.80
50,000 55,500
655,500
115
Est. Cost to Inventory at
Sell (b) NRV LCN Total NRV LCN Allowance
0.72 6.48 6.48 194,400 194,400 45,600

0.72 6.48 6.48 97,200 97,200 300
291,600 291,600 45,900
0.99 8.91 8.91 222,750 222,750 39,750
0.18 1.62 1.25 48,600 37,500 -

0.18 1.62 0.90 32,400 18,000 -
81,000 55,500 -
595,350 569,850 85,650
(a) Existing selling price x .9

(b) Amount in letter (a) x .1
Requirement No. 2
Inventory at
Item Total cost LCN Allowance (a)
Product C 337,500 291,600 45,900

Product P 262,500 222,750 39,750
Product A 55,500 55,500 -
655,500 569,850 85,650
(a) Inventory at cost - Inventory at LCN
Required allowance, 7/31 85,650
Recorded allowance, 7/1 (3,000)
116
Loss on inventory writedown 82,650
Requirement No.
3
Inventory, 7/1 (at cost) 658,500
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x
P8) 695,000
Product P (45,000 units x P10.50) 472,500

Product A (30,000 units x
P1.25) 37,500 1,205,000
Total goods available for sale 1,863,500
Inventory, 7/31 (at cost) (655,500)
Cost of sales before loss on inventory writedown 1,208,000
Loss on inventory writedown 82,650
Cost of sales including loss on inventory writedown 1,290,650
Inventory, 7/1 (at LCN) (P658,500 -

P3,000) 655,500
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x
P8) 695,000
Product P (45,000 units x P10.50) 472,500

Product A (30,000 units x
P1.25) 37,500 1,205,000
117
Inventory, 7/31 (at LCN) (569,850)
Cost of sales including loss on inventory writedown 1,290,650
PROBLEM NO. 9 - Inventory estimation
Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased
from several suppliers and is warehoused until sold to customers.
In conducting your audit for the year ended December 31, 2015, you were satisfied that the system
of internal control was good. Accordingly, you observed the physical inventory at an interim date,
November 30, 2015 instead of at year end. You obtained the following information from your
clients general ledger:
Inventory, January 1, 2015 P1, 312,500

Physical inventory, November 30, 2015 1, 425,000
Sales for 11 months ended Nov. 30, 2015 12,600,000
Sales for the year ended Dec. 31, 2015 14,400,000
Purchases for 11 months ended Nov. 30, 2015 10,125,000
(before audit adjustments)
Purchases for the year ended Dec. 31, 2015 12,000,000
(before audit adjustments)
Your audit disclosed the following information:

a.) Shipments received in November and included in the physical inventory but recorded as
December purchases P112, 500
b.) Shipment received in unsalable condition and excluded from physical inventory. Credit memos
had not been received nor chargebacks to vendors been recorded:
Total at Nov 30, 2015 P15, 000
Total at Dec 31, 2015 (including the November unrecorded chargebacks) P22, 500
c.) Deposit made with vendor and charged to purchases in October 2015. Product was shipped in
January 2016 P30, 000
d.) Deposit made with vendor and charged to purchases in November 2015. Product was shipped
FOB destination on November 29, 2015 and was included in November 30, 2015 physical
inventory as goods in transit P82, 500
118
e.) Through the carelessness of the receiving department shipment in early December 2015 was
damaged by rain. This shipment was later sold on the last week of December at cost.
P150, 000
REQUIRED:
Determine the December 31, 2015 inventory using the gross profit method.
SOLUTION:
Computation of adjusted balances:

Inventory Purchases Purchases
Up to Up to Dec.
Nov. 30 Nov. 30 31
Unadjusted balances 1,425,000 10,125,000 12,000,000
a - 112,500 -
b - (15,000) (22,500)
c - (30,000) (30,000)
d (82,500) (82,500) -
e - - -
1,342,500 10,110,000 11,947,500
Inventory, January 1 1,312,500
Add - Net purchases up to Nov. 30 10,110,000
Less - Inventory, Nov. 30 1,342,500
119
Cost of sales for 11 months 10,080,000
Sales for 11 months ended Nov. 30 12,600,000
Cost of sales for 11 months ended Nov. 30 (10,080,000)
Gross profit 2,520,000
Divide by sales for 11 months ended Nov. 30 12,600,000
Gross profit rate for 11 months ended Nov. 30 20.00%
Computation of inventory, 12/31
Inventory, January 1 1,312,500
Add - Purchases for the year ended Dec. 31 11,947,500
Less - Cost of sales

Cost of sales with profit [(14,400,000 - 150,000)
x 80%] 11,400,000
Cost of sales without profit 150,000 11,550,000
Estimated inventory, December 31 1,710,000
PROBLEM NO. 10 Inventory estimation
On April 21, 2015 a fire damaged the office and warehouse of Muntinlupa Company. The only
accounting record saved was the general ledger from which the trial balance was prepared.
Muntinlupa Company
Trial Balance
March 31, 2015
Debit Credit
Cash 180,000
120
Accounts Receivable 400,000
Inventory, Dec 31, 2014 750,000
Land 350,000
Building 1,100,000
Acc. Dep 413,000
Other assets 56,000
Accounts payable 237, 000
Accrued expenses 180, 000
Share capital, 100 par 1,000,000
Retained earnings 520, 000
Sales 1,350,000
Purchases 520, 000
Operating expense 344,000 __________
Totals P3, 700,000 P3, 700,000
The following data and information have been gathered:
a.) The companys year end is December 31
b.) And examination of the April bank statement and cancelled checks revealed that checks written
during the period April 1 to 21 totalled P130, 000: P57, 000 paid to accounts payable as of March
31, P34, 000 for April merchandise purchases, and P39, 000 paid for other expenses. Deposits
during the same period amounted to 129,500 which consisted of receipts on account from
customers with the exception of a 9,500 refund from a vendor for merchandise in April
c.) Correspondence with the suppliers revealed unrecorded obligations at April 21 of 106,000 for
April merchandise purchases including 23,000 for shipments in transit on that date.
d.) Customers acknowledge indebtedness of 360,000 at April 21 2015. It was also estimated that
customers owed another 80,000 that will never be acknowledge or recovered. Of the acknowledge
indebtedness, 6,000 will probably be uncollectible.
e.) The insurance company agreed that the fire loss claim should be based on the assumption that
that the overall gross profit ratio for the past two years was in effect during the current year. The
companys audited financial statements disclosed the following information.
2014 2015
Net Sales 5,300,000 3,900,000
Net Purchases 2,800,000 2,350,000
121
Beg. Inventory 500,000 660,000
End. Inventory 750,000 500,000
f.) Inventory with a cost of 70, 000 was salvaged and sold for 35, 000. The balance of the inventory
was a total loss.
REQUIRED:
Determine the estimated inventory fire loss.
SOLUTION:
Inventory, December 31, 2011 750,000

Add purchases for the period Jan. 1 to April
21
Purchases up to March 31, 2012 520,000
Payments for April purchases 34,000

Unrecorded obligations for April
purchases 106,000
Purchase returns (9,500) 650,500
Less cost of sales (see computation below) 830,500
Estimated inventory on the date of fire 570,000

Less: Proceeds from sale of salvaged
merchandise 35,000
Shipments in transit 23,000 58,000
Inventory fire loss 512,000
Computation of cost of sales:
122
Sales up to March 31, 2012 1,350,000
Sales for the period April 1 to 21
Accounts receivable, 4.21.12 360,000
Accounts receivable for write-off 80,000

Receipts from customers (P129,500 -
P9,500) 120,000
Total 560,000
Less Accounts receivable, 3.31.12 400,000 160,000
Total sales 1,510,000
x cost ratio (see computation below) 0.55
Computation of cost ratio:
Inventory, 1/1/10 660,000
Net purchases (2010 and 2011) 5,150,000
Inventory, 12/31/11 (750,000)
Cost of sales (2010 and 2011) 5,060,000
/ Net sales (2010 and 2011) 9,200,000
Overall cost ratio 0.55
PROBLEM NO. 11 Roll forward analysis
You are engaged in the regular annual examination of the accounts and records of Valenzuela
manufacturing for the year ended December 31, 2015. To reduce the workload at year end, the
company upon your recommendation, took its annual physical inventory in November 30, 2015.
You observed the taking of the inventory and made tests of the inventory count and inventory
records.
123
The companys inventory account, which includes raw materials and work in process, is on
perpetual basis. Inventories are valued at cost, FIFO method. There is no finished goods inventory.
The companys physical inventory revealed that the book inventory of 1,695,960 was understated
by 84,000. To avoid delay in completing its monthly financial statements, the company decided
not to adjust the book inventory until year end except for obsolete inventory items.
Your examination disclosed the following information regarding the November 30 inventory
1. Pricing tests showed that the physical inventory was overstated by 61, 600.
2. An understatement of the physical inventory by 4,200 due to errors in footings and extensions.
3. Direct labor included in the inventory amounted to 280,000. Overhead was included at the rate
of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that
the overhead rate was proper.
4. The physical inventory included obsolete materials with a total cost of 7,000. During December
the obsolete materials were written off by a charge to cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales 1,920,800

Direct labor 338, 800
Purchases 691, 600
b. The cost of sales of 1,920,800 included direct labor of 386,000
REQUIRED
Compute for the following:
1. Adjusted amount of physical inventory at November 30, 2015
2. Adjusted amount of inventory at December 31, 2015
3. Breakdown of inventory at December 31, 2015
a. Cost of materials on hand, and materials included in work in process
b. Direct labor included in work in process
c. Factory overhead included in work in process
124
SOLUTION:
Requirement No. 1
Inventory per books, 11/30 1,695,960

Add understatement of booked
inventory 84,000
Physical inventory,11/30, per client 1,779,960
Add (deduct) adjustments

Overstatement due to pricing
errors (61,600)
Understatement due to footing and extension
errors 4,200
Obsolete materials (7,000)

Inventory per physical count, as
adjusted 1,715,560
Requirement No. 2
Adjusted balance of inventory, 11/30 1,715,560
Purchases 691,600
Direct labor 338,800
Factory overhead (200% of direct labor) 677,600
Total 3,423,560
Less cost of sales:
Per books 1,920,800

Obsolete materials written off
through COS (7,000) 1,913,800
Inventory, 12/31 1,509,760
125
Requirement No. 3
Inventory, 11/30 (see no. 1) 1,715,560
Direct labor (280,000)
Factory overhead (200% of direct labor) (560,000)
Raw materials, 11/30 875,560
Purchases 691,600
Total 1,567,160
Less: Materials included in cost of sales
Adjusted cost of sales (see no. 2) 1,913,800
Direct labor (386,400)
Factory overhead (772,800) 754,600

Cost of materials on hand and materials included in
WIP 812,560
Labor cost in the WIP:
Labor included in 11/30 inventory 280,000
Labor incurred in December 338,800
Total 618,800
Labor included in COS (386,400) 232,400
Applied factory overhead (200% of direct labor) 464,800
Total, as shown in no.2 1,509,760
126
IV AUDIT OF INVESTMENTS
SUBSTANTIVE AUDIT PROCEDURES FOR INVESTMENTS
PROBLEM NO. 1 Analysis of investments in debts instruments (comprehensive)
On January 1, 2015, Isabela Corporation purchase P1,000,000 8% bonds for P924,164 (including
brokers commission of P50,000). The bonds were purchased to yield 10%. Interest is payable
annually every January 1. The bonds mature on January 1, 2020.
Quoted price of the bonds as of the dates indicated follows:
December 31, 2015 98.0
December 31, 2016 99.0
REQUIRED:
A. Prepare the journal entries on the books of Isabela Corporation to record the following:
(Round off present value factors to four decimal places)
a) Purchase of the investment on January 1, 2015;
b) Accrual of interest income on December 31, 2015;
c) Amortization of premium or discount on December 31, 2015; and
d) Fair value adjustment as of December 31, 2015
Under the following assumptions:
a) The investment is designated as FA@FVTPL;

b) The investment is available-for-sale; and
c) The investment is held-to-maturity
B. Compute for the carrying amount of the investment in bonds at December 31, 2015 if:
a. The investment is designated as FA@FVTPL;
b. The investment is available-for-sale; and
127
c. The investment is held-to-maturity
C. Assuming the bonds were sold on December 31, 2016 at 99, prepare the journal entry to
record the sale under the following assumptions:
a) The investment is designated as FA@FVTPL;
b) The investment is available-for-sale; and
c) The investment is held-to-maturity
SOLUTION:
Requirement A
a. FA@FVTPL b. Available for Sale (AFS)
1) Purchase of investment:
FA@FVTPL P874,164 AFS securities P924,164

Commission exp. 50,000 Cash P924,164
Cash P924,164
2) Accrual of interest:
Interest receivable P80,000 Interest receivable P80,000

Interest income P80,000 Interest income P80,000
3) Amortization of discount:
No entry AFS securities P12,416

Interest income P12,416
4) FV adjustment:
FA@FVTPL P105,836* AFS securities P43,420**

FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420
* (P980,000 - P874,164) ** (P980,000 - P936,580)
Held to Maturity (HTM)
Purchase of investment:
HTM securities P924,164

Cash P924,164
128
Accrual of interest:
Interest receivable P80,000

Amortization of discount:

FV adjustment:
No entry
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
1/1/2012 P 924,164
12/31/2012 P92,416 P80,000 P12,416 936,580
12/31/2013 93,658 80,000 13,658 950,238
12/31/2014 95,024 80,000 15,024 965,262
12/31/2015 96,526 80,000 16,526 981,788
12/31/2016 98,212 80,000 18,212 1,000,000
Requirement B
Carrying amount, 12/31/12

FA@FVTPL 980,000 Fair value
Available for Sale (AFS) 980,000 Fair value
Held to Maturity (HTM) 936,580 Amortized cost
Requirement C
FA@FVTPL Available for Sale (AFS)
To update amortization To update amortization
No entry AFS securities P13,658

FV adjustment before sale FV adjustment before sale
No entry FV adj. G/L (OCI) P3,658*

AFS securities P3,658
129
* (P990,000 - P993,658)
Disposal entry Disposal entry
Cash P1,070,000 Cash P1,070,000

FA@FVTPL P980,000 FV adj. G/L (OCI) 39,762
Interest income 80,000 AFS securities P990,000
Gain on sale of TS 10,000 Interest income 80,000
Gain on sale of AFS (P/L) 39,762
Held to Maturity (HTM)
To update amortization

FV adjustment before sale
No entry
Disposal entry
Cash P1,070,000
Gain on sale of HTMS 39,762
PROBLEM NO. 2 Audit of investments in equity instruments (held for trading)
You were able to obtain the following ledger details of Trading Securities in connection with
your audit of the IMBC Corporation for the year ended December 31, 2015:
130
Date Particulars Debit Credit
Jan. 10 Purchase of 6,000 4WARD Co. shares P1,440,000
Feb. 20 Purchase of 7,000 BACK Co. shares 1,800,000
Mar. 01 Sale of 2,400 BACK Co. shares 540,000
May 31 Receipt of 4WARD share dividend- 132,000

credited to retained earnings
Aug, 15 Dale of 4,800 4WARD shares 1,176,000
Sep, 01 Sale of 1,200 4WARD shares 276,000
From the Philippine Stock Exchange, the 4WARD dividends were analyzed as follows:
Nature Declared Record Payment Rate
Cash 01/02/15 01/15/15 01/31/15 P20/share
Share 05/02/15 05/15/15 05/31/15 10%
Cash 08/01/15 08/30/15 09/15/15 P30/share
At December 31, 2015, 4WARD and BACK shares were selling at P210 and P240 per share,
respectively.
REQUIRED:
1. Determine the following:

a) Gain or oss on sale of 2,400 BACK shares on March 1
b) Total gain or loss of 4WARD shares in 2015
c) Total dividend income to be recognized in 2015
d) Carrying amount of Trading Securities as of December 31, 2015
2. Adjusting entries
SOLUTION:
131
Requirement 1
a. (60,000)
Sales proceeds 540,000
CA of investment sold (P1,800,000 x 2,400/7,200) 600,000
Loss on sale of 2,400 BACK shares on 3/1/12 (60,000)
b. 108,000
Total proceeds 1,176,000
Less dividends sold (4,800 shares x P30) 144,000
Net proceeds 1,032,000
CA of investment sold (P1,320,000* x
4,800/6,600**) 960,000
Gain on sale of 4,800 4WARD shares on 8/15/12 72,000
Total cash paid 1,440,000

Less purchased dividend (6,000 x P20) 120,000
Adjusted cost 1,320,000
** after 10% share dividend

CA of investment sold (P1,320,000* x
1,200/6,600**) 240,000
Gain on sale of 800 4WARD shares on
9/1/12 36,000
Total gain on sale of 4WARD shares 108,000
c. 198,000
Declared January 2 -
Declared May 2 -
Declared August 1 (6,600 shares x P30) 198,000
Total dividend income for 2012 198,000
d. 1,278,000
4WARD Co. [(6,000 x 1.1) - 4,800 - 1,200] = 600 x P210 126,000
BACK Co. (7,200 - 2,400) = 4,800 x P240 1,152,000
CA of trading securities (FV), 12/31/12 1,278,000
132
Requirement 2
Jan. 10 (See requirement 1.b)

Dividend income 120,000
Trading securities - 4WARD 120,000
Feb. 20
No AJE
Mar. 1 (See requirement 1.a)

Loss on sale of TS - BACK 60,000
Trading securities - BACK 60,000
May 31
Retained earnings 132,000
Aug. 15 (See requirement 1.b)

Entry made
Cash 1,176,000
Trading securities - 4WARD 1,176,000
Correct entry
Cash 1,176,000
Gain on sale of TS - 4WARD 72,000
Adjusting entry


FV adjustment loss (P/L) 42,000

Trading securities 42,000
PROBLEM NO. 3 Audit of investments in equity instrument (AFS)
133
In connection with your audit of the financial statements of the Pin Shop Company for the year
2015, the following Available for Sale Securities and Dividend Income accounts were presented
to you:
Date Available for Sale Securities Debit Credit
Description
01/15 10,000 ordinary shares, par value P50, 390,000

SPIKES Co.
04/30 5,000 shares SPIKES Co. received as share 250,000

dividend
05/20 Sold 5,000 shares @ P25 125,000
12/10 Sold 5,000 shares @ P60 120,000
04/30 Share dividend 250,000
11/30 SPIKES Company ordinary 50,000
The following information was obtained during your examination:
Type of Date Declared Date of Record Date of Rate

Dividend Payment
Share 03/15/15 04/01/15 04/30/15 50%
Cash 11/01/15 11/15/15 11/28/15 P5/share
Cash 12/01/15 12/15/15 01/02/16 20%
Closing market quotation as at December 31, 2015:
Bid Asked
SPIKES Company Ordinary 13-4/4 16-1/2
REQUIRED:
1. Determine the following using PAS 39:
134
a. Net amount to be recognized in 2015 profit or loss
b. Carrying amount of investment as of December 31, 2015
2. Assuming the entity applies PFRS 9, determine the following if the investment is
designated as a financial asset at fair value through other comprehensive income:
a. Net amount to be recognized in 2015 profit or loss

b. Carrying amount of investment as of December 31, 2015
SOLUTION:
Investment ledger
Particulars Shares Cost/share Total
Balance, 1/1/2012 10,000 39.00 390,000
Share dividend, 4/30/12 5,000 -
Balance 15,000 26.00 390,000
Sale of 5,000 shares, 5/20/2012 (5,000) 26.00 (130,000)
Balance 10,000 26.00 260,000
Sale of 2,000 shares, 12/10/2012 (2,000) 26.00 (52,000)
Balance, 12/31/2012 8,000 208,000
Requirement 1
a. 193,000
Loss on sale 5/20 (see computation below) (5,000)
Gain on sale 12/10 (see computation below) 48,000
Dividend income (see computation below) 150,000
Net amount to be recognized in P/L 193,000
Loss on sale 5/20:

Sales proceeds (5,000 shares x P25) 125,000
Cost of investment sold (see investment ledger) (130,000)
Loss on sale of investment (5,000)
Gain on sale 12/10:

Dividends sold (2,000 shares x P50 x 20%) (20,000)
Net sales proceeds 100,000
Cost of investment sold (see investment ledger) (52,000)
Gain on sale of investment 48,000
135
Dividend income:
Cash dividends declared, 11/1/2012 (10,000 shares x P5) 50,000
Cash dividends declared, 12/1/2012 (10,000 shares x P50 x 20%) 100,000
Total dividend income 150,000
FV adjustment:
Fair value 110,000
Cost 208,000
Unrealized loss (FV adjustment) - OCI (98,000)
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75) 110,000
Requirement 2
a. 150,000
Amount to be recognized in P/L - Dividend income 150,000
At initial recognition, an entity may make an irrevocable election to present in other

comprehensive
income subsequent changes in the fair value of an investment in an equity instrument within the
scope of
PFRS 9 that is not held for trading.
If an entity makes the election, it shall recognise in profit or loss dividends from that investment
when
the entitys right to receive payment of the dividend is established in accordance with PAS
18.
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75) 110,000
PROBLEM NO. 4 Analysis of investments in equity instruments (Trading and AFS)
136
On December 31 2014, L Cost Companys financial statements showed the following balances
related to its securities accounts:
Trading Securities P1,477,500
Available-for-sale securities (AFS) 1,180,000
La Costs securities portfolio on December 31, 2014, was made up of the following securities:
Security Classification Cost Fair Value
10,000 Yeye Bonel Corp. shares Trading P750,000 P762,500
8,000 Totoy Bibo Inc. shares Trading 550,000 528,250
10% Mayniladlad bonds Traing 250,000 186,750
10,000 Blaklak Inc shares Available for sale 590,000 630,000
20,000 Jumbo Inc. shares Available for sale 490,000 550,000
During 2015, the following transactions took place:
Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. for P229,500, classified as
held for trading
Apr. 15 Sold 4,000 shares of Totoy Bibo Inc. for P69 per share
May 4 Sold 4,000 shares of Bulaklak Inc. for P62 per share
Oct. 30 Purchased 15,000 shares of Pasaway Co. for P832,500, classified as held for trading
The fair values of the shares and bonds on December 31, 2015, are as follows:
Yeye Bonel Corp. shares P76.60 per share
Totoy Bibo Inc. shares P68.50 per share
Pasaway Co. shares P55.25 per share
137
Mayniladlad water bonds P205,550
Bulaklak Inc. shares P61.00 per share
Jumbo Unlimited Inc. shares P27.00 per share
REQUIRED:
1. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2015
2. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2015
3. Carrying of trading securities and AFS AS OF December 31, 2015
SOLUTION:
1. 11,875
Selling price (4,000 shares x P69) 276,000
CA of shares sold (P528,250 x 4/8) (264,125)
Gain on sale of Totoy Bibo shares 11,875
2. 12,000
Selling price (4,000 shares x P62) 248,000

Cost of shares sold (P590,000 x 4/10) (236,000)
Gain on sale of Bulaklak shares 12,000
3. 2,304,100 & 906,000
Yeye Bonel [(10,000+ 3,000) x P76.60] 995,800
Totoy Bibo [(8,000 - 4,000) x P68.50] 274,000
Pasaway (15,000 x P55.25) 828,750
Mayniladlad 205,550
Total fair value - Trading securities 2,304,100
Bulaklak Inc. [(10,000 - 4,000) x P61] 366,000

Jumbo Hotdog (20,000 x P27) 540,000
Total fair value - AFS 906,000
PROBLEM NO. 5 Audit of investments in equity instruments (carried at cost)
138
The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver Tab
Company. During your audit of the companys accounts for the year 2015, which was a fist
audit, you obtained the following:
Investment in Silver Tab Company

2013-Jan. 2 30,000 sh @ 35 P1,050,000 2015-Jul. 15 P2,000,000
2014- Jul. 2 90,000 sh @ 60 5,400,000
2015-Mar. 2 30,000 sh @ 70 2,100,000
Investment in Silver Tab Company

2015 Aug. 10 P10,000
Dividend Income
2015 Jan. 2 P120,000
Apr. 1 150,000
Aug. 10 10,000
Dec. 20 100,000
The transactions pertaining to the foregoing for 2015 were as follows:
Jan. 2 Received cash dividend (declared on December 1) of P1 per share
May 2 Bought 30,000 shares at P70 per share
Received cash dividend (declared on March 1 to shareholders of record as of March

Apr. 1
10) of P1 per share
July 15 Sold 50,000 shares at P40 per share
Received an extra dividend in shares of one share of Red Tab Company for every
Aug. 10 ten shares of Silver Tab Company. The share dividend had a market value of P3 per
share and its book value on the ledger of Silver Tab Company was on P1 per share.
139
Received cash dividend of P1 per share, declared December 1, out of Silver Tab
Dec. 20
Companys Reserve for Depletion.
Sold 10,000 Silver Tab Company shares at P90. Cash was received on January 5,
29
2016
REQUIRED:
Adjusting entries as of December 31, 2015.
SOLUTION:
Entry made
1/2 Cash 120,000
3/2 Investment in Silver Tab 2,100,000
Cash 2,100,000
7/15 Cash 2,000,000
Investment in Silver Tab 2,000,000
(50,000 shares x P40)
8/10 Investment in Red Tab 10,000

(100,000/10 x P1)
12/20 Cash 100,000
12/29 None
Should be entry
Note: the entry made can be considered correct if the company accrued the dividend
1/2 in 2011 and reversed in 2012. Since there was no debit entry in the "Dividend
Income" account, we will assume that no accrual was made in 2011.
3/2 Investment in Silver Tab 2,070,000
Dividend income 30,000 *
Cash 2,100,000
*(30,000 x P1) - purchased dividend
7/15 Cash 2,000,000
Loss on sale 250,000
Investment in Silver Tab 2,250,000
Note: in the absence of specific identification,

use FIFO to determine cost of investment sold
140
From 2010 lot (30,000 x P35) 1,050,000
From 2011 lot (20,000 x P60) 1,200,000
2,250,000
(100,000/10 x P3)
Note: Property dividend received is recorded at FV
12/20 Cash 100,000
Investment in Silver Tab 100,000
Note: the dividend received is a liquidating dividend.
12/29 AR - non trade 900,000 *
Gain on sale 310,000
* (10,000 x P90)
From 2011 lot: Shares Cost

Original cost 90,000 5,400,000
Sold on 7/15 (20,000) (1,200,000)
Balance 70,000 4,200,000
Liquidating dividend -
(70,000 x P1) (70,000)
Balance 70,000 4,130,000
(10,000/70,000 x P4,130,000)
Adjusting journal entry

1/2 Dividend income 120,000
7/15 Loss on sale 250,000

12/29 AR - non trade 900,000
141
PROBLEM NO. 6 Analysis of investments in equity and debt instruments
Your audit of the Norte Corp. disclosed that the company owned the following securities on
December 31, 2014:
Trading Securities:
Security Shares Cost Fair Value
Vigan, Inc. 9,600 P144,000 P184,000
Laoag, Inc. 16,000 432,000 288,000
10%, P200,000 face value,Santiago bonds
158,400 163,440
(interest payable every Jan. 1 and Jul. 1)
Total P734,400 P635,440
Available-for-sale Securities:
Security Shares Cost Fair Value
Candon Products 32,000 P1,376,000 P1,440,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000
Batac, Inc. 80,000 960,000 1,280,000
Total 8,576,000 8,560,000
Held to Maturity:
Cost Book Value
12%, 2,000,000 face value, Ilocos bonds
P1,900,000 1,926,000
(interest payable annually every Dec. 31)
During 2015, the following transactions occurred:
Jan. 1 Receive interest on Santiago bonds

Mar. 1 Sold 8,000 shares of Laoag, Inc. for P152,000.
May 15 Sold 3,200 shares of Batac, Inc. for P15 per share
July 1 Received interest on the Santiago bonds.
Dec. 31 Received interest on the Ilocos bonds.
31 Transferred the Ilocos bonds to the available-for-sale portfolio. The bonds
were selling at 101 on this date. The bonds were purchased on January 2,
2014. The discount was amortized using the effective interest method.
The fair values of the shares and bonds on December 31, 2015, are as follows:
Vigan, Inc. P22 per share
142
Laoag, Inc. P15 per share
10% Santiago bonds P151,200
Candon Products P42 per share
Pagudpud, Inc. P28 per share
Batac, Inc. P18 per share
REQUIRED:

1. Gain or Loss on sale of 8,000 Laoag, Inc. shares on March 1
2. Gain or Loss on sale of 3,200 Batac, Inc. shares on May 15
3. Total interest income for the year 2015
4. Carrying of trading securities and AFS as of December 31, 2015
SOLUTION:
1. P 8,000 gain
CA of shares sold (P288,000 x 8/16) (144,000)
Gain on sale of 8,000 Laoag, Inc. shares 8,000
2. P9,600 gain
Cost of shares sold (P960,000 x 3.2/80) (38,400)
Gain on sale of 3,200 Batac, Inc. shares 9,600
3. P289,640
Santiago bonds (P200,000 x 10%) 20,000
Ilocos bonds (P1,926,000 x 14%*) 269,640
Total interest income for 2012 289,640
*Computation of effective interest rate:

Less carrying amount, 1/2/11 (Cost) 1,900,000
Discount amortization for 2011 26,000
Add nominal interest (P2,000,000 x 12%) 240,000
Effective interest 266,000
Divide by carrying amount, 1/2/11 1,900,000
Effective interest rate 14.00%
4. Trading Securities: P482,400; AFS: P11,466,400
Trading securities
Vigan, Inc. (9,600 x P22) 211,200
143
Laoag, Inc. [(16,000 - 8,000) x P15] 120,000
10% , P200,000 face value , Santiago bonds 151,200
Total fair value 482,400
Available-for-sale securities
Candon Products (32,000 x P42) 1,344,000
Pagudpud, Inc. (240,000 x P28) 6,720,000
Batac, Inc. [(80,000 - 3,200) x P18] 1,382,400
Ilocos bonds (P2,000,000 x 1.01) 2,020,000
Total fair value 11,466,400
FV adjustment gain on transfer of securities (OCI)

Add discount amortization in 2012:
Effective interest (P1,926,000 x 14%) 269,640
Nominal interest (P2,000,000 x 12%) 240,000 29,640
Fair value of Ilocos bonds on 12/31/12 (P2M x 1.01) 2,020,000
FV adjustment gain on transfer of securities (OCI) 64,360
PROBLEM NO. 7 Analysis of investments in equity instruments

(Trading and Associate)
The following subsidiary ledger reflects the trading securities of Gateway Company for the year
of 2015:
TEMPLAR CORPORATION
Date Transactions Debit Credit

Sep. 05 Purchased 20,000 shares P1,000,000
08 Cash dividends to stockholders of record P50,000
Sept. 15, declared Aug. 15
Oct. 01 Purchase 50,000 shares 2,600,000
05 Sold 20,000 shares at P5 1,000,000
Cash collected for sale of 20,000 shares
made on Nov. 1 declaration of P5 cash
Nov. 30 3,300,000
dividend per share to stockholders on
record as of December 1
Dec. 15 Cash dividend received 150,000
Total P3,600,000 P4,500,000
144
On January 2, 2015, Gateway Company purchased 39,000 ordinary shares of Dark Co.s 200,000
shares outstanding for P1,170,000. On the date, the carrying amount of the acquired shares on
Dark Co.s books was P810,000. Gateway attributed the excess of cost over carrying amount to
goodwill.
During 2015, Gateways president gained a seat on Darks board of directors, which enables
Gateway to exercise significant influence over Dark. Dark reported profit of P800,000 for the
year ended December 31, 2015, and declared and paid cash dividends of P200,000 during 2015.
Market values of the securities at December 31, 2015, are as follows:

Templar Corp. P60 per share
Dark Company P30 per share
REQUIRED:
Determine the amount to be included in Gateways 2015 profit or loss and the carrying amount
of investments as of December 31, 2015 to be reported on the statement of financial position.
Templar
Dark
SOLUTION:
1. Amount in profit or loss

Templar P3,000,000
Dark P156,000
2. Carrying amount in SFP

Templar P1,800,000
Dark P1,287,000
Amount to be recognized in profit or loss - Investment in Templar

Gain on sale 10/05 (see computation below) 350,000
Gain on sale 11/30 (see computation below) 2,160,000
Dividend income (50,000 shares x P5) 250,000
FV adjustment gain 240,000
Net amount to be recognized in P/L 3,000,000
Gain on sale 10/05:

Sales proceeds (20,000 shares x P65) 1,300,000
Less Cost of investment sold (see below) 950,000
145
Cash paid 1,000,000
Less Purchased dividend 50,000
Correct acquisition cost 950,000
Gain on sale 11/30:

Cash received 3,300,000
Less dividends sold (20,000 shares x P5) 100,000
Net sales proceeds 3,200,000
Less Cost of investment sold 1,040,000
Gain on sale 2,160,000
FV adjustment gain:
Fair value, 12/31/12 (30,000 x P60) 1,800,000
Balance before FV adjustment (see investment ledger) 1,560,000
FV adjustment gain 240,000
Investment in Templar ledger

Sept. 5 acquisition Shares Cost/share
Purchase, Sept. 5 20,000 47.50
Sale, Oct. 5 (use FIFO) (20,000) 47.50
Balance, Dec. 31, 2012 -
Oct. 1 acquisition Shares Cost/share

Purchase, Oct. 1 50,000 52.00
Sale, Nov. 30 (20,000) 52.00
Balance, Dec. 31, 2012 30,000 52.00
Amount to be recognized in SFP - Investment in Templar

Fair value, 12/31/12 (30,000 x P60) 1,800,000
Amount to be recognized in profit or loss - Investment in Dark

Share of profit (P800,000 x .195) 156,000
Amount to be recognized in SFP - Investment in Dark

Acquisition cost 1,170,000
Share of profit (P800,000 x .195) 156,000
Dividends received (P200,000 x .195) (39,000)
Investment in stock balance, 12.31.11 1,287,000
146
* Use equity method since there is a significant influence, i.e. Gateway's President
is represented in the board of directors.
PROBLEM NO. 8 Analysis of investments in equity instruments (AFS and Associate)
On January 3, 2013, JR Company purchased for P500,000 cash a 10% interest in Judi Corp. On
that date, the net assets of Judi had a book value of P3,750,000. The excess of cost over the
underlying equity in the net assets is attributable to undervalued depreciable assets having a
remaining life of 10 years from the date of JRs purchase. The investment in Judi Corp. is not
intended for trading.
The fair value of JRs investment in Judi securities is as follows:
December 31, 2013 P570,000

December 31, 2014 P525,000
December 31, 2015 P2,200,000
On January 2, 2015, JR purchased an additional 30% of Judis stock for P1,575,000 cash when
the book value of Judis net assets was P4,150,000. The excess was attributable to depreciable
assets having a remaining life of 8 years.
During 2013, 2014, and 2015 the following occurred:
Judi Net Income Dividends Paid by Judi to JR

