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1. One is using periodic inventory system. For the year, its total purchases amounted to
P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is
80% of its beginning inventory. One’s cost of sale is
a. P 250,000 b. P 251,250 c. P 249,000 d. P 248,750
2. Two’s purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30.
Freight is P500, FOB shipping point collect. The net purchase amounts under net
method is
a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500
4. The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination
collect, P200. If the account is paid 15 days after the invoice date, the net payment
should be
a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800
6. Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination
collect. The merchandise was sold at 120% of cost. The gross profit is
a. P 1,000 b. P 1,040 c. P 6,000 d. P 6,240
7. The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is
P176. The sale is at mark-up of 10%. The gross profit is
a. P 117.60 b. P 88.24 c. P 115.25 d. P 100.00
8. The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If
the account is paid on the 25th day from the invoice date, the total payment would be
a. P 294,000 b. P 299,700 c. P 294,300 d. P 300,300
9. Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The
journal entry in both books of Four and Five would be
Books of Four Books of Five
a. Freight-out 200 Freight-in 200
Cash 200 Accounts payable 200
b. Freight-in 200 No entry
Accounts receivable 200
c. Freight-in 200 No entry
Cash 200
d. Freight-in 200 Freight-out 200
Cash 200 Accounts receivable 200
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10. Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting
to P10,000 was returned due to defect. The amount to be collected by Six is
a. P 205,200 b. P 203,750 c. P 204,000 d. P 195,200
11. Amar Company received P96,000 on April 1, 2002 for one year’s rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2002
adjusting entry is
a. Debit rent revenue and credit unearned rent revenue, P24,000.
b. Debit rent revenue and credit unearned rent revenue, P72,000.
c. Debit unearned rent revenue and credit rent revenue, P24,000.
d. Debit unearned rent revenue and credit rent revenue, P72,000.
12. Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and
recorded the entire amount as insurance expense. The December 31, 2002 adjusting
entry is
a. Debit insurance expense and credit prepaid insurance, P21,000.
b. Debit insurance expense and credit prepaid insurance, P51,000.
c. Debit prepaid insurance and credit insurance expense, P21,000.
d. Debit prepaid insurance and credit insurance expense, P51,000.
13. Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month,
9% note with a face value of P480,000. The December 31, 2002 adjusting entry is
a. Debit interest expense and credit interest payable, P7,200.
b. Debit interest expense and credit interest payable, P10,800.
c. Debit interest expense and credit cash, P7,200.
d. Debit interest expense and credit interest payable, P43,200.
14. On December 31, 2002, Asilo Company’s bookkeeper made an adjusting entry debiting
supplies expense and credit supplies inventory for P12,600. The supplies inventory
accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002
balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was
made during the month, on account. The entry for that purchase was
a. Debit supplies inventory and credit cash, P8,700.
b. Debit supplies expense and credit accounts payable, P8,700.
c. Debit supplies inventory and credit accounts payable, P8,700.
d. Debit supplies inventory and credit accounts payable, P16,500.
15. Astillo Company loaned P300,000 to another company on December 1, 2002 and
received a 3-month, 15%, interest-bearing note with a face value of P300,000. What
adjusting entry should Astillo Company make on December 31, 2002?
a. Debit interest receivable and credit interest income, P7,500.
b. Debit cash and credit interest income, P3,750.
c. Debit interest receivable and credit interest income, P3,750.
d. Debit cash and credit interest receivable, P7,500.
.
16. The supplies inventory account balance at the beginning of the period was P66,000.
Supplies totaling P128,250 were purchased during the period and debited to supplies
inventory. A physical count shows P38,250 of supplies inventory at the end of the
period. The year-end adjusting entry is
a. Debit supplies inventory and credit supplies expense, P90,000.
b. Debit supplies expense and credit supplies inventory, P128,250.
c. Debit supplies inventory and credit supplies expense, P156,000.
d. Debit supplies expense and credit supplies inventory, P156,000.
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17. At the end of 2002, Avila Company made four adjusting entries for the following items:
(1) depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as
prepaid insurance); (3) interest payable, P9,000; and (4) rental revenue receivable,
P10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries
that may be reversed is/are
a. Entry 1 c. Entries 3 and 4
b. Entry 4 d. Entries 2, 3, and 4
18. Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at
December 31, 2002 before performing an aging of accounts receivable. As a result of
the aging, Bagaipo Company determined that an estimated P20,000 of the December
31, 2002 accounts receivable would prove uncollectible. The adjusting entry at
December 31, 2002 would be
a. Doubtful accounts expense 8,000
Allowance for doubtful accounts 8,000
b. Doubtful accounts expense 20,000
Accounts receivable 20,000
c. Allowance for doubtful accounts 8,000
Doubtful accounts expense 8,000
d. Doubtful accounts expense 8,000
Interest revenue 8,000
19. Assuming that the company does not reverse the adjusting entries, what should be
made on April 1, 200 when the annual interest payment is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.
20. Using the data of No. 19, but assuming that the company does reverse its adjusting
entries, what entry should be made on April 1, 2003 when the annual interest payment
is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.
Answer:
1. b 2. b 3. a 4. c 5. b 6. a 7. d 8. d 9. c 10. a
11.a 12.d 13.a 14.c 15.c 16.d 17.c 18.a 19.c 20.d
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Problem 1
The following is the post-closing trial balance of Abagon Shop dated February 1, 2006:
Debit Credit
Cash 120,000
Accounts Receivable 280,000
Allowance for doubtful accounts 2,800
Unused shop supplies 800
Shop Equipment 240,000
Accumulated depreciation - shop 48,000
equipment
Accounts payable 88,800
Notes payable 100,000
Accrued interest payable 1,200
Abagon, Capital 400,000
Total 640,800 640,800
For the month of February, the following are the transactions of Abagon Shop.
1. Abagon withdrew P100,000 cash from the business for her personal use.
2. Paid P12,000 insurance premium.
3. Paid P24,000 rent.
4. Total service rendered to various customers, P140,000, 40% of total sales are on cash
basis and the balance on open account.
5. Received promissory note from customer to replace P40,000 accounts receivable.
6. Collected in cash P164,000 of accounts receivable.
7. Paid the notes payable of P100,000 plus the P2,400 interest.
8. Purchased P2,400 shop supplies on cash basis.
9. Paid salaries, P24,000.
At the end of the month, the following information are available to effect adjustments.
a. The insurance in number 2 for P12,000 is applicable for six months starting February.
b. The rent of P24,000 paid in number 3 is for 3 months, starting February.
c. The note receivable is number 5 is earning 12% interest per year. The note is dated
February 1, and is due on April 30.
d. Bad debts expense is estimated at 2% of accounts receivable balance.
e. The annual depreciation is P48,000.
f. The unused supplies balance is P1,000.
Questions
1. Cash at end of February is:
a. P 103,200 b. P 85,200 c. P 75,200 d. P 72,800
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5. Accounts Payable at end of February is
a. P 128,800 b. P 88,800 c. P 86,400 d. P 48,800
Solution
1 Abagon, drawing 100,000
Cash 100,000
2 Insurance expense 12,000
Cash 12,000
3 Rent expense 24,000
Cash 24,000
4 Cash 56,000
Accounts receivable 84,000
Revenue 140,000
5 Notes receivable 40,000
Accounts receivable 40,000
6 Cash 164,000
Accounts receivable 164,000
7 Notes payable 100,000
Interest expense 2,400
Cash 102,400
8 Supplies expense 2,400
Cash 2,400
9 Salaries 24,000
Cash 24,000
Adjusting Entry:
5
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
75,20
CASH 0 75,200
ACCNTS RECEIV 160,000 160,000
ALLOW. FOR BD 2,800 400 3,200
NOTES RECEIV 40,000 40,000
UNUSED SUPPLIES 800 1,000 800 1,000
SHOP EQUIPMENT 240,000 240,000
ACCUM. DEPN 48,000 4,000 52,000
ACCOUNTS PAY 88,800 88,800
NOTES PAYABLE - -
ACC. INT. PAY 1,200 1,200 -
ABAGON, DRAWING 100,000 100,000
ABAGON, CAPITAL 400,000 400,000
REVENUE 140,000 140,000
INSURANCE EXP 12,000 10,000 2,000
RENT EXPENSE 24,000 16,000 8,000
SUPPLIES EXP 2,400 800 1,000 2,200
SALARIES 24,000 24,000
INTEREST EXP 2,400 _______ 1,200 1,200
680,800 680,800
PREPAID INS 10,000 10,000
PREPAID RENT 16,000 16,000
INTEREST RECEI 400 400
INTEREST INC 400 400
BAD DEBTS 400 400
DEPRECIATION 4,000 _______ 4,000 ________
33,800 33,800 41,800 140,400
NET INCOME 98,600 ________ _______ 98,600
140,400 140,400 642,600 642,600
Answer:
1. C 2. A 3. B 4. A 5. B 5. D 8. A 9. A 9. C 10. B
Problem 2
The following selected transactions were completed during Year 1 of operations by Vicar
Corporation:
a. Sold of its 20,000 shares of its own common stock, par P1 per share, for P15 per
share and received cash in full.
c. Purchased equipment for use in operating the business at a net cash cost of
P164,000; paid in full.
d. Purchased merchandise for resale at cash cost of P140,000; paid cash. Assume a
periodic inventory system; therefore, debit Purchases.
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e. Purchased merchandise for resale on credit terms of 2/10, n/60. The merchandise
will cost P9,800 if paid within 10 days; after 10 days, the payment will be P10,000. The
company always takes the discount; therefore, such purchased are recorded at net of
the discount.
f. Sold merchandise for P180,000; collected P165,000 cash, and the balance is due in
one month.
h. Paid ¾ of the balance for the merchandise purchased in (e) within 10 days; the
balance remains unpaid.
i. Collected 50% of the balance due on the sale in (f); the remaining balance is
uncollected.
j. Paid cash for an insurance premium, P600; the premium was for two years’ coverage
(debit Prepaid insurance).
k. Purchased a tract of land for a future building for company operations, P63,000 cash.
l. Paid damages to a customer who was injured on the company premises, P10,000
cash.
Questions
Using the unadjusted trial balance, answer the following:
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2. Sales balance is:
a. P 180,000 b. P 160,000 c. P 100,000 d. P 80,000
3. Purchases balance is:
a. P 149,800 b. P 149,600 c. P 150,000 d. P 150,200
Cash 157,400
Accounts receivable 7,500
Prepaid insurance 600
Land 63,000
Equipment 164,000
Accounts payable 2,500
Notes payable 100,000
Common stock 20,000
Premium on capital stock 280,000
Sales 180,000
Purchases 149,800
Operating expenses 30,000
Purchase disc. lost 200
Loss on damages 10,000 _______
Total 582,500 582,500
ANSWER
1. b 2. d 3. a 4. d 5. b 6. b 7. c 8. d 9. b 10. a
11. a 12. b
Problem 3
8
The post-closing trial balance of the general ledger of Wilson Corporation at December 31,
20I, reflected the following:
The following transactions occurred during 20J in the order given (use the number at the
left to indicate the date):
1. Sales revenue at P30,000, of which P10,000 was on credit; cost provided by perpetual
inventory record, P19,500.
2. Collected P17,000 on accounts receivable.
3. Paid income taxes payable (20I), P4,000.
4. Purchased merchandise, P40,000, of which P8,000 was on credit.
5. Paid accounts payable, P6,000.
6. Sales revenue of P72,000 (in cash); cost, P46,800.
7. Paid operating expenses, P19,000.
8. On January 1, 20J, sold and issued 1,000 shares of common stock, par P1, for P1,000
cash.
9. Purchased merchandise, P100,000, of which P27,000 was on credit.
10. Sales revenue of P98,000, of which P30,000 was on credit; cost P63,700.
11. Collected cash on accounts receivable, P26,000.
5. Paid cash on accounts payable, P28,000.
6. Paid various operating expenses in cash, P18,000.
Assume a bad debt rate of ½% of credit sales for the period and a 32% income tax rate. At
December 31, 20J, accrued wages were P300. Use straight-line depreciation.
Questions
1. Cash at December 31, 20J is:
a. P 51,000 b. P 50,000 c. P 45,000 d. P 41,000
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3. Inventory at December 31, 20J is:
a. P 64,500 b. P 45,000 c. P 35,000 d. P 32,500
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(12) Accounts payable 28,000
Cash 28,000
(13) Operating expenses 18,000
Cash 18,000
Adjusting Entry:
(a) Operating expenses (ins. Exp) 540
Prepaid insurance 540
(P900 x 12/20)
(b) Operating expenses (depreciation) 2,500
Accumulated depreciation 2,500
(c) Operating expenses (bad debts) 200
Allowance for bad debts 200
(d) Operating expenses 300
Wages payable 300
FINANCIAL STATEMENTS
Cash 51,000
Accounts receivable 18,000
Allowance for bad debts (1,200)
Inventory 45,000
Prepaid insurance 360
Equipment 50,000
Accumulated depreciation (25,000)
Total Assets 138,160
Answer:
1. a 2. b 3. b 4. a 5. d 6. b 7. d 8. b 9. b 10.c 11.b
Problem 4
The account of PEQUIT COMPANY as at December 1, 2006 are listed below:
Cash 214,000
Accounts receivable 338,000
Marketable securities 426,000
Office supplies 31,000
Prepaid insurance 48,000
Land 370,000
Building 900,000
Accum. depreciation – bldg 250,000
Equipment 800,000
Accum. depreciation – equip. 200,000
Accounts payable 172,000
Mortgage payable 1,200,000
Capital _______ 1,305,000
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3,127,000 3,127,000
Additional information
1. Salaries in the amount of P73,000 have accrued on December 31.
2. Insurance coverage with premium of P2,000 has expired at month-end.
3. Depreciation on the building and on the equipment for the month amounted to
P3,000 and P4,500, respectively.
4. Office supplies on hand at month-end amounted to P7,000.
5. A count of the inventory amounted to P453,000 on December 31, 2006.
Questions
1. Cash balance at December 31, 2006 is:
a. P 773,750 b. P 772,700 c. P 748,450 d. P 727,700
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7. Accounts payable at December 31, 2006 is:
a. P 289,000 b. P 279,000 c. P 277,000 d. P 257,000
Solution
13
1. Salaries expense 73,000
Accrued salaries 73,000
3. Depreciation 7,500
Accum. Dep’n – bldg 3,000
Accum. Dep’n – equip 4,500
5. Inventory – BS 453,000
Inventory – IS 453,000
ANSWER:
1. C 2. C 3. B 4. A 5. C 6. A 7. C 8. B 9. D 10. C
11. A 12. D 13. C 14. B 15. A
Problem 5
The Righter Shoe Store Company prepares monthly financial statements for its bank. The
November 30 and December 31, 2006, trial balances contained the following information:
Nov. 30 Dec. 31
Dr. Cr. Dr. Cr.
Supplies 1,000 3,000
Prepaid insurance 6,000 4,250
Wages payable 10,000 15,000
Unearned rent revenue 2,000 1,000
Questions
1. What was the cost of supplies purchased during December?
a. P 1,000 b. P 2,000 c. P 3,000 d. P 4,000
2. What was the adjusting entry recorded at the end of December for prepaid
insurance?
a. Prepaid insurance 4,250
Insurance expense 4,250
b. Insurance expense 4,250
Prepaid insurance 4,250
c. Insurance expense 1,750
Prepaid insurance 1,750
d. No adjusting entry
3. What was the adjusting entry recorded at the end of December for
accrued wages?
a. Wages expense 15,000
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Wages payable 15,000
b. Wages expense 10,000
Wages payable 10,000
c. Wages expense 5,000
Wages payable 5,000
d. No adjusting entry
5. What adjusting entry was recorded at the end of December for unearned
rent?
a. Unearned rent rev. 3,000
Rent revenue 3,000
b. Rent revenue 2,000
Unearned rent rev. 2,000
c. Unearned rent revenue 1,000
Rent revenue 1,000
d. Unearned rent revenue 2,000
Rent revenue 2,000
Solution
1. D
Supplies on Hand
Beg. Bal 1,000 Adjustment 2,000
Purchases 4,000 *
Ending bal. 3,000
* squeezed figure
2. C 3. A 4. A 5. C
Problem 6
The trial balance of ANN CO., prior to the closing of its account for the fiscal year ended
September 30, 2006 follows:
Cash P22,500
Accounts receivable 93,600
Allowance for doubtful accounts P 3,190
Note receivable 15,500
Merchandise inventory, 9/30/02 56,890
Furniture and equipment 61,800
Accumulated depreciation 18,750
Goodwill 30,000
Accounts payable 53,600
Notes payable 10,000
Capital Stock 100,000
Retained Earnings 55,250
Sales 372,000
Sales return and allowances 4,760
Purchases 215,930
Purchase return and allowances 3,650
Advertising 9,610
Sales salaries 28,850
Commission expense 15,200
Miscellaneous expense 2,990
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Rent expense 13,000
Office salaries 19,720
Light and Water 1,500
Insurance expense 1,080
Taxes and licenses 4,780
General expense 16,340
Interest expense 4,120
Interest income 910
Your examination of the company’s account has the need for adjustments based on the
following items:
d. A physical inventory of merchandise taken at the end of the fiscal year 2006
amounted to P60,120.
j. Rent expense account considered of rent for the store and office space for
thirteen months starting August 1, 2006.
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Accounts receivable 500
b. Cash 500
General expenses 500
c. General Expenses 500
Cash 500
d. No adjustment
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8. The adjusting entry on item H is
a. Accrued Salaries Expense 5,000
Sales salaries 5,000
b. Accrued salaries exp. 5,000
Office salaries 5,000
c. Office salaries 5,000
Depreciation expense 5,000
d. Sales salaries 5,000
Accrued salaries expense 5,000
11. Cash
a. P24,000 b. P21,000 c. P20,500 d. P20,000
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18. Prepaid insurance
a. P630 b. P450 c. P1,080 d. P600
Answer:
1. C 2. C 3. B 4. A 5. A 6. D 7. A 8. D 9. D 10. C
11. C 12. B 13. D 14. B 15. A 16. A 17. D 18. B 19. A
Problem 7
Selected pre-adjustment account balances and adjusting information of NAPPY COMPANY for
the year ended December 31, 2006, are as follows:
Adjusting information:
1. Cost of inventory in the possession of consignee as of December 31, 2006, was not
included in the ending inventory balance, P33,600.
2. After preparing an analysis of aged accounts receivable, a decision was made to increase
the allowance for bad debts to a percentage of the ending account receivable balance to
3%. Accounts totaling P7,480 were written off as uncollectible during the year.
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4. Sales commission for the last day of the year had not been accrued. Total sales for the
day, P3,600. Average sales commission as a percent of sales is 3%.
5. No accrual has been made for a freight bill received on January 3, 2007, for goods
received on December 29, 2006, P800.
6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was
recorded as “prepaid advertising” and should be amortized over a 6-month period. No
amortization was recorded.
7. Freight charges paid on sold merchandise and not passed to the buyer were netted
against sales. Freight charges on sales during 2006 is P4,200.
9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800
on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage
value and the SLM is used. Depreciation is calculated to the nearest month.)
10. A “real” account is debited upon the receipt of supplies. Supplies on hand at year-end is
P1,600.
Questions
1. Net Sales is
a. P 499,200 b. P 489,300 c. P 488,500 d. P 487,320
3. Freight-in is
a. P 6,325 b. P 5,200 c. P 5,000 d. P 4,125
4. Inventory – 12/31/02 is
a. P 54,700 b. P 54,150 c. P 53,600 d. P 52,200
5. Cost of sales is
a. P 265,440 b. P 205,350 c. P 204,495 d. P 114,795
7. Advertising expense is
a. P 24,696 b. P 16,800 c. P 16,750 d. P 16,606
8. Depreciation expense is
a. P 14,600 b. P 12,500 c. P 12,000 d. P 11,550
9. Supplies expense is
a. P 670 b. P 580 c. P 560 d. P 480
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10. Doubtful accounts expense is
a. P 7,500 b. P 7,460 c. P 7,300 d. P 7,200
21
Supplies expense 580 580
141,984
ANSWER:
1. D 2. C 3. A 4. B 5. C 6. A 7. D 8. D 9. B 10. B
11. B 12. C 13. C
Problem 8
Presented below are unaudited balances of selected accounts of Baluyot Company as at
December 31, 2006 – its first year of operation. During the course of your audit of
Baluyot’s books you obtained additional information affecting these accounts:
Debit Credit
Cash 500,000
Accounts receivable 1,300,000
Allowance for bad debts 8,000
Sales (net) 6,750,000
Accounts payable 600,000
Purchases (net) 4,350,000
Cars and trucks 1,200,000
Machinery and equipment 950,000
Accumulated depreciation 95,000
Additional information:
a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors
amounting to P300,000. A number of checks amounting to P150,000 were mailed on
January 3, 2007.
b. On December 28, 2006, Baluyot purchased and received goods amounting to P100,000,
terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net
amounts. This particular invoice was recorded and paid on January 4, 2007.
c. On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed
at P80,000 on December 3, 2006. The goods were returned on December 30, 2006.
The supplier’s credit memo was received and recorded on January 5, 2007.
d. Goods amounting to P50,000 were invoiced for the account of Palmes Company and
recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods
were shipped to Palmes on December 30, 2006.
e. The bank returned on December 29, 2006, a customer check for P5,000 marked “No
Sufficient Fund” but no entry was made.
f. Baluyot estimates that allowance for uncollectible accounts should be one and one-half
percent (1½%) of the accounts receivable balance as of year-end. No provision has yet
been made for 2006.
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g. All the cars and trucks were acquired on May 1, 2006 at a total cost of P1,200,000.
Baluyot estimates the useful life of the cars and trucks at five-years and depreciates
these assets based on 150% declining balance. As a policy, depreciation is computed to
the nearest month and rounded-off to the nearest peso. No depreciation has been
recorded for cars and trucks as at December 31, 2006.
Questions
1. The adjusted amount of Cash is:
a. P 650,000 b. P 645,000 c. P 500,000 d. P 495,000
6. The adjusted amount of 2006 Depreciation Expense – Machinery and Equipment is:
a. P 95,550 b. P 95,500 c. P 95,417 d. P 95,000
Problem 9
The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the
fiscal year-ended September 30, 2006 follows:
DEBIT CREDIT
Cash 225,000
Accounts receivable 936,000
Allowance for doubtful accounts 31,900
Notes receivable 155,000
Merchandise inventory, Sept. 30, 2005 568,900
Furniture and Equipment 618,000
Acc. Depreciation – Furniture & Equipment 187,500
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Goodwill 300,000
Accounts payable 536,000
Notes payable 100,000
Capital stock 1,000,000
Retained earnings 552,500
Sales 3,728,200
Sales returns and allowances 47,600
Purchases 2,159,300
Purchase returns and allowances 36,500
Advertising 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expenses 29,900
Rent expense 130,000
Office salaries 197,200
Light and water 15,000
Insurance expense 10,800
Taxes and licenses 47,800
Miscellaneous general expenses 163,400
Interest expense 41,200
Interest income ________ 9,100
6,181,700 6,181,700
Your examination of the company’s accounts had indicated the need for adjustments based
on the following information:
1. The Cash account include a customers’ check for P15,000 deposited on September 25,
2006, but returned by the bank on September 29, 2006 for lack of countersignature. No
entry was made by the company for the return of the check or for its redeposit on
October 5, 2006.
3. A physical inventory taken of the merchandise stock as of the end of the fiscal year
amounted to P601,200.
4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were
still in transit on September 30, 2006 was neither taken as a liability nor included in the
inventory on that date.
5. Goods received on consignment, still unsold, were included in the inventory at the
agreed selling price of P24,000.
7. On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000
on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited
to the Furniture and Equipment account.
8. Depreciation for the fiscal year 2005-2006 has not been recorded. Depreciation rate
being used is 10% annually.
24
9. An insurance policy was taken on the inventory and equipment on April 1, 2006 with the
annual premium of P10,800 paid on that date.
10. Rent expense account consisted of rent paid for stock and office space for thirteen (13)
months ending October 31, 2006.
11. The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the
bank on September 1, 2006.
12. The Goodwill account was set-up by a credit to Retained Earnings under a resolution of
the Board of Directors.
Questions
1. Cash for the fiscal year-ended September 30, 2006 is:
a. P 195,000 b. P 210,000 c. P 225,000 d. P 240,000
2. Accounts receivable for the fiscal year-ended September 30, 2006 is:
a. P 906,000 b. P 921,000 c. P 951,000 d. P 936,000
3. Allowance for doubtful accounts for the fiscal year-ended September 30, 2006 is:
a. P 15,650 b. P 46,800 c. P 45,300 d. P 47,550
4. Merchandise inventory for the fiscal year-ended September 30, 2006 is:
a. P 617,200 b. P 641,200 c. P 677,200 d. P 561,200
5. Book value of the Furniture and Equipment for the fiscal year-ended September 30,
2006 is:
a. P 360,200 b. P 372,200 c. P 375,200 d. P 489,800
7. Accounts payable for the fiscal year-ended September 30, 2006 is:
a. P 496,000 b. P 536,000 c. P 552,000 d. P 576,000
8. Net income for the fiscal year-ended September 30, 2006 is:
a. P 326,750 b. P 332,750 c. P 346,750 d. P 347,750
9. Retained earnings for the fiscal year-ended September 30, 2006 is:
a. P 252,500 b. P 600,250 c. P 885,250 d. P 900,250
10. Insurance expense for the fiscal year-ended September 30, 2006 is:
a. P 5,400 b. P 9,200 c. P 10,800 d. P 16,200
Solution
25
4. Purchases 40,000
Merchandise Inventory 40,000
Accounts Payable 40,000
Income Summary 40,000
TRANQUILAN CORPORATION
WORKING TRIAL BALANCE
September 30, 2003
26
Goodwill 300,000 300,000 -0-
AP 536,000 40,000 576,000
NP 100,000 100,000
CS 1,000,000 1,000,000
RE 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales R& A 47,600 47,600
Purchases 2,159,300 40,000 2,199,300
Purch R&A. 36,500 36,500
Adv 96,100 96,100
Sales sal 288,500 288,500
Com. exp 152,000 152,000
Misc.sell 29,900 29,900
Rent exp 130,000 10,000 120,000
Office sal 197,200 197,200
Light & W 15,000 15,000
Ins. exp 10,800 5,400 5,400
Tax & licen 47,800 47,800
Misc. Ge 163,400 163,400
Int. exp 41,200 3,000 38,200
Int inc 9,100 9,100
6,181,700 6,181,700
DA 15,650 15,650
Gain 6,000 6,000
Depren 64,300 64,300
Pre ins 5,400 5,400
Pre rent 10,000 10,000
Disc on NP 3,000 3,000
464,350 464,350 4,049,250 4,397,00 2,564,600 2,216,850
0
NET INC 347,750 347,750
4,397,000 4,397,000 2,564,600 2,564,600
ANSWER:
1. B 2. C 3. D 4. A 5. B 6. D 7. D 8. D 9. B 10. A
Problem 10
Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown
below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal
year.
TORTOR CORPORATION
Unadjusted Trial Balance
June 30, 2006
Cash 721,800
Trading Securities 200,000
Accounts receivable 2,128,000
Inventory, June 30, 2005 5,194,300
Invest. in associates (Equity Method) 1,200,000
Equipment 1,621,000
Prepaid expenses 116,200
Goodwill 500,000
Accounts payable 2,426,400
Accrued expenses 152,600
Accrued interest payable 226,000
Allowance for bad debts 36,100
Allowance for depreciation 450,700
Loans payable 2,500,000
Capital stock 3,000,000
27
Additional paid-in capital 260,000
Retained earnings 1,808,800
Sales 21,602,000
Interest income 140,000
Purchases 13,928,000
Salaries and wages 3,250,000
Rent, light and water 750,000
Advertising 400,000
Supplies 300,000
Taxes 250,000
Miscellaneous expenses 1,793,300
Interest expense 250,000 _________
32,602,600 32,602,600
1. The cash account included an NSF check returned by the bank on June 30, 2006, but
recorded as a cash reduction in July, 2006, P44,000, and a voucher for suppliers paid in
cash on June 27, 2006 but not entered in the books, P26,500.
2. Marketable Securities which cost P200,000 have a market value of P210,000. Long-
Term Investments have a market value of P1,250,000 as at balance sheet date.
3. The company has been providing an allowance for bad debts at 5% of the
outstanding customers’ balances. Uncollectible accounts were charged off against the
allowance during the year.
7. Salaries unpaid as of June 30, 2006, P13,000 were not taken up under accrued
expenses.
8. The Goodwill account was set-up with a credit to Retained Earnings on the basis of a
resolution of the Board of Directors.
9. A 10% cash dividend declared on June 15, 2006, payable on July 31, 2006, has not
been recorded.
10. The Board of Directors approved a resolution on June 25, 2006 appropriating out of
Retained Earnings the amount of P300,000 to meet possible future losses on inventories.
28
Questions
1. Cash for the fiscal year-ended June 30, 2006 is:
a. P 633,800 b. P 651,300 c. P 677,800 d. P 695,300
2. Marketable securities for the fiscal year-ended June 30, 2006 is:
a. P 0 b. P 190,000 c. P 200,000 d. P 210,000
3. Accounts receivable for the fiscal year-ended June 30, 2006 is:
a. P 2,172,000 b. P 2,128,000 c. P 2,100,000 d. P 2,084,000
4. Allowance for doubtful accounts for the fiscal year-ended June 30, 2006 is:
a. P 72,500 b. P 104,200 c. P 106,400 d. P 108,600
7. Accumulated depreciation for the fiscal year-ended June 30, 2006 is:
a. P 390,700 b. P 552,800 c. P 562,800 d. P 622,800
8. Retained earnings before net income for the fiscal year-ended June 30, 2006 is:
a. P 708,800 b. P 1,008,800 c. P 1,308,800 d. P 1,508,000
9. Retained earnings after net income for the fiscal year-ended June 30, 2006 is:
a. P 2,639,700 b. P 2,405,500 c. P 1,840,500 d. P 1,805,500
Solution
TORTOR CORPORATION
WORKING TRIAL BALANCE
June 30, 2006
29
payable
Capital stock 3,000,000 3,000,000
APIC 260,000 260,000
RE 1,808,800 500,000
300,000
300,000 708,800
Sales 21,602,000 21,602,000
Int. inc. 140,000 140,000
Purch. 13,928,000 13,928,000
Sal. & wages 3,250,000 13,000 3,263,000
Rent, light … 750,000 750,000
30
10% x (1,621,000 + 100,000)
6. Insurance expense 7,500
Prepaid expenses 7,500
(30,000 x 3/12)
7. Salaries and wages 13,000
Accrued expenses 13,000
8. Retained earnings 500,000
Goodwill 500,000
9. Retained earnings 300,000
Dividends payable (10% x 300,000
P3,000,000)
10. Retained earnings 300,000
RE Appropriated for Possible 300,000
Losses in Inv.
ANSWER:
1. B 2. C 3. A 4. D 5. A 6. B 7. C 8. A 9. D 10. C
Problem 11
Erasmo Corporation was incorporated on December 1, 2005, and began operations one
week later. Jesus is a nonpublic enterprise. Before closing the books for the fiscal year
ended November 30, 2006, Erasmo Corporation’s controller prepared the following financial
statements:
Balance Sheet
November 30, 2006
ASSETS
Current Assets:
Cash 150,000.00
Marketable securities, at cost 60,000.00
Accounts receivable 450,000.00
Allowance for doubtful accounts (59,000.00)
Inventories 430,000.00
Prepaid insurance 15,000.00
Total current assets 1,046,000.00
Property, plant and equipment 426,000.00
Accumulated depreciation (40,000.00)
Research and developments 120,000.00
Total assets 1,552,000.00
Current Liabilities
Accounts payable & accrued expenses 592,000.00
Income tax payable 224,000.00
Total current liabilities 816,000.00
Stockholders’ Equity
Common stock, P10 par value 400,000.00
Retained earnings 336,000.00
Total stockholders’ Equity 736,000.00
Total liabilities & Stockholders’ Equity 1,552,000.00
Statement of Income
For the year ended November 30, 2006
31
Cost & expenses:
Cost of sales 1,670,000.00
Selling and Administrative 650,000.00
Depreciation 40,000.00
Research and Development 30,000.00
2,390,000.00
Income before income taxes 560,000.00
Provision for income taxes 224,000.00
Net income 336,000.00
Erasmo 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:
3. Inventories at November 30, 2006, did not include work in process inventory costing
P12,000 sent to an outside processor on November 29, 2006.
4. A P3,000 insurance premium paid on November 30, 2006, on a policy expiring one year
later was charged insurance expense.
5. On June 1, 2006, a machine purchased for P24,000 was charged to repairs and
maintenance. Erasmo depreciates machines of this type on the straight-line method over
a five year life, with no salvage value, for financial and tax purposes.
7. During November 2006, a competitor company filed suit against Erasmo for patent
infringement claiming P200,000 in damages. Erasmo Corporation’s legal counsel
believes that an unfavorable outcome is probable. A reasonable estimate of the court’s
award to the plaintiff is P50,000.
8. The 40% effective tax rate was determined to be appropriate for calculating the
provision for income taxes for the fiscal year ended November 30, 2006. Ignore
computation of deferred income taxes.
Questions
1. In the income statement for the year ended November 30, 2006, Erasmo should report
for the marketable securities
a. A realized loss of P5,000. c. A realized gain of P5,000
b. An unrealized loss of P5,000. d. An unrealized gain of P5,000
2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the
investment portfolio
32
Marketable Securities Valuation Allowance
a. P55,000 P -0-
b. P55,000 P5,000
c. P60,000 P -0-
d. P60,000 P5,000
3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for
doubtful accounts at
a. P23,000 b. P36,000 c. P59,000 d. P69,000
4. Bad debts expense for the year ended November 30, 2006, is
a. P -0- b. P23,000 c. P36,000 d. P59,000
6. Cost of goods sold for the year ended November 30, 2006, reported as
a. P1,643,000 b. P1,645,000 c. P1,658,000 d. P1,670,00
9. Depreciation expense for the year ended November 30, 2006, should be
reported at
a. P16,000 b. P37,600 c. P40,000 d. P42,400
11. In the November 30, 2006 balance sheet, research and development costs
should be reported at
a. P -0- b. P120,000 c. P135,000 d. P150,000
12. Research and development expense for the year ended November 30, 2006 is
a. P -0- b. P15,000 c. P30,000 d. P150,000
13. In the November 30, 2006 balance sheet, Erasmo should report an estimated
liability from lawsuit at
a. P -0- b. P50,000 c. P100,000 d. P200,000
14. For the year ended November 30, 2006, which one of the following adjustments
increases the Unadjusted income, before income taxes of P560,000?
a. Pension expense
b. Work in process inventory at outside processor
c. Estimated loss from lawsuit
d. Research and development cost
15. For the year ended November 30, 2006, which of the following adjustments
decreases the unadjusted income, before income taxes, of P560,000?
a. Recognition of prepaid insurance
33
b. Reduction in allowance for doubtful accounts
c. Depreciation on machine purchased June 1,2006
d. Recognition of research and development cost
Solution
ANSWER:
1. B 2. D 3. B 4. C 5. C 6. C 7. D 8. D 9. D 10. C
11. A 12. D 13. B 14. B 15. C
Problem 12
In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the
following balance sheet:
Eddie Vic Farms Corp.
Balance sheet
December 31, 2006
Assets
Cash P 493,000
Marketable securities 630,000
Accounts receivable 540,000
Inventories 1,002,000
Total current assets 2,665,000
Land, buildings, and equipment 2,904,000
Total assets P5,569,000
Liabilities and Stockholders’ Equity
Accounts payable P 684,840
Estimated losses from future crop failures 670,000
Salaries payable 300,000
Total current liabilities 1,654,840
10% Bonds payable (due in 10 years) 1,050,000
Capital stock 900,000
Retained earnings 1,964,160
Total liabilities and stockholder’s equity P 5,569,000
Additional information:
a. Cash is held in a checking account and a savings account with balances of P130,700 and
P362,300, respectively. The cash in the savings account will be used to support
operations in the event of a crop failure.
34
b. The marketable securities represents the cost of treasury bills with a total market value
of P600,000 at year-end.
d. Inventories include:
e. “Land, buildings, and equipment” includes 5 tractors that were purchased near the end
of the year for P720,000 (shown net of a P600,000, 5-year loan used to buy the
tractors). The balance of the account consists of land that was purchased for
P2,400,000 and buildings that were purchased for P510,000 (shown net of depreciation
of P126,000).
g. The company has 180,000 shares of P5 par common stock issued and outstanding. The
common stock was originally sold for P7 per share, and the premium was included in
“Retained Earnings.”
h. After reading a PAGASA report, the president believes that next year will be a bad crop
year due to prolonged “El Nino” phenomenon and estimates the company will lose about
P670,000. An appropriation of Retained Earnings has been made for this amount.
Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006:
1. Cash
a. P 130,700 b. P 231,600 c. P 362,300 d. P 493,000
2. Accounts receivable
a. P 171,000 b. P 513,000 c. P 531,000 d. P 540,000
3. Current assets
a. P 2,443,000 b. P 2,233,000 c. P 2,080,700 d. P 2,050,700
5. Noncurrent assets
a. P 4,409,300 b. P 4,289,300 c. P 4,047,000 d. P 3,927,000
6. Total assets
a. P 6,642,300 b. P 6,490,000 c. P 6,340,000 d. P5,977,700
35
7. Current liabilities
a. P 1,194,840 b. P 1,654,840 c. P 984,840 d. P 774,840
8. Total liabilities
a. P 3,514,840 b. P 2,844,840 c. P 2,634,840 d. P 2,424,840
Solution
a. Cash – restricted 362,300
Cash 362,300
b. Holding loss 30,000
Allowance for holding loss 30,000
c. Other receivable – noncurrent 360,000
Accounts receivable 360,000
Other receivable – current 120,000
Other receivable – noncurrent 120,000
Bad debts 9,000
Allowance for bad debts 9,000
(180,000 x 5%)
d. Supplies 39,000
Land, building & equipment 183,000
Inventories 222,000
e. Land, building & equipment 600,000
Long-term liability 600,000
f. Advances to suppliers 210,000
Accounts payable 210,000
g. OE: Retained earnings 670,000
Est. liability 670,000
CE: Retained earnings 670,000
Retained earnings – appropriated 670,000
Adj: Estimated liability 670,000
Retained earnings 670,000
Answer:
1. A 2. A 3. D 4. B 5. B
6. C 7. A 8. B 9. B 10. A
Problem 13
M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION.
On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the
corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the
attorney’s bill of P700, the attorney advised her to hire an accountant to keep his records.
M. Senajon was so busy that it was March 31 before she asked you to straighten out his
records. Your task is to develop the financial statements on the March transactions.
After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from
the bank. She later paid P260, including interest of P60, on this loan. She also purchased a
used pickup truck in the company’s name, paying P2,500 down and financing P7,400. The
first payment on the truck is due April 15. M. Senajon then rented an office and paid three
months’ rent P900, in advance. Credit purchases of office equipment of P800 and repair
tools of P500 must be paid by April 10.
36
Wages of P450 were paid to employees. On March 31, the company received a P75 bill for
the March utilities expense and a P50 check from a customer for work to be completed in
April.
Questions
1. The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P12,390 b. P12,315 c. P12,440 d. P11,500
9. The Total Operating expenses and other expenses of SENAJON REPAIR SERVICE
CORPORATION at March 31 is:
a. P1,585 b. P1,035 c. P1,015 d. P897
10. The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P415 b. P403 c. P(85) d. P(285)
Solution
Cash 11,500
Common stock 11,500
Pre-operating cost 700
Cash 700
Cash 5,000
Notes payable 5,000
Interest expense 60
Notes payable 200
Cash 260
Equipment 9,900
Cash 2,500
Notes payable 7,400
Rent expense 300
Prepaid rent 600
Cash 900
37
Equipment 800
AP – others 800
Tools 500
Accrued expenses 500
Cash 400
Accounts receivable 900
Revenue 1,300
Cash 300
Accounts receivable 300
Wages 450
Cash 450
Utilities 75
Accrued expenses 75
Cash 50
Advances from customer 50
Answer:
1. C 2. D 3. D 4. D 5. C 6. A 7. C 8. C 9. A 10. D
Problem 14
OMANDAC CORPORATION has just completed its third year of operations, December 31,
2006. The newly selected president was amazed, to say the least, when told that the
“company’s books have never been in balance.” In fact, he has learned that they are
P14,800 out of balance. Consequently, he has decided to ask an independent CPA to “get
things straightened out.” You are the lucky CPA! While getting an overview of the situation
you learn that the bookkeeper journalize and posts all of the daily transactions, but the
adjusting and closing entries are entered directly into the ledger accounts. A worksheet is
not used. After recording the adjusting entries, the bookkeeper prepares an adjusted trial
balance, which is then used to prepare the financial statements.
At your request the bookkeeper prepared the following post-closing trial balance following
his usual procedures:
OMANDAC CORPORATION
Post-closing Trial Balance
December 31, 2006
Cash 17,800
Accounts receivable 55,000
Note receivable 6,000
Merchandise inventory (periodic system) 120,000
Prepaid insurance 2,400
Equipment 240,000
Land (future site) 40,000
Accounts payable 20,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock, par P10 (20,000 shares outstanding) 320,000
Dividends declared and paid 4,000
Retained earnings 50,000
To balance 14,800 _______
Total 500,000 500,000
After spending considerable time digging into the records and files of the company, you
discovered the following:
a. Estimates of bad debts expense that total P5,000 have been credited directly to
Accounts Receivable.
38
b. Accrued interest expense of P4,000 was recorded, but the credit was omitted.
c. The 2006 ending inventory of P140,000 was not recorded; the beginning inventory
was P120,000.
d. Prepaid insurance of P2,400 was for two full years, 2006 and 2007.
f. Accounts payable of P2,000 were paid, but the debit was not recorded.
Questions
1. Cash at December 31, 2006 is:
a. P 11,800 b. P 13,800 c. P 15,800 d. P 17,800
39
Solution
Cash 17,800
Accounts receivable 60,000
Allowance for bad debts 5,000
Note receivable 6,000
Merchandise inventory 140,000
Prepaid insurance 1,200
Equipment 300,000
Accumulated depreciation 90,000
Land 40,000
Accounts payable 18,000
Interest payable 4,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock 200,000
APIC 120,000
Retained earnings ________ 18,000 squeezed figure
565,000 565,000
Answer
1. D 2. C 3. C 4. B 5. C 6. A 7. A 8. C 9. D 10. A
11. B 12. C
Problem 15
Your new audit client, Capiz Company, prepared the trial balance below as of December 31,
2006. The company started its operations on January 1, 2005. Your examination resulted in
the necessity of applying the adjusting entries indicated in the additional data below.
Capiz Company
TRIAL BALANCE
December 31, 2006
Debits Credits
Cash P510,000
Accounts receivable, net allowance of P20,000 600,000
Inventories, December 31, 2005 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discounts 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000
40
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000 _________
P6,000,000 P6,000,000
Additional data are as follows:
(1) The 1,500,000 common stock was issued at a 10 percent premium to the owners of
the land and buildings on December 31, 2004, the date of organization. Stock with a par
value of P180,000 was donated back by the vendors. The following entry was made:
The stock was donated because the proceeds from its subsequent sale were to be
considered as an allowance on the purchase price of land and buildings in proportion to
their values as first recorded. The treasury stock was sold in 2006 for P75,000, which
was credited to treasury Stock.
(2) On December 31, 2006, a machine costing P15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The
only entry made was one crediting the Machinery account with its sales price of P6,000.
(4) The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten
years from January 1, 2005, interest payable April 1 and October 1. The bonds were
sold on January 1, 2005, at 90; the discount is to be amortized over the life of the bonds
on straight-line basis.
(5) A sinking fund is built up on the straight-line basis, with a provision that each
installment after the first shall be decreased y the amount of the annual 6 percent
interest, which interest is to be added to the fund. The audit disclosed that the proper
installment to the sinking fund was paid by the company on December 31, 2006, but
that the amount was charged in error o the firs Mortgage, 6% Sinking Fund Bonds
account.
(6) The trustee of the sinking fund reported an addition of P4,500 interest to the fund on
December 31, 2006. this had not been recorded by the company.