2013 P350,000 P15,000
2014 P400,000 P20,000
2015 P550,000 P70,000
REQUIRED:
Answer the following:
1. The net amount to be recognized in 2013 comprehensive income related to this

investment?
2. The net amount to be recognized in 2014 comprehensive income related to this
investment?
3. The adjustment to retained earnings as of January 1, 2015 as a result of the acquisition of
the additional 30% interest in Judi Corp. is?
4. The carrying amount of the investment in Judi Corp. as of December 31, 2015 is?
147
SOLUTION:
1. P 85,000
Profit or loss - Dividend income 15,000
OCI - FV adjustment (P570,000 - P500,000) 70,000
Net amount in comprehensive income - 2010 85,000
2. (P25,000)
Profit or loss - Dividend income 20,000
OCI - FV adjustment (P525,000 - P570,000) (45,000)
Net amount in comprehensive income - 2011 (25,000)
3. Nil
4. P2,195,000
Fair value of original investment 525,000
Purchase price of 30% interest 1,575,000
Total cost of 40% interest 2,100,000
Share of profit - 2012
Based on reported amount (P550,000 x .4) 220,000
Excess of cost over underlying equity amortization
{[P2.1M - (P4.15M x .4)]/8} (55,000) 165,000
Dividends received (70,000)
PROBLEM NO. 9 Analysis of investments in debt instrument (HTM)
On June 1, 2014, Panday Corporation purchased as a long term investment 6,000 of the P1,000
face value, 8% bonds of Pira Corporation. Panday Corporation has the positive intention and
ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest
is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2020. On
November 1,2015, Panday Corporation sold the bonds for a total consideration of P5,887,500.
REQUIRED:
Determine the following: (Round off present value factors to four decimal places)
1. The purchase price of the bonds on June 1, 2014

2. The carrying amount of the investment in bonds as of December 31, 2014.
3. The interest income for the year 2015
4. The gain on sale of investment in bonds on November 1, 2015.
148
SOLUTION:
1. P5,467,992
PV of principal (P6,000,000 x 0.5568) 3,340,800

PV of interest [(P6,000,000 x 4%) x 8.8633] 2,127,192
Purchase price 5,467,992
2. P5,507,237
Date EI (5%) NI (4%) Disc. Amort. Amort. Cost

6/1/11 5,467,992
12/1/11 273,400 240,000 33,400 5,501,392
6/1/12 275,070 240,000 35,070 5,536,462
12/1/12 276,823 240,000 36,823 5,573,285
Carrying amount, 12/1/11 (see amortization schedule) 5,501,392

Add discount amortization, 12/1/11 to 12/31/11 (P35,070/6) 5,845
3. P459,911
Jan. 1 to May 31 (P275,070 x 5/6) 229,225

June 1 to Nov. 1 (P276,823 x 5/6) 230,686
Total interest income for 2012 459,911
4. P120,352

Accrued interest (P240,000 x 5/6) (200,000)
Net proceeds 5,687,500
Less carrying amount, 11/1/12:
Add discount amortization, 6/1/12 to 11/1/12 (P36,823 x
5/6) 30,686 5,567,148
Gain on sale on investment in bonds 120,352
PROBLEM NO. 10 Impairment of investments in debt instruments (HTM)
149
On April 1, 2012, KLOOTZ Corporation purchased a 5-year P10,000,000 10% bonds dated
January 1, 2012. The bonds were purchased to yield 8%. Interest is payable annually every
December 31. KLOOTZ Corporation has the positive intention and ability to hold these bonds to
maturity. This issuer paid the interest as scheduled in 2012 and 2013. During 2014, the issuer of
the bonds is in financial difficulties and it becomes probable that the issuer will be put into
administration by a receiver. On December 31, 2014, KLOOTZ estimated that none of the
interest will be collected and only P8,000,000 of the principal will be collected on maturity date.
No cash flows are received during 2015. At the end of 2015, the issuer is released from
administration and KLOOTZ receives a letter from the receiver stating that the issuer will be
able to meet its remaining obligations, including interest and repayment of principal.
REQUIRED:
Answer the following: (Round off present value to four decimal places)
1. How much was the total amount paid to acquire the investment in bonds on April
1, 2012?
2. How much is the carrying amount of the investment in bonds on December 31,
2012?
3. How much should be recognized as impairment loss in 2014?
4. How much is the interest income to be recognized in 2015?
5. How much should be recognized as reversal of impairment loss in 2015?
SOLUTION:
1. P11,014,674
Cash flow PVF@8% PV, 1/1/09

Principal 10,000,000 0.6806 6,806,000
Interest 1,000,000 3.9927 3,992,700
Purchase price, 1/1/09 10,798,700
EI (8%) NI (10%) Amort CA
1/1/09 10,798,700
12/31/09 863,896 1,000,000 (136,104) 10,662,596
12/31/10 853,008 1,000,000 (146,992) 10,515,604
12/31/11 841,248 1,000,000 (158,752) 10,356,852
12/31/12 828,548 1,000,000 (171,452) 10,185,400
12/31/13 814,832 1,000,000 (185,400) 10,000,000
PV, 1/1/09 10,798,700
150
Premium amortization, 1/1 to 4/1 (P113,456 x 3/12) (34,026)
PV, 4/1/09 10,764,674
Accrued interest (P10,000,000 x 10% x 3/12) 250,000
Total purchase price 11,014,674
2. P10,662,100
Refer to the amortization schedule 10,662,596
Principal 10,000,000 0.7350 7,350,000
Interest 1,000,000 3.3121 3,312,100
Carrying amount, 12/31/11 10,662,100
3. P3,497,900

PV of expected cash flows (P8,000,000 x 0.7972) 6,858,400
Impairment loss 3,498,452
Principal 10,000,000 0.8573 8,573,000
Interest 1,000,000 1.7833 1,783,300
Carrying amount, 12/31/11 10,356,300
PV of expected cash flows (P8,000,000 x 0.8573) 6,858,400
4. P548,672
EI (8%) NI (10%) Amort CA

12/31/11 6,858,400
12/31/12 548,672 - 548,672 7,407,072
12/31/13 592,928 - 592,928 8,000,000
5. P2,777,828
Carrying amount, 12/31/12 (without impairment) 10,185,400

Carrying amount, 12/31/12 (with impairment) 7,407,072
Reversal of impairment loss 2,778,328
The limit on the amount of reversal is what the amortized cost of the asset would have been
at the date of reversal had the impairment loss not been recorded.
151
Principal 10,000,000 0.9259 9,259,000
Interest 1,000,000 0.9259 925,900
Carrying amount, 12/31/12 - without impairment 10,184,900
Carrying amount, 12/31/12 - with impairment 7,407,072
PROBLEM NO. 11 Analysis of investments in associates of an SME
You were engaged by Spurs Corporation, a small and medium-sized entity, to audit its financial
statements for the year 2015. During the course of your audit , you noted the following regarding
its recent acquisitions of investments in equity securities:
a. On January 1, 2015, the entity acquired 25 percent of the equity of each of entities B, C
and D for P10 million, P15 million and P28 million respectively. Transaction costs of 1
percent of the purchase price of the shares were incurred by the entity.
b. On January 2, 2015, entity B declared and paid dividends of P1 million for the year ended
2014.
c. On December 31, 2015, entity C declared a dividend of P8 million for the year ended
2015. The dividend declared by entity C was paid in 2016.
d. For the year ended December 31, 2015, entities B and C recognized profit of respectively
P5 million and P18 million. However, entity D recognized a loss of P20 million for the
year.
e. Published price quotations do not exist for the shares of entities B, C and D. Using
appropriate valuation techniques the entity determined the fair value of its investments in
entities B, C and D at December 31, 2015 as P13 million, P29 million and P15 million
respectively. Costs to sell are estimated at 5 percent of the fair value investments.
f. The entity has no subsidiaries and therefore does not produce consolidated financial
statements.
In accordance with section 14.4 of the PFRS for SMEs, an investor shall account for all of its
investments in associates using one of the following: (a) the cost model in paragraph 14.5, (b) the
equity method in paragraph 14.8, or (c) the fair value model in paragraph 14.9. The entity is
seeking your advice on the effect of each method on the carrying amount of the investment and
its effect on profit or loss.
REQUIRED:
152
Determine the net amount to be recognized in 2015 profit or loss and the total carrying amount
of the investments as of December 31, 2015 using:
1. Cost Model
2. Fair Value Model
3. Equity Method
SOLUTION:
1. P/L:P(11.78) million; CA:P39.50 million

SFP amount (Cost Model) B C D Total
Purchase price 10,000,000 15,000,000 28,000,000 53,000,000
Transaction costs 100,000 150,000 280,000 530,000
Total cost 10,100,000 15,150,000 28,280,000 53,530,000
Impairment loss* - - (14,030,000) (14,030,000)
CA, 12/31/12 10,100,000 15,150,000 14,250,000 39,500,000
*Impairment loss computation:

Total cost 10,100,000 15,150,000 28,280,000
FV less cost to sell (RA) 12,350,000 27,550,000 14,250,000
- - 14,030,000
P/L amount (Cost Model) B C D Total

Dividend income 250,000 2,000,000 - 2,250,000
Impairment loss - - (14,030,000) (14,030,000)
250,000 2,000,000 (14,030,000) (11,780,000)
2. P/L:P5.72 million; CA:P57 million
FP amount (Fair Value Model) B C D Total

Fair value 13,000,000 29,000,000 15,000,000 57,000,000
P/L amount (Fair Value Model) B C D Total

Transaction costs (100,000) (150,000) (280,000) (530,000)
Dividend income 250,000 2,000,000 - 2,250,000
FV adjustment gain (loss)* 3,000,000 14,000,000 (13,000,000) 4,000,000
3,150,000 15,850,000 (13,280,000) 5,720,000
*FV adjustment gain (loss)
153
Fair value 13,000,000 29,000,000 15,000,000
CA before FV adjustment 10,000,000 15,000,000 28,000,000
3,000,000 14,000,000 (13,000,000)
3. P/L:P(8.28) million ; CA:P43.00 million

SFP amount (Equity Method) B C D Total
Purchase price 10,000,000 15,000,000 28,000,000 53,000,000
Transaction costs 100,000 150,000 280,000 530,000
SOPA (SOLA) 1,250,000 4,500,000 (5,000,000) 750,000
Dividends (250,000) (2,000,000) - (2,250,000)

CA, 12/31/12 - before impairment 11,100,000 17,650,000 23,280,000 52,030,000
Impairment loss* - - (9,030,000) (9,030,000)
CA, 12/31/12 11,100,000 17,650,000 14,250,000 43,000,000
*Impairment loss computation:

CA, 12/31/12 - before impairment 11,100,000 17,650,000 23,280,000
FV less cost to sell (RA) 12,350,000 27,550,000 14,250,000
- - 9,030,000
P/L amount (Equity Method) B C D Total

SOPA (SOLA) 1,250,000 4,500,000 (5,000,000) 750,000
Impairment loss - - (9,030,000) (9,030,000)
1,250,000 4,500,000 (14,030,000) (8,280,000)
1. Which of the following is not one of the auditors primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic

b. To determine whether securities are the property of the client
c. To determine whether securities actually exist
d. To determine whether securities are properly classified on the statement of financial
position
2. An auditor who physically examines securities should insist that a client representative be
present in order to
a. Detect fraudulent securities

b. Lend authority to the auditors directives
154
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned
3. A client has a large and active investment portfolio that is kept in a bank safe-deposit
box. If the auditor is unable to count the securities at the end of the reporting period, the
auditor most likely will:
a. Request the bank to confirm to the auditor the contents of the safe deposit box at
the end of the reporting period
b. Examine supporting evidence for transactions occurring during the year
c. Count the securities at a subsequent date and confirm with the bank whether
securities were added or removed since the end of the reporting period
d. Request the client to have a bank seal the safe-deposit box until the auditor can
count the securities at a subsequent date
4. When an auditor is unable to inspect and count a clients investment securities until after
the end of the reporting period, the bank where the securities are held in a safe deposit
box should be asked to
a. Verify any differences between the contents of the box and the balances in the
clients subsidiary ledger
b. Provide a list of securities added and removed from the box between the end of
the reporting period and the security count date
c. Count the securities in the box so that the auditor will have an independent direct
verification
d. Confirm that there has been no access to the box between the end of the reporting
period and the security-count date
5. In establishing the existence and ownership of an investment held by a corporation in the

form of publicly traded shares an auditor should inspect securities or
a. Obtain written representations from management confirming that the securities

are properly classified as trading securities.
b. Inspect the audited financial statements of the investee company.
c. Confirm the number of shares held by an independent custodian.
d. Determine that the investment is carried at the lower of cost or market.
6. Which of the following is the least effective audit procedure regarding the existence
assertion for the securities held by the auditee?
155
a. Examination of paid checks issued in payment of securities purchased
b. Vouching all changes during the year to supporting documents
c. Simultaneous count of liquid assets
d. Confirmation from the custodian
7. Which of the following is the most effective audit procedure for verification of dividends
earned on investments in equity securities?
a. Tracing the deposited dividend checks to the cash receipt book

b. Reconciling amount received with the published dividend records
c. Comparing the amounts received with preceding year dividends received
d. Recomputing selected extensions and footings of dividend schedules and
comparing totals to the general ledger.
8. In performing tests of the carrying amount of trading securities, the auditor would
usually:
a. Ask management to estimate the market value of the securities

b. Refer to the quoted market prices of the securities
c. Value the securities at cost regardless of their market prices
d. Count the securities
9. An audit procedure that provides evidence about proper valuation of trading securities
arising from a short term investment of excess cash is
a. Calculation of premium or discount amortization

b. Recalculation of investment carrying amount by applying the equity method
c. Comparison of carrying amount with the current market quotations
d. Confirmation of securities held by broker
10. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditors client owns a 30% voting
interest?
a. Market quotations of the investee companys stock
b. Current fair value of the investee companys assets
c. Historical cost of the investee companys assets
d. Audited financial statements of the investee company
156
ANSWERS:
1. A 5. C 9. C
2. D 6. A 10. D
3. D 7. B
4. D 8. B
V- AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PROBLEM NO. 1 Classification of property, plant and equipment

expenditures
White company commenced operations on July 1 2014. During the following

year, the company acquired a tract of land, demolished the building on the land
and built a new factory. Equipment was acquired for the factory and, in March
2015, the plant was ready to commence operation.
During this period, the following inflows and outflows occurred:
While searching for a suitable block of land, White Company placed an option to
buy with three real estate agents at a cost of P1,000 each. One of these blocks of
land was later acquired.
Payment of option fees P 3,000
157
Receipt of loan from bank 4,000,000
Payment to settlement agent for 100,000

title search, stamp duties and
settlement fees
Payment of arrears in rates on 50,000

building and land
Payment for land 1,000,000
Payment for demolition of current 120,000

building on land
Proceeds from sale of material 55,000

from old building
Payment to architect 230,000
Payment to council for approval of 120,000

building construction
Payment for safety fence around 34,000

construction site
Payment to construction contractor 2,400,000

for factory building
Payment for external driveways, 540,000

parking bays and safety lighting
Payment for safety inspection on 30,000

building
Payment for equipment 640,000
Payment of freight and insurance 56,000

costs on delivery of equipment
Payment of installation costs on 120,000

equipment
158
Payment for safety equipment 110,000
surrounding equipment
Payment for removal of safety 20,000

fence
Payment for new fence 80,000

surrounding the factory
Payment for advertisements in the 5,000

local paper about the forthcoming
factor and its benefits to the local
community
Payment for opening ceremony 60,000
Payments to adjust equipment to 33,000

more efficient operating levels
subsequent to initial operation
REQUIRED:
Compute the cost of the following:
1. Land
2. Land improvements
3. Building
4. Equipment
SOLUTION:
Land
Option cost (Exercised) 1,000
Settlement agent 100,000
Rates 50,000
Payment for land 1,000,000
Demolition of old building 120,000
Proceeds on sale of material (55,000)
159
1,216,000
Land improvements
Driveway et al 540,000
New fence 80,000
620,000
Building
Architects fee 230,000
Building permit fees 120,000
Fence during construction 34,000
Payment to construction contractor 2,400,000
Safety inspection 30,000
Removal of safety fence 20,000
2,834,000
Equipment
Payment for equipment 640,000
Freight & Insurance 56,000
Installation 120,000
Safety equipment 110,000

Adjustments
33,000
959,000
160
PROBLEM NO. 2 Classification of property, plant and equipment
expenditures
The following expenditures were incurred by Ayos Enterprises Co, in 2015:
Purchase of Land P
3,9,000,000
Land survey 52,000
Fees for search of title for land 6,000
Building permit 35,000
Temporary quarters for 107,500

construction crews
Payment to tenants of old 46,000

building for vacating premises
Razing old building 470,000
Excavating basement 100,000
Special assessment tax for street 20,000

project
Dividends 50,000
Damaged awarded for injuries 84,000

sustained in construction (no
insurance was carried)
Costs of construction 29,000,000
Cost of paving parking lot 400,000

adjoining building
Cost of shrubs, trees, and other 330,000

landscaping
REQUIRED:
Determine the cost of each of the following:
161
1. Land
2. Land improvements
3. Building
SOLUTION:
Land
Purchase of land 3,900,000
Land survey 52,000
Fees for search of title for land 6,000
Payment to tenants of old building for vacating
46,000
premises
Razing old building 470,000
Special assessment tax for street project 20,000
4,494,000
Land improvements
Cost of paving parking lot adjoining building 400,000
Cost of shrubs, trees, and other landscaping 330,000
730,000
Building
Building permit 35,000
Temporary quarters for construction crews 107,500
Excavating basement 100,000
Costs of construction 29,000,000
29,242,500
PROBLEM NO. 3 Audit of machinery and accumulated depreciation

accounts
You were engaged in making your second annual examination of Indigo

Company. The machinery and Accumulated Depreciation accounts are shown
below:
Machinery
01/01/15 Balance 500,000 09/01/15 Sale of 10,000

Machin
e No. 3
162
06/01/15 Machine 150,000 12/31/15 Balance 644,000
No. 23
09/01/15 Dismantlin 4,000

g of
Machine
no. 3
654,000 654,000
01/01/16 Balance 644,000
Accumulated Depreciation
12/31/15 Balance 344,000 01/01/15 Balance 280,000
12/31/15 Depreciation 64,400
344,400 344,400
01/01.16 Balance 344,400
Your examination disclosed the following information:
a. The following adjusted balances appeared on December 31, 2014 working

papers: machinery P 500,000; Accumulated Depreciation P 280,000.
b. The company has depreciated all items of machinery at 10% per annum. The
oldest item owned in seven years old as of December 31, 2015.
c. It is the companys policy to take full years depreciation in the year of
acquisition and none in the year of disposition.
d. Machine No. 3, which was purchased on March 1, 2011, at a cost of P 80,000,
was sold on September 1, 2015 for 10,000 cash.
e. Included in charges to Repairs and Maintenance account was an invoice for
installation of Machine No. 23, in the amount of P 35,000.
REQUIRED:

a. Loss on the sale of Machine No. 3
b. Adjusted balance of Machinery as of December 31,2015
163
c. Depreciation expense for 2015
d. Adjusted balance of Accumulated Depreciation as of December 31,2015
2. Adjusted entries as of December 31, 2015
SOLUTION:
Requirement No. 1. a
Dismantling cost (4,000)
Net sales proceeds 6,000

Less carrying amount:
Cost 80,000
Accumulated dep. (80,000 x 10%
x 4) (32,000) 48,000
Gain (Loss) on sale of machine no.
3 (42,000)
Requirement No. 1. b
Unadjusted machinery, 12/31/12 644,000

Error in recording disposal of machine no. 3, net (P80,000 -
P6,000) (74,000)
Installation cost of machine no.
23 35,000
Adjusted machinery,
12/31/12 605,000
Requirement No. 1. c
Depreciation expense (P605,000 x 10%) 60,500
Requirement No. 1. d
Unadjusted accumulated depreciation, 12/31/12 344,400

Accumulated depreciation of machine no. 3 (80,000 x 10%
x 4) (32,000)
Overstatement of depreciation expense
Should be (605,000 x 10%) 60,500
164
As recorded 64,400 (3,900)
Adjusted accumulated depreciation, 12/31/12 308,500
Requirement No. 2
AJE 1 - To correct recording of sale of machine

no. 3
Loss on sale of machine 42,000
Accumulated depreciation 32,000
Machinery 74,000
AJE 2 - To correct recording of installation of machine no. 23
Machinery 35,000
Repairs and
maintenance 35,000
AJE 3 - To correct overstatement of depreciation
Depreciation 3,900
PROBLEM NO. 4 Audit of machine and accumulated depreciation accounts
In the audit of the books of yellow orporation for the year 2015, the following
items and information appeared in the Production Machine account of the client:
D Particu Debi Cre

at lars t dit
e
01 Balanc P
/0 e- 20,0
1 Machi 00
ne
1,2,3
and 4
165
at P
180,00
0 each
02 Machi 396,
/2 ne 5 000
8
Machi P6,
ne 1 000
09 Machi 192,
/0 ne 6 000
1
12 Machi 432,
/0 ne 7 000
1
The Accumulated Depreciation account contained no entries for the year 2015.
The balance on January 1, 2015 per your audit, as as follows:
Machine P
1 168,750
Machine 78,750
2
Machine 67,500
3
Machine 45,000
4
Based on your further inquiry and verification, you noticed the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on
this date for P 6,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to
explosion on December 1, 2015. Machine 7 was to replace Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P 24,000; the
difference was paid in cash and charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.
166
REQUIRED:

a. Total depreciation for the year ended December 31, 2015.
b. Carrying amount of production machine as of December 31, 2015
2. Adjusting entries as of December 31,2015
SOLUTION:
Requirement No. 1
Adjusted
bal. DA Fraction Depreciation AD CA
Machine 1 - sold 2/28 - 180,000 2/12 7,500 - -
Machine 2 - destroyed 12/1 - 180,000 11/12 41,250 - -
Machine 3 - traded in 9/01 - 180,000 8/12 30,000 - -
Machine 4 180,000 180,000 12/12 45,000 90,000 90,000
Machine 5 - acquired 2/28 396,000 396,000 10/12 82,500 82,500 313,500
Total 1,224,000 233,250 199,500 1,024,500

(1.a) (1.b)
Requirement No. 2
AJE 1 - To correct recording of sale of Machine 1
Accumulated depreciation (P180,000 - P3,750) 176,250

Production machine (P180,000 - P6,000) 174,000
Gain on sale (see computation
below) 2,250
Computation of gain on sale of Machine

1:
Less carrying amount, 2/28/12
167
Carrying amount, 1/1/12 (P180,000 -
P168,750) 11,250
Depreciation - 2012 (P180,000 x .25 x 2/12) (7,500) 3,750

Gain (loss) on sale of Machine 1 2,250
AJE 2 - To correct non-recording of destruction of Machine 2
Loss on destruction (see computation below) 60,000

Production machine 180,000
Computation of loss on destruction of Machine 2:
Carrying amount, 1/1/12 (P180,000 - P78,750) 101,250
Depreciation - 2012 (P180,000 x .25 x 11/12) (41,250)
Carrying amount, 12/1/12/Loss on destruction 60,000
AJE 3 - To correct recording of trade-in of

Machine 3
Production machine no. 6 24,000

Loss on exchange (see computation
below) 58,500
Production machine
no. 3 180,000
Computation of loss on exchange (trade-

in):
Trade-in value 24,000
Less carrying amount,
9/1/12
Carrying amount, 1/1/12 (P180,000 - P67,500) 112,500
Depreciation - 2012 (P180,000 x .25 x 8/12) (30,000) 82,500

Gain (loss) on trade-in of Machine 3 (58,500)
AJE 4 - To record depreciation for 2012
Depreciation 233,250
168
PROBLEM NO. 5 Roll-forward analysis
At December 31,2014, Arnold Companys noncurrent operating asset accounts

had the following balances:
Land P
175,000
Buildings 1,500,000
Machinery 1,125,000
and
equipment
Automobiles 172,000
Leasehold 216,000
improvements
Land 0
improvements
Transactions for 2015 included the following:
Jan. A plant facility consisting of land and a

6 building was acquired from Jesco Corp.
in exchange for 24,000 ordinary shares
of Arnold. On this date, Arnolds share
had a market price of P50 a share.
Current assessed values of land and
building for property tax purposes are
P187,500 and P562,500, respectively.
Mar. New parking lots, streets, and

25 sidewalks at the acquired plant facility
were completed at a total cost of
P192,000
July Machinery and equipment were

1 purchased at an invoice cost of
P325,000, which excluded P39,000 of
input tax. Additional costs of P10,000
169
for delivery and P50,000 for
installation were incurred.
Aug. Arnold purchased a new automobile for

30 P22,500.
Nov. Arnold purchased for P350,000 a tract

4 of land as a potential future building
site.
Dec. A machine with a cost of P17,000 and a

20 remaining book value of P2,975 at date
of disposition was scrapped without
cash recovery.
REQUIRED:
Based on the above and the result of your audit, calculate the balance of the
following as of December 31, 2015.
1. Land
2. Buildings
3. Machinery and equipment
4. Property, plant and equipment
SOLUTION:
12/31/11 Addition Disposal 12/31/12

Cost
Land 175,000 312,500 a) - 487,500 (1)
Land improvements - 192,000 - 192,000
Buildings 1,500,000 937,500 b) - 2,437,500 (2)

Machinery and
equipment 1,125,000 385,000 c) 17,000 1,493,000 (3)
Automobile and
trucks 172,000 22,500 194,500
Leasehold
improvements 216,000 216,000
3,188,000 1,849,500 17,000 5,020,500 (4)
170
a) 25,000 x P50 = 1,250,000 x
187,500/750,000
b) 25,000 x P50 = 1,250,000 x
562,500/750,000
c) P325,000 + P10,000 +
P50,000
PROBLEM NO. 6 Roll-forward analysis
Olive companys property, plant, and equipment, accumulated depreciation, and

amortization balances at December 31,2014 are:
Accumulated
Cost Depreciation
Land P
275,000
Buildings 2,800,00 P 672,900
Machinery 2,380,000 367,500

and
equipment
Automobile 210,000 114,326

and trucks
Leasehold 432,000 108,000

improvements
Totals P P 1,262,726
5,097,000
Additional information on depreciation methods and useful lives follows:
Asset Depreciation Useful

method life
171
Buildings 150%- 25
declining- years
balance
Machinery straight-line 10
and years
equipment
Automobile 150%- 5
and trucks declining- years
balance
Leasehold Straight-line
improvements
Depreciation is computed to the nearest month.
Salvage values of depreciable assets are immaterial except for automobiles and
trucks which have estimated salvage values equal to 15% of cost.
Other additional information:
Olive entered into a twelve-year operating lease starting January 1, 2012. The
leasehold improvements were completed on December 31, 2011 and the facility
was occupied on January 1, 2012.
On January 6, 2015, olive completed its self-construction of a building on its

own land. Direct costs of construction were P 1,095,000. Construction of the
building required 15,000 direct labor hours. Olives construction department has
an overhead allocation system for outside jobs based on an activity denominator
of 100,000 direct labor hours, budgeted fixed costs of P2,500,00, and budgeted
variable costs of P27 per direct labor hour.
On July 1, 2015 machinery and equipment were purchased at a total invoice cost
of P325,000. Additional costs of P23,000 to rectify damage on delivery and
P18,000 for concrete embedding of machinery were incurred. A wall had to be
demolished to enable a large machine to be moved into the plant. The wall
demolition cost P7,000, and rebuilding of the wall cost P19,000.
On August 30, 2015, Olive purchased a new automobile costing P25,000.
172
On September 30,2015, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2014 was sold for P23,500.
On November 4, 2015, Olive purchased a tract of land for investment purposes

for P700,000. Olive thinks it might use the land as a potential future building
site.
On December 20,2015, a machine with a cost of P17,000 a carrying amount of

P2,975 on date of disposition, and a market value of P4,000 was sold to a
corporate officer.
REQUIRED:
Based on the above and the result of your audit, compute for the following as of
and for the year ended December 31,2015:
1. Total depreciation
2. Carrying amount of buildings
3. Carrying amount of machinery and equipment
4. Carrying amount of automobiles and trucks
5. Carrying amount of property, plant and equipment
SOLUTION:
CA,
12/31/11 Addition Disposal 12/31/12 12/31/12
Cost
Land 275,000 - - 275,000 275,000
Buildings 2,800,000 1,875,000 a) - 4,675,000 3,761,974 (2)

Machinery and
equipment 1,380,000 369,000 b) 17,000 1,732,000 1,222,075 (3)
Automobile and
trucks 210,000 25,000 48,000 187,000 68,472 (4)
Leasehold
improvements 432,000 - - 432,000 288,000
5,097,000 2,269,000 65,000 7,301,000 5,615,521 (5)
Accumulated
depreciation
173
Land - -
Buildings 672,900 240,126 c) - 913,026

Machinery and
equipment 367,500 156,450 d) 14,025 g) 509,925
Automobile and
trucks 114,326 28,952 e) 24,750 h) 118,528
Leasehold
improvements 108,000 36,000 f) 144,000
1,262,726 461,528 38,775 1,685,479

(1)
a) P1,095,000 + (2,500,000 x 15/100) + (15,000 x

P27)
b) P325,000 + P18,000 + P7,000 + P19,000
c) [(P2,800,000 - P672,900) + P1,875,000] x
.06
d) [(P1,380,000 x .1) + (P369,000 x .1 x
6/12)]
e) [(P210,000 - P114,326 - P30,000) x .3 + (P30,000 x .3 x 9/12) + (P25,000 x .3 x 4/12)]
f) P432,000/ 12
g) P17,000 - P2,975
h) (P48,000 - P30,000) + (P30,000 x 0.3 x
9/12)
PROBLEM NO. 7 Audit of Plant Assets and accumulated depreciation

accounts
The following data relate on the Plant Assets account of Survive, Inc. at
December 31, 2014:
Plant Assets
P R T C
Original Cost P 175,000 P 255,000 P 400,000 P 400,000
Year Purchased 2009 2010 2011 2013
Useful Life 10 years 75,000 hours 15 years 10 years
Salvage value P 15,500 P 15,000 P 25,000 P 25,000
174
Depreciation SYD Activity Straight Double-
method line declining
balance
Note: in the year an asset is purchased, Survive, Inc. does not record any
depreciation expense on the asset.
In the year an asset is retired or traded in, Survive, Inc. takes a full year
depreciation on the asst.
The following transaction occurred during 2015:
(a) On May 5, asset P was sold for P 65,000 cash.

(b) On December 31, it was determined that asset R had been used 10,500 hours
during 2015.
(c) On December 31, before computing depreciation expense on Asset T, the
management of Survive, Inc. decided the useful life remaining from 1/1/12
was 10 years.
(d) On December 31, it was discovered that a plant asset purchased in 2014 had
been expensed completely in that year. This asset costs P 110,000 and has
useful life of 10 years and no salvage value. Management has decided to use
the double-declining balance for this asset, which can be referred to as Asset
I.
REQUIRED:
Based on the above and the result of your audit, compute for the following as of
and for the year ended December 31, 2015:
1. Total depreciation expense for 2015

2. Adjusted balance of Plant Assets as of December 31, 2015
SOLUTION:
Requirement No. 1
Asset P [(P175,000-P15,500) x 5/55] 14,500
Asset R [(P255,000 - P15,000)/75,000 x 10,500] 33,600
Asset T (see computation below) 30,000
Asset C (P400,000 x .8 x .2) 64,000
175
Asset I (P110,000 x .2) 22,000
Total depreciation expense for 2012 164,100
Depreciation of Asset T for 2012:
Cost 400,000
Acc. depreciation, 12/31/11 [(P400,000 - P25,000) x
3/15] (75,000)
Carrying amount, 12/31/11 325,000
Residual value (25,000)
Remaining depreciable amount 300,000

Divide by remaining
life 10
30,000
Requirement No. 2
Asset P (Sold) -
Asset R 255,000
Asset T 400,000
Asset C 400,000
Asset I 110,000
Plant Assets, 12/31/12 1,165,000
PROBLEM NO. 8 Analysis of property, plant and equipment transactions
The draft balance sheet of Four Corporation as of December 31, 2015 reported
the net property, plany and equipment at P 6,270,000. Details of the amount
follow:
Land at cost P 1,000,000
Building at cost P 4,000,000
176
Less accumulated depreciation at (800,000) 3,200,000
December 31, 2014
Plant at cost 5,200,000
Less accumulated depreciation at (3,130,000) 2,070,000

December 31, 2014
P 6,270,000
The following matters are relevant
(a) The company policy for all depreciation is that it is charged to cost of sales
and a full years charge is made in the year of acquisition or completion and
none in the year of disposal.
(b) Included in the sales revenue is P 300,000 being the sales proceeds of an item
of plant that was sold on June 30,2015. The plant had originally cost P
900,000 and had been depreciated by P 630,000 as of December 31, 2014.
Other that recording the proceeds in sales and cash, no other accounting
entries for the disposal of the plant have been made. All plant is depreciated
at 25% per annum on the reducing balance basis.
(c) On September 30, 2015, the company completed the construction of a new
warehouse. The construction was achieved using the companys own
resources as follows:
Purchased materials P 150,000
Supervision 65,000
Design and planning costs 20,000
Included in the above figures are P 10,000 for materials and P 25,000 for
labor costs that were effectively lost due to the foundations being too close to
a neighboring property. All the above costs are included in cost of sales. The
building was brought into immediate use upon completion and has an
estimated useful life of 20 years (straight-line depreciation).
(d) At the beginning of the current year, the company had an open market basis
valuation of its properties (excluding the newly constructed warehouse).
Land was valued at P1.2 million and the property at 4.8 million. The
directors with these values to be incorporated into the financial statements.
The properties had an estimated remaining life of 20 years at the date of the
177
valuation (straight-line depreciation is used). The company makes a transfer
to retained earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2015 has not been accounted for the in the draft
financial statements.
REQUIRED:
Compute for the following as of and for the year ended December 31, 2015:
1. The carrying amount of the new warehouse

2. The carrying amount of plant
3. The total depreciation
4. The revaluation surplus is
SOLUTION:
Requirement No. 1
Purchased materials 150,000
Supervision 65,000
Design and planning costs 20,000
Total 1,035,000
Less costs of inefficiency 35,000
Adjusted cost of new warehouse 1,000,000

Less accumulated depreciation, 12/31/12
(P1,000,000/20) 50,000
Carrying amount of warehouse,
12/31/12 950,000
Requirement No. 2
Carrying amount of plant, 12/31/11 (P5,200,000-
P3,130,000) 2,070,000
Carrying amount of plant sold (P900,000-P630,000) (270,000)

Carrying amount of remaining plant,
12/31/11 1,800,000
Depreciation for 2012 (P1,800,000 x
.25) (450,000)
178
Carrying amount of plant, 12/31/12 1,350,000
Requirement No. 3
Building (P4,800,000/20) 240,000
New warehouse (see no. 1) 50,000
Plant ( see no. 2) 450,000
Total depreciation 740,000
Requirement No. 4
Land Building Total
Fair value 1,200,000 4,800,000
Carrying amount 1,000,000 3,200,000

Revaluation surplus,
1/1/12 200,000 1,600,000 1,800,000
Realized in 2012 - (80,000) (80,000)

12/31/12 200,000 1,520,000 1,720,000
PROBLEM NO. 9 Property, plant and equipment transaction errors
You requested a depreciation schedule for Delivery Trucks of Woman Corporation showing the
additions, retirements, depreciation and other data affecting the income of the Company in the 4-
year period 2012 to 2015, inclusive. The Delivery Trucks account consists of the following as of
January 1, 2012:
Truck No. 1 purchased Jan. 1, 2009, cost P 180,000

Truck No. 2 purchased July 1, 2009, cost 220,000
Truck No. 3 purchased Jan. 1, 2011, cost 300,000
Truck No. 4 purchased July 1, 2011, cost 240,000
179
P 940,000
The Delivery Trucks-Accumulated Depreciation account previously adjusted to January 1, 2012,

and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks
from respective date of purchase, based on five-year life, no salvage value). No charges have been
made against the account before January 1, 2012. Transactions between January 1, 2012 and
December 31, 2015, and their record in the ledger were as follows:
July 1, 2012 Truck No. 3 was traded for larger one (No.5), the agreed purchase price of which
was P340,000. Woman Mfg. Co. paid the automobile dealer P150,000 cash on the
transaction. The entry was debit to Delivery Trucks and credit to cash, P150,000.
Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Delivery
Trucks, P35,000.
July 1, 2014 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount
to Delivery Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for
P7,000 cash. Woman 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 Delivery Trucks P25,000.
Entries for depreciation had been made for the close of each year as follows: 2012, P203,000;
2013, P211,000; 2014, P244,500; 2015, P278,000
REQUIRED:
Based on the above and the result of your audit, determine the following:
1. The 2012 profit is overstated by

2. The 2013 profit is understated by
5. Adjusted carrying amount of Delivery Trucks as of December 31, 2015
SOLUTION:
Requirement No. 1-4
180
Profit
over (under)
2009:
Unrecorded loss on trade-in of Truck 3:
Trade-in value (P340,000 - P150,000) 190,000
Carrying amount,7/1/09 (P300,000 x 3.5/5) 210,000 20,000
Overstatement of depreciation expense:
Truck No. 1 (P180,000/5) 36,000
Truck No. 2 (P220,000/5) 44,000
Truck No. 3 (P300,000/5 x 6/12) 30,000
Truck No. 4 (P240,000/5) 48,000
Truck No. 5 (P340,000/5 x 6/12) 34,000
Should be depreciation expense 192,000
Depreciation expense per books 203,000 (11,000) 9,000 (1)
2010:
Unrecorded loss on sale of Truck 1:
Carrying amount, 1/1/10 (P180,000 x 1/5) 36,000 1,000
Truck No. 2 (P220,000/5) 44,000
Truck No. 4 (P240,000/5) 48,000
Truck No. 5 (P340,000/5) 68,000
181
Depreciation expense per books 211,000 (51,000) (50,000) (2)
2011:
Unrecorded loss on disposal of Truck 4:
Insurance proceeds 25,000
Total 32,000
Carrying amount, 7/1/11 (P240,000 x 2/5) 96,000 64,000
Erroneous credit to Miscellaneous Income 7,000
Truck No. 2 (P220,000/5 x 6/12) 22,000
Truck No. 4 (P240,000/5 x 6/12) 24,000
Truck No. 5 (P340,000/5) 68,000
Truck No. 6 (P360,000/5 x 6/12) 36,000
Depreciation expense per books 244,500 (94,500) (23,500) (3)
2012:
Truck No. 2 (fully depreciated as of 7/1/11) -
Truck No. 5 (P340,000/5) 68,000
Truck No. 6 (P360,000/5) 72,000
Depreciation expense per books 278,000 (138,000) (4)
182
Requirement No. 5
Cost Acc. Dep. CA, 12/31/12
Truck No. 1 (sold, 1/1/09) - - -
Truck No. 2 (acquired, 7/1/06) 220,000 220,000 -
Truck No. 3 (traded-in, 7/1/10) - - -
Truck No. 4 (damaged and sold, 7/1/11) - - -
Truck No. 5 (acquired, 7/1/09) 340,000 238,000 102,000
Truck No. 6 (acquired, 7/1/11) 360,000 108,000 252,000
920,000 566,000 354,000
PROBLEM NO. 10 Revaluation model

On 1 January 2014, Afternoon Corporation acquires two assets within the same class of plant and
equipment. Information on these assets follows:
Cost Expected useful life

Machine A 100,000 5 years
Machine B 60,000 3 years
The machines are expected to generate benefits evenly over their useful lives. The class of plant
and equipment is measured using the revaluation model.
At 31 December 2014, information about the assets follows:
Fair value Expected useful life

Machine A P 84,000 4 years
Machine B 38,000 2 years
183
On1 July 2015, machine B was sold for P32,000 cash. On the same day, Afternoon Corporation
acquired machine C for P80,000 cash. Machine C has expected useful life of four years.
At 31 December 2015, information on the machines is as follows:
Fair value Expected useful life

Machine A P61,500 3 years
Machine C 68,500 1.5 years
REQUIRED:
1. The amount to be recognized in 2014 profit or loss related to the revaluation of the assets
2. The amount to be recognized in 2014 comprehensive income related to the revaluation of the
assets
3. The gain or loss on sale of Machine B
4. The total depreciation for the year 2015
5. The amount to be recognized in 2015 profit or loss related to the revaluation of the assets
SOLUTION:
Requirement No. 1
Machine
A Machine B
Fair value 84,000 38,000
Carrying amount, 12/31/11:
Cost 100,000 60,000
Accumulated depreciation (20,000) (20,000)
184
80,000 40,000
Increase (Decrease) 4,000 (2,000)
To be recognized in OCI Profit or loss
Requirement No. 2
Profit or loss (2,000)
Other comprehensive income (OCI) 4,000
Comprehensive income 2,000
Requirement No. 3
Less carrying amount, 7/1/12:
Depreciation up to 7/1, (P38,000/2 x 6/12) (9,500) 28,500
Gain on sale of Machine B 3,500
Requirement No. 4
Machine A (P84,000/4) 21,000
Machine B (P38,000/2 x 6/12) 9,500
Machine C (P80,000/4 x 6/12) 10,000
185
Total depreciation - 2012 40,500
Requirement No. 5
Machine
A Machine C
Fair value 61,000 68,500
Carrying amount, 12/31/11:
Previous carrying amount 84,000 80,000
Depreciation - 2012 (21,000) (10,000)
63,000 70,000
Increase (Decrease) (2,000) (1,500)
To be recognized in OCI Profit or loss

PROBLEM NO. 11 Borrowing costs
Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is
identified as separate discrete job in the accounting records. At the end of 2014, Oceanwide
correctly reported P5,400,00 as Construction in Progress on the following jobs.
Accumulated Costs (including 2014 interest)

Ship Completion Date (end of month) December 31, 2014
340 October 31,2014* P2,300,000
341 June 30, 2015 1,150,000
342 September 30, 2015 1,200,000
343 January 31, 2016 750,000
*Ship 340 was completed and ready for use in October 2014 and will be placed in service May 1,
2015.
Construction costs for 2015, and the dates the expenditures were made, were as follow:
Ship Date Costs

341 April 1, 2015 P1,200,000
342 May 1, 2015 1,600,000
186
343 July 1, 2015 2,200,000
344 September 1, 2015 810,000
345 November 1, 2015 360,000
Oceandwide had the following general liabilities at December 31, 2015:

12%, 5-year note (maturity date-2017) P2,000,000
10%, 10-year bonds (maturity date-2020) 8,000,000
On January 1, 2015, Oceanwide borrowed P2,000,000 specifically for the construction of ship 343.
The loand was for 3 years with interest at 13%.
REQUIRED:
Based on the above and the result of your audit, calculate the following for the year ended
December 31, 2015.
1. Weigthed-average interest rate for the general liabilities
2. Capitalized interest on Ship No. 341
5. Total interest that Oceanwide should capitalize
Answer:
Requirement No. 1
CA Interest
12%, 5 year note 2,000,000 240,000
10%, 10 year bonds 8,000,000 800,000
Total 10,000,000 1,040,000
Weighted-average interest rate (1,040,000/10,000,000) 10.40%
Requirement No. 2
Fraction of
the year Capitalized
Date Amount CR outstanding interest
187
Ship No. 341
1/1
1,150,000 10.4% 6/12 59,800
4/1
1,200,000 10.4% 3/12 31,200
91,000
Requirement No. 3
Fraction of
Ship No. 342

1/1
1,200,000 10.4% 9/12 93,600
5/1
1,600,000 10.4% 5/12 69,333
162,933
Requirement No. 4
Fraction of
Ship No. 343

1/1
750,000 13.0% 12/12 97,500
7/1
1,250,000 13.0% 6/12 81,250
7/1
950,000 10.4% 6/12 49,400
228,150
188
Requirement No. 5
Ship No. 340 (completed 10/31/11)
-
Ship No. 341 (see no. 2)
91,000
162,933
228,150
Ship No. 344 (P810,000 x 10.4% x 4/12)
28,080
Ship No. 345 (P360,000 x 10.4% x 2/12)
6,240
Total
516,403
PROBLEM NO. 12 Wasting Asset

On January 2, 2013, Calamba Company purchased land for P450,000, from which it is estimated
that 400,000 tons of ore could be extracted. It estimates that it will cost P80,000 to restore the land,
after which it could be sold for P30,000.
During 2013, the company mined 80,000 tons and sold 50,000 tons. During 2014, the company
mined 100,000 tons and sold 120,000 tons. At the beginning of 2015, the company spent an
additional P100,000, which increased the reserves by 60,000 tons. In 2015, the company mined
140,000 tons and sold 130,000 tons. The company uses a FIFO cost flow assumption.
REQUIRED:
Based on the above and the result of your audit, compute for the following: (Round depletion rate
to two decimal places)
1. Depletion for 2014
2. Depletion for 2015 is
3. Depletion included in 2015 cost of sales
4. Carrying amount of the natural resources as of December 31, 2015
Answer:
Requirement No. 1
189
Cost of land 450,000
Estimated restoration cost 80,000
Total cost 530,000
Less residual value 30,000
Cost subject to depletion 500,000
Divide by total estimated reserves 400,000
2010 and 2011 depletion per ton 1.25
Depletion for 2011 (100,000 x P1.25) 125,000
Requirement No. 2
Original cost to be depleted 500,000
Less accumulated depletion, 1/1/12 (180,000 x P1.25) 225,000
Remaining DA, 1/1/12 275,000
2012 mine improvements 100,000
New cost to deplete 375,000
Divide by remaining estimated reserves
(400,000 - 180,000 + 60,000) 280,000
2012 depletion per ton 1.34
Depletion for 2012 (140,000 x P1.34) 187,600
Requirement No. 3
From 1/1/12 inventory (10,000 x 1.25) 12,500
190
From 2012 extraction (120,000 x 1.34) 160,800
Depletion included cost of sales for 2012 173,300
Requirement No. 4
Cost (P450T + P80T + P100T) 630,000
Less accumulated depletion, 12/31/12
Accumulated depletion, 1/1/12 225,000
Depletion for 2012 187,600 412,600
CA, 12/31/12 217,400
PROBLEM NO. 13 Wasting asset

In connection with your audit of the Gold Mining Corporation for the year ended December 31,
2015, you noted that the company purchased for P16,640,000 mining property estimated to contain
12,800,000 tons of ore. The residual value of the property is P1,280,000.
Building used in mine operations costs P1,280,000 and have estimated life of fifteen years with no
residual value. Mine machinery costs P2,560,000 with an estimated residual value of P512,000
after its physical life of 4 years.
Following is the summary of the companys operations for the first year of operations.
Tons mined 1,280,000 tons

Tons sold 1,024,000 tons
Unit selling price per ton P4.40
Direct labor 1,024,000
Miscellaneous mining overhead 204,800
Operating expenses (excluding depreciation 921,600
Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated
as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is
chargeable to production.
REQUIRED:
Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2015?
191
2. Total inventoriable depreciation for 2015?
3. How much is the Inventory as of December 31,2015?
4. How much is the cost of sales for the year ended December 31, 2015?
5. How much is the maximum amount that may be declared as dividends at the end of the
companys first year of operations?
Answer:
Requirement No. 1
Less residual value 1,280,000
Depletable cost 15,360,000
Divide by total estimated reserves 12,800,000
Depletion rate 1.20
Tons mined in 2012 1,280,000
Depletion for 2012 1,536,000
Requirement No. 2
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x
80%] 102,400
Depreciation - Machinery [(P2,560,000-P512,000/4] 512,000
Total 614,400
Requirement No. 3
Depletion (see no. 1) 1,536,000
Depreciation (see no. 2) 614,400
192
Miscellaneous mining overhead 204,800
Total available for sale 3,379,200
Divide by tons mined 1,280,000
Cost per ton 2.64
Tons remaining (1,280,000 - 1,024,000) 256,000
Inventory, 12/31/12 675,840
Requirement No. 4
Cost of sales (1,024,000 tons x P2.64) 2,703,360
Requirement No. 5
Sales (1,024,000 x P4.4) 4,505,600
Cost of sales (see no. 4) (2,703,360)
Gross profit 1,802,240
Operating expenses (921,600)

Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x
20%] (25,600)
Net income 855,040
Realized depletion (1,024,000 tons x P1.2) 1,228,800
Maximum amount that may be declared as dividends 2,083,840
PROBLEM NO. 14 Analysis of property, plant and equipment and investment property
of an SME
In 2015, your audit client Hawks Corporation, a small and medium-sized entity, incurred (and
paid) the following expenditures in acquiring property consisting of ten identical freehold detached
houses each with separate legal title including the land on which it is built:
193
Date Amount (in Php) Additional information
1-Jan-15 200,000,000 20 per cent of the price is attributable to the land
Non-refundable transfer taxes (not included in the

1-Jan-15 20,000,000 P200,000,000 purchase price
1-Jan-15 1,000,000 Legal costs directly attributsble to the acquisition
Reimbursing the previos owner for prepaying the non-

refundable local government property taxes for the six-
1-Jan-15 10,000 month period ending 30 June 2015
1-Jan-15 500,000 Advertising campaign to attract tenants
Opening function to celebrate new rental business that

2-Jan-15 200,000 attracted extensive coverage by the local press
Non-refundable annual local government property taxes

30-Jun-15 20,000 for the year ending 30 June 2016
Day-to-day repairs and maintenance, including the salary

and other costs of the administration and maintenance
staff. These costs are attributable equally to each of the
Throughout 2015 120,000 ten units
The entity uses one of the ten units to accommodate its administration and maintenance staff. The
other nine units are rented to independent third parties under non-cancellable operating leases.
At 31 December 2015, the entity made the following assessments about the units:
194
Useful life of the buildings: 50 years from the date of acquisition
The entity will consume the buildings future economic benefits evenly over 50 years from
the date of acquisition
The fair value of the units can be determined reliably without undue cost or effort on an ongoing
basis and that the residual value of the owner-occupied unit is nil.
At 31 December 2015 the fair value of each unit was reliably estimated as P25,000,000.
REQUIRED:
Based on the above and the result of your audit, answer the following as of and for the year ended
December 31, 2015:
1. How much should be reported as property, plant and equipment?
2. How much should be recognized in profit or loss regarding the increase in fair value of
investment properties?
3. How much is the total expense to be recognized in profit or loss?
4. Assume that the fair value of the units cannot be determined reliably without undue cost or
effort on an ongoing basis, how much should be reported as line item for investment
properties in the entitys statement of financial position?
5. Assume that the fair value of the units cannot be determined reliably without undue cost or
effort on an ongoing basis, how much is the total expense to be recognized in profit or loss?
Answer:
Requirement No. 1
Purchase price 200,000,000
Non-refundable transfer taxes 20,000,000
Legal costs 1,000,000
Total cost 221,000,000
Cost of owner-occupied property (P221 million x 1/10) 22,100,000
Depreciation - 2012 (P22.1 million x .8 x 1/50) (353,600)
Carrying amount, 12/31/12 21,746,400
Requirement No. 2
Fair value of investment properties (P25 million x 9) 225,000,000
195
Cost of investment properties (P221 million x 9/10) 198,900,000
FV adjustment gain 26,100,000
Requirement No. 3
Property taxes for 2012 20,000
Advertising 500,000
Opening function 200,000
Day-to-day repairs and maintenance 120,000
Depreciation of owner-occupied property (see no. 1) 353,600
Total expense in profit or loss 1,193,600
Requirement No. 4
The fair value of the units cannot be determined reliably without undue cost or effort on an
ongoing basis.
Therefore, the entity accounts for the units as property, plant and equipment using the
cost-depreciation-impairment model in Section 17. However, in accordance with paragraph
17.31, it discloses investment property as a separate class of property, plant and equipment.
Requirement No. 5
Property taxes for 2012 20,000
Advertising 500,000
Opening function 200,000
Day-to-day repairs and maintenance 120,000
Depreciation of properties (P221 million x .8 x 1/50) 3,536,000
Total expense in profit or loss 4,376,000
196
1. Property, plant and equipment is typically judged to be one of the accounts least susceptible
to fraud because
a. The amounts recorded on the balance sheet for most companies are immaterial
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2. Which one of the following procedures would provide the best evidence about the original
cost of a piece of equipment?
a. Fixed asset schedule
b. Purchase invoice
c. Receiving report
d. Inquiry of the purchasing agent
3. Determining that proper amounts of depreciation are expensed provides assurance about
managements assertions of values and
a. Presentation and disclosure.
b. Rights and obligations.
c. Completeness.
d. Existence or occurrence.
4. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
5. Analytical estimation of depreciation by the auditor is an important audit test because it

does which of the following?
a. It yields statistical precision in sampling.
b. It signals which additions will be vouched.
c. It gives the auditor an indication of the impaired balances existing in financial
statements.
d. It is a good starting point for determining additional procedures.
197
6. When few property and equipment transactions occur during the year the continuing
auditor usually obtains an understanding of internal control and performs
a. Test of controls
b. Analytical procedures to verify current year additions to property equipment
c. A thorough examination of the balances at the beginning of the year,
d. Extensive tests of current year property and equipment transactions.
7. Which of the following combinations of procedures is an auditor most likely to perform to

obtain evidence about fixed asset addition?
a. Inspecting documents and physically examining assets
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.
8. If an auditor tours a production facility, which of the following misstatements or

questionable practices is most likely to be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
9. In testing for unrecorded retirements of equipment, an auditor is most likely to

a. Select items of equipment from the accounting records and then locate them during the
plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to
repairs and maintenance expense
10. The auditor is least likely to learn of retirements of equipment through which of the
following?
a. Review of the purchase return and allowance account
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy.
11. Which of the following procedures would least likely lead the auditor to detect unrecorded
fixed asset disposals?
a. Examine insurance policies.
b. Review repairs and maintenance expense.
c. Review property tax files.
d. Scan invoices for fixed asset additions.
198
12. The auditor selects a sample of asset disposals and examines the sales documentation
evidencing disposal of the equipment and recomputes gain or loss on the disposal. This
audit steps primarily tests which of the following assertions for the equipment account?
a. Existence assertion
b. Rights assertion
c. Presentation assertion
d. Valuation assertion
13. Additions to equipment are sometimes understated. Which of the following accounts would
be reviewed by the auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable
b. Depreciation expense
c. Gain on disposal of equipment
d. Repair and maintenance expense
14. In violation of company policy, Coatsen Company erroneously capitalized the cost of
painting its warehouse. An auditor would most likely detect this when
a. Discussing capitalization polices with Coatsens controller.
b. Examining maintenance expense accounts.
c. Observing the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
15. The most significant audit step in substantiating additions to the equipment account balance
is
a. Comparison to prior years acquisitions.
b. Review of transactions near the end of the reporting period for proper period cutoff.
c. Calculation of ratio of depreciation expense to gross office equipment cost.
d. Examination of vendors invoices and receiving reports for current years acquisitions.
ANSWERS:
1. B 5. D 9. A 13. D
2. B 6. D 10. A 14. D
3. A 7. A 11. B 15. D
4. D 8. C 12. D
VI AUDIT OF INTANGIBLE AND OTHER ASSETS
PROBLEM NO. 1 Audit of recognition and measurement of intangible assets
The accountant of the newly organized Zerg Corporation provided to you the details the companys
Intangible Assets account as follows:
Date Intangible Assets Description Amount

01/02 Organization costs P 233,000
01/15 Goodwill 15,000
199
04/01 Patent 490,000
05/01 License and trademark 300,000
07/01 R & D laboratory 1,310,000
12/31 Product development costs 1,750,000
4, 098, 000
Transactions during 2015 included the following:
Jan 2 Paid legal fees of P 150,000 and stock certificate costs of P83,000 to complete
organization of the corporation of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hand out
pamphlets and candy to create goodwill for the new enterprise. Clown cost, P10,000;
pamphlets and candy, P5,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P429,000

Patent application and 61,000
licensing fees
Total 490,000
It is estimated that in 5 years other companies will have developed improved

processes, making the Zerg Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark
to be printed on the container in exchange for 6, 000, no-par, ordinary shares of Zerg
selling for P50 per share. The license is worth twice as much as the trademark, both
of which may be used for 5 years.
Jul.1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be

developed in future research projects.
Dec. 31 Paid salaries for an engineer and chemist involved in research and development
totaling P1,720,000 in 2015.
It is the companys policy to take full year amortization in the year of acquisition.
REQUIRED:
1. Prepare the necessary adjusting journal entries as of December 31, 2015.
2. Compute the carrying amount of the Intangible assets as of December 31, 2015.
3. Compute the total amount resulting from the foregoing transactions that should be
expensed when incurred.
200
SOLUTION:
Requirement No. 1
1/2 Organization expenses 233,000
Intangible assets 233,000
1/15 Advertising expense 15,000
4/1 Patents 490,000
5/1 Licences (P300,000 x 2/3) 200,000
Trademark 100,000
7/1 Building 1,310,000
Intangible assets 1,310,000
Research and development

12/31 expense 1,750,000
Intangible assets 1,750,000
Amortization expense 158,000
Patent (P490,000/5) 98,000
201
Licences (P200,000/5) 40,000
Trademark (P100,000/5) 20,000
Requirement No. 2
Cost
Patent 490,000
Licences 200,000
Trademark 100,000 790,000
Less amortization
Patent (P490,000/5) 98,000
Licences (P200,000/5) 40,000
Trademark (P100,000/5) 20,000 158,000
Requirement No. 3
Organization expenses (Jan. 2 transaction) 233,000
Advertising expense (Jan. 15 transaction) 15,000
R and D expense (Dec. 31 transaction) 1,750,000
Total 1,998,000
PROBLEM NO. 2 Audit of patent
You gathered the following information related to the Patents account of the Templar Cookie
Corporation in connection with your audit of the companys financial statements for the year 2015.
202
In 2014, Templar developed a new machine that reduces the time required to insert the fortunes
into its fortune cookies. Because the process is considered very valuable to the fortune cookie
industry, Templar patented the machine. The following expenses were incurred in developing and
patenting the machine:
Research and development laboratory expenses P1,500,000

Metal used in the construction of the machine 480,000
Blueprints used to design the machine 192,000
Legal expenses to obtain patent 720,000
Wages paid for the employees work on the research, 1,800,000
development, and building of the machine (60% of the time was
spent in actually building the machine)
Expense of drawing required by the patent office to be submitted 102,000
with the patent application
Fees paid to the government patent office to process application 150,000
Duting 2015, Templar paid P225,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.
It is the companys policy to take full year amortization in the year of acquisition.
REQUIRED:
1. Cost of machine
2. Amount that should charged to expense when incurred in connection with the development of
the patented machine.
3. Carrying amount of patent as of December 31, 2015.
SOLUTION:
Requirement No. 1
Metal used in the construction of the machine 480,000
Blueprints used to design the machine 192,000
Wages paid to the employees (P1,800,000 x 60%) 1,080,000
Cost of machine 1,752,000
203
Requirement No. 2
Research and development laboratory expenses 1,500,000
Wages paid to the employees (P1,800,000 x 40%) 720,000
R & D expense 2,220,000
Requirement No. 3
Legal expenses to obtain patent 720,000
Expense of drawing required by the patent office 102,000

Fees paid to the government patent
office 150,000
Cost of patent 972,000
Less amortization up to 12/31/12 (P972,000 x 2/20) 97,200
Carrying amount of patent, 12/31/12 874,800
Notes: Cost of defending the patent should be expensed

Since the useful life is not given, the patent was amortized
using
the legal life of 20 years.
PROBLEM NO. 3 Amortization and impairmentof intangible assets
The Terran Company acquired several small companies at the end of 2014 and, based on the
acquisitions, reported the following intangibles in its December 31, 2014 statement of financial
position:
Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000
204
The companys accountant determines the patent has an expected life of 10 years and no expected
residual value, and that it will generate approximately equal benefits each year. The company
expects to use the copyright and tradename for the foreseeable future. The accountant knows that
the computer software is used in the companys 120 sales offices. The company has replaced the
software in 60 offices in 2015, and expects to replace the software in 40 more offices in 2016 and
the remainder in 2017.
In December 31, 2015, there are no indications of impairment of patent and computer software.
The following information relate to the other intangible assets:
a.) Because of the rampant piracy, the copyright is expected to generate cash flows of just
P8,000 per year.
b.) The tradename is expected to generate cash flows of P15,000 per year.
c.) The goodwill is associated with Terrans SCV Manufacturing reporting unit. The cash
flows expected to be generated by the SCV Manufacturing reporting unit is P200,000 per
year for the next 24 years. The reporting unit has a carrying amount of P2,100,000.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for al litems is 5%)
1. Total amortization of intangible assets in 2015
2. Total loss on impairment in 2015
3. Carrying amount of goodwill on December 31, 2015
4. Carrying amount of other intangible assets on December 31, 2015
SOLUTION:
Requirement No. 1
Patent (P200,000/10) 20,000
Computer software [P100,000 x (60/120)] 50,000
205
Total amortization 70,000
*The useful lives of copyright and tradename are indefinite, so no amortization expense is
recognized.
** Goodwill is not amortized.
Requirement No. 2
Impairment loss
Copyright:
Carrying amount 400,000
Recoverable amount (P8,000/0.05) 160,000 240,000
Tradename:
Goodwill:
Carrying amount of Anne Manufacturing unit 3,000,000
Recoverable amount (P200,000 x 14.0939) 2,818,780 181,220
Total impairment loss 471,220
Requirement No. 3
Original amount of Goodwill 900,000
Less impairment loss 181,220
Carrying amount of Goodwill, 12/31/12 718,780
Question No. 4 - A
Patent (P200,000 - P20,000) 180,000
206
Copyright (recoverable amount) 160,000
Tradename (recoverable amount) 300,000
Computer software (P100,000 - P50,000) 50,000

Carrying amount of other intangible assets,
12/31/12 690,000
PROBLEM NO. 4 Amortization and impairment of intangible assets
On December 31, 2014, Probe Corporation acquired the following three intangible assets:
A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
Goodwill for P1,500,000. The goodwill is associated with Probes Nexus Manufacturing
reporting unit.
A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just
3 years.
On December 31, 2015, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:
a.) Because of a decline in the economy, the trademark is now expected to generate cash flows
of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable
horizon.
b.) The cash flows expected to be generated by the Nexus Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Nexus Manufacturing reporting unitare as follows:
Book values Fair values

Identifiable assets P2,700,00 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000
c.) The cash flows expected to be generated by the customer list are P120,000 in 2016 and P
80,000 in 2017.
REQUIRED:
207
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
1. Total amortixation for the year 2015
2. Impairment loss for the year 2015
3. Carrying amount of Trademark as of December 31, 2015
4. Carrying amount of Goodwill as of December 31, 2015
5. Carrying amount of Customer list as of December 31, 2015
SOLUTION:
Requirement No. 1
Trademark* -
Goodwill* -
Customer list (P220,000/3) 73,333
*The useful life is indefinite, so no amortization expense is

recognized.
Requirement No. 2
Impairment
loss
Trademark:
Goodwill*:
Carrying amount of Manufacturing
unit
208
(P2,700,000 + P1,500,000 - P1,800,000) 2,400,000
Recoverable amount (P250,000 x
12.0416) 3,010,400 -
Customer list
Carrying amount (P220,000 - P73,333) 146,667
Recoverable amount:
2013: (P120,000 x 0.9434) 113,208
2014: (P80,000 x 0.8900) 71,200 184,408 -
Total impairment loss 133,333
*Since goodwill does not generate cash flows independently from other assets or
group
of assets, the recoverable amount of goodwill as an individual asset cannot be
determined. Therefore, the recoverable amount is determined for the cash

generating unit to which goodwill
belongs.
Requirement No. 3
Cost 300,000
Less impairment loss 133,333
Carrying amount of Trademark, 12/31/12 166,667
Requirement No. 4
Since goodwill is not amortized and is not impaired as of 12/31/12,
the carrying amount is P1,500,000.
Requirement No. 5
Cost 220,000
209
Less amortization for 2012 73,333
Carrying amount of Customer List,
12/31/12 146,667
PROBLEM NO. 5 Expenses related to intangible assets
You noted the following items relative to the companys Intangible assets in connection with your
audit of the Five Corporations financial statements for the year 2015.
Franchise
On January 1, 2015, Five signed an agreement to operate as franchisee of Clear Copy Service, Inc.
for an initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was
signed and the balance was payable in four annual payments of P120,000 each, beginning January
1, 2016. The agreement provides that the down payment is not refundable and no future services
are required of the franchisor. The implicit rate for loan of this type is 14%. The agreement also
provides the 5% of the revenue from the franchise for 2015 was P8,000,000. Five estimates the
useful life of the franchise to be ten years.
Patent
On July 1, 2015, Five purchased a patent from the inventor, who asked P1,100,000 for it. Five paid
for the patent as follows: cash, P400,000; issuance of 10,000 shares of its ordinary shares, par P10
(market value, P20 per share); and a note payable due at the end of three years, face amount,
P500,000, noninterest-bearing. The current interest rate for this type of financing is 12 percent.
Five estimates the useful life of the patent to be ten years.
Trademark
Five purchased for P1,200,000 a trademark for a very successful soft drink it markets under the
name POWER! The trademark was determined to have an indefinite life. A competitor recently
introduced a product that is in direct competition with the POWER! Product, thus suggesting the
need for an impairment test. Data gathered by the entity suggests that the useful life of the
trademark is still indefinite, but the cash flows expected to be generated by the trademark have
been reduced either to P40,000 per year (with a probability of 70%) or to P80,000 per year (with
30% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted
interest rate is 10%.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Round off present value
factors to 4 decimal places)
1. Carrying amount of franchise as of December 31, 2015.
210
2. Carrying amount of patent as of December 31, 2015
3. Total expenses related to the intangible assets in 2015
SOLUTION:
Requirement No. 1
Down payment 200,000

Add PV of installment payments (P120,000 x
2.9137) 349,644
Cost of franchise 549,644
2012 amortization (P549,644/10) (54,964)
Carrying amount of franchise, 12/31/12 494,680
Requirement No. 2
Cash paid 400,000
Fair value of shares issued (10,000 x P20) 200,000
PV of note payable (P500,000 x 0.7118) 355,900
Cost of patent 955,900
2012 amortization (P955,900/10 x 6/12) (47,795)
Carrying amount of patent, 12/31/12 908,105
Requirement No. 3
Franchise related expenses
Amortization of franchise (see no. 1) 54,964
Periodic franchise fee (P8,000,000 x .05) 400,000
211
Interest expense (P349,644 x .14) 48,950 503,914
Patent related expenses:
Amortization (see no. 2) 47,795
Interest expense (P355,900 x .12 x 6/12) 21,354 69,149
Trademark related expense (Impairment loss)
Carrying amount 1,200,000
Recoverable amount:
Outcome 1 (P40,000/.05 x .7) 560,000
Outcome 2 (P80,000/.05 x .3) 480,000
1,040,000 160,000
Total expenses - 2012 733,063
PROBLEM NO. 6 Impairment of cash generating unit
On November 15, 2015, Rodeo Corporation acquired Rapids, a company that operates a scenic
railway along the coast of a popular tourist area. The summarized statement of financial position
at fair values of Rapids on July 1, 2015, reflecting the terms of acquisition was.
Goodwill P 200,000
Operating license 1,200,000
Property-train stations and land 300,000
Rail track and coaches 300,000
Steam engines (2) 1,000,000
Purchase consideration P3,000,000
The operating license is for ten years. It has recently been renewed by the transport authority and
is stated at the cost of its renewal. The carrying amounts of the property and rail track and coaches
are based on their estimated replacement cost. The engines are valued at their net selling price.
On December 1,2015, the boiler of one of the steam engines exploded, completely destroying the
whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its age, a
replacement could not be obtained. Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2million.
212
Passenger numbers after the accident were below the expectations even after allowing for the
reduced capacity. A market research report concluded that the tourists were not using the railway
because of the fear of a similar accident occurring to the remaining engine. In the light of this, the
value in use of the business was re-assessed on December 31,2015 at P1.8 million. On this date
Rodeo received an offer of P900,000 in respect of the transferable operating license.
REQUIRED:
Based on the above and the result of your audit, compute the carrying amount of the following as
of December 31,2015 after recognizing the impairment loss, if any:
1. Goodwill
2. Operating license
3. Property-trains stations and land
4. Rail track and coaches
5. Steam engines
SOLUTION:
CA after
Carrying Impairment CA after Impairment impairment
Assets amount allocated impairment reallocation reallocation
1 Goodwill 200,000 (200,000) - - -
2 Operating license 1,200,000 (333,333) 866,667 33,333 900,000

Property-train stations and
3 land 300,000 (83,333) 216,667 (16,667) 200,000
4 Rail tracks and coaches 300,000 (83,333) 216,667 (16,667) 200,000
5 Steam engines (2) 1,000,000 (500,000) 500,000 - 500,000
3,000,000 (1,200,000) 1,800,000 1,800,000
Computation of impairment loss:
213
Carrying amount of the CGU 3,000,000
Recoverable amount (VIU) 1,800,000
Allocation of impairment loss:
Exploded steam engine (500,000)
Goodwill (200,000)
Balance pro rata (Operating license, Train stations and Rail tracks) (500,000)
Re-allocation of impairment loss:
Pro rata (Train stations and Rail tracks) 33,333
Alternative solution:
Carrying Impairment CA after

Assets amount allocated impairment
1 Goodwill 200,000 (200,000) -
2 Operating license 1,200,000 (300,000) 900,000

Property-train stations and
3 land 300,000 (100,000) 200,000
4 Rail tracks and coaches 300,000 (100,000) 200,000
5 Steam engines (2) 1,000,000 (500,000) 500,000
3,000,000 (1,200,000) 1,800,000
Allocation of impairment loss:
Exploded steam engine 500,000
Goodwill 200,000
214
Operating license (P1,200,000 - P900,000) 300,000
Balance pro rata (Train stations and Rail tracks) 200,000
1,200,000
PROBLEM NO. 7 - Impairment and reversal of impairment in a cash-generating unit
One of the cash-generating units of Tweak Corporation is the associated with the manufacture of
wine barrels. At 31 December 2014, Tweak Corporation believed, based on an analysis of
economic indicators, that the assets of the unit were impaired. The carrying amounts of the assets
of the unit at 31 December 2014 were:
Buildings, net(Depreciated at P60,000 per annum) P240,000

Machinery, net(Depreciated at P45,000 per annum) 180,000
Goodwill 15,000
Inventory 80,000
Receivables, net(Allow. For doubtful debts of P5,000) 35,000
Cash __20,000
Total P570,000
Tweak Corporation determined the value in use of the unit to be P535,000. The receivables were
considered to be collectible, except those considered doubtful.
During 2015, Tweak Corporation increased the depreciation charge on buildings to P65,000 per
annum, and to P50,000 per annum for factory machinery. The inventory on hand at 31, December
2014 was sold by the end of 2015. At 31 December,2015, Tweak Corporation, due to return in the
market to the use of traditional barrels for wines and an increase in wine production, assessed the
recoverable amount of the cash-generating unit to be P20,000 greater than the carrying amount of
the unit.
REQUIRED:
1. Carrying amount of the assets at 31 December 2014 after allocating impairment loss.
2. Carrying amount of the assets at 31 December 2015 after the reversal of impairment loss.
SOLUTION:
215
Requirement No. 1 500,000
I.L.
CA Allocation* CA after
Buildings 240,000 (9,600) 230,400
Factory machinery 180,000 (7,200) 172,800
Goodwill 15,000 (15,000) -
Inventory 80,000 (3,200) 76,800
Receivables 35,000 35,000
Cash 20,000 20,000
570,000 (35,000) 535,000
* Charge the impairment loss first to goodwill. The balance (P20,000) will be
allocated pro rata to the other assets in the unit except cash and receivables.
Requirement No. 2
Reversal of impairment loss on impaired assets:
Inventory - Sold already. No more reversal.
Goodwill - Not allowed.