Questions
Based on the above and the result of your audit, you are to provide the answers to the
following:
41
2. The adjusted net book value of the Building as of December 31, 2006 was
a. P 907,200 b. P905,400 c. P950,400 d. P945,000
3. The correct net book value of the machinery as of December 31, 2006 was
a. P399,000 b. P354,000 c. P345,000 d. P348,000
5. How much was the gain or loss on sale of machinery on December 31, 2006?
a. P6,000 loss b. P6,000 gain c. P7,500 loss d. P7,500 gain
6. The adjusted net carrying amount of 6% sinking fund bonds as of December 31,
2006 was
a. P675,000 b. P679,500 c. P690,000 d. P735,000
7. The correct balance of sinking fund assets as of December 31, 2006 was:
a. P75,000 b. P79,500 c. P150,000 d. P154,500
10. The correct balance of stock donation as of December 31, 2006 was:
a. P180,000 b. P105,000 c. P0 d. P75,000
Solution
1. OE: Treasury stock 180,000
Stock donation 180,000
CE: Memo entry
Adj: Stock donation 180,000
Treasury stock 180,000
---------------------------------------------------------
OE: Cash 75,000
Treasury stock 75,000
CE: Cash 75,000
Land 30,000
Building 45,000
Adj: Treasury stock 75,000
Land 30,000
Building 45,000
2. OE: Cash 6,000
Machinery 6,000
CE: Cash 6,000
Accum. Dep’n 3,000
Loss on sale 6,000
Machinery 15,000
Adj: Accum. Dep’n: mach 3,000
Loss on sale 6,000
Machinery 9,000
3. Depreciation 63,900
Accum. Dep’n – Mach 45,000 *
Accum. dep’n - bldg 18,900
* 444,000 + 6,000 – 15,000 x 10% = 45,000
** 990,000 – 45,000 = 945,000 x 2% = 18,900
Accum. Dep’n – bldg 900
42
Retained earnings 900
4. Discount on bonds 75,000
Sinking fund bonds 75,000
Retained earnings 7,500
Interest expense 7,500
Discount on bonds 15,000
P 75,000/10 yrs = P7,500 – 2002
7,500 – 2003
5. OE: Sinking fund bond 70,500
Cash 70,500
CE: Sinking fund 70,500
Cash 70,500
Adj: Sinking fund 70,500
Sinking fund bond 70,500
6. Sinking fund 4,500
Interest income 4,500
Answer:
1. B 2. A 3. D 4. B 5. A 6. C 7. C 8. A 9. B 10. C
Problem 16
Instructions:
1. Prepare the audit adjustments required in the problems.
2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and
Loss (WPL).
3. Compute the final balances of each account on your WBS and WPL, proceed to the
questionnaires and transfer all answers to the final answer sheet.
4. Assume no other issues, except those discussed on the problem.
On November 20, 2006 you have substantially completed your fieldwork relative to your
audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store
and office is located in Davao City.
Based on your review of the records you have found out that the company’s financial
statements at the end of its fiscal year September 30, 2006 submitted by their account is
subject to the adjustments you noted in your audit.
43
Audit finding No. 4
A physical inventory taken of the merchandise on September 30, 2006 amounted to
P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 2006 from J. Ramos,
interest due on maturity date (assume 30 days per month).
44
Audit finding No. 17
A payment of P1,000 for Taxes on September 29, 2006 was not recorded in the books.
RUCHELL Corporation
Working Balance Sheet
September 30, 2006
Land
Furniture & Equipment 50,850
Accumulated Depreciation (12,170)
TOTAL 38,680
Goodwill 10,000
Patents 20,000
TOTAL 30,000
Total Assets 240,630
45
Liabilities
Accounts payable 35,420
Accrued expenses -
Notes payable 31,000
Stockholders’ equity
Capital Stock, P100 75,000
Additional paid in capital -
Stock dividend distributable -
Donated capital -
Retained Earnings 99,210
Total Liab. & S. E 240,630
RUCHELL CORPORATION
Working Profit and Loss
Year Ended September 30, 2006
PER AUDIT FINAL
BOOKS ADJUSTMENT BALANCES
Sales 269,810
Sales returns ( 1,950)
Sales discounts ( 1,700)
Net sales 266,160
Cost of sales
Inventory, beg. 39,500
Purchases 189,360
Purchase returns ( 3,700)
Purchase discounts ( 1,970)
Inventory, end (41,500)
181,690
Gross Profit 84,470
Advertising ( 7,210)
Doubtful Accounts -
Salesman’s Salaries (21,650)
Miscellaneous Selling expenses ( 1,940)
Rent expense (11,700)
Insurance expense ( 1,200)
Light and water ( 300)
Taxes ( 1,510)
Office salaries ( 3,330)
Miscellaneous office expense ( 1,560)
Loss on sale -
Amortization of Intangibles -
Interest Expense ( 4,060)
Other Income 430
Net Income 30,440
Questions
1. Cash
a. P 9,500 b. P8,400 c. P10,600 d. P5,800
46
a. P57,200 b. P53,400 c. P50,000 d. P58,300
5. Inventories
a. P41,500 b. P46,400 c. P45,000 d. 40,000
6. Doubtful accounts
a. P2,980 b. P2,670 c. P4,170 d. P4,000
7. Prepayments
a. P2,980 b. P3,700 c. p2,050 d. P2,650
9. Depreciation
a. P5,085 b. P6,285 c. P6,085 d. P4.985
12. Sales
a. P269,810 b. P274,710 c. P264,910 d. P260,100
13. Purchases
a. P189,360 b. P187,360 c. P180,000 d. P200,160
16. Goodwill
a. P0 b. P10,000 c. P5,000 d. P6,000
18. Patents
a. P0 b. P10,000 c. P15,000 d. P5,000
47
a. P0 b. P26,000 c. P24,000 d. P25,000
21. Advertising
a. P7,210 b. P5,210 c. P2,210 d. P5,000
22. Light and Power
a. P500 b. P5,300 c. P300 d. P0
23. Taxes
a. P1,970 b. P2,510 c. P1,000 d. P300
25. Land
a. P0 b. P50,000 c. p26,000 d. P24,000
Answer:
1. B 2. B 3. B 4. B 5. C 6. C 7. B 8. D 9. A 10. A
11. A 12. C 13. A 14. D 15. B 16. A 17. C 18. C 19. A 20. C
21. C 22. C 23. B 24. A 25. B 26. C 27. B 28. B 29. A 30. A
Entries:
Finding 1 Finding 8
Accounts receivable 1,100 Prepayments 900
Cash 1,100 Insurance expense 900
Finding 2 Finding 9
Bad debts 4,170 Prepayments 900
Allow. For BD 4,170 Rent expense 900
Finding 3 Finding 10
Sales 4,900 Prepayment 150
Accounts receivable 4,900 Interest expense 150
Inventory 3,500 Finding 11
COS 3,500 Retained earnings 2,000
Finding 4 APIC 2,000
COS 39,500 Finding 12
Inventory 39,500 Retained earnings 10,000
Inventory 41,500 Goodwill 10,000
COS 41,500 Finding 13
Finding 5 Office salaries 1,200
Interest receivable 180 Accrued expenses 1,200
Interest income 180 Finding 14
Finding 6 Amortization 5,000
48
No adjustments Patents 5,000
Finding 7
Depreciation 5,085
AD 5,085
Finding 15 Finding 18
Loss on sale 1,000 Retained earnings 9,000
Investment 1,000 Stock div. distr. 7,500
Finding 16 APIC 1,500
Note payable 5,000 Finding 19
Advertising 5,000 Land 50,000
Donated capital 50,000
Finding 17
Taxes 1,000 Finding 20
Cash 1,000 No adjustment
Finding 21
Sales discount 20
Purchase discount 20
WORKING PAPER
Per books Per audit
2,100.0
Cash 10,500.00 0 8,400.00
Marketable securities 15,000.00 15,000.00
1,100.0 4,900.0
Accounts receivable - trade 57,200.00 0 0 53,400.00
4,170.0 (2,670.0
Allow.for bd - debit balance 1,500.00 0 0)
Notes receivable 21,500.00 21,500.00
45,000.0 39,500.0
Inventories 39,500.00 0 0 45,000.00
1,000.0
Investment in A. Co. - 100 shares 25,000.00 0 24,000.00
Interest receivable - 180.00 180.00
1,950.0
Prepayments 1,750.00 0 3,700.00
50,000.0
Land - 0 50,000.00
Furniture & Equipment 50,850.00 50,850.00
(12,170.0 5,085.0 (17,255.0
Accumulated depreciation 0) 0 0)
10,000.0
Goodwill 10,000.00 0 -
5,000.0
Patents 20,000.00 0 15,000.00
240,630.0 267,105.0
0 0
49
4,900.0
Sales 269,810.00 0 264,910.00
(1,950.0 (1,950.0
Sales returns 0) 0)
(1,700.0 (1,720.0
Sales discounts 0) 20.00 0)
Net sales 266,160.00 261,240.00
39,500.0
Cost of sales *** 181,690.00 0 20.00
41,500.0
0
3,500.0
0 176,170.00
Gross profit 84,470.00 85,070.00
Other income 430.00 180.00 610.00
TOTAL 84,900.00 85,680.00
Operating expenses
(7,210.0 5,000.0 (2,210.0
Advertising 0) 0 0)
4,170.0 (4,170.0
Doubtful accounts - 0 0)
(21,650.0 (21,650.0
Salesmen's salaries 0) 0)
(1,940.0 (1,940.0
Miscellaneous selling expenses 0) 0)
(11,700.0 (10,800.0
Rent expenses 0) 900.00 0)
(1,200.0 (300.00
Insurance expense 0) 900.00 )
(300.00 (300.00
Light and water ) )
(1,510.0 1,000.0 (2,510.0
Taxes 0) 0 0)
(3,330.0 1,200.0 (4,530.0
Office salaries 0) 0 0)
(1,560.0 (1,560.0
Miscellaneous office expenses 0) 0)
1,000.0 (1,000.0
Loss on sale - 0 0)
5,085.0 (5,085.0
Depreciation - 0 0)
5,000.0 (5,000.0
Amortization of intangibles - 0 0)
Income from operations 34,500.00 24,625.00
(4,060.0 (3,910.0
Interest expense 0) 150.00 0)
Net income 30,440.00 20,715.00
12,000.0
Retained beginning 68,770.00 0 56,770.00
9,000.0 (9,000.0
Dividends - 0 0)
Retained end 99,210.00 68,485.00
186,105.0 186,105.0
0 0
*** COS
Inventory - beg. 39,500.00
Purchases 189,360.00
(3,700.0
Purchase returns 0)
Purchase discounts (1,970.0
50
0)
TGAS 223,190.00
(41,500.0
Inventory - end 0)
COS 181,690.00
1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy for 3
years. On December 31, 2006, Rosete’s unadjusted trial valance showed a balance of
P270 for prepaid insurance and P13,230 for insurance expense. What amounts should
be reported for prepaid insurance and insurance expense in Rosete’s December 31, 2006
financial statements?
Prepaid Insurance Insurance Expense
a. P 9,900 P 3,600
b. P 10,200 P 3,600
c. P 10,200 P 3,300
d. P 10,200 P 3,030
In its December 31, 2006 balance sheet, what amount should Palmes report as prepaid
expenses?
a. P 20,400 b. P 14,400 c. P 8,000 d. P 6,400
51
4. What is the purpose of the following entry?
Supplies xxxx
Supplies expense xxxx
5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry
could be made on January 1?
a. Wages expense 15,000
Wages payable 15,000
b. Prepaid expense 15,000
Wages expense 15,000
c. Wages expense 15,000
Prepaid wages 15,000
d. Wages payable 15,000
Wages expense 15,000
6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance
was debited. Assuming a December 31 year-end, what is the reversing entry at the
beginning of the next period?
a. None is required.
b. Cash 6,000
Prepaid insurance 6,000
c. Prepaid insurance 5,500
Insurance expense 5,500
d. Insurance expense 500
Prepaid insurance 500
7. A consulting firm started and completed a project for a client in December 2006. The
project has not been recorded on the consulting firm’s books, and the firm will not
receive payment from the client until February 2007. The adjusting entry that should be
made on the books of the consulting firm on December 31, 2006, the last day of the
firm’s fiscal year, is
a. Cash in transit xxx
Consulting revenue xxx
b. Consulting revenue receivable xxx
Consulting revenue xxx
c. Unearned consulting rev. xxx
Consulting revenue xxx
d. Consulting revenue receivable xxx
Unearned consulting revenue xxx
8. Cristie Company sublet a portion of its warehouse for 5 years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Cristie
recorded as a credit to calendar-year basis. The adjustment on December 31 of the first
year should be
a. No Entry.
52
b. Unearned rental income 2,500
Rental income 2,500
c. Rental income 2,500
Unearned rental income 2,500
d. Unearned rental income 12,500
Rental income 12,500
10. Jay Corporation renewed an insurance policy for 3-years beginning July 1, 2006 and
recorded the P81,000 premium in the prepaid insurance accounts. The P81,000
premium represents an increase of P23,400 from the P57,600 premium charged 3 years
ago. Assuming Jay'’ records its insurance adjustments only at the end of the calendar
year, the adjusting entry required to reflect the proper balances in the insurance
accounts at December 31, 2006, Jay’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.
11. The 2006 financial statements of Hershey Company reported net income for the year
ended December 31, 2006 of 2 million. On July 1, 2007, subsequent to the issuance of
the 2006 financial statements, Hershey changed from an accounting principle that is not
generally accepted to one that is generally accepted. If the generally accepted
accounting principle had been used in 2006, net income for the year ended December
31, 2006 would have been decreased by 1 million. On August 1, 2007, Hershey
discovered a mathematical error relating to its 2006 financial statements. If this error
had been discovered in 2006, net income for the year ended would have been increased
by P500,000.
What amount, if any, should be included in net income for the year ended December 31,
2007 because of the items noted above?
a. P 0 c. P 500,000 increase
b. P 500,000 decrease d. P 1,000,000 decrease
12. Edcelle Company reported a retained earnings balance of P400,000 at December 31,
2005. In August 2006, Edcelle determined that insurance premiums of P60,000 for the
3-year period beginning January 1, 2005 had been paid and fully expensed in 2005.
Edcelle has a 30% income tax rate.
What amount should Edcelle report as adjusted beginning retained earnings in its 2006
statement of retained earnings?
a. P 442,000 b. P 440,000 c. P 428,000 d. P 420,000
53
13. Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31,
2005 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2006 resulted in a cumulative effect of P30,000
on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related
income taxes.
On October 1, 2006, Yuri Retailers signed a 4-month, 16% note payable to finance the
purchase of holiday merchandise. At that date, there was no direct method of pricing the
merchandise, and the note’s market rate of interest was 11%. Yuri recorded the
purchase at the note’s face amount. All of the merchandise was sold by December 1,
2006. Yuri’s 2006 financial statements reported interest payable and interest expense
on the note for 3 months at 16%. All amounts due on the note were paid February 1,
2007.
14. Yuri’s 2006 cost of goods sold for the holiday merchandise was
a. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value.
b. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value plus 11% interest for 2 months.
c. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value.
d. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value plus 11% interest for 2 months.
15. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which
of the following items was reported correctly?
12/31/06 12/31/06
Retained earnings Interest payable
a. Yes Yes
b. No No
c. Yes No
d. No Yes
16. On December 31, 2006, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The
terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2006 and arrived at Fineafle on January 5, 2007. Because of a clerical
error, the sale was not recorded until January 2007, and the merchandise, sold at 25%
markup, was included in Excel’s inventory at December 31, 2006.
As a result, Excel’s cost of goods sold for the year ended December 31, 2006 was
a. Understated by P 75,000 c. Understated by P 15,000
b. Understated by P 60,000 d. Correctly stated
17. For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by
workers during the last week of the year. The amounts omitted, which are considered
material, were as follows:
54
December 31, 2005 51,000
December 31, 2006 64,000
The entry on December 31, 2006 to correct for these omissions would include a
a. Credit to wage expense for P64,000
b. Debit to wage expense for P51,000
c. Debit to wage expense for P13,000
d. Credit to retained earnings for P64,000
18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors
made at December 31, 2006:
The net effect of these errors was to overstate net income for 2006 by
a. P 130,000 b. P 170,000 c. P 230,000 d. P 290,000
19. While preparing its 2006 financial statements, Falfact Corp. discovered computational
errors in its 2005 and 2004 depreciation expense. These errors resulted in
overstatement of each year’s income by P25,000, net of income taxes. The following
amounts were reported in the previously issued financial statements:
2005 2004
Retained earnings, 1/1 P 700,000 P 500,000
Net income 150,000 200,000
Retained earnings, 12/31 P 850,000 P 700,000
Falfact’s 2006 net income is correctly reported at P180,000. Which of the following
amounts should be reported as prior-period adjustments and net income in Falfact’s
2006 and 2005 comparative financial statements?
20. The following information appeared on Blight Inc.’s December 31 financial statements:
2005 2006
Assets P 1,000,000 P1,200,000
Liabilities 750,000 800,000
Contributed capital 120,000 120,000
Dividends paid 100,000 60,000
In preparing its 2006 financial statements, Blight discovered that it had misplaced a
decimal in calculating depreciation for 2005. This error overstated 2005 depreciation by
P10,000. In addition, changing technology had significantly shortened the useful life of
55
Blight’s computers. Based on this information, Blight determined that depreciation
should be P30,000 higher in 2006 financial statements.
Assuming that no correcting or adjusting entries have been made and ignoring income
taxes, how much should Blight report as 2006 net income?
a. P 230,000 b. P 210,000 c. P 180,000 d. P 170,000
An audit of Angelina Company has revealed the following four errors that have occurred
but have not been corrected:
21. The errors cause the reported net income for the year ending December 31, 2006 to be
a. Overstated by P72,000 c. Understated by P28,000
b. Overstated by P65,000 d. Understated by P45,000
22. The errors cause the reported retained earnings at December 31, 2006 to be
a. Overstated by P65,000 c. Overstated by P25,000
b. Overstated by P32,000 d. Understated by P18,000
23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to
cash of P50,500 and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500
24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect c. Is understated by P9,000
b. Is overstated by P9,000 d. Is understated by P23,000
25. The beginning accumulated depreciation per record was P100,000. During the year, the
firm sold one of its machines recorded as follows:
Cash 270,000
Accumulated depreciation - machine 30,000
Machine 300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
a. Cash 300,000
Machine 300,000
b. Cash 30,000
Gain on sale of machine 30,000
c. Accumulated depreciation - machine 30,000
Gain on sale of machine 30,000
d. Cash 300,000
56
Machine 270,000
Gain on sale of machine 30,000
26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.
27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when
nominal accounts were already closed to income summary, but not yet closed to the
capital account. The correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases
c. P2,700 credit to purchases
d. P2,700 credit to accounts payable
28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously
recorded as P56,000. The error had been discovered when all nominal and temporary
accounts were already closed to the real account. The correcting entry would require a
a. Debit to capital account c. Credit to cost of sale
b. Debit to income summary account d. Credit to owner’s capital
29. A sales discount of P5,000 was recorded as purchase discount. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P5,000 debit to purchase discount c. P5,000 credit to sales discount
b. P5,000 credit to purchase discount d. P5,000 credit to accounts payable
31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been
discovered when nominal accounts were already closed. The correcting entry would
require a
a. P20,000 debit to rent expense c. P40,000 credit to rent income
b. P20,000 debit to rent income d. No adjustment entry is necessary
32.A cash collection of P5,000 from customer’s open account was recorded as P500. The
error had been discovered when nominal accounts were still open. The correcting entry
would require a
a. P4,500 debit to accounts receivable c. P500 credit to accounts
receivable
b. P4,500 debit to cash d. P500 credit to cash
33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had
been discovered when nominal accounts were already closed. The correcting would
require a
a. P900 debit to cash. c. P900 debit to sale
b. P900 debit to accounts receivable d. P900 credit to accounts receivable
57
34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit
to cash P5,500 and credit to notes receivable P5,500. The error had been discovered
when nominal accounts were still open. The correcting entry would require a
a. P500 debit to cash. c. P500 credit to cash
b. P500 debit to accounts receivable d. P500 credit to interest income
35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with
a face value of P100,000 was not taken up as of December 31, 2004. The collection of
the note, which matured on January 31, 2007, was recorded as
Cash 102,000
Notes receivable 100,000
Interest Income 2,000
The error was discovered after collection. The correcting entry would require a
a. P2,000 debit to cash.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income
If the error had been discovered when the nominal accounts were still open, the
correcting entry would require a
a. P900 debit to purchase return
b. P900 debit to accounts payable
c. P900 credit to purchases
d. P900 credit to accounts payable
Answer:
1. c 2. a 3, d 4, b 5. d 6. a 7. b 8. d 9. d 10. d
11. d 12. c 13. c 14. a 15. d 16. b 17. c 18. b 19. a 20. c
21. b 22. b 23. c 24. a 25. b 26. c 27. b 28. c 29. b 30. d
58
Problem 1
The first audit of the books of Luzon Company was made for the year ended December 31,
2006. In examining the books, the auditor found that certain items had been overlooked or
incorrectly handled in the last 3 years. These items are:
a. At the beginning of 2004, the company purchased a machine for P1,020,000 (salvage
value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base
for the 3 years.
b. At the end of 2005, the company failed to accrue sales salaries of P90,000.
c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was determined
that the company owed an additional P170,000 in taxes related to 2004. The company
did not record a liability in 2004 or 2005 because the possibility of loss was considered
remote, and charged the P170,000 to a loss account in 2006.
d. Luzon Company purchased another company early in 2004 and recorded goodwill of
P900,000. Luzon had not amortized goodwill because its value had not diminished. The
estimated economic life of the goodwill is 20 years.
e. In 2006, the company wrote off P174,000 of inventory considered to be obsolete; this
loss was charged directly to Retained Earnings.
f. Year-end wages payable of P6,800 were not recorded because the bookkeeper though
that “they were immaterial.”
g. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of P5,280 because “the amount of the check is about
the same every year.
Questions
59
Retained earnings 17,000
Solution
a. Accumulated depreciation 51,000
Depreciation expense (2006) 17,000
Retained earnings (2004 & 2005) 34,000
b. Retained earnings 90,000
Salaries expense 90,000
c. No adjustment
d. No adjustment since no indication of impairment.
e. Loss on obsolete inventory 174,000
Retained earnings 174,000
f. Salaries expense 6,800
Salaries payable 6,800
g. Prepaid insurance 4,400
Insurance expense 4,400
Answer:
1. B 2. A 3. D 4. D
Problem 2
A CPA is engaged by the Sony Corporation in 2006 to examine the books and records and to
make whatever corrections are necessary. An examination of the accounts discloses the
following:
a. Dividends had been declared on December 15 in 2004 and 2005 but had not been
entered in the books until paid.
b. Improvements in building and equipment of P9,600 had been debited to expense at the
end of April 2003. Improvements are estimated to have an 8-year life. The company
uses the straight-line method in recording depreciation and computes depreciation to
the nearest month.