- Allowed subject to
Buildings limit.
- Allowed subject to
Machinery limit.
Computation of limit on the extent of reversal:
Buildings Machinery Total
CA, 12/31/12 - without impairment
Buildings (P240,000 - P60,000) 180,000

216
Machinery (P180,000 - P45,000) 135,000
CA, 12/31/12 - with impairment
Buildings (P230,400 - P65,000) 165,400
Machinery (P172,800 - P50,000) 122,800
14,600 12,200 26,800
Alternative
computation:
Buildings Machinery Total

Allocated impairment
loss 9,600 7,200 16,800
Increase in
depreciation 5,000 5,000 10,000
14,600 12,200 26,800
*Since the excess of RA over the CA did not exceed the limit, the reversal would be
based on a pro rata allocation based on carrying amounts at time of reversal.
CA Allocation* CA after
Buildings 165,400 11,478 176,878
Machinery 122,800 8,522 131,322
288,200 20,000 308,200
PROBLEM NO. 8 - Impairment, reversal of impairment and revaluation of patent
Protoss Corporation acquired a patent right on July 1, 2012 for P250,000. The remaining legal life
on the date of purchase is 15 years. However, due to rapidly changing technology, management
estimates that the remaining useful life on July 1, 2012 is only 5 years.
217
At January 1, 2013, management is uncertain that the process can actually be made economically
feasible, and decides to write down the patent to an estimated recoverable amount of P75,000.
Amortization will be taken over 3 years from that point.
On January 1, 2015, having perfected the related production process, the entity adopts the
revaluation model to measure the patent. The patent now has a fair value of P300,000.
Furthermore, the estimated remaining useful life is now believed to be 5 years.
REQUIRED:
:
1. Loss on impairment on January 1, 2013
2. Gain on impairment recovery in 2015
3. Revaluation surplus as of December 31, 2015
4. Carrying amount patent as of December 31, 2015
SOLUTION:
Requirement No. 1
Carrying amount, 1/1/10 (P250,000 x 4.5/5) 225,000
Recoverable amount 75,000
Impairment loss 150,000
Requirement No. 2
Fair value, 1/1/12 300,000
Carrying amount, 1/1/12 (P75,000 x 1/3) 25,000
Revaluation increase 275,000
218
CA without impairment, 1/1/12 (P250,000
x 2.5/5) 125,000
Carrying amount, 1/1/12 (P75,000 x 1/3) 25,000

Gain on impairment
recovery 100,000
Requirement No. 3
Revaluation increase 275,000

Gain on impairment
recovery (100,000)
Revaluation surplus, 1/1/12 175,000

Realized - 2012
(P175,000/5) (35,000)
12/31/12 140,000
Requirement No. 4
Carrying amount (Fair value), 1/1/12 300,000
Amortization - 2012 (P300,000/5) (60,000)
PROBLEM NO.9 - Audit of intangibles and other assets
Among the account balances of Naga Corporation at December 31, 2014 are the following:
Patent, net P2,450,000

Installment contract receivable 7,200,000
Relevant transactions and other information for 2015 were as follows:

a.) The patent was purchased from Inventor Company for P3,150,000 on September 1, 2011.
On that date, the remaining legal life was fifteen years, which was also determined to be
the useful life.
219
b.) The installment contract receivable represents the balance of the consideration received
from the sale of a factory building to Feeble Company on March 31,2013, for P12,000,000.
Feeble ade a P3,000,000 down payment and signed a five year 13% note for the P9,000,000
balance. The first of equal annual principal payments of P1,800,000 was received on March
31,2014 together with interest to that date. The note is collateralized by the factory building
with a fair value P10,000,000 at December 31, 2015. The 2015 payment was received on
time.
c.) On January 2, 2015, Naga purchase a trademark from Cool Corporation for P2,500,000.
Naga considers the life of the trademark to be indefinite.
d.) On May 1, 2015, Naga sold the patent to Simple Company in exchange for a P5,000,000
non-interest bearing note due on May 1, 2018. There was no established exchange price
for the patent, and the note had no ready market. The prevailing rate of interest for a note
this type at May 1, 2015 was 14%. The present value of 1 for three period at 14% is 0.675.
The collection of the note receivable from Simple is reasonably assured.
e.) On July 1, 2015, Naga paid P18,800,000 for 750,000 ordinary shares of Pure Corporation,
which represented 25% investment in Pure. The fair value of all of Pures identifiable assets
net of liabilities equals their carrying amount of P64,000,000. The market price of Pures
ordinary share on December 31, 2015 was P26.00 per share.
f.) Pure reported net income and paid dividends of

Net income Dividends per share
Six months ended 6/30/15 P5,760,000 None
Six months ended 12/31/15 7,040,000 P2.00
Dividend was paid on November 30, 2015
QUESTIONS:
Based on the above and the result of your audit, compute for the following:
1. Gain on sale of patent
2. Total interest income for 2015
3. Noncurrent portion of the installment contract receivable as of December 31, 2015
4. Carrying amount of the note receivable from sale of patent as of December 31, 2015
220
5. The carrying amount of the investment in Pure Corporation as of December 31, 2015
SOLUTION:
Requirement No. 1
Present of note received (P5,000,000 x 0.675) 3,375,000
Less carrying amount of patent, 5/1/12:
Amortization up to 5/1/12 (P3,150,000/15x4/12) (70,000) 2,380,000
Gain on sale of patent 995,000
Requirement No. 2
Note receivable from sale of patent (P3,375,000 x 14% x 8/12) 315,000
Installment contract:
1/1 to 3/31 (P7,200,000 x 13% x 3/12) 234,000
4/1 to 12/31 (P5,400,000 x 13% x 9/12) 526,500 760,500
Total interest income - 2012 1,075,500
Requirement No. 3
Installment contract receivable, 12/31/11 7,200,000
Less principal payment received, 3/31/12 1,800,000
Balance, 12/31/12 5,400,000
Less principal payment to be received, 3/31/13 1,800,000
Noncurrent portion 3,600,000
221
Requirement No. 4
CA - NR from sale of patent, 5/1/12 3,375,000

Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 14%
x 8/12) 315,000
CA - NR from sale of patent, 12/31/12 3,690,000
Requirement No. 5
Dividends received (750,000 x 2) (1,500,000)
Share of profit (P7,040,000 x 25%) 1,760,000
CA - Investment in Pure Corp., 12/31/12 19,060,000
PROBLEM NO.10 Audit of intangibles and other assets
GDI., Inc, had the following noncurrent asset account balances at December 31, 2014
Patent P1,920,000
Accumulated amortization (240,0000)
Deferred tax asset 360,000
Transactions during 2015 and other information relating to the noncurrent assets of GDL, Inc were
as follows:
a. The patent was purchased from Grey Company for P1,920,000 on January 1, 2013, at
which date the remaining life was sixteen years. On January 1, 2015, GDL determined that
the useful life of the patent was only eight years from the date of acquisition.
b. On January 3, 2015, in connection with the purchase of a trademark from Cody

Corporation, the partie entered into a noncompetiton agreement and a consulting contract.
GDL paid Cody P8,000,000, of which three-quarters was for trademark and one-quarter
was for Codys agreement not to compete for a five-year period in the line of business
covered by the trademark. GDI considers the life of the trademark to be indefinite. Under
222
the consulting contract, GDL agreed to pay Cody P500,000 annually on January 3 for five
years. The first payment was made on January 3,2015
c. Deferred tax asset is provided in recognition of temporary differences between accounting

and tax reporting of rent income and warranty liability. For the year ended December 31,
2015, (1) rent collected in advance decreased by P200,000, and (2)product warranty
liability increased by P150,000. GDLs income tax rate for 2015 was 35%
REQUIRED:
1. The total amortization of the intangible assets for the year 2015
2. The carrying amount of the intangible assets as of December 31,2015
3. The carrying amount of deferred tax asset as of December 31, 2015
SOLUTION:
Requirement No. 1
Patent amortization (P1,680,000/6) 280,000
Trademark -
Noncompetition agreement (P2,000,000/5) 400,000
Requirement No. 2
Patent (P1,680,000 - P280,000) 1,400,000
Trademark (P8,000,000 x 3/4) 6,000,000
Noncompetition agreement (P2,000,000 - P400,000) 1,600,000
Carrying amount of intangible assets, 12/31/12 9,000,000
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Requirement No. 3
Deferred tax asset, 12/31/11 360,000
Decrease in deferred tax asset:

Decrease in unearned rent (P200,000 x
35%) (70,000)
Increase in warranty liability (P150,000
x 35%) 52,500 (17,500)
PROBLEM NO. 11 - Theory
Select the best answer for each of the following
1. In evaluating control risk and effectiveness for intangible assets, controls should be
designed for numerous purposes. Which of the following is not a usual control for
intangible assets?
a. Ensure that decision are appropriately made as to when to capitalize or expense
research and development expenditures.
b. Develop amortization schedules that reflect the remaining useful life of patents or
copyrights associated with the assets.
c. Identify and account for intangible asset impairment.
d. All of the above are usual controls for intangible assets.
2. The most effective means for the auditor to determine whether a recorded intangible asset
possesses the characteristics of an asset is to
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent applications.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze research and development expenditures to determine that only those
expenditures possessing future economic benefit have been capitalized.
3. In auditing intangible assets, an auditor most likely review or recomputed amortization and
determine whether the amortization period is reasonable in support of managements
financial statement assertion of
a. Valuation
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b. Completeness
c. Existence or occurrence
d. Rights and obligations
4. When an internally generated asset meets the recognition criteria the appropriate treatment
for costs previously expensed is:
a. Reinstatement
b. No adjustment as these amounts may not be reinstated.
c. Include in the cost of the development of the asset.
d. Capitalize into the cost of the asset and adjust the opening balance of retained
earnings.
5. Which statement is correct regarding initial recognition of research and development costs?
a. All research costs should be charged to expense.
b. All development costs should be capitalized.
c. If an entity cannot distinguish the research phase of an internal project to create an
intangible asset from the development phase, the enterprise treats the expenditure
for that project as if it were incurred in the development phase only.
d. A research and development project acquired in a business combination is not
recognized as an asset.
6. Assuming TLL Co. has capitalized all research and development costs associated with
patent. You, CPA, who is examining this account, will probably
a. Confer with management regarding transfer of the amount from the balance sheet
to the income statement.
b. Confirm that the patent is registered and on file with the intellectual property office.
c. Confer with the management regarding a change in the tite of the account to
goodwill
d. Confer with management regarding ownership of the patent.
7. There is goodwill involved in the acquisition of a business if the purchase price paid is in
excess of the normal or usual return for the industry as a whole but such goodwill is not
recorder if it has not been purchased or paid for.
a. False; True.
b. True; False.
c. False; False.
d. True; True.
8. Which of the following comparisons would be the most appropriate audit test for the
amount of recorded goodwill?
a. The purchase price and the book value of assets purchased
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b. The purchase price and the fair value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 5% of net assets for the past five years.
ANSWERS:
1. D 5. A
2. C 6. A
3. A 7. D
4. B 8. B
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V11 AUDIT OF LIABILITIES
PROBLEM NO. 1 Recognition and classification of liabilities

The Comprehensive Entitys chief accountant provided the following information:
Notes payable:
Arising from purchase of goods
304,000
Arising from 5 year-bank loans, on which marketable
securities valued at P600,000 have been pledged as security,
500,000
P400,000 due on June 30, 2016; P100,000 due on Dec. 31, 2016
Arising from advances by officers, due June 30,2016 50,000
Reserve for general contingencies 400,000
Employees income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers deposit 50,000
Accounts payable arising from purchase of goods, 170,000
net of debit balances of P30,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Share dividends payable
100,000
Dividends in arrears on preference shares 800,000
Convertible bonds, due January 31, 2107 1,000,000
First mortgage serial bonds, payable in semi-annual installments of P50,000,
due April 1 and October 1 of each year
2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB
390,000
Estimated liability for damages
160,000
Estimated liability on meeting guarantee for service requirements
on merchandise sold 120,000
Estimated liability for premiums 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Share warrants outstanding 120,000
Share options outstanding 210,000
227
Unused letters of credit
400,000
Notes receivable discounted 20,000
On March 1, 2016, the P400,000 note payable was replaced by an 18-month note for the same
amount. The entity is considering similar action on the P100,000 note payable due on December
31, 2016. The 2015 financial statements were authorized for issue on March 31, 2016.
On December 1, 2105, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal.
The entitys attorney believe that the suit is without merit. No court date has been set.
REQUIRED:
Determine the following as of December 31, 2015.
1. Total current liabilities
2. Total noncurrent liabilities
SOLUTION:
Requirement No. 1
Trade and other
NP - Arising from purchase of goods
304,000 payables
NP - Arising from 5 year-bank loans, P400,000
due on June 30, 2013; P100,000 due on Dec. Borrowings
500,000
31, 2013
NP - Arising from advances by officers, due Trade and other
June 30, 2013 50,000 payables
Trade and other
Employees income tax withheld
20,000 payables
Trade and other
Advances received from customers on purchase
payables or Separate
orders 64,000
item
Trade and other
Containers deposit
50,000 payables
Accounts payable arising from purchase of Trade and other
goods - gross (P170,000+P30,000) 200,000 payables
Trade and other
AR with credit balance
40,000 payables
Trade and other
Cash dividends payable
80,000 payables
First mortgage serial bonds - current portion (P50,000 Borrowings -
x 2) 100,000 separate item
Overdraft with Allied Bank Borrowings
90,000
228
Estimated liability for damages Provisions
160,000
Estimated liability on meeting guarantee for
Provisions
service requirements on merchandise sold 120,000
Estimated liability for premiums Provisions
75,000
Trade and other
Deferred revenue payables or Separate
87,000
item
Trade and other
Accrued interest on bonds payable
360,000 payables
Current liabilities
2,300,000
Requirement No. 2
Convertible bonds, due January 31, 2014 Separate item
1,000,000
First mortgage serial bonds - noncurrent portion
Separate item
(P2M - P.1M) 1,900,000
Noncurrent liabilities
2,900,000
Items not included:

Reserve for general contingencies - Equity
AP with debit balances - Trade and other
receivables
Accounts receivable gross - Trade and other
receivables
Share dividends payable - Equity
Dividends in arrears on preference shares - Disclose
only
Cash in bank balance with PNB - Cash and cash equivalents
Share warrants outstanding - Equity (share
premium)
Share options outstanding - Equity (share
premium)
Unused letters of credit - Contingent liability
Notes receivable discounted - Contingent
liability
Treatment of additional information:

Note refinancing - disclose
Lawsuit filed by former employee - ignore
PROBLEM NO. 2 Classification of liabilities
229
You were able to obtain the following from the accountant for Okey Corp. related to the companys
liabilities as of December 31, 2015
Accounts Payable P 650,000
Notes payable trade 190,000
Notes payable bank 800,000
Wages and Salaries payable 15,000
Interest payable 143,000
Mortgage notes payable 10% 600,000
Mortgage notes payable - 12% 1,500,000
Bonds payable 2,000,000
The following additional information pertains to these liabilities.
a. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A P300,000, 8% note issued March 1, 2013, payable on demand. Interest is payable
every six months.
(2) A 1-year, P500,000, 11 % note issued January 2, 2105. On December 30, 2015, Okey
negotiated a written agreement with Allied Bank to replace the note with a 2-year,
P500,000, 10% note to be issued January 2, 2016. The interest was paid on December
31, 2015.
b. The 10% mortgage note was issued October 1, 2012, with a term of 10 years. Terms of the
note give the holder the right to demand immediate payment if the company fails to make
a monthly interest payment within 10 days of the date the payment is due. As of December
31, 2015, Okey is three months behind in paying its required interest payment.
c. The 12% mortgage note was issued May 1, 2009, with a term of 20 years. The current
principal amount due is P1,500,000. Principal and interest payable annually on April 30.
A payment of P220,000 is due April 30, 2016. The payment includes interest of P180,000.
d. The bonds payable is 10-year, 8% bonds, issued June 30, 2006. Interest is payable semi-
annually every June 30 and December 31.
REQUIRED:
Determine the following as of December 31, 2015.
SOLUTION:
Requirement No. 1
Trade and other
Accounts payable
650,000 payables
Trade and other
Notes payable trade
190,000 payables
230
Notes payable bank (payable on demand) Borrowings
300,000
Trade and other
Wages and salaries payable
15,000 payables
Trade and other
Interest payable
143,000 payables
Mortgage notes payable 10% (with breach of
Borrowings
covenant) 600,000
Mortgage notes payable 12% (current Borrowings - separate
portion) 40,000 item
Bonds payable (due, 6/30/13) Borrowings
2,000,000
Current liabilities
3,938,000
Requirement No. 2
Notes payable bank (refinanced) Separate item
500,000
Mortgage notes payable 12% (noncurrent
Separate item
portion) 1,460,000
Noncurrent liabilities
1,960,000
PROBLEM NO. 3 Classification of liabilities

Dallas Corporation is selling audio and video appliances. The companys fiscal year ends on March
31. The following information relates to the obligation of the company as of March 31, 2015:
Notes Payable
Dallas has signed several 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, 2015.
Due date Amount
April 31, 2105 P 700,000
July 31, 2105 900,000
February 1, 2016 800,000
April 30, 2016 1,200,000
June 30, 2106 1,500,00
P 1,500,000
Estimated warranties
Dallas has a one-year product warranty on some selected items. The estimated warranty liability
on sales made during the 2013-2104 fiscal year and still outstanding as of March 31, 2014,
231
amounted to P252,000. The warranty costs on sales made from April 1, 2104, to March 31, 2015,
are estimated at P630,000. The actual warranty costs incurred during 2014-2015 fiscal year are as
follows:
Warranty claims honored on 2013-2014 sales P 252,000
Warranty claims honored on 2014-2105 sales 285,000
Total P 537,000
Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to P
560,000 as of March 31, 2015.
Dividends
On March 10, 2015, Dallas board of directors declared a cash dividend of P0.30 per ordinary
share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2015
to ordinary shareholders on record at the close of business on March 31, 2015. As of March 31,
2015. As of March 31, 2015, Dallas has 5 million, P2 par value, ordinary shares issued and
outstanding.
Bonds Payable
Dallas issued P5,000,000, 12% bonds, on October 1, 2009 at 96. The bonds will mature on October
1, 2019. Interest is paid semi-annually on October 1, 2019. Interest is paid semi-annually on
October 1 and April 1. Dallas uses the straight line method to amortize bond discount.
REQUIRED:
Determine the following as of March 31, 2015.
SOLUTION:
Requirement No. 1
Notes payable - current (maturing up to
3/31/13) 2,400,000
Accrued interest - notes payable 340,000

Estimated warranty payable (P252,000 + P630,000 -
P537,000) 345,000

Cash dividends payable (5 million shares x
P0.30) 1,500,000
232
Accrued interest - bonds payable (P5,000,000 x .12 x 6/12) 300,000
Total current liabilities 5,445,000
Requirement No. 2
Bonds payable:
Face value 5,000,000

Unamortized bond discount (P200,000 x
4.5/10) (90,000) 4,910,000
Notes payable - non current 2,700,000
Total non current liabilities 7,610,000
PROBLEM NO. 4 Audit of liability for premiums and warranties
Nuggets Music Emporium carries a wide variety of music promotion techniques warranties and
premiums to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts
and labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for
an AM/FM radio.
Nuggets pays P34 for each radio and estimates that 60% of the coupons given to customers will
be redeemed.
Nuggets total sales for 2015 were P7,200,000 P5,400,000 from musical instrument and sound
reproduction equipment and P1,800,000 from recorded and sheet music. Replacement parts and
labor for warranty work totaled P164,000 during 2015. A total of 6,500 AM/FM radio used in the
premium program were purchased during the year and there were 1,200,000 coupons redeemed in
2015.
The accrual method is used by Nuggets to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January 1,
2015, were as shown below:
Inventory of Premium AM/FM radio P 39,950
Estimated Premium Claims Outstanding 44,800
233
Estimated Liability from Warranties 136,000
REQUIRED:
Based on the above and the result of your audit, determine the amounts that will be shown on the
2015 financial statements for the following:
1. Warranty expense
2. Estimated liability from warranties
3. Premium expense
4. Inventory of AM/FM radio
5. Estimated liability for premiums
SOLUTION:
Requirement No. 1
Warranty expense (P5,400,000 x .02) 108,000
Requirement No. 2
Estimated liability from warranties, 1/1/12 136,000
Add warranty expense for 2012 108,000
Total 244,000
Less actual expenditures for 2012 164,000

Estimated liability from warranties,
12/31/12 80,000
Requirement No. 3
Premium expense [(1,800,000 x .6)/200 x
P14] 75,600
Requirement No. 4
Inventory of premium, 1/1/12 39,950
Add premium purchases (6,500 x P34) 221,000
Total premiums available 260,950

Less premiums issued (1,200,000/200 x
P34) 204,000
Inventory of premiums, 12/31/12 56,950
234
Requirement No. 5
Estimated premium claims outstanding,
1/1/12 44,800
Add premium expense for 2012 75,600
Total 120,400
Less premiums issued (1,200,000/200 x
P14) 84,000
Estimated premium claims outstanding,
12/31/12 36,400
PROBLEM NO. 5 Audit of provisions and contingencies

Relevant extracts from Magic Corporations financial statements at 31 December 2014 are as
follows:
Current Liabilities
Provisions for warranties P405,000
Non-current liabilities
Provisions for warranties 270,00
Note 10 Contingent liabilities

Magic is engaged in litigation with various parties in relation to allergic reactions to traces
of peanuts alleged to have been found in packets of fruit gums. Magic strenuously denies
the allegations and, as at the date of authorizing the financial statements for issue, is unable
to estimate the financial effect, if any, of any costs or damages that may be payable to the
plaintiffs.
The provision for warranties at 31 December 2014 was calculated using the following
assumptions: There was no balance carried forward from the prior year.
Estimated costs of repairs products with minor defects

P1,500,000
Estimated cost of repairs products with major defects
P9,000,000
Expected % of products sold during 2014
having no defects in 2105
80%
having minor defects in 2105 15%
having major defects in 2105 5%
235
Expected timing of settlement of warranty payments
-those with minor defects All in
2015
-those with major defects 40% in 2015, 60% in
2016
During the year ended 31 December 2015 the following occurred:

1. In relation to the warranty provision of P675,000 at 31 December 2014, P300,000 was paid
out of provision. Of the amount paid, P225,000 was for products with minor defects and
P75,000 was for products with major defects, all of which related to amounts that had been
expected to be paid in 2015.
2. In calculating its warranty provision for 31 December 2015, Magic made the following
adjustments to the assumptions used for the prior year:
Estimated costs of repairs products with minor defects No

change
Estimated cost of repairs products with major defects
P7,500,000
having no defects in 2105
85%
having minor defects in 2105 35%
having major defects in 2105 2%
-those with minor defects All in
2016
-those with major defects 20% in 2016, 80% in
2017
3. Magic determined that part of its plant and equipment needed an overhaul the conveyer
belt on one of its machines would need to be replaced in about December 2016 at an
estimated cost of P500, 000. The carrying amount of the conveyer belt at 31 December
2104 was P280,000. Its original cost was P400,000.
4. Magic was unsuccessful in its defense of the peanut allergy case and was ordered to pay
P2,000,000 to the plaintiffs. As at 31 December 2015 Magic had paid P1,500,000.
236
5. Magic commenced litigation against one of its advisers for negligent advise given on the
original installation of the conveyers belt referred to in (4) above. In October 2015 the court
found in favor of Magic. The hearing for damages had not been scheduled as at the date of
financial statements for 2015 were authorized for issue. Magic estimated that it would
receive but P500,000.
6. Magic signed an agreement with Choko Bank to the effect that Magic would generate a
loan made by Choko Bank to Magics subsidiary, UN Ltd. UNs Ltd. loan with Choko
Bank was P300,000,000 as at 31 December. UN Ltd. was in strong financial position at 31
December 2015.
REQUIRED:
Determine the following as of and for the year ended December 31, 2015.
1. Net amount to be recognized in profit or loss
2. Total current provisions
3. Total noncurrent provisions
SOLUTION:
Requirement No. 1
No defects - 85% -
Minor defects (P1,500,000 x .13) 195,000
Major defects (P5,000,000 x .02) 150,000
Increase in provision in 2012 345,000
Unused amounts reversed in 2012 (P180,000 - P75,000) (105,000)

Warranty expense in 2012 240,000
Requirement No. 2
Balance, 1/1/12 (P405,000+270,000) 675,000
Amounts used in 2012 (300,000)

Increase in provision in 2012 345,000
Unused amounts reversed in 2012 (105,000)

Balance, 12/31/12 615,000
New provision 345,000
Balance of provision from 2010 payable in 2012 270,000
Balance, 12/31/12 615,000
Current portion of Provision for warranties

Balance of provision from 2011 payable in 2013 270,000
2012 provision:
Minor defects 195,000
237
Major defects (P100,000 x .2) 30,000
495,000
Requirement No. 3
Provision for warranties, 12/31/12 615,000
Less current provision for warranties 495,000
Noncurrrent provision for warranties 120,000
Notes:
1. The expected overhaul is not a provision, as the entity has no present
obligation to conduct the overhaul. Rather, it is evidence that the
conveyer belts useful life has been shortened.
2 . The unpaid amount of P700,000 owing as a result of the peanut allergy
case
should be included as part of trade and other payables as there is no
uncertainty
regarding timing or amount of settlement and hence it is not a provision.
3. The entity's guarantee of the loan made by Choko Bank to UN Ltd
would be disclosed as a contingent liability rather than recorded as a
provision
because UN Ltd was in a strong financial position at 31 December 2011
and therefore whilst the entity has a present obligation under the
guarantee,
it is not probable that an outflow of economic benefits will be required
to settle
the obligation.
PROBLEM NO. 6 Audit of bonds payable

In your initial audit of Bulls Co., you find the following ledger account balance.
12%, 25-year Bonds Payable, 2011 issue

1/1/2011 CR P 1,600,000
Treasury Bonds
1/1/2015 CD P 216,000
Bond Premium
1/1/2011 CR P 80,000
238
Interest Expense
1/1/2015 CD P 96,000
7/1/105 CD P 96,000
The bonds were redeemed for permanent cancellation on October 1, 2015 at 105 plus accrued
interest.
REQUIRED:
1. Compute for the adjusted balances of the following
(Use straight-line amortization method)
a. Adjusted balance of bonds payable as of December 31, 2015
b. Unamortized bond premium on December 31, 2015
c. The total bond interest expense for the year 2105
d. The gain or loss on bond redemption
SOLUTION:
Requirement No. 1.a
Total bonds issued 1,600,000

Face value of bonds retired {P216,000/[1.05 + (.12 x
3/12)]} 200,000
Adjusted balance of bonds payable,
12/31/12 1,400,000
Requirement No. 1.b

Unamortized bond premium, 12/31/12 (P80,000 x 14/16 x
20/25) 56,000
Requirement No. 1.c
Nominal interest
Remaining bonds (P1,400,000 x .12) 168,000
Bonds retired (P200,000 x .12 x 9/12) 18,000
Total 186,000
Less premium amortization
Bonds retired (P80,000/25 x 2/16 x 9/12) 300
239
Remaining bonds (P80,000/25 x 14/16) 2,800 3,100
Bond interest expense 182,900
Requirement No. 1.d

Carrying amount of bonds
retired
Face value 200,000

Unamortized bond premium
(P80,000 x 2/16 x 20.25/25) 8,100 208,100
Redemption price (P200,000 x 1.05) 210,000

Gain (Loss) on bond
redemption (1,900)
Requirement No. 2
AJE 1 - To correct recording of bond retirement (see requirement 1.d)
Bonds payable 200,000
Premium on bonds payable 8,100
Interest expense (P200,000 x .12 x 3/12) 6,000
Loss on bond retirement 1,900
Treasury bonds 216,000
AJE 2 - To correct non-recording of premium

amortization
Retained earnings (P80,000 x 4/25) 12,800
Interest expense (see requirement 1.c) 3,100
AJE 3 - To correct entry made on 1/1/12 on Interest

expense
240
Interest expense 96,000
AJE 4 - To correct non-accrual of interest expense at

12/31/12
Interest expense (P1.4M x .12 x 6/12) 84,000
Interest payable 84,000
PROBLEM NO. 7 Audit of bonds payable

On January 1, 2014, Thunder Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds
dated January 1 at an effective annual interest rate(yield) of 9%. Interest is payable each December
31. Thunder uses the effective interest method of amortization. On December 31, 2015, the 2,000
bonds were extinguished early through acquisition in the open market by Thunder for P 1,980,000
plus accrued interest.
On July 1, 2014, thunder issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at
par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 12%. On July 1, 2015, an investor in
Thunders convertible bonds tendered 1,500 bonds for conversion into 15,000 ordinary shares of
Thunder, which had a fair value of P105 and a par value of P1 at the date of conversion.
REQUIRED:
1. Issue price of the 2,000 5 year bonds
2. Carrying amount of the 2,000 5 year bonds at December 31, 2014
3. Gain on early retirement of bonds on December 31, 2015
4. Equity component of the 6-year bonds
5. Increase share premium as a result of the conversion of the 1,500 6-year
SOLUTION:
Requirement No. 1
PV of interest [(P2,000,000 x .11) x 3.8897] 855,734
Issue price 2,155,534
241
Requirement No. 2
Carrying amount, 1/1/11 (see no. 1) 2,155,534

Less premium amortization for 2011:
Nominal interest (P2,000,000 x .11) 220,000
Effective interest (P2,155,534 x .09) 193,998 26,002
Requirement No. 3
Retirement price 1,980,000

Carrying amount,
12/31/12:
Carrying amount, 12/31/11 (see no. 1) 2,129,532

Less premium amortization for 2012:
Nominal interest (P2,000,000 x .11) 220,000
Effective interest (P2,129,532 x .09) 191,658 28,342 2,101,190
Gain early retirement of bonds 121,190
Retirement price 1,980,000
Gain early retirement of bonds 121,286
242
Requirement No. 4

Less liability component:
Present value of the principal (P5,000,000 x 0.4970) 2,485,000

Present value of the interest [(P5,000,000 x .05 x
8.3838) 2,095,950 4,580,950
Equity component 419,050
Requirement No. 5
PV of principal (P1,500,000 x 0.5584) 837,600
Par value of shares issued (15,000 shares x P1) 15,000
Net increase in share premium 1,374,608
PROBLEM NO. 8 Convertible bonds payable

On January 1, 2011, Calauag Corporation issued a 10 per cent convertible bonds with face value
of P 4,000,000 maturing on December 31, 2019. Each P1,000 bond is convertible into ordinary
shares of Calauag at a conversion price of P25 per share. Interest is payable half-yearly in cash. At
the date of issue, Calauag could have issued nonconvertible debt with a ten-year term bearing a
coupon interest rate of 11 per cent.
On January 1, 2015, the convertible bond has a fair value of P 4,400,000. Calauag makes a tender
offer to the holders to repurchase the bonds for P4,400,000. The holders of the P2,000,000 bonds
accepted the offer. At the date of repurchase, Calauag could have issued non-convertible debt with
a five-year term being a coupon interest rate of 8 per cent.
On December 31, 2015, to induce the holders of the remaining bonds to convert the bonds
promptly, Calauag reduces the conversion price to P20 if the bonds are converted before March 1,
2016 (ie within 2 months). The market price of Calauags ordinary shares on the date the terms are
amended is P32 per share.
REQUIRED:
243
1. The proceeds from issuance of convertible bonds to be allocated to the equity component
2. Carrying amountof the bonds at December 31, 2014
3. Amount to be recognized in profit or loss as a result of the repurchase of the bonds on
January 1, 2015
4. Decrease in equity as a result of the repurchase of the bonds on January 1, 2015
5. Amount to be recognized in profit or loss as a result of the amendment of the terms on
December 31, 2015 is
SOLUTION:
Requirement No. 1
Issue price 4,000,000

Less liability
component:
PV of interest [(P4,000,000 x .05) x 11.9504] 2,390,080
3,760,880
Requirement No. 2

PV of interest [(P4,000,000 x .05) x
7.5376] 1,507,520
Carrying amount,
12/31/11 3,849,120
Requirement No. 3
Carrying amount of bonds retired (P3,849,120 x 1/2) 1,924,560