60
c. The physical inventory of merchandise had been understated by P3,000 at the end of
2004 and by P4,300 at the end of 2005.
d. The merchandise inventories at the end of 2005 and 2006 did not include merchandise
that was then in transit and to which the company had title. This shipments of P3,800
and P5,500 were recorded as purchases in January of 2006 and 2004, respectively.
e. The company had failed to record sales commissions payable of P2,100 and P1,700 at
the end of 2005 and 2006, respectively.
f. The company had failed to recognized supplies on hand of P1,200 and P2,500 at the end
of 2005 and 2006, respectively.
Questions:
1. Corrected net income of 2004
a. P 19,800 b. P 15,600 c. P 13,600 d. P 16,800
Solution
2004 2005 2006
Unadjusted Net income/Loss 18,000 (11,200) (12,400)
Item B (1,200) (1,200) (1,200)
Item C 3,000 (3,000)
4,300 (4,300)
Item D – unrecorded ending inv. 3,800 (3,800)
5,500
- unrecorded purchases (3,800) 3,800
(5,500)
Item E (2,100) 2,100
61
(1,700)
Item F 1,200 (1,200)
___________ __________ 2,500
Adjusted net income/loss 19,800 (12,000) (16,200)
Retained earnings – beg. 81,000 94,600 67,600
Item A (15,000) (15,000)
Item B – error in recording improv. 9,600
- unrecorded depreciation (800) _________ ____________
Retained earnings - end 94,600 67,600 51,400
Answer:
1. A 2. C 3. A 4. C 5. C 6. A
Problem 3
A partial trial balance of Josh Alejandro Corporation is as follows on December 31, 2006:
Dr.____ ____Cr.____
Supplies on hand P 13,500
Accrued salaries and wages P 7,500
Interest receivable on investments 25,500
Prepaid insurance 450,000
Unearned rent -0-
Accrued interest payable 75,000
b. Through oversight, the Accrued Salaries and Wages account was not changed during
2006. Accrued salaries and wages on 12/31/06 amounted to P22,000.
c. The interest receivable on investments account was also left unchanged during 2006.
Accrued interest on investments amounts to P21,750 on 12/31/06.
e. P140,000 was received on January 1, 2005, for the rent of a building for both 2005
and 2006. The entire amount was credited to rental income.
f. Depreciation for the year was erroneously recorded as P25,000 rather than the
correct figure of P250,000.
Questions
1. The accrued salaries and wages at year-end is:
a. P 29,500 b. P22,000 c. P 14,500 d. P 7,500
2. How much is the adjusted salaries and wages at year-end assuming that the balance of
this account in the book is P350,000?
a. P 379,500 b. P 372,000 c. P 364,500 d. P 342,500
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a. P 450,000 b. P 325,000 c. P 125,000 d. P 0
4. Supplies on hand at year-end is:
a. P 13,500 b. P 8,000 c. P 5,500 d. P 2,500
Solution
1. Supplies expense 8,000
Supplies on hand 8,000
2. Accrued salaries and wages 7,500
Salaries and wages expense 7,500
To reverse accrued salaries.
Salaries and wages expense 22,000
Accrued salaries and wages 22,000
3. Interest income 25,500
Interest receivable 25,500
To reverse accrued income.
Interest receivable 21,750
Interest income 21,750
4. Insurance expense 125,000
Prepaid insurance 125,000
5. Retained earnings 70,000
Rent income 70,000
6. Depreciation expense 225,000
Accumulated depreciation 225,000
7. Retained earnings 36,000
Accumulated depreciation 36,000
Answer:
1. B 2. C 3. B 4. C 5. A
Problem 4
The before tax income for Franzine Gomez Co. for 2005 was P303,000 and P232,200 for
2006. However, the accountant noted that the following errors had been made:
1. Sales for 2005 included amounts of P114,600 which was received in cash during 2005,
but for which the related products were delivered in 2006. Title did not pass to the
purchaser until 2006.
3. The bookkeeper in recording interest expense for both 2005 and 2006 on bonds payable
made the following entry:
The bonds have a face value of P250,000 and pay a stated interest rate of 6%. They
were issued at a discount of P15,000 on January 1, 2005, to yield an effective interest of
7%. (Assume that the effective yield method should be used.)
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2005 and 2006 for P25,500 and P30,000, respectively. The company applies a
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rate of 10% to the balance in the equipment account at the end of the year in its
determination of depreciation charges.
Questions
Solution
1. Retained earnings 114,600
Sales 114,600
2. Cost of sales (beg. inv) 25,920
Retained earnings 25,920
3. Retained earnings 1,450
Interest expense 1,552
Discount on bonds payable 3,002
Int. paid Int. exp. Amort. Carrying
Value
235,000
2002 15,000 16,450 1,450 236,450
2003 15,000 16,552 1,552 238,002
2002 2003
Unadjusted net income 303,000 232,200
Item 1 (114,600) 114,600
Item 2 25,920 (25,920)
Item 3 (1,450) (1,552)
Item 4 (25,500) (30,000
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- error in recording depreciation 2,550 2,550
__________ 3,000
Adjusted net income 189,920 294,878
Answer:
1. D 2. A 3. C 4. A 5. C
Problem 5
You have been assigned to examine the financial statements of Macelle Company for the
year ended December 31, 2006. Below is the Balance Sheet of the company.
2. The physical inventory count on December 31, 2005, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Macelle uses
periodic inventory system.
3. The physical inventory count on December 31, 2006, improperly included merchandise
with a cost of P42,500 that had been recorded as a sale on December 27, 2006.
5. In 2006, the company sold for P18,500 fully depreciated equipment that originally cost
P110,000. The company credited the proceeds from the sale to the Equipment account.
7. Macelle has a portfolio of trading securities. No entry has been made to adjust to
market. Information on cost and market value is as follows:
COST MARKET
December 31, 2005 P 190,000 P 190,000
December 31, 2006 168,000 164,000
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9. A large piece of equipment was purchased on January 3, 2006, for P1,600,000 and was
charged to Repairs Expense. The equipment is estimated to have a service life of 8 years
and no residual value. Macelle normally uses the straight – line depreciation method for
this type of equipment.
10. A P75,000 insurance premium paid on July 1, 2005, for a policy that expires on June 30,
2009, was charged to insurance expense.
11. A trademark was acquired at the beginning of 2005 for P250,000. No amortization has
been recorded since its acquisition. Trademark has an economic life of 5 years.
Questions
1. Current assets at year-end is:
a. P 776,000 b. P 695,000 c. P 691,000 d. P 678,500
8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment
b. Retained earnings 42,500
Cost of sales 42,500
c. Cost of sales 42,500
Retained earnings 42,500
d. Retained Earnings 42,500
Inventory 42,500
Solution
1. Depreciation expense 16,000
Accumulated depreciation 16,000
2. Cost of sales (beg. inv) 95,000
Retained earnings 95,000
3. Cost of sales 42,500
Inventory 42,500
4. Cash 28,000
Accounts receivable 28,000
5. Accumulated depreciation 110,000
Machinery 91,500
Gain on sale 18,500
6. Loss on damages 625,000
Estimated liability on damages 625,000
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7. Unrealized holding loss 26,000
Valuation allowance 26,000
Market value – beg. 190,000
Market value – end 164,000
Unrealized holding loss 26,000
8. Salaries payable 48,000
Salaries expense 48,000
To reverse accrued salaries.
Salaries expense 36,600
Salaries payable 36,600
9. Equipment 1,600,000
Repairs expense 1,600,000
Depreciation expense 200,000
Accumulated depreciation 200,000
10. Insurance expense 25,000
Prepaid insurance 37,500
Retained earnings 62,500
11. No amortization since no information about its impairment.
Answer:
1. C 2. B 3. B 4. D 5. B 6. A 7. A 8. D
Problem 6
Matias Corporation requires audited financial statements for credit purposes. After making
normal adjusting entries, but before closing the accounting records for the year ended
December 31, 2006. Matias’s controller prepared the following financial statements for
2006:
Matias Corporation
STATEMENT OF FINANCIAL POSITION
December 31, 2006
Assets
Cash 1,225,000
Marketable equity securities 125,000
Accounts Receivable 460,000
Allowance for doubtful accounts ( 55,000)
Inventories 530,000
Property and equipment 620,000
Accumulated Depreciation ( 280,000)
Total Assets 2,625,000
Matias Corporation
STATEMENT OF INCOME
For the Year Ended December 31, 2006
Net Sales 1,700,000
Cost of sales 570,000
Gross Profit 1,130,000
Operating Expenses
Selling and administrative 448,000
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Depreciation 42,000
Income before income tax 640,000
Income tax expense 192,000
Net Income 448,000
Matias’s tax rate for all items was 30% for all affected years, and it made estimated tax
payments when due. Matias has been profitable in the past and expects results in the
future to be similar to 2006. During the course of the audit, the following additional
information (not considered when the above statements were prepared) was obtained:
2. At December 31, 2006, the market value of the remaining securities in the portfolio was
P142,000.
3. The P530,000 inventory total, which was based on a physical count at December 31,
2006, was priced at cost. Subsequently, it was determined that the inventory cost was
overstated by P66,000. At December 31, 2006, the inventory’s market value
approximated the adjusted cost.
4. Pollution control devices costing P48,000, which is high in relation to the cost of the
original equipment, were installed on December 29, 2005, and were charged to repairs in
2005.
5. The original equipment referred to in Item 4, which had a remaining useful life of six
years on December 20, 2005, is being depreciated by the straight-line method for both
financial and tax reporting.
6. A lawsuit was filed against Matias Corporation in October 2006 claiming damages of
P250,000. Company’s legal counsel believes that an unfavorable outcome is probable,
and a reasonable estimate of the court’s award to the plaintiff is P60,000, which will be
paid in 2007 if the case is settled.
Questions
1. Marketable Equity Securities at year-end is:
a. P 155,000 b. P 125,000 c. P 95,000 d. P 82,000
2. Allowance for market decline in value of marketable equity security at year-end is:
a. P 0 b. P 8,000 c. P 10,000 d. P 13,000
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Solution
1. Marketable equity securities 30,000
Gain on sale 30,000
2. Loss on market decline 13,000
Allowance for market decline 13,000
3. Cost of sales 66,000
Inventory 66,000
4. Equipment 48,000
Retained earnings 48,000
5. Depreciation 8,000
Accumulated depreciation 8,000
6. Loss on damages 60,000
Estimated liability on damages 60,000
Answer:
1. A 2. D 3. A 4. A 5. C
Problem 7
Long established a retail business in 2004. Early in 2007, Long entered into negotiations
with Short with the intent to form a partnership. You have been asked by Long and Short
to check Long’s books for the past three years to help Short evaluate the earnings potential
of the business.
During the examination of the accounts, you found the data given below:
g. On January 1, 2006, sold operational equipment for P31,500 that originally cost P35,000
on January 1, 2004. Cash was debited for P31,500 and equipment was credited for
P31,500. The asset sold was depreciated in 2004 and 2005 but not on the 2006 on the
basis of a 10-year life and no residual value.
69
h. No allowance for bad debts has been set up. An analysis of accounts receivable as of
December 31, 2006, indicates that the allowance account should have a balance of
P14,000, of which P3,500 relates to 2004, P4,900 to 2005, and P5,600 to 2006.
Questions
1. Adjusted net income of 2004 is:
a. P 85,834 b. P 82,334 c. P 52,094 d. P 39,466
Solution
Problem 8
VILLA LYDIA CO. The records of the Company have not been examined for the
three-year period ended December 31, 2006. As a result of your audit of the
records for the year ended December 31, 2006 and your review of the records of
the two prior years, it is necessary to revise the net income and the retained
income based upon the audited data, which follows:
70
From your examination, you obtained the following information which must be taken into
consideration at the close of the year involved:
Questions
1. Adjusted net income of 2005 is:
a. P 119,400 b. P 110,800 c. P 102,600 d. P 90,800
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c. Retained earnings 4,100
Cost of sales 3,000
Accrued taxes 4,100
Accounts payable 3,000
d. No adjusting entry is necessary.
8. Adjusted net income of 2004 (assuming P85,000 is recorded as net income of 2004) is:
a. P 116,900 b. P 115,000 c. P 107,900 d. P 87,900
Solution
1. No adjustment since the 2004 financial statement was not affected.
2. Equipment 30,000
Retained earnings 30,000
Retained earnings 3,000
Depreciation expense 3,000
Accumulated depreciation 6,000
3. No adjustment since the 2004 financial statement was not affected.
4. Allowance for bad debts 9,000
Accounts receivable 9,000
5. Retained earnings 6,000
Allowance for market decline 6,000
6. Accumulated depreciation 3,000
Retained earnings 3,000
7. Land 9,000
Retained earnings 9,000
8. Retained earnings 14,300
Cost of sales 14,300
9. Retained earnings 5,000
Accumulated depreciation 5,000
10. Machinery 12,000
Accounts payable – others 12,000
Taxes 5,900
Accrued taxes 5,900
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(4,100) _________
Retained earnings - end 203,700 319,100
Answer:
1. B 2. C 3. C 4. B 5. C 6. D 7. A 8. D
Problem 9
The Corporation prepared its own income statement for the years 2005 and 2006. The
President was not satisfied and decided to engage the services of a CPA. The following
errors were discovered by the CPA:
___2005__ ___2006___
Net income after income tax P 123,250 P 156,250
Inventory understatement at year-end P - P 12,500
Prepaid expenses not taken up 5,000 15,000
Merchandise purchased on account not
Recorded as liability but included in
inventory 25,000
Unearned rent received taken into income 9,000
Accrued taxes unrecorded 20,000 15,000
Questions
1. Net income of 2005 is:
a. P 163,250 b. P 108,250 c. P 83,250 d. P 73,250
Solution
2005 2006
Unadjusted net income 123,250 156,250
12,500
5,000 (5,000)
15,000
(25,000) 25,000
(9,000)
(20,000) 20,000
__________ (15,000)
Adjusted net income 83,250 199,750
Answer:
1. C 2. A
Problem 1O
Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash
basis during the year
Wizard is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2006 financial statements prepared on the accrual basis of
accounting from Wizard. As Wizard’s external auditor, you were called upon to assist in
preparing the financial statements. The following information were obtained during the
course of your engagement:
Wizard Company
TRIAL BALANCE
December 31, 2006
Debits Credits
73
Cash P448,000
Accounts receivable, 12/31/05 283,500
Inventory, 12/31/05 1,085,000
Furniture & Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated depreciation, 12/31/05 P 567,000
Accounts payable 297,500
Wizard, Drawings
Wizard, Capital, 12/31/05 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries expense 3,045,000
Taxes and licenses 217,000
Insurance expense 152,250
Rent expense 598,500
Utilities expense 220,500
Living expenses 227,500 _________
P 14,472,500 P 14,472,500
Additional information:
2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.
3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31,
2006 and December 31, 2005 respectively.
4. The inventory totaled P1,274,000 based on a physical count of the goods at December
31, 2006. The inventory was priced at cost, which approximates market value.
5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage
for one year. The premium on the previous policy, which expired on April 30, 2006, was
P136,500.
6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant
lot adjacent Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard
paved and fenced in the lot at a cost of P787,500. The improvements were completed on
April 1, 2006, and estimated to have a useful life of fifteen years. No provision for
depreciation has been recorded. Depreciation on furniture and fixtures was P210,000 for
2006.
8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome
is probable and that a reasonable estimate of the settlement is P3,000,000.
9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also
receives P4,375 per week for living expenses.
74
Questions
Determine the balances of the following under the accrual basis of accounting.
1. Accounts Receivable
a. 415,000 b. P 283,500 c. P 131,500 d. P 152,000
3. Inventory
a. P 1,274,000 b. P 1,085,000 c. P 189,000 d. P 896,000
4. Prepaid Insurance
a. P 147,000 b. P 96,250 c. P 50,750 d. P0
7. Accrued Expenses
a. P 114,750 b. P 69,750 c. P 24,750 d. P0
8. Wizard, Drawings
a. P 707,500 b. P 480,000 c. P 227,500 d. P0
10. Sales
a. P 11,842,500 b. P 11,559,000 c. P 11,427,500 d. P 11,296,000
11. Purchases
a. P 5,873,000 b. P 5,575,500 c. P 5,339,250 d. P 5,103,000
75
18. Cost of sales
a. P 5,386,500 b. P 5,368,500 c. P 5,150,250 d. P 4,065,000
Solution
1. A - P415,000 given in item no. 1
2. C - P394,250 (P415,000 – P20,750 item no. 2)
3. A - P1,274,000 given in item no. 4
4. C - P152,250 x 4/12 = P50,750
5. C
Furniture & fixtures 2,068,500
Leasehold improvements 787,500
Less: Accumulated dep’n – 1/1/02 ( 567,000)
2002 Depreciation – improve. ( 39,375)
2002 Dep’n – furniture ( 210,000)
Carrying value – 2002 2,039,625
6. A - P533,750 given in item no. 3
7. B - P69,750 given in item no. 7
8. A
Salaries – P40,000 x 12 - P 480,000
Living allowance P4,375 x 52 weeks - 227,500
Total 707,500
9. B
Capital – beg. 2,180,500
Omission of prepaid expense in 2001 45,500
Omission of accrued expenses in 2001 ( 45,000)
Total 2,181,000
10. B
Sales – cash basis - 11,427,500
+ AR – end - 415,000
- AR – beg - 283,500
Sales – accrual basis - 11,559,000
11. B
Purchases – cash basis - 5,339,250
+ AP – end - 533,750
- AP – beg - 297,500
Purchases – accrual basis - 5,575,500
12. D
Salaries per record - 3,045,000
- Salaries of the proprietor * - 480,000
Adjusted Salaries - 2,565,000
* Salaries of the proprietor for a partnership is considered as part of profit distribution
13. B
Taxes and licenses – cash basis - 217,000
+ Accrued taxes – end - 33,750
- Accrued taxes – beg - 20,250
Taxes and licenses – accrual basis - 230,500
14. B
Insurance expense – cash basis - 152,250
+ Prepaid insurance – beg - 45,500
- Prepaid insurance – end - 50,750
Insurance expense – accrual basis - 147,000
15. B
Utilities – cash basis - 220,500
+ Accrued utilities – end - 36,000
- Accrued utilities – beg - 24,750
Utilities – accrual basis - 231,750
16. A – given in item # 2
17. B – refer to Question # 5 question
18. A
Beginning inventory - 1,085,000
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Purchases - 5,575,500
Ending inventory - (1,274,000)
Cost of Sales - 5,386,500
19. C
Since there is a comprehensive insurance policy for the damage, only P500,000 will be charged as loss (3M –
2.5M)
Problem 11
You have been engaged to examine the financial statements of Vince Corporation
for the year ended December 31, 2006. In the course of your examination, you
have ascertained the following information:
1. Vince uses the allowance method of accounting for uncollectible trade accounts
receivable. The allowance is based upon 3% of past due accounts (over 120 days) and
1% of current accounts as of the close of each month. Due to the changing economic
conditions and climate, the amount of past due accounts has increased significantly, and
management has decided to increase the percentage based on past due accounts to 5%.
The following balances are available:
As of As of
Nov. 30, 2006 Dec. 31, 2006
2. The merchandise inventory on December 31, 2005 did not include merchandise
having a cost of P7,000.00 which was stored in a public warehouse. Merchandise having
a cost of P3,000.00 was erroneously counted twice and included twice in the
merchandise inventory on December 31, 2006. Vince uses a periodic inventory system.
3. On January 2, 2006, Vince had a new machine delivered and installed in its new
factory. The cost of this machine was P97,000.00 and the machine is being depreciated
on a straight-line method over an estimated useful life of 10 years. When the new
machine was installed, Vince paid for the following items which were not included in the
cost of the machine, but were charged to repairs and maintenance:
Delivery Expense - P 2,500.00
Installation Costs - 8,000.00
Rearrangement of related Equipment - 4,000.00
P14,500.00
4. On May 3, 2006, Vince exchanged 500 shares of treasury stock (P50.00 par value
common stock) for a parcel of land to be used as a site for a new factory. The treasury
stock had a cost P70.00 per share when it was acquired and on May 03, 2006, it had a
fair value of P80.00 per share. Vince received P2,000.00 when an existing building on
the land was sold for scrap. The land was capitalized at P40,0000.00 and Vince recorded
a gain of P5,000.00 on the sale of its treasury stock.
77
Treasury stock . . . . . . . . . . . . . . P 35,000.00
Gain on Sale of treasury stock . . . . . 5,000.00
Cash . . . . . . . . . . . . . . . P 2,000.00
Miscellaneous Income . . . . . . . . . . P 2,000.00
Questions
1. The allowance for uncollectible accounts to be reported on the Balance Sheet is:
a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00
4. If no proper correcting entries were made at December 31, 2005, by how much will
2005 net income before income taxes be overstated or understated?
a. Understated by P7,000.00 c. Overstated by P 7,000.00
b. Understated by P4,000.00 d. Overstated by P 4,000.00
5. Machinery and equipment account should be reported in the balance sheet (net of
accumulated depreciation) at December 31, 2006:
a. P 100,350.00 b. P 110,050.00 c. P 111,500.00 d. P 101,800.00
6. Land account should be reported in the balance sheet at December 31, 2006:
a. P 35,000.00 b. P 33,000.00 c. P 40,000.00 d. P 38,000.00
10. If no proper correcting entries were made at December 31, 2006, by how much will
2006 net income before income taxes be overstated or understated?
a. Understated by P 493,450.00 c. Overstated by P 539,050.00
b. Understated by P 534,050.00 d. Overstated by P 498,450.00
Solution
(1) Doubtful Account Expense 14,500.00
Allowance for D/A 14,500.00
Required allowance as of 12.31.2006
-on past due accounts (5% x P30,000.00) P 1,500.00
-on current accounts (1% x P400,000.00) 4,000.00
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Total P 5,500.00
Unadjusted “debit” balance of Allowance for D/A 9,000.00
Additional Provision (expense) P14,500.00
(2) a. Merchandise Inventory, 01.01.2006 7,000.00
Retained Earnings 7,000.00
(to correct understatement of inventory at end of 2005)
b. Cost of Sales 3,000.00
Merchandise Inventory, 12.31.2006 3,000.00
(to correct overstatement ending inventory for 2006)
(3) a. Machinery 14,500.00
Repairs and Maintenance 14,500.00
(to reclassify delivery and installation costs)
b. Depreciation Expense 1,450.00
Accumulated Depreciation 1,450.00
(to provide for depreciation for items not capitalized)
(4) Miscellaneous Income 2,000.00
Gain on Sale of Treasury Stock 5,000.00
Land 2,000.00
APIC-T/S 5,000.00
(to correct client’s entry on the purchase of land)
(5) Prepaid Pension Cost 480,000.00
Pension Expense 480,000.00
(to correct client’s entry in the treatment of prepaid pension cost)
Current Service and interest cost P 620,000.00
Expected return on Plan Asset
(P 1,000,000.00 x 10%) ( 100,000.00)_
Pension Expense P 520,000.00
Reported pension expense 1,000,000.00
Prepaid Pension Cost P 480,000.00
Answer:
1. C 2. A 3. C 4. A 5. A 6. D 7. D 8. B 9. D 10. D
Problem 12
Ron-Ron Storage underwent a restructuring in 2006. The company conducted a thorough
internal audit, during which the following facts were discovered. The audit occurred during
2006 before any adjusting entries or closing entries are prepared.
a. Additional printers were acquired at the beginning of 2004 and added to the company’s
office network. The P9,000 cost of the printers was inadvertently recorded as
maintenance expense. The printers have five-year useful lives and no material salvage
value. This class of equipment is depreciated by the straight-line method.
b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and
recorded the expenditure as office supplies on hand. The error was discovered a week
later.
c. On December 31, 2005, inventory was understated by P112,000 due to a mistake in the
physical inventory count. The company uses the periodic inventory system.
d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares,
P1) as follows:
The shares had a market price at the time of P10 per share.
e. At the end of 2005, the company failed to accrue interest expense that accrued during
the last four months of 2005 on bonds payable. The bonds which were issued at face
79
value mature in 2010. The following entry was recorded on March 1, 2006, when the
semi-annual interest was paid:
f. A three-year liability insurance policy was purchased at the beginning of 2005 for
P216,000. The full premium was debited to insurance expense at the time.
Questions
Solution
2004 2005 2006
A 9,000
(1,800) (1,800) (1,800)
B
C 112,000 (112,000)
D
E (120,000) 120,000
(120,000)
F _________ 144,000 (72,000)
Under/(Over) 7,200 134,200 185,800
Answer:
1. D 2. B 3. B 4. C
Problem 13
You been asked by a client to review the records of the Claire Joy Company, a small
manufacturer of precision tools and machines. Your client is interested in buying the
business, and arrangements have been made for you to review the accounting records.
a. Claire Joy Company commenced business on April 1, 2003, reporting on a fiscal year
ending March 31. The company has never been audited, but the annual statements
prepared by the bookkeeper reflect the following income before closing and before
deducting income taxes:
80
2005……………………………………… 111,400
2006……………………………………… 103,580
Sales price was determined by adding 30% to cost. You learned that the consigned
goods were sold the following year.
c. On March 30, 2005, two machines were shipped to a customer on a C.O.D. basis. The
sale was not entered until April 5, 2005 when cash was received for P6,100. The
machines were not included in the inventory at March 31, 2005. (Title passed on March
30, 2005).
d. All machines are sold subject to a five-year warranty. It is estimated that the
expense ultimately to be in connection with the warranty will amount to ½ of 1% of
sales. The company has charged an expense account for warranty costs incurred.
Sales per books and warranty costs were:
Warranty of Expense for Sales Made in
Year Ended March 31 Sales 2004 2005 2006 Total
2004 P940, 000 P760 P760
2005 1, 010, 000 360 P1, 310 1, 670
2006 1, 795, 000 320 1, 620 P1, 910 3, 850
f. A delivery equipment with a 10-year life (no residual value, straight-line depreciation)
was purchased on April 1, 2005 by issuing a P 600,000 non- interest- bearing, 4 year
note. The entry made to record the purchase was a debit to Delivery Equipment and a
credit to Notes payable for P 600,000; a 10% is a fair rate of interest on the note. The
accountant failed to provide for depreciation for the year on this equipment.
g. For the last three (3) years, the company has failed to accrue salaries and wages. The
correct amounts at the end of each fiscal year were:
2004…………………………………. P 12, 000
2005…………………………………. 18, 000
2006…………………………………. 10, 000
Questions
Answer the following questions based on the audit findings. Ignore income tax implications.
81
1. The adjusting entry to set up the estimated Liability under Warranties is
a. Warranty expense 5,411
Retained earnings 7,006
Estimated liability under warranties 12,417
b. Retained earnings 5,411
Warranty expense 7,006
Estimated liability under warranties 12,417
c. Warranty expense 12,417
Estimated liability under warranties 12,417
d. Retained earnings 12,417
Estimated liability under warranties 12,417
2. The total receivable from the bank representing dealers fund reserve as of
March 31, 2006 is:
a. P 5,100 b. P 6,900 c. P 12,000 d. P 14,000
6. The audited balance of Discount on Note Payable as of March 31, 2006 is:
a. P 0 b. P 102, 452 c. P 149, 211 d. P 190, 192
7. Depreciation Expense for fiscal year 2006 that should be provided on the
equipment purchased on April 1, 2005 is
a. P 13,660 b. P 40,981 c. P 60,000 d. P 66,000
Solution
Adjusting entry:
b. Sales 5,590
Accounts receivable 5,590
Inventory 4,300
Cost of sales 4,300
c. Sales 6,100
Retained earnings - beg 6,100
d. Warranty expense 12,417
Estimated warranty payable 12,417
2004 940,000 – 7,800 = 932,200
2005 1,010,000 + 6,100 – 7,800 = 1,023,900
2006 1,795,000 – 5,590 – 6,100 = 1,783,310
Adjusted balance = 3,739,410
X ½ of 1% = .005
Total Warranty expense = 18,697
Less: Warranty paid = 6,280
Estimated warranty liability = 12,417
e. Fund reserve from the bank 14,000
Other income 14,000
f. OE: Delivery equipment 600,000
Notes payable 600,000
CE: Delivery equipment 409,808
Discount on NP 190,192
Notes payable 600,000
82
Adj: Discount on NP 190,192
Delivery equipment 190,192
Adj: Interest expense 40,981
Discount on NP 40,981
P409,808 x 10% = P 40,981
g. Retained earnings 18,000
Salaries 18,000
Salaries 10,000
Accrued salaries 10,000
Answer:
1. C 2. D 3. D 4. D 5. C 6. C 7. B
Problem 14
You are auditing the accounts of Keith Zandro Merchandising Corporation for the year ended
December 31, 2006. You discover that the adjustments made in the previous audit for the
year 2005 were not entered in the accounts by Keith Zandro’s bookkeeper; therefore, the
accounts are not in agreement with the audited amounts as of December 31, 2005. The
following adjustments were included in the 2005 audit report:
c. Allowance for doubtful accounts for 2005 was understated by P2,000 because bad
debts expense in 2005 was not recorded.
d. Selling expense for 2005, P5,000, was not recorded in the accounts until paid in
2006.
e. Accrued wages of P4,000 at December 31, 2005, were not recorded in the
accounts until paid in January 2006.
f. Prepaid insurance at December 31, 2005 was understated by P600 because this
amount was included in 2005 expense. The insurance policy expires on December 31,
2006.
g. Income tax expense of P2,400 for the last part of the year ended December 31,
2005, was not recorded until paid in January 2006.
Questions:
Based on the information given, answer the following:
83
3. Operating expenses of 2005 is understated by
a. P 21,800 b. P 21,800 c. P 20,600 d. P 19,400
Solution
NET INCOME
2005 2006
A. Omission of purchases (12,000) 12,000
Omission of inventory 12,000 (12,000)
B. Omission of purchases (18,000) 18,000
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G (2,400) 2,400
H (9,000) _______
(39,800) 28,800
OPERATING EXPENSES
2005 2006
A
B.
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G
H (9,000) _______
(19,400) 8,400
Answer:
1. B 2. C 3. D 4. D 5. A
Pro0blem 15
Tuburan Company was organized during 2002 by three technical experts to assemble (parts
to be purchased from suppliers) and market an electronic device that they had previously
patented. No products were sold during 2002; however, 2003 and 2004 produced significant
sales, but modest profits. During 2003, the company hired bookkeeper who, although very
industrious, had very little knowledge of accounting. Realizing this competency problem, the
company is considering engaging an outside independent CPA to as they said “straighten
things out and make recommendations.” Among numerous other accounting problems,
adjusting entries have never been made. The bookkeeper stated that “the transactions are
recorded in the right way when they occur.”
The following 2005 transactions, and the way in which the bookkeeper recorded or
explained them, are being discussed:
a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count).
84
Inventory of parts 17,000
Purchases 17,000
Record when paid, because that is when the wages requires the payment of resources
and “it all events out anyway.”
d. Note payable, P60,000, five-year, 15%, interest payable each October 31; signed
November 1, 2004.
Interest expense 9,000
Cash 9,000
Because this is the correct amount of interest each year
e. Contract to deliver six electronic devices, signed October 15, 2005, pending
assembly, P45,000.
Due from customers 45,000
Sales 45,000
f. Property taxes for 2005, billed in November 2005, payable without penalty up to
February 15, 2004, P9,000. Paid on February 14, 2006.
February 14, 2006:
Property taxes 9,000
Cash 9,000
g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the
30-day credit period, on January 26, 2006.
85
5. Accrued expenses at December 31, 2005 is understated by
a. P 38,500 b. P 12,500 c. P 11,750 d. P 11,000
Solution
1. B
P 60,000 x 15% = P 9,000
2. C
P 60,000 x 15% x 2/12 = P 1,500
3. B Given in item A
4. C
Retained earnings 3,000
Wages expense 3,000
Wages expense 11,000
Wages payable 11,000
5. A
Interest payable 1,500
Wages payable 11,000
Property taxes 9,000
Advertising 17,000
Total 38,500
Problem 16
Branzuela Corporation reported the following amounts of net income for the years ended
December 31, 2003, 2004 and 2005:
2003 P127,000
2004 150,000
2005 128,500
You are performing the audit for the year ended December 31, 2005. During your
examination, you discover the following errors:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
c. Branzuela records sales on the accrual basis but failed to record sales on account made
near the end of each year as follows
2003 P4,000
2004 5,000
2005 3,500
86
d. The company failed to record accrued office salaries as follows:
e. On March 1, 2004, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P10,000 and market value was P13,000. the stock dividend was
recorded as follows:
g. On January 1, 2005, Branzuela retired bonds with a book value of P120,000 for
P106,000. The gain was incorrectly deferred and is being amortized 10 years as a
reduction of interest expense on other outstanding obligations.
Questions:
1. What is the adjusted net income for the year ended December 31, 2003?
a. P133,000 b. P121,000 c. P117,000 d. P113,000
2. What is the adjusted net income for the year ended December 31, 2004?
a. P159,000 b. P160,000 b. P179,000 c. P187,000
3. What is the adjusted net income for the year ended December 31, 2005?
a. P129,600 b. P131,600 c. P139,600 d. P142,600
4. What adjusting entry should be made on December 31, 2005 to correct the error
described in item B?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases 15,000
Accounts payable 15,000
c. Accounts payable 15,000
Cash 15,000
d. Accounts payable 15,000
Retained earnings 15,000
5. The adjusting entry on December 31, 2004 to correct the error described in item E
should include a debit to
a. Common stock P10,000 c. Additional paid in capital, P3,000
b. Retained earnings, P16,000 d. Miscellaneous expenses, P3,000
Solution
2003 2004 2005
Unadjusted Net Income 127,000 150,000 128,500
A 14,000 (14,000)
(23,000)
87
B 15,000
C 4,000 (4,000)
5,000 (5,000)
3,500
D (10,000) 10,000
(14,000) 14,000
E 13,000
F 5,000 (2,000)
G 14,000
___________ ___________ (1,400)
Adjusted Net Income 121,000 179,000 129,600
Answer:
1. B 2. A 3. D 4. A 5. B
88
Questions
1. The entry to correct/adjust item F is:
a. Investment 50,000
Cash 50,000
b. Other assets 50,000
Cash 50,000
c. Short-term investment 50,000
Cash 50,000
d. No adjustment
4. DON CORPORATION’S cash and cash equivalents balance at December 31, 2006 is:
a. Overstated by P1,950,100 c. Overstated by P 1,845,100
b. Overstated by P 1,895,100 d. Overstated by P 1,795,100
5. DON CORPORATION’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 618,800 b. P 623,800 c. P 673,800 d. P 723,800
Solution
89
m. Investment – current 150,000
Cash 150,000
n. No adjustment
o. No adjustment
p. Operating expenses 80,000
Cash 80,000
q. Short-term investment 600,000
Cash 600,000
r. Short-term investment 100,000
Cash 100,000
s. No adjustment
t. No adjustment
u. Investment 150,000
Cash 150,000
Answer:
1. D 2. D 3. C 4. A 5. A
Problem 2
The following items are found in the cash account of Ivie Company at December 31, 2006.
The company’s controller asks your opinion whether the items listed below should be
considered as part of cash account and come up with adjusting entry to adjust the cash
account.
Questions
90
a. Accounts receivable 4,000
Sales discounts 4,000
b. Sales discounts 4,000
Accounts receivable 4,000
c. Accounts receivable 4,000
Sales 4,000
d. No adjustments
5. IVIE COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006 is:
a. P 771,000 b. P 741,000 c. P 721,000s d. P 691,000
Solution
Item 1 - Cash
Item 2 - Cash
Item 3 - Cash
Item 4 - Other Assets
Item 5 - Investment
Item 6 - Investment – current
Item 7 - Cash
Item 8 - Cash
Item 9 - Current liability
Item 10 – Offset to cash
Item 11 – Offset to Cash
Item 12 – Unused supplies
Item 13 – Cash as cash equivalents
Item 14 – Short-term investment
Item 15 – Cash
Item 16 – Cash
Item 17 – property recorded as disbursement
91
Answer:
1. B 2. A 3. D 4. D 5. D
Problem 3
Your audit of the December 31, 2006, financial statements of Mato Corporation reveals the
following:
Questions
2. MATO CORPORATION’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 560,000 b. P 544,000 c. P 514,000 d. P 509,000
Solution
Answer:
1. C B. B
92
Problem 4
The controller of Pacatang Company is attempting to determine the amount of cash to be
reported on its December 31, 2006 balance sheet. The following information is provided:
1. PACATANG COMPANY’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 1,910,300 b. P 2,400,300 c. P 2,510,300 d. P 3,510,300
2. The travel advance of P180,000 for executive travel should be classified as:
a. Accounts receivable c. Prepaid expenses
b. Travel expenses d. Advances to employees
Solution
Commercial savings account P1,000,000
Commercial checking account 900,000
Petty cash fund 5,000
Currency and coin on hand 5,300
Amount of cash to be reported on balance sheet at 12.31.03 P1,910,300
Answer:
1. A 2. D
Problem 5
Present journal entries to record the following transactions in the books of Marites
Corporation, which uses a calendar year as accounting period. Assume that the company is
using the imprest method in accounting for petty cash fund:
93
a. A petty cash fund was set up on November 1, 2006 in the amount of P2,400.
b. On November 29, 2006, a check was issued to replenish the fund, the composition of
which was as follows:
Currency – bills and coins 166
Vouchers showing expenditures for:
Office supplies 270
Charges from purchased of supplies 124
Repairs and maintenance 350
Wages paid to casual employees 950
Charges from purchased of goods to be sold 400
c. On December 18, 2006, the fund was replenished and correspondingly increased to
P3,000; its composition included the following:
Currency – bills and coins 158
Vouchers showing expenditures for:
Store supplies 304
Accounts payable 914
Charges from purchased of goods to be sold 242
Miscellaneous expenses 782
d. An examination on December 31, 2006, disclosed the following composition of the fund,
although it was not replenished on this date:
Currency – bills and coins 958
Check of office manager, dated January 5, 2007 1,000
Vouchers showing expenditures for:
Office supplies 126
Miscellaneous expenses 90
Accounts payable 800
e. On January 5, 2007, the check of office manager was cashed and the proceeds were
added to the petty cash fund.
Questions
1. The entry to record the November 29 replenishment of petty cash fund is:
a. Operating expenses 1,694
Freight-in 400
Cash short/over 140
Cash 2,234
b. Operating expenses 2,234
Petty cash fund 2,234
c. Operating expenses 1,694
Freight-in 400
Cash short/(over) 140
Petty cash fund 2,234
d. No entry since the company is using an impress fund system.
2. The adjusted Petty Cash Fund balance of MARITES CORPORATION at December 31,
2006 is:
a. P 3,000 b. P 1,958 c. P 984 d. P 958
94
3. The entry to record the December 31, 2006 adjustment of petty cash fund is:
a. Operating expenses 216
Accounts payable 800
Cash short/over 26
Petty cash fund 1,042
b. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
c. Operating expenses 216
Accounts payable 800
Advances – employees 1,000
Cash short/(over) 26
Petty cash fund 2,042
d. No entry since there is no replenishment yet.
4. The entry to record the January 6, 2004 replenishment of petty cash fund is:
a. Operating expenses 216
Accounts payable 800
Cash short/over 26
Petty cash fund 1,042
b. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
c. Operating expenses 216
Accounts payable 800
Advances – employees 1,000
Cash short/(over) 26
Cash 2,042
d. No entry since the account has been adjusted on December 31.
Solution
a. Petty cash fund 2,400
Cash 2,400
b. Operating expenses 1,694 TCAF 2,260
Freight-in 400 Accountability 2,400
Cash short/over 140 Shortage 140
Cash 2,234
c. Operating expenses 1,086 TCAF 2,400
Accounts payable 914 Accountability 2,400
Freight-in 242 Shortage 0
Cash 2,242
Petty cash fund 600
Cash 600
d. Operating expenses 216 TCAF 2,994
Advances to employees 1,000 Accountability 3,000
Accounts payable 800 Shortage 26
Cash short/over 26
Petty cash fund 2,042
95
Petty cash fund 2,042
Operating expenses 216
Advances to employees 1,000
Accounts payable 800
Cash short/over 26
e. No entry
f. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
Answer:
1. A 2. D 3. C 4. B
Problem 6
Your audit of the petty cash (P10,000) of Juliet Company as of December 31, 2006 revealed
the following: (cash count date is January 3, 2007 at 5:00 pm)
The cashier informed you that owing to the lack of cash it was necessary for him to open
certain payroll envelopes unclaimed by employees and use the cash found herein. They
were as follows:
Dec. 15, 2006 - Ed A. P 1,250
Dec. 30, 2006 - Andoy 1,750
Dec. 30, 2006 - Macky 650
Dec. 30, 2006 - Paz 1,000
The cashier also informed you that all cash sales receipts were passed through his fund
and that cash sales tickets Nos. 2059 to 2061 under dates of Dec. 30, Jan. 3 and Jan. 4
for P350, 500 and P545, respectively, had not yet been turned over to the general
cashier.
The petty cash vouchers found in the petty cash box were as follows:
Dec. 30, 2006Transportation P515
Dec. 30, 2006Token gifts to visitors 650
Dec. 30, 2006Freight for office supplies purchase 215
Jan. 1, 2007 Freight for mdse. purchased 125
Jan. 2, 2007 Freight for mdse. sold 575
Questions
2. The adjusted petty cash balance of JULIET COMPANY at December 31, 2006 is:
a. P 10,000 b. P 9,625 c. P 5,975 d. P 4,625
96
3. The entry to adjust the unclaimed payroll at December 31, 2006 is:
a. Petty Cash Fund c. Cash
Salaries expense Accrued salaries
b. Salaries expense d. Accrued salaries
Petty cash fund Cash
5. The Cash account (excluding PCF) of JULIET COMPANY is understated at December 31,
2006 by:
a. P 4,650 b. P 4,900 c. P 6,045 d. P 6,370
Solution
Cash Count Due to custodian 1,370
Bills 7,750 Petty cash fund 1,370
Coins 245
IOUs 1,375 Advances to employees 1,375
Checks 3,225 Petty cash fund 1,375
Vouchers 2,080
TCAF 14,675 Cash 350
Accountability Sales 350
PCF per ledger (10,000)
Unclaimed payroll ( 4,650) Advances to employees 1,250
Undeposited sales ( 1,395) Petty cash fund 1,250
Cash shortage 1,370
Cash 4,650
Accrued salaries 4,650
Problem 7
You are making an audit of the Darwin Corporation for the past calendar year. The balance
of the Petty Cash account at December 31, 2006 was P1,300. Your count of the imprest
cash count made at 8:30 am on January 3, 2007, in the presence of the petty cash
custodian, revealed:
Checks:
Date Maker Bank
12/28/06 Macky, vice-president PNB 360.00
12/29/06 Andy, employee DBP 60.00
12/31/06 Bobot, customer RCBC 153.80
01/02/07 Neil, customer PNB 121.36
97
01/10/07 Jeff, employee PNB 60.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)
Vouchers:
Dec. 11 #261 Richard, shipping clerk – temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency – P28.80; merchandise freight bills, P31.20. P 60.00
Dec. 28 # 301 Postage 12.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 88.93
Jan. 2 # 500 Freight bill on merchandise purchases 29.36
Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice # 315 Dec. 30 P 120.00
328 Dec. 31 153.80
334 Jan. 2 121.36
(As a general rule, the petty cashier endeavored to turn over the proceeds of
cash sales to the general cashier on the 10 th, 20th and last days of each month.
Proceeds on these sales were recorded and deposited by the general cashier.)
Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These
stamps represent the unused stamps purchased on Voucher # 301.