PV of interest [(P2,000,000 x .05) x
8.1109] 811,090
Retirement price - liability (Fair value of bonds retired,
1/1/12) 2,162,290
Loss on retirement of bonds - profir or
loss (237,730)
244
Requirement No. 4
Retirement price (P4,400,000 x 1/2) 2,200,000
Less payment applied to liability component (see no. 3) 2,162,290

Retirement price - equity (residual
amount) 37,710
Requirement No. 5
Ordinary shares to issued - amended terms
(P2,000,000/P20) 100,000
Ordinary shares to issued - original terms
(P2,000,000/P25) 80,000
Incremental ordinary shares to be issued 20,000
Fair value of incremental shares to be issued (20,000 x

P32) 640,000
PROBLEM NO. 9 - Audit of Leases
Ebony Ltd is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered
into an agreement on July 1, 2014 to sell its processing plant to Ivory Ltd P467,100. At the date of
sale, the plant had a carrying amount of P400,000 and a future useful life of five years. Ivory Ltd
immediately leased the processing plant back to Ebony Ltd. The terms of the lease agreement
were:
Lease term: 3 years

Economic life of plant: 5 years
Annual rental payment, in arrears (commencing 30/6/15): P165,000
Residual value of plant at end of lease term: P90,000
Residual value guaranteed by Ebony Ltd: P60,000
Interest rate implicit in the lease: ?
The lease is cancellable, but only with the permission of the lessor. At the end of the lease term,
the plant is to be returned to Ivory Ltd. In setting up the lease agreement, Ivory Ltd incurred P9,414
in legal fees and stamp duty costs. The annual rental payment includes P15,000 to reimburse the
lessor for maintenance costs incurred on behalf of the lessee.
245
REQUIRED:
Based on the above and the result of your audit, determine the following: (Round off present value
factors to four decimal places)
1. Interest rate implicit in the lease

2. Interest income to be recognized by the lessor for the fiscal period ended June 30, 2015
3. Carrying amount of the finance lease receivable to be reported by the lessor at June 30, 2015
4. Total lease-related expenses to be recognized by the lessee during the fiscal period ended June
30, 2015
5. Amount to be reported by the lessee under current liabilities as liability under finance lease as
of June 30, 2015
SOLUTION:
Requirement No. 1
Computation of net investment in the lease:
Fair value of asset 467,100
Initial direct cost (IDC) 9,414
476,514
Using 6%: Cash flow PVF at 6% PV
PV of rental payments 150,000 2.6730 400,950
PV of GRV 60,000 0.8396 50,376
PV of MLP 451,326
PV of URV 30,000 0.8396 25,188
246
476,514
The interest rate implicit in the lease is the discount rate that, at the inception of the
lease,
causes the aggregate present value of (a) the minimum lease payments and (b) the
URV to be
equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of
the lessor.
Requirement Nos. 2&3
Refer to the amortization schedule

below.
Amortization schedule (Lessor)
Interest
Date Payment (10%) Principal C.A.
7/1/11 476,514
6/30/12 150,000 28,591 121,409 355,105
6/30/13 150,000 21,306 128,694 226,411
6/30/14 240,000 13,589 226,411 -
Requirement No. 4
Interest expense (see amortization schedule below) 27,080
247
Executory costs 15,000
Depreciation [(P451,326 - P60,000) /

3] 130,442
Lease related expenses 172,522
Requirement No. 5
Amortization schedule (Lessee)
Interest
Date Payment (10%) Principal C.A.
7/1/11 451,326
6/30/12 150,000 27,080 122,920 328,406
6/30/13 150,000 19,704 130,296 198,110
6/30/14 210,000 11,890 198,110 -
PROBLEM NO. 10 - Audit of Leases
248
Jackie Corporation has entered into an agreement to lease a machine to a Lessee Corporation. The
lease agreement details are as follows:
Length of lease: 5 years

Commencement date: January 1, 2015
Annual lease payment payable December 31 each year commencing December 31, 2015: P8000
Fair value of the machine at January 1, 2015: P34,797
Estimated economic life of the machine: 8 years
Estimated economic residual value of the asset at the end of its economic life: P2000
Residual value at the end of the lease term, of which 50% is guaranteed by Lessee Corporation:
P7,200
Interest rate implicit in the lease: ?
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on
cancellation. Lessee Corporation does not intend to buy the machine at the end of the lease term,
Jackie Corporation incurred P1,000 to negotiate and execute the lease agreement. Jackie
Corporation purchased the machine for P34,797 just before the inception of the lease.
REQUIRED:
Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places)
1. The interest rate implicit in the lease is

2. Ignoring income taxes, if Jackie Corporation erroneously accounted for the transaction as an
operating lease, its profit for 2015 will be overstated by
3. The amount to be reported by Lessee Corporation under current liabilities as liability under
finance lease as of December 31, 2015
4. The depreciation7 amount to be recognized by Lessee Corporation for the year ended
December 31, 2015
5. Ignoring income taxes, if Lessee Corporation erroneously accounted for the transaction as an
operating lease, its profit for 2015 will be overstated by
SOLUTION:
249
Requirement No. 1
Computation of net investment in the lease:
Fair value of asset 34,797
Initial direct cost (IDC) 1,000
35,797
Using 9%: Cash flow PVF at 9% PV
PV of GRV 3,600 0.6499 2,340
PV of MLP 33,457
PV of URV 3,600 0.6499 2,340
35,797
The interest rate implicit in the lease is the discount rate that, at the inception of the lease,
causes the aggregate present value of (a) the minimum lease payments and (b) the URV to
be
equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of the
lessor.
Requirement No. 2
250
Profit under operating lease (As recorded)
Rent income 8,000
Depreciation [(P34,797 - P2,000)/8] (4,100)
IDC amortization (P1,000/5) (200)
3,700
Profit under finance lease (Should be)
Interest income (P35,797 x .09) 3,222
Over (Under) 478
Requirement No. 3
Computation of present value of MLP:
PV of GRV 3,600 0.6499 2,340
PV of MLP 33,457
The PV of the MLP is 96% (P33,457/P35,797) of the fair value of the leased asset.
Amortization schedule (Lessee)
Date Payment Interest (9%) Principal C.A.
251
1/1/12 33,457
12/31/12 8,000 3,011 4,989 28,468
12/31/13 8,000 2,562 5,438 23,030
12/31/13 8,000 2,073 5,927 17,103
12/31/14 8,000 1,539 6,461 10,642
12/31/15 11,600 958 10,642 -
Requirement No. 4
Cost 33,457
Guaranteed residual value (3,600)
Depreciable amount 29,857
/ Lease term 5
Annual depreciation 5,971
Requirement No. 5
Expenses under operating lease (As recorded)
Rent expense 8,000
Expenses under finance lease (Should be)
Interest expense 3,011
252
Depreciation 5,971 8,982
Over (Under) (982)
Therefore, profit is overstated.
PROBLEM NO. 11 - Audit of Income Taxes
Roy Ltd has determined its accounting profit before tax for the year ended June 30, 2015 to be
P256,700. Included in this profit are the items of income and expense shown below.
Royalty revenue (exempt from taxation): P8,000

Proceeds on sale of building: P75,000
Carrying amount of building sold: P70,000
Entertainment expense (non deductible): P1,700
Depreciation expense - Buildings: P7,600
Depreciation expense - Plant: P22,500
Doubtful debts expense: P4,100
Annual leave expense: P46,000
Insurance expense: P4,200
Development expense: P15,000
The company's draft balance sheet at June 30, 2015 showed the following assets and liabilities:
Assets
Cash P2,500
Allowance for doubtful debts (4,100) P17,400
Inventory 31,600
Prepaid insurance 4,500
253
Land 75,000
Buildings 170,000
Accumulated depreciation (59,500) 110,500
Plant 150,000
Accumulated Depreciation (67,500) 82,500
Deferred Tax Asset, 9opening balance) 9,600
333,600
Liabilities
Accounts Payable 25,000
Provision for annual leave 10,000
Deferred tax liability (opening balance) 27,270
Loan 140,000
202,270
Additional Information
a. Quarterly income tax installments paid during the year were:

October 28, 2014 P18,000
January 28, 2015 17,500
April 28, 2015 18,000
with the final balance due on July 28, 2015
b. The tax depreciation rate for plant (which cost P150,000 three years ago) is 20%.
Depreciation on buildings is not deductible for taxation purposes.
c. The building sold during the year had cost P100,000 when acquired six years ago. The
company depreciates buildings at 5% p.a., straight-line.
254
d. During the year, the following cash amounts were paid:
Annual leave P52,000
Insurance 3,700
e. Bad debts of P3,500 were written off against the allowance for doubtful debts during the
year.
f. The P15,000 spent (and expensed) on development during the year is not deductible for
tax purposes until June 30, 2016.
g. Roy Lt has tax losses amounting to P12,500 carried forward from prior years.
h. The company tax rate is 30%.
REQUIRED:
Compute for the following as of and for the fiscal period ended June 30, 2015:
1. Current tax expense

2. Current tax payable
3. Deferred tax liability
4. Deferred tax asset
5. Deferred tax expense (benefit)
SOLUTION:
Requirement No. 1
Accounting profit 256,700
Reversal of accounting items:
Royalty revenue (exempt from taxation) (8,000)
Gain on sale of building (P75,000 - P70,000)* (5,000)
Entertainment expense (non-deductible) 1,700
Depreciation expense - buildings 7,600
Depreciation expense - plant 22,500
Doubtful debts expense 4,100
Annual leave
expense 46,000
255
Insurance expense 4,200
Development expense 15,000
344,800
Add (deduct) tax amounts:
Depreciation expense - plant (P150,000 x .2) (30,000)
Bad debts written off (item e) (3,500)
Annual leave paid (item d) (52,000)
Insurance paid (item d) (3,700)
Tax losses from prior years (item g) (12,500)
Taxable profit 243,100
Tax rate 30%
Current tax expense 72,930
* Non assessable since depreciation is not deductible for tax purposes
Requirement No. 2
Current tax expense (see no. 1) 72,930
Less quarterly income tax installments paid 53,500
Current tax payable 19,430
Requirement No. 3
Total taxable temporary differences (see analysis below) 27,000
Tax rate 30%
Deferred tax liability, 6/30/12 8,100
256
Requirement No. 4
Total deductible temporary differences (see analysis

below) 29,100
Tax rate 30%
Comparison of carrying amount of asssets/liabilities and tax base
Carrying Differenc
amount Tax base e Remarks
Accounts receivable 17,400 21,500 4,100 Deductible
Prepaid insurance 4,500 - 4,500 Taxable
Buildings 110,500 110,500 - Permanent
Plant 82,500 60,000 * 22,500 Taxable
Development
expenditure - 15,000 15,000 Deductible
Annual leave 10,000 - 10,000 Deductible
* P150,000 x 2/5
Requirement No. 5
Beginnin Effect on tax

Ending g Inc(Dec) expense
Deferred tax liability 8,100 27,270 (19,170) Credit
257
Deferred tax asset 8,730 9,600 (870) Debit
Journal entry:
Deferred tax liability 19,170
Deferred tax asset 870
Income tax expense 18,300
PROBLEM NO. 12 Audit of Income Taxes
The accounting profit before tax for the year ended December 31, 2015 for Belen Ltd amounted
to P18,500 and included:
Depreciation motor vehicle (25%) P4,500
Depreciation equipment (20%) 20,000
Rent revenue 16,000
Royalty revenue (exempt from tax) 5,000
Proceeds on sale of equipment 19,000
Carrying amount of equipment sold 18,000
Annual leave expense 5,000
The draft statement of financial position at December 31, 2015 contained the following assets and
liabilities:
258
2015 2016
Assets
Cash P11,500 P9,500
Receivables 12,000 14,000
Allowance for doubtful debts (3,000) (2,500)
Inventory 19,000 21,500
Rent receivable 2,800 2,400
Motor vehicle 18,000 18,000
Acc. Dep motor vehicle (15,750) (11,250)
Equipment 100,000 130,000
Acc. Dep equipment (60,000) (52,000)
Deferred tax asset ? 5,550
P135,200
Liabilities
Accounts payable 15,655 21,500
Provision for annual leave 4,500 6,000
Current tax liability ? 7,600
Deferred tax liability ? 2,745
37,845
Additional information
The company can claim a deduction of P15,000 (15%) for depreciation on equipment, but
the motor vehicle is fully depreciated for tax purposes.
The equipment sold during the year had been purchased for P30,000 two years before the
date of sale.
The company tax rate is 30%.
259
REQUIRED:
Compute for the following as of and for the year ended December 31, 2015:
1. Current tax expense

2. Deferred tax liability
3. Deferred tax asset
4. Deferred tax expense (benefit)
SOLUTION:
Requirement No. 1
Accounting profit 18,500
Reversal of accounting items:
Depreciation - motor vehicle 4,500
Depreciation - equipment 20,000
Rent revenue (16,000)
Royalty revenue (exempt from taxation) (5,000)
Gain on sale of equip. (P19,000 - P18,000) (1,000)
Annual leave expense 5,000
29,800
Add (deduct) tax amounts:
Depreciation - motor vehicle -
Depreciation - equipment (15,000)
260
Rent revenue collected (P16,000 + P2,400 - P2,800) 15,600
Royalty revenue (exempt from taxation) -
Bad debts written off (P2,500 + P2,300 - P3,000) (1,800)
Entertainment expense (non-deductible) -
Loss on sale of equip. - tax [P19,000 - (P30,000 x .7)] (2,000)
Annual leave paid (P5,000 + P6,000 - P4,500) (6,500)
Taxable profit 20,100
Tax rate 30%
Current tax expense 6,030
Requirement Nos. 2-4
Comparison of carrying amount of asssets/liabilities and tax base
Carrying
amount Tax base Difference Remarks
Receivables 12,000 15,000 a 3,000 Deductible
Rent receivable 2,800 - 2,800 Taxable
Motor vehicle 2,250 - 2,250 Taxable
Equipment 40,000 55,000 b 15,000 Deductible
Provision for annual leave 4,500 - 4,500 Deductible
a - [P100000-(P100000*0.15*3)]
b - (P12,000 + P3,000)
Requirement No. 2
261
Deferred tax liability, 12/31/12 (P5,050 x .3) 1,515
Requirement No. 3 6,750
Deferred tax asset, 12/31/12 (P22,500 x .3)
Requirement No. 4
Effect on tax
Ending Beginning Inc(Dec) expense
Deferred tax liability 1,515 2,745 (1,230) Credit
Deferred tax asset 6,750 5,550 1,200 Credit
Journal entry:
Income tax expense 2,430
PROBLEM NO. 13 Audit of long term liabilities
In connection with your audit of Celtics Corporations financial statements for the year 2015, you
noted the following liability account balances as of December 31, 2014:
Note payable, bank P5,600,000
Liability under finance lease 430,000
262
Transactions during 2015 and other information relating to Celtics liabilities were as follows:
a. The principal amount of the note payable is P5,600,000 and bears interest at 12%. The note
is dated April 1, 2014 and is payable in four equal annual installments of P1,400,000
beginning April 1, 2015. The first principal and interest payment was made on April 1,
2015.
b. The finance lease is for a ten-year period beginning December 31, 2012. Equal annual
payments of P100,000 are due on December 31 of each year, and the 14% interest rate
implicit in the lease known by Celtics. The present value at December 31, 2014 of the seven
remaining lease payments (due December 31, 2015 through December 31, 2021)
discounted at 14% was P430,000.
c. Deferred income taxes are provided in recognition of temporary differences between
financial and income tax reporting. For the year ended December 31, 2015, depreciation
per tax return exceeded book depreciation by P312,500. Celtics; effective income tax rate
before 2015 is 32%. Effective January 1, 2015, the tax rate was changed from 325 to 35%.
d. On July 1, 2015, Celtics issued for P1,774,000, P2,000,000 face amount of its 10%, P1,000
bonds. The bonds were issued to yield 12%. The bonds are dated July 1, 2015 and will
mature on July 1, 2022. Interest is payable annually on July 1.
REQUIRED:
1. Total noncurrent liabilities as of December 31, 2015

2. Current portion of long-term liabilities as of December 31, 2015
3. Total interest expense for the year 2015
4. Accrued interest payable as of December 31, 2015
SOLUTION:
Requirement No. 1
15% Note payable, bank
Balance, 12/31/12 (P5,600,000 - P1,400,000) 4,200,000
Less installment due on April 1, 2013 1,400,000 2,800,000
Liability under finance lease
263
Balance, 12/31/11 430,000
Less principal payment on 12/31/12:
Total payment 100,000
Applicable to interest (P430,000 x .14) 60,200 39,800
Balance, 12/31/12 (see no. 1) 390,200
Less principal payment due on 12/31/13:
Total payment 100,000
Applicable to interest (P390,200 x .14) 54,628 45,372 344,828
10% bonds payable
Add discount amortization:
Effective interest (1,774,000 x .12 x 6/12) 106,440
Nominal interest (2,000,000 x .10 x 6/12) 100,000 6,440 1,780,440
Deferred income tax liability
Balance, 12/31/11 700,000
Effect of change in tax rate [(P700,000/.32 x .35) -

P700,000] 65,625
Provision for deferred income tax (P312,500 x .35) 109,375 875,000
264
Total noncurrent liabilities, 12/31/12 5,800,268
Requirement No. 2
Note payable, bank - due 4/1/13 1,400,000
Finance lease liability - principal payment due on 12/31/13 (see no. 2) 45,372
Current portion of long-term liabilities, 12/31/12 1,445,372
Requirement No. 3
Note payable, bank
1/1 to 3/31 (P5,600,000 x .12 x 3/12) 168,000
4/1 to 12/31 (P4,200,000 x .12 x 9/12) 378,000 546,000
Liability under finance lease (see no. 1) 60,200
Bonds payable (1,774,000 x .12 x 6/12) 106,440
Total interest expense for 2012 712,640
Requirement No. 4
Note payable, bank (P4,200,000 x .12 x 9/12) 378,000
265
Bonds payable (P2,000,000 x .10 x 6/12) 100,000
Accrued interest payable, 12/31/12 478,000
PROBLEM NO. 14 Audit of employee benefits
The following information pertain to Mavericks Corporations, your audit client which started
operations on December 31, 2011, employee benefits.
Summarized information about its employees at December 31, 2015 includes:
Employee Number of Salary level for the Percentage wage
Category employees the 12-month period increase effective
in category ending 6/30/16 from 7/1/16
A 9 P100,000 5%
B 200 P50,000 7%
C 300 P25,000 9%
Annual salary increases are expected to continue at the same rates for the foreseeable future.
At December 31, 2015, the appropriate discount factors (determined using the current market yield
for high quality corporate bonds) are 0.9524 for a 12-month period, 0.9009 for a 24-month period,
0.8547 for a 36-month period and 0.8 for a 48-month period.
266
The entitys employees work a five-day week. The entitys operations close for the six mandatory
public holidays. Three of the public holidays are before June 30.
Holiday leave
The entitys employees are each entitled to 20 paid days holiday leave per year.
Category A employees can carry forward unused holiday leave for one calendar year on a first-in,
first out (FIFO) basis. Holiday leave not taken in the prescribed period is forfeited.
Category B employees cannot carry forward unused holiday leave but are paid for all-holiday leave
not used in the previous calendar year. The payment is made as part of the January payroll of the
following year.
Category C employees cannot carry forward unused holiday leave and are not paid for unused
holiday leave.
At December 31, 2015 the entitys holiday leave records were as follows:
Employee Number of employees Average days holiday
Category in category leave per employee unused on

January 1, 2015
A 9 10
B 200 6
C 300 8
At December 31, 2015 the entity expects 25 days holiday leave accumulated at December 31,
2015 by employees in category A to expire unused on December 31 2016.
267
The entity expects that holiday leave will on average be taken evenly throughout the year.
Long-service awards
The entitys employees are entitled to receive government mandated long-service payments from
the entity calculated at 5% of salary (as determined for the 12 months before the payment) at the
end of each 5-year period of continuous employment. The payment is made as part of the
December payroll in the fifth year. The entity does not fund this obligation in advance.
Employee turnover is expected to follow average historical patterns. For ease of calculation
assume that staff join and leave on December 31. Furthermore, assume that none of the employees
who joined the entity after January 1 2012 left or are expected to leave the entity in the foreseeable
future (i.e. all leavers were employed on December 31, 2011)
At December 31, 2015 the entitys long-service award records were as follows:
Employee Category
A B C
Employed on 12/31/2011 9 196 306
Employee turnover on 12/31/2012:
Joined 1 9 18
Left 1 8 20
268
Joined 0 10 11
Left 0 9 16
Joined 0 11 15
Left 0 10 12
Joined 0 10 16
Left 0 9 18
Pension plan
On January 5 2016 the entity paid a contribution of P100,000 to a defined contribution plan in part
exchange for services performed by the entitys employees in December 2015.
Voluntary redundancy offer
In December 2015, with a view to reducing its workforce, the entity made an irrevocable offer to
its employees of a voluntary redundancy package. In accordance with the offer the entity will
compensate any employee who accepts voluntary redundancy on or before June 30, 2016.
The compensation offered is equal to the employees annualized salary for the 12-month period
ending June 30, 2016.
269
At December 31, 2015 the entitys voluntary redundancy records include:
Employee Number of employees Number of employees

Category who accepted voluntary expected to accept
redundancy by 12/31/15 voluntary redundancy
in 2016
A 0 1
B 2 8
C 5 25
REQUIRED:
Based on the above and the result of your audit, calculate the entitys liability for employee benefits
at December 31, 2015.
1. Short-term employee benefits

2. Other long term employee benefits category A employees
3. Other long term employee benefits category B employees
4. Other long term employee benefits category C employees
5. Total provision for employee benefits
SOLUTION:
Requirement No. 1
Category A employees
[(32.5* days x P392.16**) + (32.5 days x P411.76***)] 26,127
Category B employees [(200 x 6 days x P50,000/255] 235,294
270
Category C employees (non-accumulating and non-vesting) -
Short-term employee benefits (holiday leave) 261,421
working days for the year (255) = [(365/7 x 5) - 6]
* {[(9 x 10) - 25]/2}
** P100,000/255
*** [(P100,000 x 1.05)/255]
Requirement No. 2
To be paid, 12/31/13 (Joined 12/31/08)
(P102,500* x .05 x 8 x 4/5 x 0.9524) 31,239
To be paid, 12/31/14 (Joined 12/31/09)
(P107,625* x .05 x 1 x 3/5 x 0.9009) 2,909
Other long term benefits - Category A employees 34,148
*Computation of expected salary:
For 2013: Jan - Jun (P100,000/2) 50,000
Jul - Dec (P100,000/2 x 1.05) 52,500 102,500
For 2014: Jan - Jun (P100,000/2 x 1.05) 52,500
Jul - Dec (P52,500 x 1.05) 55,125 107,625
271
Requirement No. 3
To be paid, 12/31/13 (Joined 12/31/08)
(P51,750* x .05 x .77** x 196 x 4/5 x 0.9524) 297,534
To be paid, 12/31/14 (Joined 12/31/09)
(P55,373* x .05 x .77 x 9 x 3/5 x 0.9009) 10,371
To be paid, 12/31/15 (Joined 12/31/10)
(P59,250* x .05 x .77 x 10 x 2/5 x 0.8547) 7,799
To be paid, 12/31/16 (Joined 12/31/11)
(P63,398* x .05 x .77 x 11 x 1/5 x 0.8) 4,296
Other long term benefits - Category B employees 320,000
For 2013: Jan - Jun (P50,000/2) 25,000
Jul - Dec (P50,000/2 x 1.07) 26,750 51,750
For 2014: Jan - Jun (P50,000/2 x 1.07) 26,750
Jul - Dec (P26,750 x 1.07) 28,623 55,373
For 2015: Jan - Jun (P26,750 x 1.07) 28,623
Jul - Dec (P28,623 x 1.07) 30,627 59,250
For 2016: Jan - Jun (P28,623 x 1.07) 30,627
272
Jul - Dec (P30,627 x 1.07) 32,771 63,398
**Estimated payment for a five-year cycle (saving of 23% due to employees leaving before vesting)
Computation of saving: {[36 + (36/4)]/196}
Requirement No. 4
To be paid, 12/31/13 (Joined 12/31/08)
(P26,125* x .05 x .73** x 306 x 4/5 x 0.9524) 222,321
To be paid, 12/31/14 (Joined 12/31/09)
(P28,476* x .05 x .73 x 18 x 3/5 x 0.9009) 10,113
To be paid, 12/31/15 (Joined 12/31/10)
(P31,039* x .05 x .73 x 11 x 2/5 x 0.8547) 4,261
To be paid, 12/31/16 (Joined 12/31/11)
(P33,833* x .05 x .73 x 15 x 1/5 x 0.8) 2,964
Other long term benefits - Category C employees 239,659
For 2013: Jan - Jun (P25,000/2) 12,500
Jul - Dec (P25,000/2 x 1.09) 13,625 26,125
For 2014: Jan - Jun (P25,000/2 x 1.09) 13,625
273
Jul - Dec (P13,625 x 1.09) 14,851 28,476
For 2015: Jan - Jun (P13,625 x 1.09) 14,851
Jul - Dec (P14,851 x 1.09) 16,188 31,039
For 2016: Jan - Jun (P14,851 x 1.09) 16,188
Jul - Dec (P16,188 x 1.09) 17,645 33,833
**Estimated payment for a five-year cycle (saving of 27% due to employees leaving before vesting)
Computation of saving: {[66 + (66/4)]/306}
Requirement No. 5
Short-term employee benefits (see no. 1) 261,421
Other long term employee benefits (long service awards)
Category A employees (see no. 2) 34,148
Category B employees (see no. 3) 320,000
Category C employees (see no. 4) 239,659 593,807
Post-employment benefits - defined contribution plan (pension) 100,000
Termination benefits (see computation below) 1,350,000
Total 2,305,228
274
*Computation of termination benefits:
Category A employees (P100,000 x 1) 100,000
Category B employees (P50,000 x 10) 500,000
Category C employees (P25,000 x 30) 750,000
1,350,000
275
VIII AUDIT OF EQUITY
PROBLEM NO. 1 - Equity components
The following data were compiled prior to preparing the statement of financial position of the
Conviction Corporation.
Authorized share capital, P100 par value P4,000,000

Unissued share capital 800,000
Subscribe share capital 480,000
Subscriptions receivable 120,000
Premium on share capital 320,000
Gain on sale of treasury shares 80,000
Donated capital 800,000
Share warrants outstanding 200,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Treasury shares, at cost 144,000
Retained earnings, unappropriated 720,000
Revaluation increment on property 800,000
Net unrealized loss on available for sale 96,000
securities
Required:
Compute for the following:
1. Total share premium
2. Contributed capital
3. Appropriated retained earnings
4. Total Equity
5. Legal Capital
SOLUTION:
Requirement Nos. 1 to 4
Authorized share capital 4,000,000
276
Unissued share capital
(800,000)
Issued share capital 3,200,000
Subscribed share capital 480,000
Subscriptions receivable (120,000) 360,000
Share premium
Gain on sale of treasury shares 80,000
Donated capital 800,000
Stock warrants outstanding 200,000 1,400,000 (1)
Contributed capital 4,960,000 (2)
Retained earnings
Appropriated for sinking fund 400,000
Appropriated for treasury shares 144,000
Total appropriated retained earnings 544,000 (3)
Unappropriated (P720,000 - P144,000) 576,000 1,120,000
Revaluation surplus 800,000
Net unrealized loss on available for sale securities (96,000)
Treasury shares (144,000)
Total equity 6,640,000 (4)
Requirement No. 5
Issued share capital 3,200,000
Subscribed share capital 480,000
Legal capital 3,680,000 (5)
277
PROBLEM NO. 2 - Analysis of transactions affecting equity components
The shareholders equity accounts of Tenacity Corporation at December 31, 2014, had the
following balances:
Share capital - preference shares,

P100 par value, 6% cumulative; P900,000
15,000 shares authorized; 9,000
shares issued and outstanding
Share capital - ordinary, P1 par value,
900,000 shares authorized; 600,000
600,000 shares issued and
outstanding
Share premium 1,200,000
Retained earnings 3,300,000
Total shareholders equity P6,000,000
The following transactions occurred during 2015:
January 6 - Issued 22,500 ordinary shares to Weakness Company in exchange for land. On
the date issued, the share had a market price of P16.50 per share. The land had a carrying
amount of P210,000, and an assessed value for property taxes of P245,000.
January 31 - Sold 1,200, P1,000, 12% bonds, at 98 with one detachable share warrant
attached to each bond. Interest is payable annually on January 31. The fair value of the bonds
without the share warrants is 95. The detachable warrants have a fair value of P50 each and
expire one year from issuance. Each warrant entitles the holder to purchase 10 ordinary
shares at P10 per share.
February 22 - Purchased 7,500 of its own ordinary shares to be held as treasury shares for
P24 per share.
February 28 - Subscriptions for 21,000 ordinary shares were received at P26 per share,
payable 50% down and the balance by March 15.
March 15 - The balance due on 18,000 shares was received and those shares were issued.
The subscriber who defaulted on the 3,000 remaining shares forfeited the down payment in
accordance with the subscription agreement.
April 30 - Distributed property dividend to ordinary shareholders. The property had a

carrying amount of P910,000 and fair value of P950,000.
August 30 - Reissued 3,000 treasury shares for P20 per share.
278
September 14 - There were 945 warrants detached from the bonds and exercised.
November 30 - Declared a cash dividend of P2 per share to all ordinary shareholders of

record December 15, 2015. The dividend was paid on December30, 2015.
December 15 - Declared the required annual cash dividends on preference shares 2014. The
dividend was paid on January 15, 2015.
January 8, 2016 - Before closing the accounting records for 2015, Tenacity became aware
that no depreciation had been recorded for 2014 for a machine purchased on July 1, 2014.
The machine was properly capitalized at P480,000 and has an estimated useful life of eight
years when purchased. Tenacity is subject to 35% income tax. The appropriate correcting
entry was recorded on the same day.
Adjusted net income after tax for 2015 was P2,585,650.
Required:
Compute for the following as of December 31, 2015:
1. Share capital - preference shares
2. Share capital - ordinary shares
3. Share premium
4. Unappropriated retained earnings
5. Total equity
SOLUTION:
2012
12.31.11 Transactions 12.31.12
Share capital - PS 900,000 900,000

Share capital - OS 600,000 1/6 22,500 649,950
3/15 18,000
9/14 9,450
Subscribed share capital-OS - 2/28 21,000 -
3/15 (18,000)
3/15 (3,000)
Subscriptions receivable - 2/28 (273,000) -
279
3/15 234,000
3/15 39,000
Share premium 1,200,000 1/6 348,750 2,158,800
1/31 36,000
2/28 525,000
3/15 (75,000)
3/15 39,000
9/14 (28,350)
9/14 113,400
Retained earnings - appropriated - 12/31 108,000 108,000
Retained earnings - unappropriated 3,300,000 4/30 (950,000) 3,451,250
8/30 (12,000)
11/30 (1,290,900)
12/15 (54,000)
12/31 2,585,650
1/8 (19,500)
12/31 (108,000)
Treasury shares - 2/22 (180,000) (108,000)
8/30 72,000
6,000,000 7,160,000
Journal entries for 2012
1/6 Land (22,500 shares x P16.50) 371,250
280
Share capital-OS (22,500 shares x P1) 22,500
Share premium-EOP 348,750
1/31 Cash (1,200 x P1,000 x .98) 1,176,000
Discount on bonds payable (P1,200,000 - P1,140,000) 60,000
Bonds payable 1,200,000
Share premium-warrants 36,000
Issue price with 1,176,000
Issue price without (1,200 x P1,000,000 x .95) (1,140,000)
2/22 Treasury shares (7,500 x P24) 180,000
Cash 180,000
2/28 Cash (21,000 x P26 x 50%) 273,000
Subscriptions receivable (21,000 x P26 x 50%) 273,000
Subscribed share capital-OS (21,000 shares x P1) 21,000
3/15 Cash (18,000 x P26 x 50%) 234,000
Subscriptions receivable 234,000
Subscribed share capital-OS (18,000 shares x P1) 18,000
Share capital-OS 18,000
281
Subscribed share capital-OS (3,000 shares x
P1) 3,000
Share premium-EOP [3,000 shares x (P26 -
P1)] 75,000
Subscriptions receivable (3,000 x P26 x 50%) 39,000
Share premium - forfeited subscriptions 39,000
4/30 Retained earnings (at fair value) 950,000
Property dividends payable 950,000
8/30 Cash (3,000 x P20) 60,000

Treasury shares (3,000 x
P24) 72,000
9/14 Cash (945 x 10 x P10) 94,500

Share premium-warrants (945/1,200 x
P36,000) 28,350
Share capital-OS (945 x 10 x P1) 9,450
11/30 Retained earnings 1,290,900
Dividends payable - OS 1,290,900
Ordinary shares issued and outstanding, 1/1 600,000
Shares issued, 1/6 22,500
282
Number of shares issued, 12/31 649,950
Treasury shares (7,500 - 3,000) (4,500)
Number of shares issued and outstanding 645,450
Dividends per share 2.00
Total dividends 1,290,900
12/15 Retained earnings (900,000 x 6%) 54,000
Dividends payable - PS 54,000
1/8 Retained earnings 19,500
Income tax payable (480,000/8 x 1/2 x 35%) 10,500
Accumulated depreciation (480,000/8 x 1/2 ) 30,000
12/31 P/L summary 2,585,650
Retained earnings -
12/31 unappropriated 108,000
Retained earnings - appropriated (cost of TS) 108,000
PROBLEM NO. 3 - Audit of equity transactions and balances
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was engaged in
the audit of the Fortitude Company at the close of the companys first year of operations on
December 31, 2015. The company closed its books prior to the time you began your year-end
fieldwork.
Your audit and review showed the following shareholders equity accounts in the general ledger:
283
Share Capital
08/30 CD P550,000 01/02 CR P6,000,000
12/29 J 545,000
Retained Earnings
12/29 J P545,000 12/01 CR P287,500
12/31 J 4,000,000
Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the Articles of Incorporation Fortitude Company:
Authorized share capital - 150,000 shares