Questions
1. The petty cash fund shortage at December 31, 2006 is:
a. P 216.39 b. P 123.83 c. P 98.03 d. P 95.03
2. The adjusted petty cash fund balance of DARWIN CORPORATION at December 31, 2006
is:
a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54
3. DARWIN CORPORATION’S operating expenses found in the petty cash fund at December
31, 2006 is:
a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93
Solution
Cash count
98
Currency and coins 571.38 Due to custodian 95.03
Checks 755.16 PCF 95.03
Vouchers 237.59
IOU 36.00 Cash 273.80
TCAF 1,600.13 Sales (SI#328 & 315) 273.80
Accountability
PCF per ledger (1,300.00) Adv. to employee 60.00
Undeposited sales ( 395.16) PCF 60.00
Cash shortage 95.03
Adv. to employee 60.00
Operating expenses 100.93
Freight-in 47.30
PCF 208.23
Freight-in 31.20
Adv. to employee 31.20
Problem 8
In connection with your audit of the financial statements of Reyes Corporation for the year
ended December 31, 2006, you conducted a surprise count of the company’s petty cash and
undeposited collections at 9:10 am on January 3, 2007. You count disclosed the following:
Bills Coins
P100.00 5 pieces P1.00 205 pieces
50.00 40 pieces 0.50 162 pieces
20.00 35 pieces 0.25 32 pieces
10.00 27 pieces
Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Reyes Corp. Karren, Inc. 14,000
Dec. 31 Reyes Corp. Sheryl, sales manager 1,680
Dec. 31 Reyes Corp. Victor Corp. 17,800
Dec. 31 Reyes Corp. Ma. Karen, Inc. 8,300
Dec. 31 Merry Corp. Reyes Corp. 27,000
(not endorsed)
Unreimbursed vouchers
Date Payee Description Amount
Dec. 23 Sheryl, sales mgr. Advance for trip P 7,000
Dec. 28 Post Office Postage stamps 1,620
Dec. 29 Messengers Transportation 150
Dec. 29 Ace, Inc. Computer repair 800
99
Other items found inside the cash box:
1. Unclaimed pay envelope of Jeanette. Indicated on the pay slip is his net salary of
P7,500. Your inquiry revealed that Jeanette’s salary is mingled with the petty cash
fund.
Additional information:
3. The petty cash balance per general ledger is P10,000. The last replenishment of the
fund was made on December 22, 2006.
Questions
2. The adjusted petty cash balance of REYES CORPORATION at December 31, 2006 is:
a. P 4,964 b. P 2,110 c. P 1,200 d. P 430
Solution
Bills and coins 3,764
Checks 69,980
Vouchers 9,570
TCAF 83,314
Accountability
PCF per ledger (10,000)
100
Undeposited sales – with receipts (43,300)
Unclaimed payroll ( 7,500)
Unendorsed check (27,000)
Undeposited sales – without receipts (14,000)
Check endorsed by sales manager ( 1,680)
Cash shortage (20,166)
Cash 57,300
Sales (with and without receipts) 57,300
Cash 7,500
Accrued salary 7,500
Answer: 1. B 2. B 3. C
Problem 9
Mary Jane is the cashier of Adlawan Corporation. AS representative of the Zarate and
Associates, CPAs, you were assigned to verify her cash on hand in the morning of January
3, 2007. You began to count at 9:00 AM in the presence of Mary Jane. In the course of
your counting, you found currencies in paper bills and coins together with checks, vouchers,
and other items, which are mentioned below:
IOUs:
Date Maker Amount
12/20/06 Yap, Janitor P 500
12/22/06 Felix, clerk 750
12/24/06 Ablay, bookkeeper 500
101
12/18/06 Posts Office Supplies 300.00
12/20/06 Alejandre, carpenter Repairs 2,950.00
12/21/06 Violan Miscellaneous expense 554.00
2. Cash sale of January 2, 2007 amounted to P8,650 per sales records, while cash
receipts book and bank deposit slip showed that only P7,650 was deposited in the
bank on January 3, 2007
3. The following employees’ pay envelopes had been opened and the money removed.
Each envelope was marked “Unclaimed” - Ernesto, P332.50; Secinando, P447.50.
Questions
1. The petty cash shortage of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 2,748.50 b. P 1,748.50 c. P 968.50 d. P 188.50
2. The adjusted petty cash balance of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 10,950 b. P 11,950 c. P 11,730 d. P 12,730
Solution
Cash count
Bills and coins 2,730.00 Due to custodian 968.50
Checks 10,000.00 Petty cash fund 968.50
IOUs 1,750.00
PCF Vouchers 6,331.50 Adv. to employees 1,750.00
TCAF 20,811.50 Petty cash fund 1,750.00
Accountability
PCF per ledger (20,000.00) Adv. to employees 1,000.00
Uneposited sales ( 1,000.00) Operating expenses 4,349.00
Unclaimed payroll ( 780.00) Freight-in 982.50
Cash shortage 968.50 Petty cash fund 6,331.50
Cash 780.00
Accrued salary 780.00
Answer:
1. C 2. A 3. D
Problem 10
In your year-end audit of Angela Corp., the cashier showed a cash accountability of
P1,100,000 as at December 31, 2006. The following transactions were extracted in the
books of the company, in summary form:
102
Inventory, end 185,000
Inventory, beg 203,000
Cost of sales 960,000
Income tax accrued 18,500
Payment of bank loan 200,000
Subscription receivable 250,000
Subscribed capital stock 950,000
Purchases of fixed assets 320,000
Proceeds from short-term bank loan 300,000
Accounts payable, end 425,000
Accounts payable, beg. 200,000
Questions
Solution
* Accounts Receivable
Beg. bal 275,000 Collection 1,360,000 squeeze figure
Cr. Sales 1,480,000 Write-off 25,000
Recovery 15,000 ________
1,770,000 1,385,000
End bal 385,000
Problem 11
The following data are gathered from the cash books and bank statement received from
Davao Bank by Grace Company:
103
The cash in bank ledger account shows a debit balance of P290,438.50 as of May 31.
An examination of the checks encashed by the bank shows that the following checks are not
presented for payment:
No. 187, P3,608; No. 189, P15,499; No. 191, P4,400;
No. 192, P1,545.50, No. 193, P23,001
A certified check for P24,750 payable to creditor, was encashed by the bank during May.
The bank statement shows a deduction of P10,802 for check No. 184. The check was
actually made out at P10,208.
A check deposited on May 27 for P34,100 was returned by the bank on May 28 marked
Refer to Maker.
A non-interest bearing note for P44,000 was collected by the bank for the account Grace
Company. Collection fee deducted by the bank is P330.
Check No. 179 for P26,400 was erroneously recorded in the books as P46,200.
Interest on an outstanding loan payable, deducted by the bank on May 31, P1,320.
Collections on May 31 to be deposited on June 1, P26,488.
Questions
Solution
Adjusting entry:
104
Cash 1,320
Answer:
1. C 2. B
Problem 12
The following data pertaining to the cash transactions and bank account of Abiso Company
for May 2006 are available to you:
Customer’s checks returned by the bank marked NSF, indicating that the
customer’s balance was not adequate to cover the checks; no entry has
been made in the accounting records to record the returned check 2,280
Questions
1. The adjusted cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. P 87,570 b. P 90,000 c. P 90,570 d. P 90,900
2. The cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. Understated by P39,318 c. Understated by P38,418
b. Understated by P38,988 d. Understated by P35,988
Solution
Book Bank
Unadjusted balance 51,582 95,874
Service charge ( 327)
DM – printed checks ( 375)
Outstanding checks (20,184)
Deposit in transit 14,610
Loan proceed 17,100
Proceed from note collection 24,300
Bank error ( 2,700)
Bank error 2,400
NSF ( 2,280) __________
Adjusted balance 90,000 90,000
Adjusting entry:
105
Cash 327
Cash 17,100
Prepaid interest 900
Bank loan 18,000
Cash 24,300
Note receivable 24,000
Interest income 300
Problem 13
In connection with an audit, you are given the following bank reconciliation.
BANK RECONCILIATION
December 31, 2006
Balance per ledger, 12/31/03 P 34,349.72
Add: Collections received on the last day of
December and charged to “Cash in Bank”
on books but not deposited 5,324.50
Debit memo for customer’s checks returned
unpaid (check is on hand but no entry has been
made on the books) 4,000.00
Debit memo for bank service charge for December 1,000.00
P 46,674.22
Deduct:
Outstanding checks P 18,625
(see details below)
Credit memo for proceeds of a note receivable
which had been left at the bank for collection
but which has not been recorded as collected 8,000
Check for an account payable entered on books
as P12,625 but drawn and paid by bank as
16,225 3,600 32,225.00
Computed balance P 14,449.22
Unlocated difference 36,601.00
Balance per bank (check to confirmation) P 51,050.22
106
Questions:
2. A check for an account payable entered on books as P12,625 but drawn and paid by
bank as 16,225
a. Should not be included in the reconciliation since the bank already gave the money
to the payee.
b. Should not be included in the reconciliation since bank’s record is always followed.
c. Should be included as deduction in the book reconciliation since this is considered as
book error, thus a reconciling item.
d. Should be included as addition in the book reconciliation since this is considered as
book error, thus a reconciling item.
4. The cash balance of the company per record at December 31, 2006 is:
a. Overstated by P600 c. Understated by P 3,400
b. Overstated by P1,200 d. Overstated by P 6,600
Solution
Bank Book
Unadjusted balance 51,050.22 34,349.72
Returned checks ( 4,000.00)
Service charge ( 1,000.00)
Collection of note receivable 8,000.00
Deposit in transit 5,324.50
Outstanding checks (22,625.00)
Book error ____________ ( 3,600.00)
Adjusted balance 33,749.72 33,749.72
Adjusting entry
Cash 8,000
Note receivable 8,000
Problem 14
The cash books of Grace Corporation show the following entries during the month of June
2006.
Cash Receipts Journal Check Register
Date Amount Date Check No. Amount
June 1Balance 762,000 June2 801 15,625
4Deposit 113,000 3 802 7,526
4Deposit 811,000 5 803 229,205
7Deposit 152,200 7 804 169,555
107
10 Deposit 11,300 8 805 74,936
10 Deposit 12,700 10 806 274,600
11 Deposit 73,000 11 807 34,842
17 Deposit 110,075 13 808 250,000
18 Deposit 3,725 14 809 1,070,000
18 Deposit 65,000 17 810 167,300
19 Deposit 26,463 19 811 3,130
20 Deposit 133,037 21 812 82,730
27 Deposit 273,628 23 813 127,200
30 Deposit 92,400 25 814 93,080
30 815 720
CM - Represents a 60-day, 6% note for P40,000 collected by the bank for the account of
Grace Company.
CM - Represents a 60-day, 6% own note for P200,000 discounted by Grace Corporation with
the bank and not yet recorded in the books.
DM - Represents bank service charge for the month.
Check No. 924 represents a check signed by Graciele Company.
Collection charge – represents collection fee charged by the bank.
Questions
1. The unadjusted cash ledger balance of GRACE CORPORATION at June 30, 2006 is:
a. P 114,079 b. P 113,179 c. P 39,079 d. P 38,179
2. The unadjusted cash bank balance of GRACE CORPORATION at June 30, 2006 is:
a. P 261,305 b. P 336,305 c. P 337,205s d. P 412,205
108
3. The deposit in transit of GRACE CORPORATION at June 30, 2006 is:
a. P 92,400 b. P 104,500 c. P 182,000 d. P 0
5. The adjusted cash balance of GRACE CORPORATION at June 30, 2006 is:
a. P 277,879 b. P 276,079 c. P 261,305 d. P 201,079
Solution
Unadjusted book bal. 39,079 Unadjusted bank bal. 337,205
Error – Deposit in transit 92,400
Check # 801 – P 15,625 Outstanding checks:
Correct 16,525 ( 900) # 802 7,526
Collection fee ( 200) # 813 127,200
DM ( 300) # 814 93,080
CM 40,400 # 815 720 (228,526)
CM 198,000 Error 75,000
Adjusted balance 276,079 Adjusted balance 276,079
Adjusting entry:
Accounts payable 900
Cash 900
Cash 40,200
Collection fee 200
Notes receivable 40,000
Interest income 400
Service charge 300
Cash 300
Cash 198,000
Interest expense 2,000
Notes payable 200,000
Answer:
1. C 2. C 3. A 4. B 5. B
6. D 7. B
Problem 15
The bank portion of the bank reconciliation for Angelo Company at October 31, 2006 was as
follows:
Angelo Company
Bank Reconciliation
October 31, 2006
Cash Balance per Bank P 12,367.90
Add: Deposit in transit 1,530.20
P 13,898.10
Less: Outstanding checks
109
2451 P 1,260.40
2470 720.10
2471 844.50
2472 426.80
2474 1,050.00 4,301.80
The adjusted cash balance per bank agreed with the cash balance per books at October 31.
The November bank statement showed the following checks and deposits.
Bank Statement
Checks Deposits
Date Number Amount Date Amount
Cash Receipts
Cash Payments Journal Journal____
Date Number Amount Date Number Amount Date Amount
11-1 2475 1,640.70 11-20 2483 575.50 11-3 1,211.60
11-2 2476 2,830.00 11-22 2484 829.50 11-7 990.10
11-2 2477 600.00 11-23 2485 974.80 11-12 2,575.00
11-4 2478 538.20 11-24 2486 900.00 11-17 1,472.70
11-8 2479 1,570.00 11-29 2487 398.00 11-20 2,954.00
11-10 2480 1,330.00 11-30 2488 800.00 11-24 2,567.30
11-15 2481 695.40 Total 14,294.10 11-27 1,650.00
11-18 2482 612.00 11-29 1,186.00
11-30 1,225.00
Total 15,831.70
1. A credit of P2,105.00 for the collection of a P2,000 note for Angelo Company plus
interest of P120 and less a collection fee of P15. Angelo company has not accrued any
interest on the note.
110
At November 30, the cash balance per books was P11,123.90, and the cash balance per the
bank statement was P17,604.60. The bank did not make any errors, but Angelo Company
made two errors.
Note: The correction of any errors pertaining to recording checks should be made to
Accounts Payable. The correction of any errors relating to recording cash receipts should be
made to Accounts Receivable
Questions
1. The unadjusted cash ledger balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90 b. P 12,990.90 c. P 13,188.90 d. P 13,377.90
2. The unadjusted bank balance of ANGELO COMPANY at November 30, 2006 is:
a. P 12,828.90 b. P 13,008.90 c. P 13,188.90 d. P 17,614.60
5. The adjusted book balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90 b. P 12,990.90 c. P 13,188.90 d. P 13,377.90
Solution
Adjusting entry:
Cash 2,105
Service charge 15
Notes receivable 2,000
Interest income 120
Service charge 50
Cash 50
Accounts receivable 9
Cash 9
Accounts payable 180
Cash 180
Answer:
1. A 2. D 3. C 4. A 5. B
111
Problem 16
The following information pertains to the cash of Jenny Company:
Nov 31 Dec. 31
Balance shown on bank statement P 27,380 P 26,960
Balance shown in general ledger before
reconciling the bank account 25,780 25,000
Outstanding checks 8,630 10,150
Deposits in transit 6,850 12,450
For Dec.
Deposits shown in bank statement P 55,880
Charges shown on bank statement 56,300
Cash receipts shown in company’s books 53,980
Cash payments shown in company’s books 54,760
The bank service charge was P180 in November (recorded by the company during
December) and P240 in December (not yet recorded by the company).
Included with the December bank statement was a check for P5,000 that had been received
on December 25 from a customer on account. The returned check marked “NSF” by the
bank, has not yet been recorded on the company’s books.
During December the bank collected P7,500 of bond interest for the company and credited
the proceeds to the company’s account. The company earned the interest during the
current accounting period but has not yet recorded it.
During December the company issued a check for P6,960 for equipment. The check, which
cleared the bank during December, was incorrectly recorded by the company for P8,960.
Questions
112
6. The check issued but was incorrectly recorded as P8,960 should be adjusted by:
a. Accounts payable 2,000 c. Cash 2,000
Cash 2,000 Accounts payable 2,000
b. Equipment 2,000 d. Cash 2,000
Cash 2,000 Equipment 2,000
Solution
Nov. 30 Receipts Disburs. Dec. 31
Balance per book 25,780 53,980 54,760 25,000
Service charge – Nov. 30 (180) (180)
- Dec. 31 240 (240)
NSF check 5,000 (5,000)
Interest earned 7,500 7,500
Book error __________ _________ (2,000) 2,000
Adjusted Balance 25,600 61,480 57,820 29,260
Adjusting entry
Cash 7,500
Interest income 7,500
Cash 2,000
Equipment 2,000
Answer:
1. A 2. C 3. C 4. B 5. D 6. D
Problem 17
ELEFANTE’s check register shows the following entries for the month of December
ELEFANTE’s bank reconciliation for November revealed one outstanding check (No.14343)
for P12,000 (written on November 28), and one deposit in transit for P5,550 (made
November 29).
113
2006
Dec. 1 Beginning balance P 95,970
1 Deposit P 5,550 101,300
4 Check No. 14344 P 32,500 68,800
5 Deposit 56,000 124,800
14 Check No. 14345 14,000 110,800
15 Loan Proceeds 500,000 610,800
20 NSF check 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800
Note: All errors noted in this problem were committed by the Elefante, not the bank. It is
also noted that the company failed to record one deposit in the book.
Questions
1. The unadjusted cash receipts per ledger of ELEFANTE COMPANY for the month of
December is:
a. P 119,620 b. P 114,000 c. P 110,620 d. P 105,000
2. The unadjusted cash receipts per bank of ELEFANTE COMPANY for the month of
December is:
a. P 574,150 b. P 568,600 c. P 565,150 d. P 559,600
Solution
Dec. 1 Receipts Disburs. Dec. 31
Bank balance 95,970 565,150 55,100 606,020
Deposit in transit – Dec. 1 5,550 (5,550)
- Dec. 31 49,000 49,000
Outstanding checks
Dec. 1 - #14343 (12,000) (12,000)
Dec. 31 - #14343 – P12,000
#14346 - 8,600 __________ ________ 20,600 (20,600)
Adjusted balance 89,520 608,900 63,700 634,420
114
Adjusted balance 89,520 608,900 63,700 634,420
Adjusting entry
Cash 500,000
Notes payable 500,000
Cash 3,600
Interest income 3,600
Problem 18
Juliet Company maintains a checking account at the Davao Bank. At July 31, selected data
from the ledger balance and the bank statement are as follows:
Cash in Bank
Per Books Per Bank
Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a
credit memorandum of P2,070 for collection of a P2,000 note plus interest revenue of P70.
The July debits per bank consist of checks cleared, P74,700 and a debit memorandum of
P40 for printing additional company checks.
You also discover the following errors involving July checks: (1) a check for P230 to a
creditor on account that cleared the bank in July was journalized and posted as P320, and
(2) a salary check to an employee for P255 was recorded by the bank for P155.
The June 30 bank reconciliation contained only two reconciling items: deposits in transit,
P1,000 and outstanding checks, P2,600.
Questions
115
3. The adjusted cash ledger balance of JULIET COMPANY at July 31 is:
a. P 25,020 b. P 24,820 c. P 24,730 d. P 24,640
Solution
Adjusting entry:
Cash 2,070
Notes receivable 2,000
Interest income 70
Service charge 40
Cash 40
Cash 90
Accounts payable 90
Answer:
1. A 2. C 3. B 4. B
Problem 19
You are asked to audit the cash of Letty Corporation. Letty Corporation carries its checking
account with Mindanao Bank. The following data are available:
116
c. Additional data:
1. Balance in Petty Cash account, P200 (not included in Letty Cash account).
2. The deposits of P93,400 by Letty Company are overstated by P100; the bank
recorded the correct amount.
3. The checks cleared by the bank of P82,150 erroneously included a P300 check
drawn by Laity Corporation; the bank has not yet corrected this error.
4. November 30: deposits outstanding, P2,000; and checks outstanding, P1,500.
Questions
Solution
Adjusting entry:
Cash 25,000
Cash – foreign bank 25,000
Service charge 70
Cash 70
Accounts receivable 180
Cash 180
Accounts receivable 100
Cash 100
Due to custodian 400
Cash 400
Answer:
1. B 2. A 3. D 4. B
Problem 20
In Your audit of the accounts of Cleenenth Company, you find the following facts on
December 31, 2006.
117
Balance of bank statement 1,200,000
Outstanding checks, December 31:
No. 000567 10,000
581 55,000
582 40,000
602 25,000
615 65,000
616 70,000 265,000
Receipts of December 31, deposited the following month 275,000
The bank statement shows the following charges:
Service charge for December 5,000
NSF check received from a customer 85,000
Additional information:
The stub for check number 000581 and the invoice relating thereto show that it was for
P35,000 but was incorrectly recorded as P55,000. This was in payment of the accounts
payable.
Payment has been stopped on check number 000567 which was drawn in payment of
accounts payable. The payee cannot be located.
Included in the bank statement was a canceled check the company had failed to record.
The check was in payment of accounts payable.
Questions
4. The adjusted cash balance of CLEENETH COMPANY at December 31, 2006 is:
a. P 1,290,000 b. P 1,240,000 c. P 1,210,000 d. P 1,180,000
Solution
Balance per book 1,350,000 Accounts payable 50,000
Service charge ( 5,000) Cash 50,000
NSF check ( 85,000)
Overstatement of disburs Service charge 5,000
check # 581 20,000 Cash 5,000
Cancellation of check
# 567 10,000 Accounts receivable 85,000
Total 1,290,000 Cash 85,000
Unrecorded disburs. * ( 50,000)
Adjusted balance 1,240,000 Cash 20,000
Accounts payable 20,000
Balance per bank 1,200,000
Outstanding checks ( 265,000) Cash 10,000
118
Deposit in transit 275,000 Accounts payable 10,000
Overstatement of disburs
check # 581 20,000
Cancellation of check
# 567 10,000
Adjusted balance 1,240,000
* squeeze figure
Answer:
1. B 2. C 3. A 4. B
Problem 21
Dema-ala Company is very profitable small business. It has not, however, given much
consideration to internal control. For example, in an attempt to keep clerical and office
expenses to a minimum, the company has combined the jobs of cashier and bookkeeper.
As a result, Maria handles all cash receipts, keeps the accounting records, and prepares the
monthly bank reconciliation.
The balance per bank statement on October 31, 2006, was P73,520. Outstanding checks
were: No. 62 for P507, No. 183 for P600, No. 284 for P1,103, No. 862 for P762.84, No. 863
for P907.20, No. 864 for P661.12. Included with the statement was a credit memorandum
of P800 indicating the collection of a note receivable for Dema-ala Company by the bank on
October 25. Dema-ala Company has not recorded this memorandum.
The company’s ledger showed one cash account with a balance of P87,570.88. The balance
included undeposited cash on hand. Because of the lack of internal control, Maria took for
personal use all the undeposited receipts in excess of P15,182.04. She then prepared the
following bank reconciliation in an effort to conceal her theft of cash.
Questions
Solution
Book Bank
Unadjusted balance 87,570.88 73,520.00
Collection of note 800.00
Outstanding checks
# 62 P 507.00
#183 600.00
#284 1,103.00
119
#862 762.84
#863 907.20
#864 661.12 ( 4,541.16)
Deposit in transit _________ 15,182.04
Total 88,370.88 84,160.88
Cash shortage (4,210.00) ________
Adjusted cash balance 84,160.88 84,160.88
Adjusting entry:
Cash 800
Notes receivable 800
Due to custodian 4,210
Cash 4,210
Answer:
1. A 2. D
Problem 22
On December 15 of the current year, Darwin, who owns Herald Corporation, asks you to
investigate the cash-handling activities in his firm. He thinks that an employee might be
stealing funds. “I have no proof” he say, “but I’m fairly certain that the November 30
undeposited receipts amounted to more than P6,000 although the November 30 bank
reconciliation prepared by the cashier shows only P3,619.20. Also, the November bank
reconciliation doesn’t show several checks that have been outstanding for a long time. The
cashier told me that these checks needn’t appear on the reconciliation because he has
notified the bank to stop payment on them and he had made the necessary payment on the
books.
At your request, Darwin showed you the following November 30 bank reconciliation
prepared by the cashier.
You discover that the P600 unrecorded bank credit represents a note collected by the bank
on Darwin’s behalf. It appears in the deposits column of the November bank statement.
Your investigation also reveals that the October 31 bank reconciliation showed three checks
that had been outstanding longer than 10 months: No. 1432 for P300, No. 1458 for
P233.45, and No. 1512 for P126.55.
You also discover that these items were never added back into the cash account in the
books. In confirming that the checks shown on the cashier’s November 30 bank
reconciliation were outstanding on that date, you discover that check No. 2353 was actually
a payment of P829.16 and had been recorded on the books for the amount.
120
To confirm the amount of undeposited receipts at November 30, you request a bank
statement for December 1-12 (called a cut-off bank statement). This indeed shows a
December 1 deposit of P3,619.20.
Questions
Solution
Adjusting entry:
Cash 600
Notes receivable 600
Service charge 30
Cash 30
Cash 660
Accounts payable 660
Due to custodian 2,500
Cash 2,500
Answer:
1. B 2. C 3. C
Problem 23
The bank statement for the account of ARNOLD COMPANY at December 31, 2006 showed a
credit balance of P20,000, while the company’s ledger balance of the cash account as of
November 30, 2006 was a debit of P40,000. During December, 2006, the ledger showed
two postings, a debit of P60,000 and a credit of P39,000 from the Cash Receipts and Check
Disbursements Journal, respectively.
Your examination revealed that the cash column of the receipts book was underfooted by
P6,400. The receipts book recorded only the collections from customers and did not include
a bank credit in December for P8,000, representing loan proceeds of a P10,000 promissory
note.
121
overfooted by P500, records only the checks issued by the company. In the month of
December, 2006, the bank charged ARNOLD COMPANY for P5,000 representing a loan
guaranteed by the client but was dishonored by the maker, the company vice-president.
The December bank service charges of P1,200 were erroneously charged by the bank to the
account of Ronald Company. The bank made the correction in January, 2007. The
outstanding checks as of December 31, 2006 amounted to P5,600.
On the morning of January 2, 2007, a cash count conducted produced the following:
Questions
3. The maximum probable cash shortage of ARNOLD COMPANY at December 31, 2006
based on the records is:
a. P 54,200 b. P 50,200 c. P 46,200 d. P 36,400
4. The adjusted cash balance of ARNODL COMPANY at December 31, 2006 is:
a. P 19,500 b. P 21,300 c. P 20,900 d. P 24,500
Solution
Book Bank Cash shortage 50,200
Unadjusted balance 61,000 20,000 - Bank Recon
Understatement of receipts 6,400 Cash shortage – AR ledger
CM 8,000 -AR subsidiary
Overstatement of disbursements 500 ledger credit
DM – service charge (5,000) posting 70,400
DM – service charge not recorded - Cash debit
in the book and erroneously postings * 66,400 4,000
recorded by the bank (1,200) (1,200) Maximum Shortage 54,200
Outstanding checks (5,600)
Deposit in transit * Cash debit posting 60,000
(5,200 + 2,900 – 1,800) ______ 6,300 unrecorded collection 6,400
Total 69,700 19,500 66,400
Cash shortage (50,200) ______
Adjusted cash balance 19,500 19,500
Answer::
1. A 2. B 3. A 4. A
Problem 24
The PAMA CORPORATION engaged your services to audit its account. In your examination of
cash, you find that the Cash account represents both cash on hand and cash in bank. You
further noted that there is very poor internal control of cash.
122
Your audit covers period ended June 30, 2006. You started the audit on June 15. Upon cash
count on this date, cash on hand amounted to P4,800. Examination of the cash book and
other evidence of transaction disclosed the following:
The company cashier presented to you the following reconciliation statement for June, 2006
which he has prepared:
3. The cash shortage of PAMA CORPORATION from July 1 to July 15, 2006 is:
a. P 8,000 b. P 7,800 c. P 3,000 d. P 2,800
4. The total cash shortage of PAMA CORPORATION up to July 15, 2006 is:
a. P 14,400 b. P 15,600 c. P 15,800 d. P 19,400
5. The adjusted cash balance of PAMA CORPORATION at June 30, 2006 is:
a. P 35,900 b. P 39,600 c. P 43,800 d. P 44,900
Solution
Book Bank
Unadjusted balance 46,500 42,400
Outstanding checks ( 11,500)
123
Deposit in transit 5,000
CM 900
Service charge ( 100) ______
Total 47,300 35,900
Cash shortage (11,400) ______
Adjusted cash balance 35,900 36,900
ANSWER:
1. D 2. B 3. A 4. D 5. A
Problem 25
In connection with the general examination of the accounts of Nelson Trading Company at
December 31, 2006, you obtained the information and data as shown below relative to your
verification of Cash.
After application of the necessary auditing procedures, the following were noted:
124
certain erasures. No entry has been made to record the cancellation of check
#6518.
2. Check #6517 for P225 - this was erroneously recorded on the books as
P2,250.
3. Check of Neil Trading for P900 - this was charged by bank in error.
d. Proceeds from sale of stocks amounting to P23,250 (cost is P18,000) transmitted
directly by the broker to the bank and credited on December 31, 2006. No entry has
been made on the books to record this sale of stock investment.
e. The company failed to record disbursement for payment of accounts payable at
December 31, 2006 for P1,500.
Questions
1. The adjusted cash receipts per ledger of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 448,800 b. P 448,125 c. P 444,225 d. P 425,550
2. The adjusted cash disbursement per bank of NELSON TRADING COMPANY at December
31, 2006 is:
a. P 401,325 b. P 402,000 c. P 405,735 d. P 406,125
3. The adjusted cash ledger balance of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 91,350 b. P 95,400 c. P 97,200 d. P 97,500
4. The adjusted cash in bank balance of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 91,350 b. P 95,400 c. P 97,200 d. P 97,500
5. The cash shortage of NELSON TRADING COMPANY at December 31, 2006 is:
a. P 765 b. P 675 c. P 575 d. P 390
Solution
Dec. 1 Receipts Disburse. Dec. 31
Balance per book 50,400 425,550 405,735 70,215
Overfooting of disburse. ( 1,500) 1,500
Service charge 15 ( 15)
Cancellation of check
# 6518 ( 2,400) 2,400
Overstatement of
disbursement ( 2,025) 2,025
Proceeds from sale of
stock 23,250 23,250
Unrecorded disbursement _________ _________ 1,500 ( 1,500)
Balance 50,400 448,800 401,325 97,875
Cash shortage _________ ( 675) _________ ( 675)
Adjusted balance 50,400 448,125 401,325 97,200
125
Adjusting entry:
Service charge 15
Cash 15
Cash 2,025
Accounts payable 2,205
Cash 1,500
Accounts payable 1,500
Cash 2,400
Accounts payable 2,400
Cash 23,250
Stock investment 18,000
Gain on sale 5,250
Answer:
1. B 2. A 3. C 4. C 5. B
PART 2
PROBLEM
During your audit of Rupert Corp. you established the following data concerning the cash position as of
December 31, 2004:
Questions
11. In preparing your own reconciliation, the adjusted cash in bank figure should be:
126
a. P 4,720.00 b. P 4,833.00 c. P 5,933.00 d. P 6,393.00
12. The adjusted cash on hand and in bank per ledger would be:
a. P 7,713.00 b. P 8,520.00 c. P 8,530.00 d. P 8,882.00
PROBLEM
The following data are to be used in reconciling the May 31, 2004 bank balance of Royal Asia Corporation:
April May
Cash in bank balance – at the end of month P 3,561.00 P 4,629.72
Bank Statement Balance – end of the month 7,403.50 3,862.20
Bank service charges for the month 6.00 6.80
Checks marked NSF 815.00 118.00
Deposits in transit – end of month 950.00 925.40
Drafts collected by the bank (unrecorded by
the company until the month following
collection) 1,500.00 202.00
Outstanding checks at end of month 4,463.00 149.68
Checks of Loyal Asia Corporation charged to
the company’s account 349.50 60.00
Check number 6129 erroneously recorded in
the check register as P 78; the correct amount is 87.00
(This check is outstanding on 05.31.2004)
Receipts during the month 42,700.17
Total credits to cash in bank 41,631.45
Total charges on bank statement 45,317.57
Questions
PROBLEM
The El Gato Painting Company maintains a checking account at American Bank. Bank statements are
prepared at the end of each month. The November 30, 2003, reconciliation of the bank balance is as
follows:
127
#382 340 (806)
Adjusted balance per bank, November 30 P 3,625
The Company’s general ledger checking account showed the following for December:
The checks that were processed by the bank in December include all of the outstanding checks at the end
of November except for check#365. In addition, there are some December checks that had not been
processed by the bank by the end of the month. Also, you discover that check#411 for P320 was correctly
recorded by the bank but was incorrectly recorded on the books as a P230 disbursement for advertising
expense. Included in the bank’s deposits is a P1,300 deposit incorrectly credited to the company’s
account. The deposit should have been posted to the credit of the Los Gatos Company. The NSF checks
have not been redeposited and the company will seek payment from customers involved.
Questions
10. The cash shortage at December 31, 2003 is:
a. P 0 b. P 1,020 c. P 1,321 d. P 1,120
On January 10, 2005, you started the audit of the financial records of Bong Corporation for the year
ended December 31, 2004. From your investigation, you discovered the following:
1. The bookkeeper acts also as the cashier. Her December 31, 2004 year-end cash reconciliation
contained the following:
Cash 161,400
Petty Cash 1,500
3. The cost of the cash on hand at the close of business on January 10, 2005, including the petty cash
was as follows:
128
Customers’ checks in payment of account 900
11,850
4. From January 2, 2005 to January 10, 2005, the date of your cash count, total cash receipts
appearing in the cash record were P38,600. According to the bank statement for the period from
January 2, 2005 to January 10, 2005, total deposits were P32,400.
5. On July 5, 2004, cash of P1,600 was received from a customer in settlement of his account. This was
booked by a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
6. On December 5, 2004, cash of P2,900 was received from a customer in settlement of his account.
Bong Corporation debited Inventory and credited Accounts Receivable.
7. Cash of P1,800 received from customer during 2004 was not recorded.
8. Checks received from customers from January 2, 2005 to January 10, 2005, totaling P4,200 were not
recorded but were deposited in the bank.
9. On July 1, 2004, the bank refunded interest of P200 because a note of Bong Corporation was paid
before maturity. No entry had been made for the refund.
10. In the cashiers petty cash, there were receipts for collection from customer on January 9, 2005
totaling P1,250; these were unrecorded and undeposited.
11. In the outstanding checks, there is one for P750 made payable to a trade creditor. Investigation
shows that this check had been returned by the creditor on June 14, 2004 and a new check for
P1,250 was issued in its place; the original check for P750 was made in error as to amount.
Questions
12. The correct cash balance, per ledger as of December 31, 2004 is:
a. P 169,700 b. P 168,650 c. P 167,900 d. P 167,700
14. The amount of cash shortage for the period from January 1, 2005 to January 10, 2005 is:
a. P 4,300 b. P 7,000 c. P 8,500 d. P 15,700
PROBLEM
The following bank reconciliation is presented for the ROY COMPANY for the month of November 2004:
Per bank
December deposits 26,100
December disbursements 22,420
Balance, 12/31/04 21,720
129
All items that were outstanding as of November 30, cleared through the bank in December, including the
bank credit. In addition, P2,500 in checks were outstanding as of December 31, 2004.
Questions
PROBLEM
You have substantially completed the audit of Jhohan Corporation for the fiscal year ended June 30,
2002. You are now consolidating your working papers and reviewing the adjusting journal entries (AJE)
you will make.
Data gathering your audit of specific accounts are described below. You are expected to formulate the
appropriate journal entries and be aware of their impact on the accounts.
CASH LEAD SCHEDULE
Petty Cash fund P 5,000
Cash on Hand 15,000
Banco De Oro (BDO) current 205,000
PCI Bank – current account #1 90,000
PCI Bank – current account #2 (15,000)
Coco Bank – savings and time deposits 105,000
Total P 405,000
You conducted a count of the Petty Cash Fund and Cash on Hand at 8:00AM July 1, 2002, the
first working day of the new fiscal year 2002-2003. Results of the count are shown below
Count of Petty Cash Fund
Currency P 1,500
Officer’s check cash out of petty cash fund with
management approval 800
Employee’s VALES (duly approved) 1,200
Unreplenished petty cash vouchers for various
office expense 1,500
Total counted P 5,000
The supporting schedule for BDO current contains the following bank reconciliation
JHOHAN CORPORATION
Bank Reconciliation with BDO Current
130
June 30, 2002
** Traced to cash disbursements books and to July cut-off bank statement (as of July 10, 2002).
Included in outstanding checks is a P4,000 company check payable to a supplier, dated and
recorded as of June 29, 2002, but not delivered to payee until July 14, 2002.
1. PCI Bank current account #1 includes a P20,000 compensating balance against short-term
borrowing arrangements at June 30, 2002. The compensating balance is not legally restricted as to
withdrawal by Jhohan Company.
2. The credit balance in PCI Bank current account #2 represents check drawn in excess of the deposit
balance. The checks are still outstanding on June 30, 2002.
1. Saving accounts #1537 has been set aside by the Board of Directors for the acquisition of new
equipment.
Questions
4. PCI Bank current accounts Nos. 1 and 2 should be reported in the audited balance sheet as
follows:
a. P90,000 as part of cash, P15,000 as a current liability because the
credit balance cannot be offset against current account # 1
131
b. P75,000 as part of cash
c. P70,000 as part of cash, P15,000 as a current liability; P20,000
compensating balance as part of current assets.
d. None of the above.
5. The adjusted amount of Coco Bank deposits that should be reported as part of cash in the
audited balance sheet is
a. P30,000 b. P50,000 c. P105,000
d. P55,000
PROBLEM
On December 31, 2004, the cash account of Jan Company has a debit balance of P3,500,000. An
analysis of the cash account shows the following details:
Cash and cash equivalents on Jan’s December 31, 2004 balance sheet should be
a. P 2,760,000 c. P 2,935,000
b. P 2,810,000 d. P 2,885,000
PROBLEM
The December 31, 2004 trial balance of Chavie Company includes the following accounts:
The cash on hand includes a customer post dated check of P100,000 and a postal money
order of P40,000.
The petty cash fund includes unreplenmished petty cash vouchers for P2,000 and an
employee check for P3,000 dated January 31, 2004.
A check for P200,000 was drawn against Security Bank account, date January 15, 2005,
delivered to the payee and recorded at December 31,2004.
132
The BPI time deposit is set aside for acquisition of land to be used as a factory site.
Total cash and cash equivalents on the balance sheet as of December 31, 2004 should be
a. P 4,965,000 c. P 6,965,000
b. P 5,465,000 d. P 4,775,000
PROBLEM
The Ralph Company’s internal control over its cash transactions is very weak. The company’s cash
position at December 31, 2004 were as follows:
The cash book showed a balance of P 15,000.00, which included as cash on hand. A credit on the bank’s
records did not appear on the company’s books. The bank statement showed a balance of P 12,300.00:
and the outstanding checks were: 01000-P120.00; 01100-P100.00; 01201-P230.00; 01511-P110.00;
01513-P140.00; 01515-P150.00.
The cashier removed all of the cash on hand in excess of P 3,000.00 and then prepared the following
reconciliation:
Questions
1. The cash shortage if any, is:
a. P 0 b. P 300.00 c. P 500.00 d. P 700.00
2. A correct reconciliation will show that the cashier’s accountability for cash on hand is:
a. P 3,300.00 b. P 3,400.00 c. P 3,500.00 d. P 3,700.00
3. The adjusted cash in bank balance for the balance sheet of December 31, 2004 is:
a. P 11,300.00 b. P 11,450.00 c. P 11,600.00 d. P 11,850.00
PROBLEM
Borres Company carries its checking account with Platinum Bank. The company is ready to prepare its
December 31 bank reconciliation and has requested you as auditor to prepare it for them. The following
data are available:
A. The November 30 bank reconciliation showed the following: (1) cash on hand (held back each
day by Borres Company for change), P400 (included in Borres’ cash account); (2) deposit in
transit, #51, P2,000; and (3) checks outstanding, #121, P1,000; #130, P2,000; and #142,
P3,000.
133
day for change) P 56,000
C. Bank statement, December 31:
Questions
134
CHAPTER 4 – Audit of Receivables
Problem 1
The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet
submitted to a banker for credit. You are called upon to audit the report and, upon
analysis, the asset was found to consist of the following items:
The amount of P1,125,000 due from customers was the remaining balance after deducting
accounts with credit balances of P6,000.
During your examination, you noted that on December 31, the company assigned P300,000
of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based
on the accounts assigned was charged and deducted from the cash received. The client
recorded this transaction by a debit to cash and a credit to notes payable.
135
Questions
Solution
(1) Claims Receivable 22,500
Accounts receivable 22,500
(2) Sales 30,000
Accounts receivable 30,000
(3) Advances to affiliates 150,000
Accounts receivable 150,000
(4) Receivables - officers/employee 13,500
Accounts receivable 13,500
(5) Deposits for contracts bidding 67,500
Accounts receivable 67,500
(6) Subscription receivable 60,000
Accounts receivable 60,000
(7) Advances to suppliers 24,000
Accounts receivable 24,000
(8) Advances to officers/employee 4,500
Accounts receivable 4,500
(9) Accounts receivable 30,000
Allowance for bad debts 30,000
(10) Accounts receivable 6,000
Customers with credit balance 6,000
(11)
OE: Cash 237,000
Notes payable 237,000
CE: Cash 237,000
Commission expense 3,000
Notes payable 300,000
Adj: Commission expense 3,000
Notes payable 3,000
Current non-trade AR
Claims receivable 22,500
Advances to off/empl
( 13,500 + 4,500) 18,000
Advances to suppliers 24,000
Total 64,500
136
Answer:
1. D 2. A 3. B 4. A
Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000
In your examination, you find that the balance of Accounts Receivable represents sales of
the current audit year only; that credit balances in the subsidiary ledger for accounts
receivable totaled P80,000; and that the current year’s provision for bad debts expense was
5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next
previous year). Sequential to aging the accounts receivable, you and the company’s
treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to
be sustained on collection of the accounts receivable balance.
Questions
Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000
137
- Additional write-off 50,000
Ending balance 300,000
Answer:
1. C 2. B 3. D 4. C
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:
At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance
for bad debts at the beginning of the year is P19,327.20.
Questions
1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P
689,488.80
2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80
4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14
6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14
Solution
Accounts Receivable
Credit Sales 720,736.80 Collection 294,000.00
Recoveries 6,505.20 Sales discount
from credit cust. 6,000.00
Write-off 19,200.00
Sales returns from
credit customer 10,080.00
__________ Recoveries 6,505.20
727,242.00 335,785.20
Ending bal. 391,456.80
138
Net credit sales:
Credit sales 720,736.80
- Sales discounts from credit sales ( 6,000.00)
- Sales returns from credit sales (10,080.00)
Net credit sales 704,656.80
Bad debts:
Net credit sales 704,656.80
x % of uncollectible 2%
Bad debts 14,093.136
Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
Selected Accounts Debit Credit
Cash P 500,000
Accounts receivable 1,300,000
Allowance for doubtful accounts 8,000
Net sales P 6,750,000
a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co.,
recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods
were shipped to Variety Store on December 30, 2006.
b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked
“DAIF”, but no entry was made.
c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one
and one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.
Questions
2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000
Solution
139
(1) A 1,300,000 + 50,000 + 5,000 P1,355,000
Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.
When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the
2% cash discount.
Questions
3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600
4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000
Solution
Accounts Receivable
* Beg. bal. 50,400 Collections 470,400
Sales 780,000 Allow. for BD 90,000
830,400 560,400
140
End bal. 270,000
* squeezed figure
Answer:
1. A 2. B 3. C 4. D
Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2006. During the audit of the accounts receivable and other related
accounts, certain information was obtained.
The December 31, 2006 debit balance in the Accounts Receivable control account is
P197,000.
The only entries in the Bad Debts Expense account were: a credit for P324 on December
31, 2006, because Marlisa Company remitted in full for the accounts charged off October
31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.
An aging schedule of the accounts receivable as of December 31, 2006 and the decision are
shown in the table below:
141
There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1-3 months
accounts receivable of P500 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2006. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and the auditor decides to adjust the control to the sum of the
subsidiaries after corrections are made.
Questions
3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,
2006 is:
a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20
4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:
a. P 9,850.00 c. P 4,764.20
b. P 6,359.80 d. Cannot be determined
5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:
a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20
7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:
a. Accounts receivable 1,440 c. Accounts receiv. 1,440
Allow. for BD 1,440 Misc. income 1,440
b. Allow. for BD 1,440 d. No adjustment
Accounts receivable 1,440
Solution
142
Adjustments:
Add(Deduct)
(2) Correction to 10.31.02
entry to write-off
uncollectible accts. (200)
(3) Write-off of acct.
considered definitely
uncollectible ( 1,000) (1,000) (1,000)
(4) Reclassification of
credit balances 2,500 2,000 500 2,500
P 198,300 P 95,240 P 77,320 P 22,180 P 5,000 P 199,740
(5) To adjust the control
acct. to agree with SL 1,440
Adjusted balance P 199,740
Answer:
1. A 2. C 3. D 4. A 5. C
6. A 7. C 8. A
Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account
of ROY COMPANY. The following data are available:
143
Accounts Receivable, general ledger balance P 848,000
The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:
Debit balances:
Under one month P 360,000
One to six months 368,000
Over six months 152,000
P 880,000
Credit balances:
Almario P 8,000 - OK; additional billing in
January 2004
Peter 14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
Bituin 18,000 - Advance on a sales contract
P 40,000
The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are
made.