Par value per share - P100
From the board of directors minutes of meetings, the following resolutions were extracted:
01/02 - authorized the issuance of 50,000 shares at P120 per share.
08/30 - authorized the acquisition of 5,000 shares at P110 per share.
12/01 - authorized the re-issuance of 2,500 treasury shares at P115 per share.
12/29 - Declared a 10% share dividend, payable January 31, 2016 to shareholders on record
as of January 15, 2016. The market value of the share on December 29, 2015 was P130 per
share.
Required:
1. Prepare adjusting entries as of December 31, 2015.
2. Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2015.
a. Share capital
b. Share premium
c. Total retained earnings
d. Total equity
SOLUTION:
Requirement no. 1
01/02 Share capital [50,000 shares (P120-P100)] 1,000,000
284
Share premium 1,000,000
08/30 Treasury shares 550,000
Share capital 550,000
12/01 Retained earnings 287,500
Treasury shares (2,500 shares x P110) 275,000
Share premium 12,500
12/29 Retained earnings (P617,500 - P545,000) 72,500
Share capital 545,000
Share dividends distributable (4,750 x P100) 475,000
Shares issued 50,000
Treasury shares (5,000 -2, 500) (2,500)
Shares outstanding 47,500
Dividend rate (small share dividend) 10%
Shares to be issued 4,750
Market value per share 130
Total amount to be charged to RE 617,500
Total par value of stock dividend payable 475,000
12/31 Retained earnings (2,500 shares x P110) 275,000
285
Retained earnings appropriated for treasury shares 275,000
Requirement no. 2
Share capital (P5,995,000-P1,000,000+P550,000-P545,000) 5,000,000
Share dividends distributable 475,000
Share premium (P1,000,000+P12,500+P142,500) 1,155,000
Retained earnings-appropriated 275,000

Retained earnings (P3,742,500-P287,500-P72,500-P275,000) 3,107,500 3,382,500
Treasury shares (P550,000-P275,000) (275,000)
Total equity 9,737,500
PROBLEM NO. 4 - Audit of retained earnings
The Retained Earnings account of Endurance Company shows the following debits and credits for
the year 2015:
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
Jan. Balance 726,400
1
(a) Loss from fire 5,250 721,150
(b) Write-off of
52,500 668,650
goodwill
(c) Share
dividends 140,000 528,650
distributed
(d) Loss on sale of
48,300 480,350
equipment
RETAINED EARNINGS
Balance
286
(e) Officers
compensation
related to
income of 325,500 154,850
prior periods
- accrual
overlooked
(f) Loss on
retirement of
preference
70,000 84,850
shares at
more than
issue price
(g) Paid in
capital in 129,500 214,350
excess of par
(h) Share
issuance
expenses ( 10,000 204,350
related to
letter g)
(i) Share
subscription 8,470 212,820
defaults
(j) Gain on
retirement of
preference
25,900 238,720
shares at less
than issue
price
RETAINED EARNINGS
Balance
(k) Gain on
early
15,050 253,770
retirement
of bonds
(l) Gain on life
insurance
10,500 264,720
policy
settlement
(m) Correction
of a
50,050 314,320
fundamental
error
287
(n) Effect of
change in
accounting
principle 100,000 414,320
from FIFO
to weighted
average
(o) Dividends
25,000 389,320
Payable
(p) Loss on sale
of treasury 20,000 369,320
shares
(q) Proceeds
from sale of
40,000 409,320
donated
shares
RETAINED EARNINGS
Balance
(r) Appraisal
increase in 250,000 659,320
land
(s) Gain on life
insurance
100,000 559,320
policy
settlement
Required:
1. Prepare adjusting journal entries to correct the Retained Earnings account.
2. Determine the correct amount of Retained Earnings account before closing the profit or
loss for the period.
SOLUTION:
a Profit or loss (Other expense) 5,250
288
b Profit or loss (Other expense) 52,500
d Profit or loss (Other expense) 48,300
g Retained earnings 129,500
h Share premium 10,000
i Retained earnings 8,470
Share premium 8,470
j Retained earnings 25,900
k Retained earnings 15,050
Profit or loss (Other income) 15,050
l Retained earnings 10,500
Profit or loss (Other income) 10,500
q Retained earnings 40,000

289
r Retained earnings 250,000
Revaluation surplus 250,000
Unadjusted retained earnings balance 559,320
a 5,250
b 52,500
d 48,300
g (129,500)
h 10,000
i (8,470)
j (25,900)
k (15,050)
l (10,500)
q (40,000)
r (250,000)
Correct amount of RE before closing profit or loss 195,950
Jan.
1 Balance 726,400
c Share dividend (140,000)
e Officers compensation related to income
of prior periods accrual overlooked (325,500)
290
f Loss on retirement of preferred shares
at more than issue price (70,000)
m Correction of prior-period error 50,050
n Effect of change in accounting principle
from FIFO to weighted average 100,000
o Dividends payable (25,000)
p Loss on sale of treasury stock (20,000)
s Appropriated for property acquisition (100,000)
Correct amount of RE before closing profit or loss 195,950
PROBLEM NO. 5 - Audit of equity transactions and balances
Resilience Corporation was organized on January 1, 2013, and began operations immediately.
Unfortunately, the company hired an incompetent bookkeeper. For the years 2013 through 2015,
the bookkeeper presented an annual balance sheet that reported only one amount for shareholders
equity: 2013, P1,377,000; 2014, P1,566,000 and 2015, P1,850,000. Also, the condensed income
statement reported as follows: 2013, net loss, Pl75,000; 2014, net profit, P120,000; and 2015, net
profit, P409,300 (cumulative earnings of P354,300). Based on the P354,300, the president has
recommended to the board of directors that a cash dividend f P350,000 be declared and paid during
January 2016. The outside director on the board has objected on the basis that the companys
financial statements contain major errors (there has never been an audit). You have been engaged
to clarify the situation. The single shareholders equity account, provided by the bookkeeper,
appeared as follows:
Shareholders Equity
2013 Share P13,000 2013 Ordinary
issue costs shares,
par P
P1,600,000
5,200,00
0 shares
issued
2013 Net loss 175,000
2014 Bought 2014 Net profit
1,000 (includin
shares 7000 g 220,000
from an P100,000
unhappy land
291
shareholde write-up
r Ekis based on
president
s
estimate)
Depreciation expense* 2014 Ordinary
shares,
2,000 18,000
shares
issued
(2013, P15,000;
2014, P17,000; 55,000
2015, P23,000)
Miscellaneous expense* 2015 Sold 300
of Ekis 2,700
shares
(2013, P20,000; 50,000
2014, P250,000;
2015, P5,000)
2015 Cash loan
to the
company
president 100,000 2015 Net Profit 409,300
P400,000 P2,250,000
* Recorded as expense but not shown on the income statement.
Required:
Based on the concerns of the outside director, answer the following:
1. What is the adjusted balance of retained earnings as of December 31, 2015?
2. What entry is necessary (a) to close the above single shareholders equity account and (b)
to record the various components of shareholders equity in separate accounts?
3. What is the adjusted total equity as of December 31, 2015?
SOLUTION:
Requirement no. 1
RE
2010 2011 2012
12.31.12
Unadjusted profit (loss) (175,000) 220,000 409,300
454,300
Depreciation expense (15,000) (17,000) (23,000) (55,000)
Miscellaneous expense (20,000) (25,000) (5,000) (50,000)
292
Land write-up (100,000)
(100,000)
Adjusted profit (loss) (210,000) 78,000 381,300 249,300
Requirement no. 2
Shareholders equity 1,850,000
Treasury shares 4,900
Loans receivable 100,000
Share capital 1,010,000
Share premium EOP 595,000
Share premium TS 600
Land 100,000
Requirement no. 3
Share premium EOP 595,000
Share premium TS 600
Treasury shares (4,900)
PROBLEM NO. 6 - Audit of equity-settled share-based payment
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in
the sales department. The share options will vest at the end of year 3, provided that the employees
remain in the entitys employ, and provided that the volume of sales of a particular product
increases by at least an average of 5 per cent per year. If the volume of sales of the product increases
293
by an average of between 10 per cent and 15 per cent each year, each employee will receive 200
share options. If the volume of sales increases by an average of 15 per cent or more, each employee
will receive 300 share options.
On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity
A also estimates that the volume of sales of the product will increase by an average of between 10
per cent and 15 per cent per year, and therefore expects that, for each employee who remains in
service until the end of year 3, 200 share options will vest. The entity also estimates, on the basis
of a weighted average probability, that 20 per cent of employees will leave before the end of year3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will remain
in service for the three-year period. Product sales have increased by 12 per cent and the entity
expects this rate of increase to continue over the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity
now expects only three more employees will leave during year 3, and therefore expects a total of
15 employees will have left during the three-year period, and hence 85 employees are expected to
remain. Product sales have increased by 18 per cent, resulting in an average of 15 per cent over
the two years to date. The entity now expects that sales will average 15 per cent or more over the
three-year period, and hence expects each sales employee to receive 300 share options at the end
of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the
three-year period, and 86 employees remain. The entitys sales have increased by an average of 16
per cent over the three years. Therefore, each of the 86 employees received 300 share options.
Required:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.
SOLUTION:
Year Computation Comp. Exp. Cumulative
1 80 200 options P20 1/3 106,667 106,667
2 (85 300 options P20 2/3) P106,667 233,333 340,000
3 (86 300 options P20 3/3) P233,333 176,000 516,000
PROBLEM NO. 7 - Audit of cash-settled share-based payment
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on
condition that the employees remain in its employ for the next three years.
294
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years
2 and 3. During year 2, 40 employees leave and the entity estimates that a further 25 will leave
during year 3. During year 3, 22 employees leave. At the end of year 3, 150 employees exercise
their SARs, another 140 employees exercise their SARs at the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists
as shown below. At the end of year 3, all SARs held by the remaining employees vest. The intrinsic
values of the SARs at the date of exercise (which equal the cash paid out) at the end of years 3, 4
and 5 are also shown below.
Year Fair value Intrinsic value
1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00
Required:
Compute for the amounts to be recognized as compensation expense and liability in year 1 to 5.
SOLUTION:
Year Computation Expense Liability
1 405 100 SARs P14.40 1/3 194,400 194,400
2 400 100 SARs P15.50 2/3 - P194,400 218,933 413,333
3 253 100 SARs P18.20 3/3 - P413,333 47,127 460,460
150 100 SARs P15.00 225,000 272,127
4 113 100 SARs P21.40 - P460,460 (218,640) 241,820
140 100 SARs P20.00 280,000 61,360
5 0 - P241,820 (241,820) -
113 100 SARs P25.00 282,500 40,680
PROBLEM NO. 8 - Audit of cash or equity settled share-based payment
295
An entity grants to an employee the right to choose either 1,000 phantom shares, ie. a right to a
cash payment equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the
completion of three years service. If the employee chooses the share alternative, the shares must
be held for three years after vesting date.
At grant date, the entitys share price is P50 per share. At the end of years 1, 2 and 3, the share
price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next
three years. After taking into account the effects of the post-vesting transfer restrictions, the entity
estimates that the grant date fair value of the share alternative is P48 per share.
Required:
Compute for the amounts to be recognized as expense, equity and liability in year 1 to 3, if at the
end of year 3 the employee chooses:
1. The cash alternative
2. The equity alternative
SOLUTION:
The fair value of the equity alternative is P57,600 (1,200 shares P48). The fair value of the cash
alternative is P50,000 (1,000 phantom shares P50). Therefore, the fair value of the equity
component of the compound instrument is P7,600 (P57,600 P50,000).
Year Computation Expense Equity Liability
1 Equity component (P7,600 1/3) 2,533 2,533

Liability component (1,000 P52 1/3) 17,333 17,333
Total 19,866 2,533 17,333
2 Equity component (P7,600 1/3) 2,533 2,533

Liability component [(1,000 P55 2/3)-P17,333] 19,334 19,334
Total 21,867 5,066 36,667
3 Equity component (P7,600 - P5,066) 2,534 2,534

Liability component [(1,000 P60 3/3)-P36,667] 23,333 23,333
296
Total 25,867 7,600 60,000
Scenario 1: cash of P60,000 paid (60,000)
Scenario 1 totals 67,600 7,600 -
Scenario 2: 1,200 shares issued 60,000 (60,000)
Scenario 2 totals 67,600 67,600 -
PROBLEM NO. 9 - Book value per share
The equity section of the balance sheet of the Guts Company on December 31, 2015 shows the
following items:
6% Cumulative preference share capital,

P100 par value (liquidation value,
P115 per share); Authorized, 6,000 shares,
issued, 4,000 shares; in treasury, 600 shares P400,000
Ordinary share capital, P100 par value,
authorized, 20,000 shares; issued and
outstanding, 8,000 shares 800,000
Share premium - preference shares 150,000
Share premium - ordinary shares 165,000
Reserve for bond retirement 320,000
Treasury shares - preference, at cost (84,000)
Total P2,209,600
Required:
1. Book value per share of ordinary
2. Book value per share of ordinary, assuming the preference share is participating
SOLUTION:
297
Requirement No. 1
Excess
over par Preference Ordinary
Balances 1,069,600 340,000 * 800,000
PS dividend (P340,000 x 6%) (20,400) 20,400
PS liquidation premium (3,400 x P15) (51,000) 51,000
Balance to OS 998,200 998,200
Total 411,400 1,798,200
Divide by outstanding shares 3,400 8,000
Book value per share 121.00 224.78
Computation of "excess over par"
Outstanding par value of PS* (340,000)
Outstanding par value of OS (800,000)
1,069,600
Details of "excess over par"

150,000
Premium on PS
165,000
Premium on OS
Retained earnings, appropiated - bond
retirement 320,000
Retained earnings, unappropiated 458,600

Excess of cost of TS over par (P84,000 -
P60,000) (24,000)
Excess over par 1,069,600
298
Note: For computation of BV/share purposes, TS is treated as a retired stock.
Shares Amount
* PS issued 4,000 400,000
Treasury PS, at par (600 x P100) (600) (60,000)
Outstanding PS 3,400 340,000
Requirement No. 2
Excess
over par Preference Ordinary
Balances 1,069,600 340,000 * 800,000
PS dividend (P340,000 x 6%) (20,400) 20,400
PS liquidation premium (3,400 x P15) (51,000) 51,000
OS dividend (P800,000 x 6%) (48,000) 48,000
Balance for participation 950,200
Preference (340/1,140 x P950,200) 283,393
Ordinary (800/1,140 x P950,200) 666,807
Total 694,793 1,514,807
Divide by outstanding shares 3,400 8,000
Book value per share 204.35 189.35
PROBLEM NO. 10 - Earnings per share
The information below pertains to Prancer Company for 2015.
299
Profit for the year P1,200,000
8% convertible bonds issued at par (P1,000
per bond). Each bond is convertible into
40 ordinary shares 2,000,000
6% convertible, cumulative preference shares,
P100 par value. Each share is convertible
into 3 ordinary shares. 3,000,000
Ordinary shares, P10 par value 6,000,000
Share options (granted in a prior year) to
purchase 50,000 ordinary shares at P20
per share 500,000
Tax rate 40%
Average market price of ordinary shares P25 per share
There were no changes during 2015 in the number of ordinary shares, preference shares, or
convertible bonds outstanding. There is no treasury share.
Required:
Compute basic and diluted earnings per share for 2015
SOLUTION:
Profit to OS WA Outs. OS EPS
Basic 1,020,000 600,000 1.70

a)
Exercise of
- 10,000
options b)
1,020,000 610,000 1.67
Bond conversion 96,000 80,000

c)
1,116,000 690,000 1.62
PS conversion 180,000 90,000

d) e)
1,296,000 780,000 1.66
Notes:
a) Profit for the year 1,200,000
300
PS dividend (P3M x .06) (180,000)
1,020,000
b) Shares to be issued on exercise 50,000

Assumed TS acquired [(50,000 x
P20)/P25] (40,000)
10,000
c) Net interest savings on bond conversion
(P2M x .08 x .6) 96,000
d) PS dividend (P3M x .06) 180,000
e) Shares to issued on PS conversion

(P3M/P100 x
3) 90,000
PROBLEM NO. 11 - Earnings per share
Edmund Halvor of the controllers office of East Aurora Corporation was given the assignment of
determining the basic and diluted earnings per share values for the year ending December 31, 2015.
a. The company is authorized to issue 8,000,000, P10 par value, ordinary shares. As of
December 31, 2014, 3,000,000 shares had been issued and were outstanding.
b. The per share market prices of the ordinary shares on selected dates were as follows.
Price per Share
July 1, 2014 P20.00
January 1, 2015 21.00
April 1, 2015 25.00
July 1, 2015 11.00
August 1, 2015 10.50
November 1, 2015 9.00
December 31, 2015 10.00
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c. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred shares
had been issued on July 1, 2014. The share was issued at its par value of P25, and it has a
cumulative dividend of P3 per share. The share is convertible into ordinary shares at the
rate of one share of convertible preference for one share of ordinary. The rate of conversion
is to be automatically adjusted for share splits and share dividends. Dividends are paid
quarterly on September 30, December 31, March 31, and June 30.
d. East Aurora Corporation is Subject to a 40% income tax rate.
e. The after-tax profit for the year ended December 31, 2015 was P13,550,000.
The following specific activities took place during 2015.
1. January 1 - A 5% ordinary share dividend was issued. The dividend had been declared on
December 1, 2014, to all shareholders of record on December 29, 2014.
2. April 1 - A total of 200,000 preference shares was converted into ordinary shares. The
company issued new ordinary shares and retired the preference shares.
3. July 1 - A 2-for-1 ordinary share split became effective on this date. The board of directors
had authorized the split on June 1.
4. August 1 - A total of 300,000 ordinary shares were issued to acquire a factory building.
5. November 1 - A total of 24,000 ordinary shares were purchased on the open market at P9
per share. These shares were to be held as treasury shares and were still in the treasury as
of December 31, 2015.
6. Ordinary shares cash dividends - Cash dividends to ordinary shareholders were declared
and paid as follows.
April 15 - P0.30 per share
October 15 - P0.20 per share
7. Preference shares cash dividends - Cash dividends to preference shareholders were

declared and paid as scheduled.
Required:
Compute Basic and diluted earnings per share for 2015.
SOLUTION:
Computation of basic EPS:
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Profit for 2012 13,550,000
Less PS dividends:
March 31 (700,000 shares x P.75) 525,000

6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3) 1,125,000 1,650,000
Profit to OS 11,900,000
/WA outstanding OS (see below) 6,736,000
Basic EPS 1.77
Computation of WA outstanding OS:
Date Adj. shares Mos. O/S W.A
1/1/12 (3,000,000 x 1.05 x 2) 6,300,000 12/12 6,300,000
4/1/12 (200,000 x 1.05 x 2) 420,000 9/12 315,000
8/1/12 300,000 5/12 125,000
11/1/12 (24,000) 2/12 (4,000)
6,736,000
Computation of diluted EPS:
Add PS dividends:
March 31 (700,000 shares x P.75) 525,000

6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3) 1,125,000 1,650,000
/WA outstanding OS (see below) 7,891,000
Diluted EPS 1.72
303
Number of shares to compute basic EPS 6,736,000
Convertible PS still outstanding (500,000 x 1.05 x 2) 1,050,000
Convertible PS converted (200,000 x 1.05 x 2 x 3/12) 105,000
Number of shares to compute diluted EPS 7,891,000
PROBLEM NO. 12 - Analysis equity transactions including EPS computation
Hawks Corporation was incorporated in 2014. During 2014, the company issued 100,000 shares
of P1 par value ordinary shares for P27 per share. During 2015, the company had the following
transactions.
1/2/15 Issued 10,000 shares of P100 par value cumulative

preference shares at par. The preference shares are
convertible into five ordinary shares and had a
dividend rate of 6%.
3/1/15 Issued 3,000 ordinary shares for legal service

performed. The value of the legal services was
P100,000. The shares are actively traded on a stock
exchange and valued on 3/1/12 at P32 per share.
7/1/15 Issued 40,000 ordinary shares for P42 per share.

10/1/15 Repurchased 16,000 treasury shares for P34 per
share
12/1/15 Sold 3,000 treasury shares for P29 per share.
12/30/15 Declared and paid a dividend of P0.20 per share on

ordinary shares and a 6% dividend on the preference
shares.
During 2014, Hawks Corporation had a profit of P250,000 and paid dividends of P28,000. During
2015 Hawks Corporation had a profit of P380,000.
Required:
1. Total share premium as of December 31,2015
2. Total retained earnings as of December 31, 2015
304
3. Total equity as of December 31, 2015
4. Basic earnings per share for the year 2015
5. Diluted earnings per share for the year 2015
SOLUTION:
Requirement No. 1-3

Share
premium RE Total equity
2011
Issued 100,000 ordinary shares at P27 2,600,000 2,700,000
Profit 250,000 250,000
Dividends (28,000) (28,000)
Balances, 12/31/11 2,600,000 222,000 2,922,000
2012
1/2/12 - Issued 10,000 PS at par 1,000,000
3/1/12 - Issued 3,000 OS for legal services 93,000 96,000
7/1/12 - Issued 40,000 OS at P42 1,640,000 1,680,000
10/1/12 - Repurchased 16,000 TS at P34 (544,000)
12/1/12 - Reissuance of 3,000 TS at P29 (15,000) 87,000
12/30/12 - PS dividend (P1M x .06) (60,000) (60,000)
'- OS dividend (130T x P.20) (26,000) (26,000)
Profit 380,000 380,000
Balances, 12/31/12 4,333,000 501,000 5,535,000
(1) (2) (3)
Requirement No. 4
305
Profit for 2012 380,000
Less PS dividend for 2012 60,000
Profit to OS 320,000
Divide by the WA outstanding OS (see below) 118,750
Basic EPS for 2012 2.69
Shares Time O/S WA
1/1/12 100,000 12/12 100,000
3/1/12 3,000 10/12 2,500
7/1/12 40,000 6/12 20,000
10/1/12 (16,000) 3/12 (4,000)
12/1/12 3,000 1/12 250
118,750
Requirement No. 5
Profit to OS (see no. 4) 320,000
Add PS dividend for 2012 60,000
Adjusted profit to OS 380,000
Divide by the WA outstanding OS:
Actual (see no. 4) 118,750
Potential (10,000 x 5) 50,000 168,750
Diluted EPS for 2012 2.25
PROBLEM NO. 13 - Analysis equity transactions including EPS computation
306
The shareholders equity section of the Jerely Corporations statement of financial position as of
December 31, 2014 is presented below:
12% Preference share capital, P100 par P 270,000

Ordinary share capital, P20 par 1,598,400
Share premium - preference 36,800
Share premium - ordinary 235,200
Share premium - treasury shares 3,200
Jerely had 65,000 ordinary shares as December 31, 2013.
The following shareholders equity transactions were recorded in 2014 and 2015:
2014
May 1 - Sold 9,000 ordinary shares for P24, par value P20.
July 1 - Sold 700 preference shares for P124, par value P100.
Jul. 31 - Issued an 8% share dividend on ordinary shares. The market value of ordinary share was
P30 per share.
Aug. 30 - Declared cash dividends of 12% on preference shares and P3 per share on ordinary
shares.
Dec. 31 - Profit for the year amounted to P1,345,040
2015
Feb. 1 - Sold 2,200 ordinary shares for P30.
May 1 - Sold 600 preference shares for P128.
May 31 - Issued 2-for-1 split of ordinary shares. The par value of the ordinary share was reduced
to P10 per share.
Sep. 1 - Purchased 1,000 ordinary shares for P18 to be held as treasury shares.
Oct. 1 - Declared and paid cash dividends of 12% on preference shares and P4 per share on ordinary
shares.
Nov. 1 - Sold 1,000 shares of treasury shares for P22.
Dec. 31 - Profit for the year amounted to P991,520.
Required:
307
Determine the amounts, as required, in Jerely Corporations comparative financial statements as
of and for the years ended December 31,2014 and 2015.
1. Dividends paid to ordinary shareholders in 2015

2. Retained earnings as of December 31, 2015
3. Total equity as of December 31, 2015
4. Basic earnings per share for 2014
5. Basic earnings per share for 2015
SOLUTION:
Requirement No. 1
Ordinary shares outstanding, 12/31/11 (P1,598,400/P20) 79,920
Shares issued 2/1/12 2,200
82,120
Share split, 5/31/12 x 2
164,240
Treasury shares acquired, 9/1/12 (1,000)
Ordinary shares outstanding, 10/1/12 163,240
x Dividend per share 4
Dividends paid to ordinary shareholders 652,960
Requirement No. 2
Retained earnings, 12/31/11 1,585,840
Profit for 2012 991,520
Dividends - ordinary (see no. 36) (652,960)
Dividends - preference [(P270,000 + P60,000) x .12] (39,600)
Retained earnings, 12/31/12 1,884,800
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Requirement No. 3
Total equity, 12/31/11 3,729,440
Add (deduct) 2012 transactions:
2/1 - Issuance of OS (2,200 x P30) 66,000
5/1 - Issuance of PS (600 x P128) 76,800
5/31 - share split -
9/1 - Acquisition of TS (1,000 x P18) (18,000)
10/1 - PS dividend (see no. 37) (39,600)
- OS dividend (see no. 37) (652,960)
11/1 - Re-issuance of TS (1,000 x P22) 22,000
Profit for 2012 991,520
Total equity, 12/31/12 4,175,200
Requirement No. 4
Profit for 2011 1,345,040
Less PS dividend (270,000 x 12%) 32,400
Divide by weighted average number of OS (see below) 153,360
Basic earnings per share - 2011 8.56
Computation of weighted average number of OS

Adjusted
shares Fraction Total
Jan. 1 (65,000 x 1.08* x 2**) 140,400 12/12 140,400
May 1 (9,000 x 1.08* x 2**) 19,440 8/12 12,960
Total 153,360
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*Share dividend, 7.31.11
**2-for-1 share split, 5.31.12
Requirement No. 5
Profit for 2012 991,520
Less PS dividend (P330,000 x 12%) 39,600
Profit to OS 951,920
Divide by weighted average number of OS (see below) 163,707
Basic earnings per share - 2012 5.81
Computation of weighted average number of OS

Adjusted
shares Fraction Total
Jan. 1 (79,920 x 2*) 159,840 12/12 159,840
Feb. 1 (2,200 x 2*) 4,400 11/12 4,033
Sept. 1 (1,000) 4/12 (333)
Nov. 1 1,000 2/12 167
Total 163,707
PROBLEM NO. 14 - Theory
1. In an examination of shareholders equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized.
310
b. Stock splits are capitalized at par or stated value on the dividend declarations date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer
agent.
2. In audit of a medium-sized manufacturing concern, which one of the following areas can
be expected to require the least amount of audit time?
a. Owners equity
b. Assets
c. Revenue
d. Liabilities
3. When corporate client maintains its own stock records, the auditor primarily will rely upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate state
official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.
4. When a client company does not maintain its own share records, the auditor should obtain
written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreement to repurchase.
5. The auditor is concerned with establishing that dividends are paid to client corporation
shareholders owning shares of the
a. Issue date
b. Record date
c. Declaration date
d. Payment date
6. An audit program for the retained earnings account should include a step that requires
verification of the
a. Fair value used to charge retained earnings to account for a two-for-one share split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable.
c. Authorization for both cash and share dividends.
d. Gain or loss resulting from disposition of treasury shares.
7. During an audit of an entitys shareholders equity accounts, the auditor determines

whether there are restrictions on retained earnings resulting from loans, agreements, or law.
This audit procedure most likely is intended to verify managements assertion of
a. Existence
b. Valuation
311
c. Completeness
d. Presentation and disclosure
8. If the auditee has a material amount of treasury shares on hand at year-end, the auditor
should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury share transactions during the
year.
c. Not count the certificates if treasury share is a deduction from shareholders equity
d. Count the certificates only if the company classifies treasury shares with other assets.
9. In performing tests concerning the granting of stock options, an auditor should

a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entitys payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.
10. The auditor would not expect the client to debit retained earnings for which of the following
transactions?
a. A 4-for-1 share split.
b. Loss resulting from disposition of treasury shares.
c. A 1-for-10 share dividend.
d. Correction of error affecting prior years earnings.
ANSWER:
1. A 5. B 9. D
2. A 6. C 10. A
3. D 7. D
4. B 8. A
IX COMPLETING THE AUDIT AND

AUDIT OF FINANCIAL STATEMENTS PRESENTATION
PROBLEM NO. 1 Statement of financial position
312
The general ledger summarized trial balance of Heat Corporation, a manufacturing company,
includes the following accounts at December 31, 2015:
Debit Credit
Accumulated depreciation - buildings P 120,000
Accumulated depreciation leased assets 310,000
Accumulated depreciation plant and 3,726,000
equipment
Allowance for doubtful debts 80,000
Bank loans 2,215,000
Bank overdrafts 350,000
Buildings, at cost P 1,030,000
Cash 175,000
Current tax payable 152,000
Debentures 675,000
Deferred tax 420,000
Deposits, at call 36,000
Finished goods 1,042,000
Goodwill 2,530,000
Investments in listed (AFS) 52,000
Investments revaluation reserve 25,000
Land, at valuation 250,000
Land revaluation reserve 81,000
Lease liabilities 350,000
Leased assets 775,000
Others 575,000
Patents 110,000
Plant and equipment 8,275,000
Prepayments 141,000
Provision for employments benefits 275,000
Provision for restructuring 412,000
Provision for warranty 42,000
Raw materials 490,000
Sundry creditors and accruals 715,000
Sundry debtors 320,000
Trade creditors 1,617,000
Trade debtors 1,744,000
Work in progress 151,000
P17,121,000 P17,121,000
a) Bank loans and other loans are all repayable beyond one year.
313
b) P 300,000 of the debentures is repayable within one year.
c) Lease liabilities include P 125,000 repayable within one year.
d) Provision for employment benefits includes P 192,000 payable within one year.
e) The planned restructuring is intended to be completed within one year.
f) Provision for warranty includes P 20,000 estimated to be incurred beyond one year.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Total current assets is

a. P4,019,000 c. P4,071,000
b. P3,983,000 d. P4,035,000
e.
Answer: A
2. Total noncurrent assets is

a. P8,814,000 c. P8,891,000
b. P8,839,000 d. P8,866,000
Answer: D
3. Total current liabilities is

a. P3,883,000 c. P3,921,000
b. P3,885,000 d. P3,693,000
Answer: B
4. Total noncurrent liabilities is

a. P3,913,000 c. P3,810,000
b. P4,105,000 d. P3,915,000
Answer: A
5. Which of the following events after the reporting period will be at least likely to result in
an adjustment to the financial statement?
a. Culmination of events affecting the realization of accounts receivable owned as of the
end of the reporting period.
b. Culmination of events affecting the realization of inventories owned as of the end of
the reporting period.
314
c. Making changes in the settlement of liabilities which were estimated as of the end of
d. Material changes in the quoted market prices of listed investment securities since the
end of the reporting period.
Answer: D
PROBLEM NO. 2 Statement of financial position (Small and Medium sized Entity)
The accounts were taken from the unadjusted trial balance of VECO Co., a small and medium
sized entity, as at December 31, 2015:
Cash P 124,000
Trading Securities, at cost 87,000
Notes Receivable 92,000
Trade accounts Receivable 122,000
Merchandise Inventory 136,000
Notes Payable 150,000
Trade accounts payable 75,000
Employees income tax withheld 4,000
Bonds payable 250,000
Share dividends payable 15,000
Income tax payable 28,000
Analysis of the above accounts disclosed in the following:
Bank overdraft of P 13,000 was deducted from cash balance
Trade accounts receivable was net of customers deposit of P 7,000
Merchandise worth P 15,000 received December 30, 2015 was included in the inventory
but was not recorded as purchase.
Accounts payable was net of accounts with debit balance of P 12,000
A bank loan of P30,000due December 31, 2017 was included in the notes payable
balance
Bonds payable which was issued in 2015 will mature in five annual installments
beginning June 1, 2016
Trading securities are investment in 10,000 ordinary shares with publish price quotation
at December 31, 2015 of P9 per share.
315
QUESTIONS:
1. How much total current assets should be reported on the statement of financial position as
at December 31, 2015?
a. P590,000
b. P598,000
c. P605,000
d. P587,000
Answer: A
2. How much total current liabilities should be reported on the statement of financial
position as at December 31, 2015?
a. P590,000
b. P598,000
c. P605,000
d. P587,000
Answer: C
The following statement of financial position was prepared by the accountant for Excel
Corporation.
Excel Corporation
Statement of Financial Position
December 31, 2015
Assets
Cash P 25,500
Investment securities Trading (includes long 312,000
term investment of P250,000 in shares of
Professional Developers)
Inventories (net amount still due of P10,000 624,600
made on inventories to be delivered in 18
months)
Prepaid expenses 33,000
Property, plant and equipment (excluding 220,000
P60,000 of equipment still in use, but fully
depreciated)
Goodwill (based on estimate by the president
of Excel Corporation) 70,000
Total Assets P 1,285,100
Liabilities and Equity
316
Notes payable (P75,000 due in 2017) P 135,000
Accounts payable (not including amount due 142,000
to suppliers of inventory see above)
Long term liability under pension plan 60,000
Retained earnings restricted for buildings 105,000
expansion
Taxes payable 44,500
Bonds payable (net of discount of P10,000) 290,000
Deferred income tax liability 68,000
Share capital (10,000 shares, P1 par) 10,000
Unrestricted retained earnings 117,100
Total Liabilities and Owners Equity P 1, 285,000
QUESTIONS:
1. The total current assets as of December 31, 2015 is

a. P735,100 c. P830,100
b. P820,100 d. P745,100
Answer: B
2. The total assets as of December 31, 2015 is

a. P1,142,100 c. P1,057,100
b. P1,215,100 d. P1,227,100
Answer: D
3. The total current liabilities as of December 31, 2015 is

a. P331,500 c. P406,500
b. P321,500 d. P246,500
Answer: A
4. The total equity as of December 31, 2015 is

a. P402,600 c. P367,600
b. P472,600 d. P297,600
Answer: A
317
5. Which statement is correct regarding the presentation and disclosure of the entitys
financial position?
a. When an entity presents current and non-current liabilities, as separate classifications
in its statement of financial position, it may classify deferred tax liabilities as current
liabilities.
b. An entity may not present assets and liabilities in order of liquidity.
c. An entity is required to disclose the maturity dates of financial assets and financial
liabilities.
d. Current assets include assets that are sold, consumed, or realized as part of the normal
operating cycle only when they are expected to be realized within twelve months after
Answer: C
In connection with your audit of the Manning Corporation, the companys bookkeeper prepared
a statement of financial position at December 31, 2015 which was presented with the total assets
aggregating P 1,965,500 and total liabilities and equity for the same amount.
Your verification disclosed the following:
Assets
Cash (including paid expenses of p100 and P 80,000
P4,000 contribution to a special fund for the
acquisition of fixed assets)
Advances by employees 1,000
Certificate of PLDT preference shares (not 2,000
held for trading)
Marketable equity securities intended for long 52,000
term income earnings
Promissory note from a corporate 14,000
officer(renewed for the past two years)
Merchandise inventory (including P1,000 489,500
worth of obsolete items and P4,000
merchandise received on consignment which
was included in accounts payable)
Accounts receivable (including P3,000 188,000
ascertained to be uncollectible. Of the amount
collectible, a provision for bad debts 1%
should be set up)
Manning Corporation shares, at cost 10,000
Prepaid insurance (including P800 cash 2,000
surrender value of life insurance on the
president; the company is the beneficiary)
318
Prepaid rental (covering the period January 1, 6,000
2015 to December 31, 2016)
Building (net of P60,000 allowance for 1,000,000
depreciation; current years depreciation of
P5,000 not yet entered)
Equipment, at cost (prior and current years
depreciation amounted to P10,000) 120,000
Total Assets P1,965,000

Serial bonds (ten year bonds issued on 1/1/13 P 150,000
maturing on 12/31/22 at P25,000 a year)
Accounts payable (of this total, P2,000 210,000
pertains to creditors with debit balances
deducted there-from)
Notes payable (due 7/7/17) 10,000
Accrued taxes 5,500
Appropriated retained earnings for plant 20,000
expansion
Share dividends payable 30,000
Share capital, at par value 1,000,000
Total liabilities and Equity P 1,965,000
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following as
of December 31, 2015:
1. Total current assets

a. P749,750 c. P753,750
b. P746,750 d. P751,750
Answer: D
2. Total noncurrent assets

a. P1,777,800 c. P1,117,800
b. P1,175,800 d. P1,180,800
Answer: A
319
a. P268,500 c. P269,500
b. P298,500 d. P272,750
Answer: A
4. Total liabilities
a. P407,500 c. P433,500
b. P403,500 d. P404,500
Answer: B
5. Total equity
a. P1,521,050 c. P1,526,050
b. P1,529,150 d. P1,496,050
Answer: C
PROBLEM NO. 5 Statement of the financial position
Presented below is the unaudited statement of financial position of EPSI Manufacturing

Corporation as of December 31, 2015, prepared by the bookkeeper.
EPSI Manufacturing Corporation

For the year ended December 31, 2015
Assets
Cash P 225,000
Accounts Receivable, net 345,700
Inventories 560,000
Prepaid income taxes 40,000
Investments 57,700
Land 450,000
Building 1,750,000
Machinery and Equipment 1,964,000
Goodwill 37,000
Total Assets P 5,429,400

Accounts payable P 133,800
Mortgage payable 900,000
Notes payable 500,000
Lawsuit liability 80,000
Income taxes payable 61,200
320
Total liabilities P 2,123,000
Share capital, P50 par, 40,000 shares issued 2, 231,000

Total liabilities and equity P 5,429,400
Your firm has been engaged to perform an audit, during which time the following data are found:
Checks totaling P14,000 in payment of accounts payable were mailed on December 30, 2015
but were not recorded until 2016. Late in December 2015, the bank returned a customers
P2000 check, marked DAIF, but no entry was made. Cash includes P100,000 restricted for
building purposes.
Included in accounts receivable is a 30,000 note due on December 31, 2018, from the
company's president.
During 2015, the company purchased 500 ordinary shares of a corporation that supplies the
company with raw materials. Total cost of these shares was P51,300, and the fair value on
December 31, 2015 was 47000. The company plans to hold the shares indefinitely.
Treasury shares were recorded at cost when the company purchased 200 of its own shares for
P32 per share in May 2015. This amount is 1 included in investments.
On December 30, 2015, the company borrowed P500,000 from a bank in exchange for a 10%
note payable, maturing on December 30, 2020. Equal principal payments are due December
30 of each year, beginning in 2016. This note is collateralized by a P250,000 tract of land
acquired as a potential future building site, which is included.
The mortgage payable requires 50,000 principal payments, plus f interest, at the end of each
month. Payments were made on January 31 and February 28, 2016. The balance of this
mortgage is due on 1 June 30, 2016. On March 1, 2016, prior to issuance of the audited
financial statements, the company consummated a noncancellable agreement with the lender
to refinance this mortgage. The new terms require P100,000 annual principal payments, plus
interest, on February 28 beginning in 2017. The final payment is due on February 28, 2021
The lawsuit liability will be paid in 2016.
The following is an analysis of the deferred tax liability at December 31, 2015:
Deferred taxes related to depreciation P48,000
Deferred taxes related to lawsuit liability (20,000)
Net deferred tax liability P28,000
321
The current income tax expense reported in companys 2015 income statement was P61,200.
The company is authorized to issue 100,000 shares of P50 par value ordinary shares.
QUESTIONS:
Based on the result of your audit, compute the adjusted amount of the following as of December
31, 2015:
1. Current assets
a. P 984,700
b. P 1,012,700
c. P 986,700
d. P 1,026,700
Answer: C
2. Carrying amount of the property, plant and equipment

a. P 3,914,000
b. P 3,774,000
c. P 4,164,000
d. P 3,494,000
Answer: D
3. Total assets
a. P 4,994,700
b. P 4,964,700
c. P 4,984,700
d. P 5,004,700
Answer: D
4. Current assets
a. P 1,221,000
b. P 1,261,000
c. P 421,000
d. P 426,000
Answer: B
5. Current liabilities
a. P 1,221,000
b. P 1,261,000
c. P 421,000
d. P 426,000
322
Answer: A
6. Noncurrent liabilities
a. P 1,223,000
b. P 1,200,000
c. P 428,000
d. P 448,000
Answer: D
7. Equity
a. P 3,295,700
b. P 3,306,400
c. P 3,300,000
d. P 3,302,100
Answer: A
The following data were taken from Jun Company for the year 2015:
Sales P 5,590,000
Inventories, January 1:
Work in process 238,350
Finished goods 442,000
Inventories, January 1:
Work in process 175,720
Finished goods 412,000
Purchases 2,051,500
Purchase returns 17,150
Purchase discounts 12,550
Freight in 8,250
Freight out 200,000
Sales salaries 445,000
Office salaries 155,000
Depreciation factory building 44,000
Depreciation office equipment 44,000
Depreciation store equipment 77,000
Depreciation machinery and equipment 25,500
323
Amortization patents 33,000
Bad debts expense 20,000
Factory supplies expense 75,550
Accrued manufacturing expense payable 34,500
Indirect labor 35,300
Factory light and power 65,000
Property taxes and insurance factory 13,200
building
Prepaid insurance expense 18,750
Royalties on production 13,200
Supervision expense 65,000
Tools expense 10,500
Miscellaneous factory expense 50,250
Dividends paid 70,000
QUESTIONS:
1. The total manufacturing costs is

a. P 3,450,050
b. P 3,496,250
c. P 3,420,750
d. P 3,431,250
Answer: B
2. Cost of goods sold is

a. P 3,588,880
b. P 3,513,380
c. P 3,523,880
d. P 3,542,680
Answer: A
3. Total selling expense is

a. P 522,000
b. P 735,200
c. P 800,200
324
d. P 722,000
Answer: D
4. The income before income taxes is

a. P 1,005,120
b. P 1,114,860
c. P 1,121,360
d. P 1,051,360
Answer: C
PROBLEM NO. 7 Statement of profit and loss
The B corporation presented the following multiple-step income statement and statement of
retained earnings for the year ended December 31, 2015, as developed by its bookkeeper who
has completed 12 units of accounting:
B Corporation
Revenue Statement
31 December 2015
Net sales P 390,000

Less: Dividends declared P3.50 per ordinary 15,000
share
Revenues
Less: Selling expenses P 375,000
Gross profit 41,600
Less: Operating expenses
Interest expense P 8,200
Cost of goods sold 227,400
Provision for income tax 23,920
Net operating income P 73,880
Add: Dividend revenue 3,600
Less: General and administrative expenses 48,600
Net Profit P 28,880
B Corporation
Retained Earnings Statement
31 December 2015
Beginning retained earnings P 116,000

Add: net profit 28,880
Adjusted retained earnings P144,880
Less: Loss on sale of land 8,000
Ending retained earnings P 136,880
325
QUESTIONS:
The correct net profit is

a. P43,880 c. 34,000
b. P39,000 d. 35,880
Answer: A
PROBLEM NO. 8 Statement of profit or loss and other comprehensive income
Tawi2 Companys income statement fot the year ended December 31, 2015 reported net profit of
P 10,000,000. The auditor raised questions about the following amounts that had been included
in the net profit:
Unrealized loss on decline in value of P 500,000

available for sale securities
Loss onj write off of inventory due to a 1,500,000
government ban net of tax
Adjustment of profit of prior year net-debit 2,000,000
Loss from expropriation of property , net of 3,500,000
tax
Exchange differences gain on translating 4,500,000
foreign operations
Revaluation surplus realization 1,000,000
QUESTIONS:
1. Tawi2 Companys 2015 statement of comprehensive income should report profit at

a. P 9,000,000 c. P7,000,000
b. P 6,500,000 d. P 8,500,000
Answer: C
2. Tawi2 Companys 2015 statement of comprehensive income should total comprehensive

income at
a. P12,000,000 c. P 5,000,000
b. P11,000,000 d. P 4,000,000
Answer: B
PROBLEM NO. 9 Statement of financial postion and statement of profit or loss
326
Bulls, Inc., a nonpublic enterprise, is negotiating a loan for expansion purposes and the bank
requires audited financial statements. Before closing the accounting records for the year ended
December 31, 2015, Bulls controller prepared the following comparative financial statements
for 2015 and 2014.
Bulls, Inc.
December 31, 2015 and 2014
2015 2014
Assets
Cash P 275,000 P 150,000
Trading Secutities 78.000 78,000
Accounts Receivable 487,000 392,000
Allow. For doubtful accounts (50,000) (32,000)
Inventories 425,000 307,000
Property, plant, and equipment 310,000 217,000
Total assets P 1,375,000 P991,000

Accounts payable and accrued P 420,000 P 347,000
liabilities
Estimated liability from lawsuit 100,000 _
Share capital, P10 par 260,000 260,000
Share premium 130,000 130,000
Retained earnings 465,000 254,000
Total liabilities and equity P 1,375,000 P 991,000
Bulls, Inc.
Statement of Profit or Loss
For the Years Ended December 31, 2015 and 2014
2015 2014
Net Sales P1580,000 P1,250,000
Operating expenses:
Cost of Sales P755,000 P690,000
Selling and admin. 485,000 365,000
Depreciation 29,000 18,000
Estimated loss form lawsuit 100,000 _________
P1,369,000 P1,073,000
Profit P 211,000 P 177,000
During the course of the audit, the following additional information was obtained:
327
a. The trading securities were acquired on December 31, 2014. The securities have a fair
value of P67, 000 at December 31, 2015.
b. In discussion with the company officials, it was determined that the doubtful accounts
expense rate based on net sales should be reduced to 2% from 3%, effective January 1,
2015
c. As a result of errors in the physical count, inventories were overstated by P12,000 at
December 31, 2014 and by P17,500 at December 31, 2015
d. On January 1, 2014, the cost of equipment purchased for P30, 000 was debited to repairs
and maintenance. Bulls depreciates equipment of this type by straight-line method over
five-year life with no residual value.
e. On July 1, 2015, fully depreciated equipment purchased for P21, 000 was sold as scrap
for P2,500. The only entry Bulls made was to debit cash and credit property and
equipment for the scrap proceeds. The property and equipment (net) had a current cost of
P250, 000 at December 31, 2015.
f. Advertising and promotion expense for the year ended December 31, 2014 includes the
P25,000 cost of printing sales catalogs for a special promotional campaign held in
January 2015
g. Bulls was named as defendant in a lawsuit in October 2015. Bulls counsel is of the
opinion that Bulls has good defense, and does not anticipate any impairment of Bulls
management wished liability will be incurred. Nevertheless, Bulls management wished
to be conservative and, therefore established a loss contingency of P100,000
QUESTIONS:
Based on the above and the result of your audit, compute for the following: (Disregard
income taxes)
1. Adjusted retained Earnings as of January 1, 2015

a. P266,000
b. P297,000
c. P285,000
d. P291,000
Answer: D
2. Adjusted profit for the year ended December 31, 2015

a. P281,800
b. P181,800
c. P287,800
d. P306,800
Answer: A
328
3. Adjusted current assets as of December 31, 2015
a. P1,266,760
b. P1,190,300
c. P1,154,900
d. P1,202,300
Answer: D
4. Adjusted carrying amount of property and equipment as of December 31, 2015

a. P168,500
b. P180,500
c. P178,000
d. P192,500
Answer: B
5. Adjusted Shareholders equity as of December 31, 2015

a. P962,800
b. P950,800
c. P974,800
d. P862,800
Answer: A
PROBLEM NO. 10 Statement of financial position of profit or loss
Reproduced below is the draft statement of financial position of Spurs, a public listed company,
as at 31 March 2015
P00 P00
Non-current assets (note(i))
Freehold property 126,000
Plant 110,000
Investment property at 1 April 2014 (note(iii)) 15,000
251,000
Current Assets
Inventory (note(iii)) 60,400
Trade receivables and prepayments 31,200
Cash 13,800 105,400
Total Assets 356,400
Equity and liabilities

Capital Reserves:
329
Ordinary shares of P0.25 each 150,000
Reserves:
Share Premium 10,000
Accumulated profits 1 April 2014 52,500
: Year 31 March 2015 47,500 110,000
260,000
Non-Current liabilities
Deferred tax at 1 April 2014 (note (v)) 18,700
Current Liabilities
Trade payables (note(iii)) 47,400
Provision for plant overhaul (note(iv)) 12,000
Income tax payable 4,200 63,600
Suspense account (note(vi)) 14,100
Total equity and liabilities 356,400
(i) The profit or loss has been charged with P32 million being the first of four equal
annual rental payments for an item of excavating plant. This first payment was made
on 1 April 2014. Spurs has been advised that this is a finance lease with an implicit
interest rate of 10% per annum. The plant had a fair value of 1311.2 million at the
inception of the lease. None of the non-current assets have been depreciated for the
current year. The freehold property should be depreciated at 2% on its cost of P130
million, the leased plant 18 depreciated at 25% per annum on a straight-line basis and
the non-leased plant 15 depreciated at 20% on the reducing balance basis.
(ii) Spurs adopts the fair value model for its investment property. Its value at 31 March
2015 has been assessed by a qualified surveyor at P12 .4 million.
(iii) During an inventory count on 31 March 2015 items that had cost P6 million were
identified as being either damaged or slow moving. It ' is estimated that they will only
realize P4 million in total, on which sales commission of 10% will be payable. An
invoice for materials delivered on 12 March 2015 for P500, 000 has been
discovered. It has not been recorded in Spurs bookkeeping system, although the
materials were included in the inventory count.
(iv) Spurs operates some heavy excavating plant which requires a major overhaul every
three years. The overhaul is estimated to cost P18 million and is due to be carried out
in April 2016. The provision of P12 million represents two annual amounts of P6
million made in the years to 31 March 2014 and 2015.
(v) The deferred tax liability required at 31 March 2015 has been calculated at P225
million
330
(vi) The suspense account contains the credit entry relating to the issue on 1 October 2014
of a P 15 million 8% loan note. It was issued at a discount of 5% and incurred direct
issue costs or P150, 000. It is redeemable after four years at a premium of 10%.
Interest is payable six months in arrears. The first payment of interest has not been
accrued and is due on 1 April 2015. Appointment of issue costs, discounts and
premiums can be made on straight-line basis.
QUESTIONS:
Based on the above and the result of your audit, compute for the following:
(Disregard effect of the adjustments on current income tax)
1. Adjusted profit for the fiscal year ended 31 March 2015

a. P18,487,500 c. P12,487,500
b. P18,300,000 d. P18,675,000
Answer: B
2. Total noncurrent assets as of 31 March 2015

a. P232,200,000 c. P223,800,000
b. P236,200,000 d. P219,800,000
Answer: A
3. Total current liabilities as of 31 March 2105

a. P55,400,000 c. P55,900,000
b. P55,100,000 d. P54,500,000
Answer: C
4. Total non-current liabilities as of 31 March 2015

a. P42,500,000 c. P42,125,000
b. P44,000,000 d. P42,312,500
Answer: A
5. Total equity as of 31 March 2015

a. P237,175,000 c. P224,800,000
b. P236,987,500 d. P236,800,000
Answer: D
331
PROBLEM NO. 11 Computation of statement of profit or loss items from statement of
financial position and statement of cash flows
The following financial statements are for Pol Company.
Pol Company
Comparative Statements of Financial Postion
December 31, 2015 and 2014
Assets 2015 2014
Cash P 400 P 3,400
Inventory 30,000 34,000
Prepaid general expenses 5,700 5,000
Property, plant, and equipment 305,000 320,000
Patent 36,000 40,000
Total Assets P302,200 P291,500

Accounts Payables P 25,000 P 22,000
Wages Payable 12,000 10,300
Interest Payable 2,800 4,300
Dividends Payable 14,000 _
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
Total Liabilities and Shareholders Equity P302,200 P291,500
Pol Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating acitivites

Cash collected from customers P 685,300
Cash payments for:
Inventory purchases P 300,000
General expenses 102,000
332
Wages expenses 150,000
Interest expenses 11,000
Income tax expenses 23,900 586,900
Net cash provided by operating activities P 98,400
Cash flows from investing activities
Sale of property, plant, and equipment P 27,200
Purchase of property, plant, and equipment (60,000)
Net cash used in investing activities (32,800)
Cash flows from financing activities:
Retirement of bonds payable P (23,000)
Payment of Dividends (42,000)
Net cash used in financing activities (65,000)
Net increase in cash P 600
Cash at the beginning of the year 3,400
Cash at the end of the year P 4,000
Consider the following additional information:
(a) All accounts payable relate to inventory purchases.
(b) Property, plant, and equipment sold had an original cost of P75,000 and a carrying
amount of P22,000.
QUESTIONS:
Based on the foregoing, compute the following for the year ended December 31, 2015:
1. Cost of goods sold

a. P307,000
b. P300,000
c. P299,000
d. P293,000
Answer: A
2. Depreciation expense
a. P27,600
b. P25,400
c. P53,000
d. P78,400
Answer: A
333
3. Total operating expense
a. P282,400
b. P284,600
c. P310,000
d. P335,400
Answer: B
4. Loss on retirement of bonds payable

a. P3,000
b. P20,000
c. P23,000
d. P0
Answer: A
5. Net Income
a. P12,800
b. P54,800
c. P40,800
d. P68,800
Answer: D
PROBLEM NO. 12 Computation of statement of cash flow items from statement of financial
position and statement of profit or loss items
Al Corp. uses the direct method to prepare its statement of cash flows. Als trial balances at
December 31, 2015 and 2014 are as follows:
12/31/15 12/31/14
Debits P 35,000 P 32,000
Cash 33,000 30,000
Inventory 100,000 95,000
Unamortized bond discount 4,500 5,000
Cost of goods sold 250,000 380,000
Selling expenses 141,500 172,000
General and Administrative expenses 137,000 151,300
Interest expense 4,300 2,600
Income tax expense 20,400 61,200
P 756,700 P 976,100
Credits
Allowance for uncollectible accounts P 1,300 P 1,100
Accumulated depreciation 16,500 15,000
Trade accounts payable 25,000 17,500
334
Income taxes Payable 21,000 27,100
Deferred tax liability 5,300 4,600
8% callable bonds payable 45,000 20,000
Share capital 50,000 40,000
Share Premium 9,100 7,500
Retained earnings 44,700 64,600
Sales 538,800 778,600
P 756,700 P 976,100
Al purchased P5,000 equipment during 2015

Al allocated one-third of its depreciation expense to selling expense and the remainder to
general and administrative expenses
QUESTIONS:
Based on the foregoing, what amounts should Al report in its statement of cash flows for the year
ended December 31, 2015 for:
1. Cash collected form customers?

a. P258,500 c. P536,000
b. P541,600 d. P535,800
Answer: D
2. Cash paid for goods to be sold?

a. P258,500 c. P242,500
b. P257,500 d. P226,500
Answer: D
3. Cash paid for interest?

a. P4,800 c. P3,800
b. P4,300 d. P1,700
Answer: C
4. Cash paid for income taxes?

a. P25,800 c. P19,700
b. P20,400 d. P15,000
Answer: A
335
5. Cash paid for selling expenses?
a. P142,000 c. P141,000
b. P141,500 d. P140,000
Answer: C
PROBLEM NO. 13 Statement of cash flows
The following is a list of the items to be included in the preparation of the 2015 statement of cash
flows for the Norhan Company:
a. Net income, P59,200

b. Payment for purchase of building, P98,000
c. Increase in accounts receivable, P7,400
d. Proceeds from issuance of ordinary shares, P37,100
e. Increase-in accounts payable, P4,500
f. Proceeds from' sale of land, P7,000
g. Depreciation expense, P12,600
h. Payment of dividends, P36,000
i. Gain on sale of land, P5,300
j. Decrease in inventory, P3,700
k. Payment for purchase of long-term investments, P9,600
l. Amortization of discount on bonds payable, P1,900
m. Proceeds from issuance of note, P18,000
n. Increase in deferred taxes payable, P5,000
o. Equipment acquired by finance lease, P19,500
p. Decrease in salaries payable, P2,300
q. Beginning cash balance, P20,300
QUESTIONS:
Based on the foregoing information, compute for the following.
1. Cash provided by operating activities

a. P68,100
b. P89,900
c. P74,900
d. P71,900
Answer: D
336
2. Cash used in investing activities
a. P120,010
b. P107,600
c. P100,600
d. P9,600
Answer: C
3. Cash provided by financing activities

a. P19,100
b. P38,600
c. P20,600
d. P1,100
Answer: A
4. Net decrease in cash

a. P19,600
b. P6,600
c. P13,400
d. P9,600
Answer: D
5. Cash balance, ending

a. P13,700
b. P10,700
c. P700
d. P6,900
Answer: B
PROBLEM NO. 14 Statement of cash flows
The statement of financial position of Davao Company at the end of 2015 and 2014 follow:
Increase
2015 2014 Decrease
Cash P 125,000 P 175,000 P (50,000)
Accounts receivable (net) 300,000 225,000 75,000
Inventory 350,000 225,000 125,000
Prepaid expenses 50,000 125,000 (75,000)
Buildings and equipment 450,000 375,000 75,000
337
Accumulated depreciation buildings and (90,000) (40,000) 50,000
equipment
Land 450,000 200,000 250,000
P 1,635,000 P P 350,000
1,285,000
Accounts payable P 340,000 P 275,000 P 65,000
Accrued expenses 60,000 90,000 (30,000)
Notes payable bank, long-term _ 200,000 (200,000)
Mortgage payable 150,000 150,000
Share capital, P10 par 1,045,000 795,000 250,000
Retained earnings (deficit) 40,000 (75,000) 115,000
P 1,635,000 P P 350,000
1,285,000
Land was acquired for P250, 000 in exchange for ordinary shares, par P250, 000, during the
year; all equipment purchased was for cash. Equipment costing P25, 000 was sold for P10, 000;
book value of the equipment was P20, 000 and the loss was reported as an ordinary item in net
income. Cash dividends of P50, 000 were charged to retained earnings and paid during the year;
the transfer of net income to retained earnings was the only other entry in the Retained Earnings
account.
QUESTIONS:
Based on the foregoing information, compute for the following
1. Net cash provided by operating activities.

a. P120,000
b. P130,000
c. P140,000
d. P165,000
Answer: C
2. Net cash provided by (used in) investing activities.

a. P10,000
b. (P100,000)
c. (P90,000)
d. (P340,000)
Answer C
3. Net cash provided by (used in) financing activities.

a. P150,000
b. P350,000
c. (P100,000)
d. (P250,000)
338
Answer: C
X SIMULATED BOARD EXAMINATIONS 1

PROBLEM NO. 1
Your audit of Nine Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
companys collections were deposited weekly. No record was kept of cash in the bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this copy was given to the customer when he paid his account.
339
Additional Information
a. On January 2, 2015 Nine Company started business and issued share capital, 72,000 shares
with P100 par, for the following considerations:
Cash P 600,000
Building (useful life, 15 years) 5,400,000
Land 1,800,000
P 7,800,000
b. An analysis of the bank statements showed total deposits, including the original cash
investment, of P4,200,000. The balance in the bank statement on December 31, 2015, was
P300,000, but there were checks amounting to P60,000 dated in December but not paid by
the bank until January 2016. Cash on hand on December 31, 2015 was P150,000 including
customers deposit of P90,000.
c. During the year, Nine borrowed P600,000 from the bank and repaid P150,000 and P30,000
interest.
d. Disbursements paid in cash during the year were as follows:
Utilities P 120,000
Salaries 120,000
Supplies 240,000
Dividends 180,000
P 660,000
e. An inventory of merchandise taken on December 31, 2015 showed P906,000 of
merchandise.
f. Tickets for accounts receivable totaled P1,080,000 but P60,000 of that amount may prove
uncollectible.
g. Unpaid suppliers invoices for merchandise amounted to P420,000.
h. Equipment with a cash price of P480,000 was purchased in early January on a one-year
installment basis. During the year, checks for the down payment and all maturing
investments totaled P534,000. The equipment has a useful life of 5 years.
QUESTIONS:
(Disregard income taxes)

1. Payments for merchandise purchases in 2015
a. P2,586,000 c. P2,646,000
b. P2,436,000 d. P3,246,000
2. Collections from sales in 2015
a. P3,720,000 c. P3,000,000
b. P4,320,000 d. P4,920,000
3. Net income for the year ended December 31, 2015
a. P1,770,000 c. P1,560,000
b. P1,620,000 d. P 960,000
4. Shareholders equity as of December 31, 2015
a. P9,390,000 c. P9,180,000
b. P9,240,000 d. P8,580,000
340
5. Total assets as of December 31, 2015
a. P9,583,200 c. P9,390,000
b. P9,540,000 d. P9,450,000
PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV).
The inventory accounts at December 31, 2014, had the following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company
during 2015.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade
discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net
invoice price.
Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in
making payment. The unpaid balance on the sale is P15,200. The repossessed
merchandise is to be refinished and placed on sale. It is expected that the item can
be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit
for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made on finished goods that have a list price of P59,200 and
a cost P38,400. A reduction of P8,000 off the list price was granted as a trade-in
allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit
on this type of inventory is 25% of the sales price.
QUESTIONS:
(Assume the client is using perpetual inventorysystem)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of

a. P200,000
b. P144,000
c. P141,120
d. P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000
b. P24,000
c. P17,200
d. P14,400
8. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
341
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
9. The trade-in inventory on Aug. 30 is most likely to be valued at
a. P8,000
b. P4,800
c. P6,000
d. P6,400
10. How much will be recorded as Sales on Aug. 30?
a. P51,200
b. P56,000
c. P57,200
d. P57,600
PROBLEM NO. 3
In connection with your examination of the financial statements of the Anne Corporation for the
year 2015, the company presented to you the Property, Plant and Equipment section of its
statement of financial position as of December 31, 2014 which consists of the following:
Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000
The following transactions occurred during 2015:
Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land Anne
paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear
the land. During the course of clearing the land, timber and gravel were recovered and sold
for P20,000.
A second tract of land (site number 103) with a building was acquired for P1,200,000. The
closing statement indicated that the land value was P800,000 and the building value was
P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. A
new building was constructed for P600,000 plus the following costs:
Excavation fees P 44,000
Architectural design fees 32,000
Building permit fee 4,000
The building was completed and occupied on September 1, 2015.
A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided
regarding its future use.
Extensive work was done to a building occupied by Anne under a lease agreement. The
total cost of the work was P500,000, which consisted of the following:
Particulars Amount Useful Life
Painting of the ceilings P 40,000 One year
Electrical work Ten years

140,000
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Construction of extension to current working Thirty years
area 320,000
The lessor paid one-half of the costs incurred in connection with the extension to the current
working area.
During December 2015, costs of P260,000 were incurred to improve leased office space.
The related lease will terminate on December 31, 2017, and is not expected to be renewed.
A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2015 were P52,000.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balance of the following
as of December 31, 2015:
11. Land
a. P8,400,000 c. P5,480,000
b. P6,000,000 d. P5,900,000
12. Buildings
a. P3,800,000 c. P4,200,000
b. P4,280,000 d. P3,880,000
13. Leasehold improvements
a. P2,600,000 c. P2,560,000
b. P2,300,000 d. P2,720,000
14. Machinery and equipment
a. P3,114,000 c. P3,166,000
b. P3,100,000 d. P3,108,000
15. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Documentary support obtained by vouching entries to subsidiary records and invoices.
b. Oral evidence obtained by discussions with operating management.
c. Physical examination of a sample of newly recorded fixed assets.
d. Documentary support obtained by reviewing titles and tax returns.
PROBLEM NO. 4
The following information pertain to Teal Companys delivery trucks:
DELIVERY EQUIPMENT
01/01/13 Trucks 1,2,3, and 4 P3,200,000
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03/15/14 Replacement of Truck 3 tires 25,000
07/01/14 Truck 5 800,000
07/10/14 Reconditioning of Truck 4, which was damaged in a 35,000

collision
09/01/14 Insurance recovery on Truck 4 accident P33,000
10/01/14 Sale of Truck 2 600,000
04/01/15 Truck 6 1,000,000 150,000
05/02/15 Repainting of Truck 4 27,000
06/30/15 Truck 7 720,000
ACCUMULATED DEPRECIATION-DELIVERY EQUIPMENT

12/31/13 Depreciation expense P300,000
12/31/14 Depreciation expense 300,000
12/31/15 Depreciation expense 300,000
a. On July 1, 2014, Truck 3 was traded in for a new truck, Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
b. On April 1, 2015, Truck 6 was purchased for P1,000,000; truck 1 and cash of P850,000
being given for the new truck.
c. The depreciation rate is 20% by unit basis.
d. Unit costs of trucks 1 to 4 is at P800,000 each.
QUESTIONS:
16. How much is the net loss on disposal of trucks in 2014?

a. P510,000 c. P590,000
b. P430,000 d. P230,000
17. What is the loss on trade-in of Truck 1?
a. P410,000 c. P250,000
b. P290,000 d. P150,000
18. What is the adjusted balance of the Delivery Equipment account as of December 31, 2015?
a. P4,170,000 c. P3,170,000
b. P2,650,000 d. P3,370,000
19. The 2015 depreciation expense in understated by:
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a. P372,000 c. P92,000
b. P252,000 d. P292,000
20. Which of the following procedures would least likely lead the auditor to detect unrecorded
fixed asset disposals?
a. Examine insurance policies.
b. Review repairs and maintenance expense.
c. Review property tax files.
d. Scan invoices for fixed asset additions.
PROBLEM NO. 5
Maybe company is constructing a building. Construction began on January 1 and was completed
on December 31. Expenditures were P2,400,000 on March 1, P1,980,000 on June 1, and
P3,000,000 on December 31. Maybe Company borrowed P1,200,000 on January 1 on a 5-year,
12% note to help finance construction of the building. In addition, the company had outstanding
all year a 10%, 3-year, P2,400,000 note payable and an 11%, 4-year, P4,500,000 note payable.
21. What are the weighted-average accumulated expenditures?

a. P4,380,000 c. P7,380,000
b. P3,155,000 d. P3,690,000
22. What is the weighted-average interest rate used for interest capitalization purposes?
a. 11% c. 10.5%
b. 10.85% d. 10.65%
23. What is the avoidable interest for Maybe Company?
a. P144,000 c. P164,281
b. P463,808 d. P352,208
24. What is the actual interest for Maybe Company?
a. P879,000 c. P735,000
b. P891,000 d. P352,208
25. What amount of interest should be charged to expense?
a. P382,000
b. P735,000
c. P526,792
d. P415,192
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PROBLEM NO.6
The following information relates to the obligations of Lakers Corporation as of December 31,
2015.
Accounts payable for goods and services purchased on open account amounted to
P35,000 at December 31, 2015.
On December 15, 2015, Lakers declared a cash dividend of P.05 per share, payable on
January 12, 2016, to shareholders of record as of December 31, 2015. Lakers had 1
million ordinary shares issued and outstanding.
On December 31, 2015, Lakers entered into a six-year finance lease on a warehouse and
made the first annual lease payment of P100,000. The incremental borrowing rate was
12%, and the interest rate implicit in the lease, which was known to Lakers, was 10%.
The rounded present value factors for an annuity due for six years are 4.6 at 12% and 4.8
at 10%.
On July 1, 2015, Lakers issued P500,000, 8% bonds for P440,000 to yield 10%. The
bonds pay interest annually every June 30. At December31, 2015, the bonds were trading
on the open market at 86 to yield 12%. Lakers uses the effective interest method.
Lakers 2015 accounting profit was P850,000 and its taxable profit was P600,000. The
difference is due to P100,000 permanent differences and P150,000 of temporary
differences related to noncurrent assets. At December 31, 2015, Lakers had cumulative
taxable differences of P300,000 related to noncurrent assets. Lakers effective tax rate is
30%. Lakers made no estimated tax payments during the year.
Questions:
Based on the above and the result of your audit, determine the following as of and for the year
ended Dec. 31, 2015:
26. Carrying amount of finance lease liability

a. P480,000 c. P380,000
b. P428,000 d. P360,000
27. Carrying amount of bonds payable

a. P446,400 c. P442,000
b. P444,000 d. P430,000

a. P342,200 c. P367,000
b. P327,000 d. P347,000
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29. Noncurrent liabilities
a. P850,000 c. P895,000
b. P854,400 d. P902,800
30. Interest expense

a. P92,000 c. P44,000
b. P70,000 d. P22,000
PROBLEM NO.7
In connection with your audit of the Get Back Company, you were asked to prepare comparative
data from the companys inception to the present. The following were gathered during your
audit:
a. Get Back Companys charter became effective on January 2, 2011, when 80,000, P10 par
value, ordinary shares and 40,000, 5% cumulative, nonparticipating, preference shares
were issued. The ordinary share was sold at P12 per share and the preference share was
sold at its par value of P100 per share.
b. Get Back was unable to pay preference dividends at the end of its first year. The owners
of the preference shares agreed to accept 2 ordinary shares for every 5 shares of
preference shares owned in discharge of the preference share dividends due on December
31, 2011. The shares were issued on January 2, 2012. The fair value was P30 per share
for ordinary on the date of issue.
c. Get Back Company acquired all outstanding shares of Day Tripper Corporation on May
1, 2013, in exchange for 40,000 ordinary shares of Get Back.
d. Get Back split its ordinary shares 3 for 2 on January 1, 2014, and 2 for 1 on January 1,
2015.
e. Get Back offered to convert 20% of the preference shares to ordinary on the basis of 2
ordinary share for 1 preference share. The offer was accepted, and the conversion was
made on July 1, 2015.
f. No cash dividends were declared on ordinary shares until December 31, 2013. Cash
dividends per ordinary share were declared and paid as follows:
December 31 June 30
2013 P4.00 -
2014 P5.00 P3.00
2015 P2.00 P2.50
Questions:
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31. Outstanding number of ordinary shares as of December 31, 2015

a. 364,800 c. 372,800
b. 684,800 d. 380, 800
32. Outstanding number of preference shares as of December 31, 2015

a. 40,000 c. 32,000
b. 24,000 d. 96,000
33. Amount of cash dividends declared and paid to ordinary shareholders for the year 2014
a. P972,800 c. P1,459,200
b. P608,000 d. P1,981,440
34. Amount of cash dividends declared and paid to ordinary shareholders for the year 2015
a. P3,911,040 c. P1,713,600
b. P3,041,600 d. P1,673,600
35. Where no independent stock transfer agent are employed and the corporation issues its own
stocks and maintains stock records, cancelled stock certificates should
a. Be destroyed to prevent reissuance.
b. Be defaced and sent to the secretary of state.
c. Be defaced to prevent reissuance and attached to their corresponding stubs.
d. Not be defaced but segregated from other stock certificates and retained in a
cancelled certificates file.
PROBLEM NO.8
Bryant Corporation, a non-public entity, was incorporated on December 1, 2014, and began
operations one week late closing the books for the fiscal year ended November 30, 2015, the
controller prepared the following financial statements:
Bryant Corporation
November 30, 2015
Assets
Current assets:
Cash P150,000
Marketable securities, at cost 60,000
Allowance for doubtful accounts (59,000)
Inventories 430,000
Total current assets 1,046,000
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Property, plant and equipment 426,000
Less accumulated depreciation (40,000)
Property, plant and equipment, net 386,000
Research and development costs 120,000
Total assets P1,552,000
Liabilities and Shareholders equity

Current liabilities:
Accounts payable and accrued expenses P592,000
Income taxes payable 224,000
Total current liabilities 816,000
Shareholders equity
Share capital, P10 par value 400,000
Total shareholders equity 736,000
Total liabilities and shareholders equity P1,552,000
Bryant Corporation
Statement of Income
For the Fiscal Year Ended November 30, 2015
Net Sales P2,950,000
Operating expenses:
Cost of Sales 1,670,000
Selling and administrative 650,000
Depreciation 40,000
Research and development 30,000
2,390,000
Income before income taxes 560,000
Provision for income taxes 224,000
Net income P336,000
Bryant is in the process of negotiating a loan for expansion purposes, and the bank has requested
audited financial statements. During the course of the audit, the following additional information
was obtained:
a. The investment portfolio consists of short-term investments in marketable equity

securities with a total market valuation of P55,000 as of November 30,2015.
b. Based on an aging of the accounts receivable as of November 30, 2015, it was estimated
that P36,000 of the receivables will be uncollectible.
c. Inventories at November 30, 2015 did not include work in process inventory costing
P12,000, sent to an outside processor on November 29, 2015.
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d. A P3,000 insurance paid on November 30, 2015 on a policy expiring one year later was
charged to insurance expense.
e. Bryant adopted a pension plan on June 1, 2015 for eligible employees to be administered
by a trustee. Based upon actuarial computations, the first twelve months normal pension
was estimated at P45,000.
f. On June 1, 2015, a production machine purchased for P24,000 was charged to repairs and
maintenance. Bryant depreciates machines of this type on the straight-line method over a
five-year life with no salvage value, for financial and tax purposes.
g. Research and development costsof P150,000 were incurred the development of a patent,
which Bryant expects to be granted during the fiscal year ending November 30, 2016.
Bryant initiated a five-year amortization of the P150,000 total cost during the fiscal year
ended November 30, 2015.
h. During December 2015, a competitor company filed suit against Bryant for patent
infringement claiming P200,000 damages. Bryants legal counsel believes that an
unfavourable outcome is probable. A reasonable estimate of the courts award to the
plaintiff is P50,000.
i. The 40% effective tax rate was determined to be appropriate for calculating the provision
for income taxes for the fiscal year ended November 30, 2015. Ignore computation of the
deferred portion of income taxes.
QUESTIONS:
Based on the above and the result of your audit, determine the following as of and for the fiscal
period ended November 30, 2015:
36. Net income

a. P253,260 c. P235,260
b. P283,260 d. P239,760
37. Current assets

a. P1,084,000 c. P1,079,000
b. P1,061,000 d. P1,073,000
38. Total assets

a. P1,484,200 c. P1,489,200
b. P1,486,600 d. P1,491,600
39. Total liabilities

a. P833,340 c. P855,840
b. P783,340 d. P805,840
350
40. Total equity
a. P683,260 c. P639,760
b. P635,260 d. 653,260
PROBLEM NO.9
Hot Company was started by Chika Babes early in 2015. Initial capital was acquired by issuing
ordinary shares to various investors and by obtaining a bank loan. The company operates a retail
store that sells records, tapes, and compact discs. Business was so good during the first year of
operations that June is considering operating a second store on the other side of town. The funds
necessary for expansion will come from a new bank loan. In order to approve the loan, the bank
requires financial statements.
Chika asks for your help in preparing the balance sheet and presents you with the following
information for the year ending December 31, 2015.
a. Cash receipts consisted of the following:

From customers P3,600,000
From issue of ordinary shares 1,000,000
From bank loan 1,000,000
b. Cash disbursements were as follows:

Purchase inventory P3,000,000
Rent 150,000
Salaries 300,000
Utilities 50,000
Insurance 30,000
Purchase of equipment and furniture 400,000
c. The bank loan was made on March 31, 2015. A note was signed requiring payment of
interest and principal on March31, 2016. The interest rate is 12%.
d. The equipment and furniture was purchased on January 3, 2015, and have an estimated
useful life of 10 years with no anticipated salvage value. Depreciation per year is
P40,000.
e. Inventories on hand at the end of the year cost P1,000,000.
f. Amounts owed at December 31, 2015, were as follows:

To suppliers of inventory P200,000
To the utility company 10,000
g. Rent on the store building is P10,000 per month. On December 1, 2015, four months
rent was paid in advance.
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h. Net income for the year was P760,000. Assume that the company is not subject to the
income tax.
i. One million shares of no par ordinary shares are authorized, of which 200,000 shares
were issued and are outstanding.
QUESTIONS:
After preparing all the necessary adjustments based on the above audit findings, determine the
best choice for the following:
41. The correct cash balance as of December 31, 2015 is

a. P1,670,000 c. P1,690,000
b. P1,760,000 d. P1,696,000
42. Net income (loss) for the year is

a. P760,000 c. P750,000
b. P780,000 d. P(760,000)
43. Total accounts payable as of December 31, 2015 is

a. P200,000 c. P250,000
b. P210,000 d. P201,000
44. Total liabilities as of December 31, 2015 would amount to

a. P300,000 c. P1,300,000
b. P1,000,000 d. P1,210,000
45. Total current assets as of December 31, 2015 would amount to

a. P2,700,000 c. P1,030,000
b. P2,670,000 d. P1,670,000
PROBLEM NO. 10
Presented below is the statement of financial position of Simple Corporation prepared by the
chief accountant for the current year, 2015.
Simple Corporation
December 31, 2015
Current assets P 435,000

Investments 640,000
Property, plant and equipment 1,720,000
P3,100,000
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Current liabilities P 330,000
Long-term liabilities 1,000,000
Shareholders equity 1,770,000
P3,100,000
Consider the following information:
1. The current assets section includes: cash P100,000, accounts receivable P170,000 less
P10,000 for allowance for doubtful accounts, inventories P180,000, and unearned
revenue P5,000. The cash balance is composed of P114,000, less a bank overdraft of
P14,000. Inventories are stated on the lower of FIFO cost or market.
2. The investments section includes: the cash surrender value of a life insurance contract
P40,000; investment in ordinary shares, short-term (trading) P80,000 and long-term
(available-for-sale) P270,000; and bond sinking fund P250,000. The cost and fair value
of investments in ordinary shares are the same.
3. Property, plant and equipment includes: buildings P1,040,000 less accumulated

depreciation P360,000; equipment P450,000 less accumulated depreciation P180,000;
land P500,000; and land held for future use P270,000.
4. Intangible assets include: a franchise P165,000; goodwill P100,000; and discount on

bonds payable P40,000.
5. Current liabilities include: accounts payable P90,000; notes payable-short term P80,000
and long-term P120,000; and taxes payable P40,000.
6. Long-term liabilities are compose solely of 10% bonds payable due 2022.
7. Shareholders equity has: preference shares, no par value, authorized 200,000 shares,
issued 70,000 shares for P450,000; and ordinary shares, P1.00 par value, authorized
400,000 shares, issued 100,000 shares at an average price of P10. In addition, the
corporation has retained earnings of P320,000.
8. The companys management does not elect to use the fair value option for any of its
financial assets or liabilities.
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following to
be reported on the companys statement of financial position as of December 31, 2015:
46. Current assets

a. P548,000 c. P588,000
b. P574,000 d. P534,000
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47. Noncurrent investments
a. P830,000 c. P560,000
b. P520,000 d. P790,000
48. Property, plant and equipment

a. P1,720,000 c. P1,615,000
b. P1,885,000 d. P1,450,000
49. Total assets

a. P2,814,000 c. P3,079,000
b. P2,979,000 d. P3,093,000

a. P224,000 c. P210,000
b. P229,000 d. P215,000
XI SIMULATED BOARD EXAMINATIONS 1

LETTER ANSWERS
ANSWERS:
1. D 11. B 21. B 31. D 41. A
2. A 12. D 22. D 32. C 42. A
3. D 13. C 23. D 33. C 43. B
4. D 14. A 24. A 34. D 44. C
5. B 15. C 25. C 35. C 45. A
6. C 16. B 26. C 36. A 46. D
7. A 17. B 27. C 37. C 47. A
8. D 18. D 28. D 38. B 48. D
9. B 19. D 29. A 39. A 49. C
10. B 20. B 30. D 40. D 50. B
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X SIMULATED BOARD EXAMINATION II
PROBLEM NO. 1
You were asked by Something Corporation to audit its financial statements for the years ended
December 31, 2014 and 2015. While reviewing the entitys records for 2014 and 2015, you
discover that no adjustments have yet been made for the items below.
Item no. 1
Insurance premiums of P300,000 for the three-year period beginning January 1, 2014, had been
paid and fully expensed in 2014.
Item no. 2
The merchandise inventories at the end of 2014 and 2015 did not include merchandise that was
then in transit and to which the company had title. These shipments of P50,000 and P30,000 were
recorded as purchases in January 2015 and 2016, respectively.
Item no. 3
Rental of P60,000 on an equipment, applicable for six months, was received on November 1, 2014.
The entire amount was reported as income upon receipt.
Item no. 4
The entity purchased a machine on January 2, 2014 at a cost of P120,000. An additional of P50,000
was spent for installation, but this amount was charged erroneously to repairs expense. The
machine has a useful life o five years and residual amount of P20,000.
Item no. 5
The entity received P360,000 from a customer at the beginning of 2014 for services that it is to
perform evenly over three-year period beginning in 2014. None of the amount received was
reported as unearned revenue at the end of 2014.
Questions:
1. In relation to Item no. 1, which of the following is correct?
a. The 2014 profit is overstated
b. The 2015 profit is overstated
c. The December 31, 2014 retained earnings is correctly stated
d. The December 31, 2015 retained earnings is correctly stated
2. In relation to Item no. 2, which of the following is incorrect?

a. The 2014 profit is understated
b. The 2015 profit is correctly stated
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c. The December 31, 2014 retained earnings is correctly stated

a. The 2014 profit is overstated by P60,000.
b. The 2015 profit is understated by P60,000.
c. The 2015 profit is understated by P40,000.
d. The December 31, 2014 retained earnings is correctly stated.

a. Retained earnings at December 31, 2015, was understated by P30,000 and 2015 income
was overstated by P6,000
b. Retained earnings at December 31, 2015, was understated by P38,000 and 2015 income
c. Retained earnings at December 31, 2015, was understated by P30,000 and 2015 income
d. 2014 income was understated by P50,000
5. In relation to Item no. 5, which of the following is incorrect?

a. The 2014 profit is overstated by P240,000
b. The 2015 profit is understated by P120,000
c. The December 31, 2014 retained earnings is overstated by P240,000
PROBLEM NO. 2
The general ledger trial balance of Calamba Corporation includes the following balance sheet
accounts at December 31, 2015:
Cash P1,056,000
Accounts Receivable 1,220,000
Inventory 441,000
Trading securities 200,000
Available for sale investments 500,000
Bank overdraft 100,000
Cash
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The sales book was left open up to January 5, 2016, and cash sales totaling P150,000 were
considered as sales in December.
Checks of P93,000 in payment of liabilities were prepared before December 31, 2015,
recorded in the books, but not mailed or delivered to payees.
Post-dated checks totaling P78,000 are being held by the cashier as part of cash. The
companys experience shows that post-dated checks are eventually realized.
Customers check for P15,000 deposited with but returned by Bank, NSF on December
27, 2015. Return was recorded in the books.
The cash account includes P400,000 of compensating balance against a short-term bank
loan. The compensating balance is legally restricted as to withdrawal.
Accounts receivable
The accounts receivable consists of the following:
Trade accounts receivable P650,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Calamba on
consignment at 130% of cost (included in Calambas
ending inventory at cost) 260,000
Security deposit on lease of warehouse used for storing
some inventories 300,000
Total P1,220, 000
Inventory
A physical count of inventory at December 31, 2015 revealed that Calamba had inventory on hand
at that date with a cost of P441,000. The annual audit identified that the following items were
excluded from this amount and the related transactions were not recorded:
Merchandise of P61,000 is held by Calamba on consignment. The consignor is Laguna

Company.
Merchandise costing P38,000 was shipped by Calamba FOB destination to a customer on
December 31, 2015. The customer was expected to receive the goods on January 6, 2016.
Merchandise costing P46,000 was shipped by Calamba FOB shipping point to a customer
on December 29, 2015. The customer was scheduled to receive the goods on January 2,
2016
Merchandise costing P83,000 shipped by a vendor FOB destination on December 31, 2015
was received by Calamba on January 4, 2016.
Merchandise costing P51,000 purchased FOB shipping point was shipped by the supplier
on December 31, 2015 and received by Calamba on January 5, 2016.
Questions:
Based on the above and the result of the audit, determine the adjusted amount of the following as
of December 31, 2015
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6. Cash
a. P921,000
b. P521,000
c. P584,000
d. P506,000
7. Net accounts receivable

a. P630,000
b. P782,800
c. P767,800
d. P754,000
8. Trade and other receivables, net

a. P797,800
b. P812,800
c. P660,000
d. P784,000
9. Inventory
a. P730,000
b. P340,000
c. P451,000
d. P530,000
10. Current assets

a. P2,361,000
b. P2,498,800
c. P2,485,000
d. P2,513,800
PROBLEM NO. 3
The following data were taken from your current working papers in connection with your audit of
the Pacers Companys financial statements for the year ended December 31, 2015
Cash account consists of the following items:
Petty cash fund P25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
P331,750
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a. The count of the cashiers accountability on January 2, 2016, revealed total bills and coins
of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000
pertains to January 2016.
b. On December 29,2015 a check for P87,500 was drawn against Security Bank current
account resulting in bank overdraft of P37,500. The check was picked up by the supplier
on January 3, 2016.
c. Bank reconciliation statement prepared by the cashier for the Allied Bank account follows:
Bank Balance P310,500
Add: Deposit in transit P61,250
Bank services charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check no. Amount
214 P 2,500
219 20,750
225 6,000
228 8500 28,750
Book balance P344,250
*Check certified by the bank in December 2015

All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transits include a customers post-dated check amounting to P40,000. The check
represents a collection from account customer for sales made in the middle of October 2015.
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:
11. How much is the adjusted balance of petty cash fund as of December 31, 2015?
a. P12,000
b. P 9,000
c. P13,000
d. P16,000
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12. How much is the adjusted Allied Bank current account as of December 31, 2015?
a. P336,500
b. P296,500
c. P305,500
d. P330,250
13. How much is the cash shortage as of December 31, 2015

a. P46,500
b. P 9,000
c. P 6,500
d. P 0
14. How much is the adjusted cash as of December 31, 2015?

a. P355,500
b. P367,500
c. P398,500
d. P358,500
15. An auditor suspects that a clients cashier is misappropriating cash receipts for personal
use by lapping customer checks received in the mail. In attempting to uncover this
embezzlement scheme, the auditor most likely would compare the
a. Date checks are deposited per bank statements with dates remittance credits are
recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-
offs are actually recorded.
PROBLEM NO. 4
In connection with your examination of the financial statements of Seven, Inc for the year ended
December 31, 2015, you were able to obtain the following information from the results of your
confirmation of the entitys accounts receivable:
Customer Customers Comments Audit Findings
James The goods sold on December 1 were The client failed to record credit memo
returned on December 16, 2015 no. 23 for P12,000. The merchandise was
included in the ending inventory at cost.
360
Wade We do not owe this amount, we did not Investigation revealed that goods sold for
receive any merchandise from your P16,000 were shipped to Wade on
company. December 29, 2015, terms FOB shipping
point. The goods were lost in transit and
the shipping company has acknowledged
its responsibility for the loss of the
merchandise.
Bosh I am entitled to a 10% employee Bosh is an employee of Seven. Starting

discount. Your bill should be reduced November 2015, all company employees
by P1,200 were entitled to a special discount
Allen We have not yet sold the goods. We Merchandise billed for P18,000 were
will remit the proceeds as soon as the consigned to Allen on December 30,
goods are sold 2015. The goods cost P13,000. The
inventory was determined by physical
count at the clients warehouse.
Lewis We do not owe you P20,000. We The sale of merchandise on December 18,
already paid our accounts as evidenced 2015 was paid by Lewis on January 6,
by OR #1234 2016.
Chalmers Reduce your bill by P1,500 The amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2015, terms, FOB
destination-collect.
Questions:
16. In relation to customer Wade, the necessary adjusting entry includes
a. A debit to Sales of P16,000
b. A credit to Accounts receivable of P16,000
c. Both a and b
d. Neither a nor b
361
17. In relation to customer Allen, the necessary adjusting entry does not include
a. A debit to Sales of P18,000
b. A debit to inventory of P13,000
c. A credit to Accounts receivable of P18,000
d. None of the above
18. In relation to customer Lewis, the necessary adjusting entry includes a debit to
a. A debit to Cash of P20,000
b. A credit to Accounts receivable of P20,000
c. Both a and b
d. Neither a nor b
19. Accounts receivable as of December 31, 2015 is overstated by

a. P32,700
b. P47,500
c. P48,700
d. P68,700
20. Completeness of revenues may be tested by the auditor through the selection of a sample
of which of the following?
a. Accounts receivable and tracing them to cash receipts.
b. Recorded sales transactions and tracing them to the general ledger
c. Shipping documents and tracing them to the sales journal.
d. Inventory records and tracing them to the shipping documents.
PROBLEM NO. 5
You obtained the following information from the balance sheet of Caloocan Company in
connection with your audit of the Companys financial statements for the year 2015:
Dec 31, 2015 Dec 31, 2014
Cash P706,600 P200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000
All operating expenses are paid by Caloocan with cash and all purchases of inventory are made on
account. Caloocan sells only on product. All sales are cash sales which are made for P100 per unit.
Caloocan purchases 1,500 units of inventory per month and values its inventory using periodic
FIFO. The unit cost of inventory during January 2015 was P65.20 and increase P0.20 per month
362
during the year. During 2015, payments to suppliers totaled P943,400 and operating expenses
totaled P440,000. The ending inventory for 2014 was valued at P65.00 per unit.
Questions:
21. Number of units sold during 2015
a. 18,900
b. 18,400
c. 8,268
d. 8,768
22. Accounts payable balance at December 31, 2015

a. P400,000
b. P380,200
c. P150,000
d. P383,500
23. Inventory amount at December 31, 2015

a. P 385,900
b. P1,055,183
c. P 352,500
d. P1,022,483
24. Which of the following audit procedures would provide the least reliable evidence that the
client has legal title to inventories?
a. Confirmation of inventories at locations outside the clients facilities
b. Observation of physical inventory counts
c. Examination of paid vendors invoices
d. Analytical review of inventory balances compared to purchasing and sales activities
25. An auditor generally tests physical security controls over inventory by

a. Test counts and cutoff procedures
b. Examination and reconciliation
c. Inquiry and observation
d. Inspection and recomputation
PROBLEM NO. 6
In 2010, Hawks Corporation acquired a silver mine in bengue. Because the mine is located deep
in the Benguet mountains, Hawks was able to acquire the mine for the low price of P50,000. In
2011, Hawks constructed a road to the silver mine costing P5,000,000. Improvement to the mine
made in 2011 cost P750,000. Because of the improvents to the mine surrounding land, it is
estimated that the mine can be sold for P600,000 when the mining activities are complete.
363
During 2012, 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 2010, geologists estimated 4 million tons of silver ore could be removed from the
mine for refining. During 2013, the first year of operations, only 5,000 tons of silver ore were
removed from the mine. However, in 2014, workers mined 1 million tons of silver. During the
same yeaer, geologists discovered that the mine contained 3 millio tons of silver ore in addition to
the original 4 million tons. Improvements of P275,000 were made to the mine early in 2014 to
facilitate the removal of the additional silver. Early in 2014, an additional building was constructed
at a cost of P225,000 to the house the additional workers needed to excavate the added silver. This
building is not expected to have any residual value.
In 2015, 2.5 million tons of silver were mined and costs of P1,100,000 wew 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)
a. P6,300
b. P7,250
c. P6,500
d. P5,550

a. P1,300,000
b. P780,000
c. P1,820,000
d. P870,000
28. Depreciation for 2014

a. P250,000
b. P180,000
c. P490,000
d. P210,000

a. P1,950,000
b. P2,425,000
c. P2,150,000
d. P2,275,000
30. Depreciation for 2015

a. P525,000
b. P1,225,000
c. P625,000
d. P450,000
364
PROBLEM NO. 7
Perseverance Corporation was authorized at ehe beginning of 2013 with 300,000 authorized shares
of P100, par value ordinary shares. At December 31, 2013, the shareholders equity section of
Perseverance was as follows:
Share capital, par value P100 per share;
authorized 300,000 shares; issued 30,000
shares
P3,000,000
Retained earnings _450,000
On June 15, 2014, Perseverance issued 50,000 ordinary shares for P6,000,000. A 5% share
dividend was declared on September 30, 2014 and issued on November 10, 2014 to shareholders
of record on October 31, 2014. Market value of ordinary share was p110 per share on declaration
date. The profit of Perseverance for the year ended December 31, 2014 was P475,000.
During 2015, Perseverance had the following transactions;
Mar. 1 Perseverance reacquired 3,000 shares of it ordinary shares for P95 per
share.
May 31 Perseverance sold 1,500 treasury shares for P120 per share.
Aug. 10 Issued to shareholders one right for each share held to purchase two
additional ordinary shares for P125 per share. The rights expire on
December 31, 2015.
Sep. 15 25,000 rights were exercised when the marker value of ordinary share was
P130 per share.
Oct. 31 40,000 rights were excercised when the market value of the ordinary share
was P140 per share.
Dec. 10 Perseverance declared a cas dividend of P2 per share payable on January 5,

2016 to shareholders of record on December 31, 2015.
365
Dec. 20 Perseverance retired 1,000 treasury shares and reverted them to an unissued
basis. On this date, the market value of the ordinary share was P150 per
share.
Dec. 31 Profit for 2015 was P500,000.
Questions:
Based on the above and the result of your audit, determine the following as of December 31, 2015:
31. Share capital
a. P21,400,000
b. P21,300,000
c. P14,800,000
d. P21,250,000
32. Share premium

a. P4,627,500
b. P3,007,500
c. P4,632,500
d. P4,592,500
33. Total retained earnings

a. P600,000
b. P565,000
c. P557,000
d. P560,000
34. Total equity

a. P26,397,500
b. P25,932,500
c. P26,492,500
d. P26,445,000
35. An auditor usually obtains evidence of shareholders equity transactions by reviewing the
entitys
a. Canceled stock ceertificates.
b. Transfer agents records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
PROBLEM NO. 8
Your firm has been engaged to examine the financial statements of Ten Corporation for the year
2015. The bookkeeper who maintains the financial records has prepared all the unaudited financial
statements for the corporation. The client provides you with the information below.
366
Ten Corporation
December 31, 2015
Assets Liabilities
Current assets P1,881,100 Current liabililities P 962,400
Other assets 5,171,400 Long-term liabilities 1,439,500
________ Capital 4,650,600
P7,052,500 P7,052,500
An analysis of current assets discloses the following:

Cash (restristed in the amount of
P400,000 for plant expansion)
P 571,000
Investment if land 185,000
Accounts receivable less allowance of

P30,000
480,000
Inventories 645,100
P1,881,100
Other assets include:

Prepaid expenses P 47,400
Plant and equipment less accumulated

depreciation of P1,430,000
4,130,000
Cash surrender value of life insurance

policy
84,000
Unamortized bond discount 49,500
Notes receivable (short term) 162,300
Goodwill 252,000
Land 446,200
P5,171,400
367
Current liabilities include:
Accounts payable P510,000
Notes payable (due 2017) 157,400
Income tax payable 145,000
Share premium reserve 150,000
P962,400
Long-term liabilities include:
Unearned revenue P 489,500
Dividends payable 200,000
8% bonds payable (due May 1,

2017) 750,000
P1,439,500
Capital includes:
Retained earnings P2,810,600
Share capital, par value P10,

authorized 200,000 shares, 184,000
shares issued 1,840,000
P4,650,600
The supplementary information below is also provided:

a. On May 1, 2015, the company issued at 93.4, P750,000 of bonds to finance plant
expansion. The long term bond agreement provided for the annual payment of the interest
every May 1. The existing plant was pledged as security for the loan. Use straight-line
method for discount amortization.
b. The bookkeeper made the following mistakes:
1. In 2013, the ending inventory was overstated by P183,000. The ending inventories for
2014 and 2015 were correctly computed.
368
2. In 2015, accrued wages in the amount of P275,000 were omitted from the balance
sheet and these expenses were not charged on the income statement.
3. In 2015, a gain of P175,000 (net of tax) on the sale of certain plant assets was
credited directly to retained earnings.
c. You learned on January 28, 2016, prior to completion of the audit, of heavy damage
because recent fire to one of the entitys two plants; the loss will not be reimbursed by
insurance. The plant has a carrying amount of P1,200,000 on the date of fire.
Questions:
Based on the above and the result of the audit, answer the following:
36. The adjusted current assets as of December 31, 2015 is
a. P1,296,100
b. P1,505,800
c. P1,690,800
d. P1,553,200
37. The adjusted current liabilities as of Decemeber 31, 2015 is

a. P1,619,500
b. P1,130,000
c. P1,659,500
d. P1,419,500
38. The adjusted noncurrent liabilities as of Decemeber 31, 2015 is

a. P907,400
b. P864,500
c. P857,900
d. P1,554,00
39. The adjusted equity as of December 31, 2015 is

a. P4,525,600
b. P4,519,000
c. P4,329,000
d. P4,479,000
40. An auditor passes on several errors discovered during the audit. Which of the following
represents the best reason for the auditor not requesting that the adjustments be made by
management?
a. Management has properly disclosed the extent of the errors in the fottnotes to the
consolidated financial statements of the year under audit.
b. The attorneys response to audit inquiry includes the statement that counsel is
unaware of any errors and can make no such estimates.
c. The auditor is not required to discover all material errors in the financial statements
under the concept of reasonable assurance.
369
d. The errors are not material in aggregate after considering the reversing, effects of
passed entries from previous periods.
PROBLEM NO. 9
The following trial balance related to Imagine Corporation at 31 March 2015:
P000 P000
Debit Credit
Closing inventories 31 March 20 (note (i)) 18,900
Land and building at valuation (note (iii)) 113, 400
Plant and equipment cost (note (iii)) 64,800
Accumulated depreciation 1 April 2014 plant 30,240

and equipment
Investment property valuation 1 April 2014 28,800

(note (iii))
Trade receivables 38,700
Cash in Bank 1,620
Trade payables 21,240
Ordinary shares of P0.25 each 36,000
10% Redeemable preference shares of P1 each 18,000
Revaluation reserve (note (iii) 37,800
Retained earnings 1 April 2014 31,500
Profit or loss summary _______
88,200
264,600 264,600
The following notes are relevant:

(i) At 31 march 2015, an inventory list based on a physical count had a total cost of
P18.9 million. Some damaged goods that had cost P1.44 million were included in
370
there. The realizable value of these goods is expected to be P1.71 million, provided a
remedial work costing P0.81 million is done before they could be sold.
(ii) Included in the computation of profit or loss are finance costs consisting of interest on
overdraft, the full years preference dividend and an ordinary dividend of P0.04 per
share that was paid in September 2014.
(iii) Non-current assets:
Land and building
A professional valuer submitter a report on 1 April 2014, revaluing the land at P27
million and building at P86.4 million. The directors decided to incorporate these
values in the accounts. On that date the land and building had a carrying value of
P75.6 million and the building had a remaining life of 15 years.
Charge depreciation on a straight-line basis. Imagine does not make a transfer to

retained earnings in respect of excess depreciation.
Plant
All plant is depreciated at 12.5% on the reducing balance basis.
Investment property
On 31 March 2015 the investment property was revalued at P24.3 million. Imagine
uses the fair value model.
Questions:
Based on the above and the result of your audit, answer the following: (Ignore income taxes).
41. The adjusted profit or loss for the year ended 31 March 2015 is
a. P78,840,000
b. P79,380,000
c. P73,080,000
d. P80,640,000
42. The comprehensive income for the year ended 31 March 2015 is
a. P117,180,000
b. P79,380,000
c. P118,440,000
d. P116,640,000
43. The total assets as of 31 March 2015 is

a. P219,240,000
b. P219,780,000
c. P217,620,000
d. P218,160,000
371
44. The total liabilities as of 31 March 2015 is
a. P22,860,000
b. P40,860,000
c. P39,240,000
d. P21,240,000
45. The retained earnings balance as of 31 March 2015 is

a. P107,100,000
b. P98,820,000
c. P104,580,000
d. P105,120,000
PROBLEM NO. 10
Snow White Company began operations on January 1, 2015. The accountant prepared the
following:
Statement of Financial Position (Cash Basis)
January 1, 2015
Assets Liabilities and equity

Cash P 49,600 Accounts payable P 28,000
Parts inventory 24,000 Share capital, P100
par 265,600
Equipment 220,000
Total liabilities and
Total assets P293,600 equity P293,600
The company has developed plans to expand its business is in the process of negotiationg a bank
loan to finance the expansion. The bank is requesting of negotiating 2015 financial statements
prepared on the accrual basis of accounting. As the companys external auditor, you were called
upon to assist in preparing the financial statements. During the course of your engagement, you
obtained the following information:
Transactions for 2015

Cash sales P232,000
Collections from credit customers 80,000
Payments on account for parts 80,800
Wages paid to employees 124,000
Payments to the utility company 22,000
372
Uncollected customers bills totaled P69,800 at December 31, 2015.
On March 1, 2015, a supplier advanced the company P40,000 on a 1-year, 12% note
payable with semiannual interest payments to be made on September 1, 2015 and at
maturity on March 1, 2016.
Unpaid bills to suppliers totaled P11,200 at December 31, 2015.
Parts costing P8,000 were on hand at year-end.
Wages owed at year-end were P5,600.
Utility expense of P1,950 was unpaid at year-end.
The P18,000 insurance premium was paid for a 1-year policy effective February 1, 2015.
The rent of P3,000 was paid on the first day of every month.
The companys equipment, purchased at the time the company was founded, should be
depreciated over its useful life of 10 years using straight-line depreciation with no
residual value.
The effective tax rate is 40%. No taxes have been paid.
Questions:
Baseed on the above and the result of your engagement, you are asked to provide the following
information under the accrual basis:
46. The net income for 2015 was

a. P69,750
b. P55,050
c. P46,380
d. P41,850
47. The total current assets at year-end equaled

a. P220,000
b. P198,000
c. P197,700
d. P196,200
48. The total assets at year-end equaled

a. P417,700
b. P395,700
c. P307,450
d. P197,700
49. The total equity at year-end was

a. P395,700
b. P335,350
c. P307,450
d. P265,600
50. The total current liabilities at year-end equaled

a. P90,650
373
b. P88,250
c. P60,350
d. P48,250
XI SIMULATED BOARD EXAMINATIONS 2

LETTER ANSWERS
ANSWERS:
1. B 11. A 21. B 31. B 41. A
2. A 12. B 22. A 32. C 42. D
3. C 13. B 23. A 33. D 43. A
4. C 14. D 24. D 34. D 44. B
5. D 15. A 25. C 35. D 45. C
6. B 16. D 26. C 36. B 46. D
7. C 17. D 27. B 37. C 47. C
8. A 18. D 28. D 38. B 48. B
9. D 19. A 29. B 39. D 49. C
10. B 20. C 30. A 40. D 50. B
374

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I - AUDIT OF CASH AND CASH EQUIVALENTS

PROBLEM NO. 1 - Composition of Cash and Cash Equivalents

The following data pertain to PRTC Corporation at December 31, 2015:

Current account at Metrobank P

Current account at Metrobank 1,800,000

Payroll account 500,000

Foreign bank account (in equivalent pesos) 800,000

Travelers check 50,000

Money order 30,000

Petty cash fund - currency 4,000

Items not included:

Current account at Allied Bank (100,000) Short term borrowing

IOU from employees 10,000 Trade and other receivables

PROBLEM NO.2 - Computation of adjusted cash and cash equivalents

Cash on hand P 372,000

Petty cash fund 10,000

BPI current account 950,000

Security Bank current account No.01 1,280,000

Security Bank current account No.02 (40,000)

PNB time deposit 300,000

Cash on hand includes the following items:

Employees' vales 1,600

Currency in an envelope marked "collections for charity" with names 1,200

Unreplenished petty cash vouchers 800

Check drawn by PRTC Corporation, payable to the petty cashier 4,600

Cash on hand, per trial balance 372,000

(a) NSF check (60,000)

(b) Postdated check received (30,000)

Cash on hand, as adjusted 282,000

Adjusting journal entries

Cash on hand 60,000

Accounts receivable 30,000

Cash on hand 30,000

Requirement No. 1.b

Employees' vales (1,600)

Currency in envelope marked "collections for charity" (1,200)

Unreplenished petty cash vouchers (800)

Adjusting journal entries:

Requirement No. 1.c

BPI current account, per trial balance 950,000

BPI current account, as adjusted 1,086,000

Adjusting journal entries:

Accounts payable 50,000

Accounts receivable 86,000

Cash on hand 86,000

Requirement No. 1.d

Cash on hand (see no. 1.a) 282,000

BPI current account (see no. 1.c) 1,086,000

Security Bank current account no. 1 1,280,000

Security Bank current account no. 2 (40,000) 1,240,000

PNB time deposit (cash equivalent) 300,000

Cash and cash equivalents, as adjusted 2,914,700

Other items found inside the cash box:

Bills and coins

Denomination Quantity Amount Total

1.00 410 410

0.50 324 162

Date Drawer Amount

Dec. 30 Ms. Jessie 2,400

Date Account Amount

Total cash and cash items counted 112,628

Petty cash 20,000

Undeposited collections - without OR 28,000 AJE 4