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are
analyzed as follows:
144
a. Accounts receivable 14,000 c. Accounts receivable 14,000
Sales 14,000 Cust. with Cr. bal. 14,000
b. Sales 14,000 d. No adjustment
Accounts receivable 14,000
4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss 8,000 c. Accounts receivable 8,000
Accounts receivable 8,000 Sales 8,000
b. Accounts receivable 8,000 d. Sales 8,000
Miscellaneous gain 8,000 Accounts receivable 8,000
Solution
145
Aging of AR
Control Under 1 to 6 Over 6
Account 1 mo. mos. mos.
Unadjusted balance 848,000 360,000 368,000 152,000
(1) 8,000
(2) - (14,000)
(3) 18,000
(4) (48,000) (48,000)
(5) ( 8,000) ______ _______ _______
Adjusted balance 818,000 360,000 354,000 104,000
Answer:
1. A 2. D 3. C 4. A 5. B
6. C 7. C 8. A
Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer Account Balance – 12/31/06 Date Amount
Penas P 70,360 12/06/06 P 28,000
11/29/06 42,360
146
12/02/06 24,800
The estimated bad debt rates below are based on Karen Company’s receivable collection
experience.
Age of Accounts Rate
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%
The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,
before adjustment.
Questions
1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006
is:
a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680
2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,
2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60
3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006
is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60
4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,
2006 is:
a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40
Solution
Aging of AR
Balance 0-30 31-60 61-90 91-120 Over 120
12/31/06 Days Days Days Days Days
147
1. D 2. D 3. C 4. A
Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The
accounts receivable were circularized as at December 31, 2006 and the following
exceptions/replies have not been disposed of at the date of your examination.
Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneously
which is too much computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.
KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and
Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,
respectively.
148
Questions
1. The entry to adjust the finding made in the account of Duque is:
a. Cash 30,000 c. Accounts receivable 30,000
Accounts receivable 30,000 Cash 30,000
b. Cash 30,000 d. No adjustment
Sales 30,000
2. The entry to adjust the finding made in the account of Odessa is:
a. Purchases 74,000 c. Accounts payable 74,000
Accounts receivable 74,000 Accounts receivable 74,000
b. Sales 74,000 d. No adjustment
Purchases 74,000
3. The entry to adjust the finding made in the account of Solejon is:
a. Accounts receivable 16,200 c. Accounts receivable 16,200
Accounts receivable 16,200 Accounts payable 16,200
b. Accounts payable 16,200 d. No adjustment
Accounts receivable 16,200
4. The entry to adjust the finding made in the account of Rubin is (for sales):
a. Sales 23,700 c. Accounts receivable 23,700
Accounts receivable 23,700 Sales 23,700
b. Accounts payable 23,700 d. No adjustment
Purchases 23,700
5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):
a. Cost of sales 16,300 c. Retained earnings 16,300
Inventory 16,300 Inventory 16,300
b. Inventory 16,300 d. No adjustment
Cost of sales 16,300
6. The entry to adjust the finding made in the account of Jamea is:
a. Customers’ advances 150,000 c. Sales 200,000
Sales 150,000 Customers’ advances 50,000
Accounts receivable 150,000
b. Customers’ advances150,000 d. Sales 150,000
Accounts receivable 150,000 Customers’ advances 150,000
7. The entry to adjust the finding made in the account of Ocsio is:
a. No adjustment c. Sales 54,000
Accounts receivable 54,000
b. Accounts receivable 51,000 d. Sales 3,000
Sales 51,000 Accounts receivable 3,000
8. The entry to adjust the finding made in the account of Dela Cruz is:
a. Accounts receivable 40,000 c. Sales 60,000
Sales 40,000 Accounts receivable 60,000
b. Sales 40,000 d. No adjustment
Accounts receivable 40,000
149
9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:
a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300
10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:
a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200
Solution
For Doque No adjustment
For Odessa Accounts payable 74,000
Accounts receivable 74,000
For Solejon Accounts receivable 16,200
Accounts receivable 16,200
For Rubin Sales 23,700
Accounts receivable 23,700
Inventory 16,300
Cost of sales 16,300
For Jamea Sales 200,000
Customers’ advances 50,000
Accounts receivable 150,000
For Ocsio. Sales 3,000
Accounts receivable 3,000
For dela Cruz Sales 40,000
Accounts receivable 40,000
For Ronel Sales 18,000
Accounts receivable 18,000
Answer:
1. D 2. C 3. A 4. A 5. B
6. C 7. D 8. B 9. C 10. A
Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The
company is a distributor of a variety of electronic appliances and parts. The company uses
the calendar year for reporting purposes. Information regarding balances of MALAQUI
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as
of December 31, 2006 and the related audit finding, is given below.
The schedule of accounts receivable furnished you by the accountant reflects some errors.
The total figure in the schedule does not tally with the balance per subsidiary ledger of
P919,000. Based on your review of sales invoices, purchase orders and other related
documents, you noted the following information:
1. Sales on account of various electronics totaling P36,480 were returned by the customer
on December 28, 2006, but no entry was made in the books. The goods were included
in the year-end physical count.
150
2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2006. Your verification disclosed that
said collection was credited to net sales account.
3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the
account of DNA Corporation.
The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at
the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a
balance of P32,400 before adjustment.
Questions
2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31,
2006?
a. P 27,570.00 b. P 26,850.60 c. P 26,475.60 d. P 25,756.20
Solution
Sales 36,480
Accounts receivable 36,480
Sales 23,980
Accounts receivable 23,980
Answer:
1. D 2. D
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
151
January Register
Questions
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000
Solution
(1) Sales 50,000
Accounts receivable 50,000
Invoice # 300
152
Invoice # 310
Problem 12
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the
year ended December 31, 2006, and have observed the taking of the physical inventory of
the company on December 27, 2006. Only merchandise shipped by the Durian Corporation
to customers up to and including December 27, 2006 have been removed or excluded from
inventory. The inventory as determined by physical inventory count has been recorded on
the books by the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis.
The following lists of sales invoices are entered in the sales books for the months of
December 2006 and January 2007, respectively.
Sales Invoices
Date Amount Date Shipped
1. How much sales for month of December 2006 were erroneously recorded in January
2007?
a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000
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2. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. Zero b. P 12,500 c. P 20,000 d. P 62,000
3. How much is the correct amount of sales for the month ended December 31, 2006?
a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000
Solution
(1) B Item (I)P7,500 and Item (l), P5,000 P12,500
Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank
as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned
accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts
receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash
collected on assigned accounts receivable. Collections of assigned accounts during
September totaled P260,000 less cash discounts of P3,500.
Questions
1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on
September 1?
a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000
2. What amount is owed to Davao Bank by DY COMPANY for September collections plus
accrued interest on the note to September 30?
a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250
Solution
(1) A P625,000 – (2% x P750,000) P610,000
2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections
plus accrued interest on note to May 1.
3. The remaining accounts were collected by VAILOCES CORPORATION during May except
for P2,000 accounts written-off as worthless.
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4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the
note plus accrued interest.
Questions
3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100
4. If the assignment is on notification basis, who should collect the assigned accounts
receivable?
a. Vailoces Corporation c. A third party
b. Racel Bank d. It is the option of the customer to
whom he/she will pay the account
5. Using the assumption in number 4 above, what will be the entry of VAILOCES
CORPORATION on the April collection of the assigned accounts receivable?
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100
155
7. Using the same information in number 6 (May 1 transaction) except that the assignment
is done on a notification basis, the entry should be:
a. Notes payable 187,100 c. Notes payable 188,500
Interest expense 4,000 Interest expense 2,600
Accounts receivable 191,100 AR –assigned 191,100
b. Notes payable 195,000 d. No journal entry
Interest expense 4,000
AR - assigned 199,000
Solution
April 1 Accounts receivable – assigned 400,000
Accounts receivable 400,000
1 Cash 294,000
Finance charges (300,000 x 2%) 6,000
Notes payable 300,000
(1) Cash 191,100
Sales discounts 3,900
AR – assigned (191,100/98%) 195,000
(2) Notes payable 195,000
Interest expense 4,000
(300,000 x 16% x 1/12)
Cash 199,000
(3) Cash 203,000
Allowance for bad debts 2,000
AR – assigned 205,000
(400,000 – 195,000)
(4) Notes payable (300,000 – 195,000)105,000
Interest expense 1,400
(105,000 x 16% x 1/12)
Cash 106,400
Answer:
1. C 2. C 3. A 4. B 5. D
6. D 7. B 8. A
Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a
without recourse, notification basis. At the time the receivables are factored, 15% of the
amount factored is charged to the client as commission and recognized as revenue in UY’S
books. Also, 10% of the receivables factored is withheld by Uy as protection against sales
returns or other adjustments. This amount credited by Uy to the client Retainer account.
At the end of each month, payments are made by Uy to its clients so that the balance in the
Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad
debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established, Uy makes adjusting entries at the end of each month.
156
Questions
3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003
is:
a. P 0 b. P 20,000 c. P 60,000 d. P 80,000
4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:
a. P 50,000 b. P 40,000 c. P 20,000 d. P 0
Solution
Answer:
1. A 2. D 3. B 4. A
Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the
following accounts:
NOTES RECEIVABLE
Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000
Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000
Nov. 1 Salazar, no interest, due in one
year 75,000 201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000
Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000
Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000
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NOTES RECEIVABLE DISCOUNTED
Sept. 1 Samson note, discounted at 36,000 36,000
15%
Nov. 1 Salazar note, discounted at 75,000 111,000
15%
INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 11,560.50
All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2006. Interest income is credited only upon receipt of cash.
Questions
5. How much is the proceeds in the discounting of notes receivable for the year?
a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50
Solution
1. C
Hazel 90,000 x 15% x 2/12 = P 2,250
Rosa 15,000 x 12% x 1/12 = 150
Rona 36,000 x 15% x 1/12 = 450
Anito 18,000 x 18% x 1/12 = 270
Total accrued interest P 3,120
2. B
Samson = P 310.50
Salazar 11,250 x 2/12 = 1,875.00
Total interest expense = P2,185.50
3. A
Hazel 90,000
Rosa 15,000
Rona 36,000
Total 141,000
4. C
Salazar 75,000
5. A
Samson P 36,000 – P 310.50 = P 35,689.50
Salazar P 75,000 – P11,250 = 63,750.00
Total proceeds = P 99,439.50
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Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of
P160,000. The company receives a non-interest-bearing note due in 3 years with a face
amount of P200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 12%. The following are the present value
factors of 1 at 12%:
Questions
4. The discount amortization at the end of the second year using the effective-interest
amortization is:
a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216
Solution
1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356
Book value of equipment 160,000
Loss on sale of equipment (17,644)
2. A
Face value of note 200,000
Present value of note 142,356
Discount on notes receivable 57,644
3. C
Notes receivable 200,000
Loss on sale of equipment 17,644
Equipment 160,000
Discount on notes receivable 57,644
4. B
Present value of note, 1/1/03 142,356
Add: Interest earned in 2003
159
(142,356 x 12%) 17,083
Present value of note, 1/1/04 159,439
Add: interest earned in 2004
(159,439 x 12%) 19,133
Present value of note, 1/1/05 178,572
5. A
Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE
CORPORATION. The company received a P1,200,000 note as payment. It bears interest
rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%. The
present value table shows the following present value factors of 1 at 10%:
Questions
2. The interest income on the note receivable for the year ended December 31, 2006 using
effective interest method is:
a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474
3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847
Solution
Amount of cash to be received:
Answer:
1. B 2. C 3. C
Problem 19
160
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:
Current liability reported in the December 31, 2005, balance sheet included:
4. Notes receivable discounted as of December 31, 2005, were paid at maturity with
the exception of one P3,000 note on which the company had to pay the bank P3,090,
that included interest and protest fees. It is expected that recovery will be made on this
note early in 2004.
5. Customer notes of P60,000 were discounted with recourse during the year, proceeds
from their transfer being P58,500. Of this total, P48,000 matured during the year
without notice of protest.
7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included
in the collection in number 2)
8. Notes receivable collected during the year totaled P27,000 and interest collected was
P2,450.
10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts
receivable balance.
11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000
being pledged on the loan. Collections of P19,500 had been made on these receivables
included in the total given in transaction (2) and this amount was applied on December
31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial
payment of the loan.
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12. Petty cash fund was reimbursed based on the following analysis of expenditure
vouchers:
Travel expenses P 112
Entertainment expenses 78
Postage 93
Office supplies 173
Cash over 6
15. Total cash payment for all expenses during the year were P468,000. Charge to
General Expense
Based on the information above and some other analysis, answer the following questions:
Questions
3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash
Fund) at December 31, 2006 is:
a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000
8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00
10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:
a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555
Solution
162
(1) Accounts receivable 767,000
Sales 767,000
(2) Cash 576,500
Sales discounts 1,860
Accounts receivable 576,360
(3) Notes receivable 82,500
Accounts receivable 82,500
(4) Obligation on discounted note 12,500
Notes receivable 12,500
Accounts receivable 3,090
Cash 3,090
Obligation on discounted note 3,000
Notes receivable 3,000
(5) Cash 58,500
Interest expense 1,500
Obligation on discounted note 60,000
Obligation on discounted note 48,000
Notes receivable 48,000
(6) Allowance for bad debts 8,720
Accounts receivable 8,720
(7) Accounts receivable 2,020
Allowance for bad debts 2,020
Cash 2,020
Accounts receivable 2,020
(8) Cash 27,000
Notes receivable 27,000
Cash 2,450
Interest receivable 525
Interest income 1,925
(9) Interest receivable 630
Interest income 630
(10) Bad debts 11,855.50
Allowance for bad debts 11,855.50
(11) Cash 35,000
Notes payable 35,000
Interest expense 600
Notes payable 18,900
Cash 19,500
(12) Operating expenses 456
Cash 456
Cash 6
Other income 6
(13) Sinking fund 3,000
Cash 3,000
(14) No entry
(15) General expenses 468,000
Cash 468,000
Answer:
1. A 2. C 3. B 4. D 5. B
6. C 7. C 8. B 9. B 10. D
Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL
CORPORATION. Your examination is for the year ended December 31, 2006. The client
prepared the following schedule of Trade Notes Receivable and Interest Receivable for you
at December 31, 2006. You have agreed the opening balances to your prior year’s audit
workpapers.
NAVAL CORPORATION
TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes Receivable
163
Maker Date Terms Int. Bal. 2006 2006 Bal.
Rate 12/31/05 debits credit 12/31/06
Rubin 04/01/05 1-year 12% P 60,000 P 60,000
Co.
Cardoza 05/01/06 90 days - P 30,000 29,375 P 625
after date
Pancho 07/01/06 60 days 12% 6,000 6,000
after date
Betque 08/03/06 Demand 12% 15,000 15,000
Gabuter 10/02/06 60 days 12% 50,000 50,000 -
o after date
Noval 11/01/06 90 days 8% 42,000 35,000 7,000
after date
Gan 11/01/06 90 days 12% 32,000 32,000
after date
INTEREST RECEIVABLE
Due from Balance 2006 debit 2006 credit Balance
12/31/06
Rubin Co. P 5,400 P 1,800 P 7,200
Pancho 120 P 120
Betque 400 400
Gabutero 1,000 660 340
Noval 560 560
Gan ___________ 640 ___________ 640
Totals P 5,400 P 4,520 P 7,860 P 2,060
2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and
the proceeds were credited to the Trade Notes Receivable account. The note was paid
at maturity.
3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the
peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on
the maturity value of a dishonored note.
4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation
P15,000 and that she expected to pay the note within six months. You are satisfied that
the note is collectible.
5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were
credited to the Trade Notes Receivable and Interest Receivable accounts. On December
2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at
maturity and that it had been charged against Naval’s checking account by the bank.
Upon receiving the notice from the bank, the bookkeeper recorded the note and the
accrued interest in the Trade Notes Receivable and Interest Receivable account.
Gabutero paid Naval Corporation the full amount due in January 2003.
164
6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the
Davao National Bank on December 1.
7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On
December 1, the corporation received payment from Gan for one of the P8,000 notes
with accrued interest. Prepayment of the notes is allowed without penalty. The
bookkeeper credited the Gan’s Accounts Receivable account for the cash received.
Questions
1. At December 31, 2006, the note receivable from Cardoza has a balance of:
a. P 30,000 b. P 29,375 c. P 625 d. P 0
2. The interest income from Cardoza’s note at December 31, 2006 is:
a. P 750 b. P 625 c. P 500 d. P 0
3. At December 31, 2006, the note receivable from Pancho has a balance of:
a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0
4. The interest income from Pancho’s note at December 31, 2006 is:
a. P 370.92 b. P 250.92 c. P 246 d. P 0
5. At December 31, 2006, the note receivable from Betque has a balance of:
a. P 15,350 b. P 15,000 c. P 14,650 d. P 0
6. At December 31, 2006 the note receivable from Gabutero has a balance of:
a. P 150,000 b. P 100,000 c. P 50,000 d. P 0
7. At December 31, 2006 the note receivable from Noval has a balance of:
a. P 42,000 b. P 35,000 c. P 7,000 d. P 0
8. At December 31, 2006 the note receivable from Gan has a balance of:
a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950
Solution
165
Maturity value P6,120.00
Add.’l interest from due date , 8.30.06 to
12.31.06 (6,120 x 12% x 123/360) 250.92
Total amount due, 12.31.06 P6,370.92
NR – discounted 50,000
Notes Receivable 50,000
166
6. D 7. A 8. C 9. D 10. D
PART 2
PROBLEM
The following T-account summarizes the transactions affecting the accounts receivable
of Lance Corporation for 2004.
Accounts Receivable
Jan. 1 balance after Collections from
deducting credit balance customers, including
P 53,000.00
of P 3,000.00 overpayment of P5,000.00
P 620,000.00
Charge sales 625,000.00 Write offs 3,500.00
Charge for goods out on Merchandise returns 2,500.00
consignment Allowances to customers
5,000.00 for
Stockholders subscription 30,000.00 shipping damages 1,500.00
Accounts written off but Collections on carrier 1,000.00
recovered claims 15,000.00
1,000.00 Collection on subscription
Cash paid to customer for
Jan.1 credit balance 2,500.00
Deposit on contract 15,000.00
Claim against common
carrier for shipping
damages 1,500.00
IOUs from employees 500.00
Cash advance to affiliate 10,000.00
Advance to supplier 5,000.00
Questions
15. The correcting entry to be made on Lance corporation’s books for customers’
account with credit balance is:
a. Accounts Receivable P 2,000.00
Customers’ accounts w/ credit balances P 2,000.00
b. Accounts Receivable P 3,000.00
Customers’ accounts w/ credit balances P 3,000.00
c. Accounts Receivable P 5,000.00
Customers’ accounts w/ credit balances P 5,000.00
167
d. Accounts Receivable P 5,500.00
Customers’ accounts w/ credit balances P 5,500.00
17. The Accounts receivable of Lance Corporation at the end of the year is:
a. P 45,500.00 b. P 59,500.00 c. P 65,000.00 d. P105,000.00
PROBLEM
Client furnished you with a schedule of accounts receivable as of December 31, 2005.
Reconciliation between the general ledger control account and subsidiary balances
shows:
Per subsidiary ledger:
Total accounts with debit balances P610,000
Total accounts with credit balances ( 20,000)
Balance P590,000
Advances to officers collectible in one year 30,000
Advances for affiliated company- no definite
Repayment date 50,000
Claim against transportation company 60,000
Total per WBS P730,000
1. A cutoff examination revealed that goods having a selling price of P40,000 were
shipped to a customer FOB Shipping Point on December 28, 2005, but the sale
recorded on January 4, 2006. The goods were not included in the December 31,
2005 inventory. Company’s gross profit rate is 20%. Term of sales is n/30.
2. The claim against Transportation Company represents claim for damage goods
while in transit. The claim was paid on February 14, 2006.
3. On December 28, 2005, a customer notified the Corporation that goods billed and
shipped FOB shipping point on December 20, 2005, were lost in transit. The
invoice amount was P20,000.
5. Goods sold for P7,500 on December 20, 2005 were returned on December 27,
2005. The goods were included in the ending inventory at selling price which is
125% of cost. A credit memo was issued on January 6, 2006 at which time the
sales return was recorded
168
Fifty accounts (out of a total of 120) were selected for confirmation. Positive
confirmation request were mailed asking customers to confirm account balances as of
December 31, 2005. Second request were sent out on 15 accounts from which no
reply was received. Fifteen were signed without comments: 10 had minor differences
which have been cleared satisfactorily; one was returned by the post office unopened
and marked “not at address indicated”.
Audit Notes:
1. The P10,000 from Glenn per OR No. 1570 was credited to Blend resulting to a
credit balance amounting P10,000 to Blend’s account. Glenn’s account was
classified under 60 days past due category.
2. Goods costing P5,600 were set aside on December 29, 2005, and excluded form the
physical inventory. Shipment was made to Arjay at 125% above cost on January 3,
2006. Shipping company states that vessel was temporarily stranded on the way
its destination.
3. Credit memo No. 29-5 was issued to Cocoy on January 4, 2006, granting an
allowance of P1,000 for defective merchandise. Company policy is to record returns
and allowances in the period in which credit memo was issued. The account of
Cocy was included under current to 60 days past due.
4. Yap’s advance payment was credited to sales when received; the unused portion
will be applied to another shipment on January 4, 2006. Yap’s account was
classified under current to 60 days past due.
5. Goods were shipped at 125% above cost FOB destination to Eliseo Corporation on
December 30, 2005. These goods were excluded from the physical inventory on
December 31, 2005.
An analysis of the Allowance for Doubtful Accounts in the General Ledger shows:
169
Age category Amount
Current – 60 days past due P300,000
61 – 120 days past due 160,000
121 – 180 days past due 90,000
Over 180 days past due 60,000
Total Debit Balances P610,000
After consulting with the credit manager, the following percentages are to applied to he
total of the account in each age category (after adjustments per audit) for the purpose
of estimating the required balance in the Allowance for Doubtful Accounts:
Questions
15. The gross amount of Trade Accounts Receivable to be reported in the audited balance
sheet at December 31, 2005 is?
a. 633,500 b. 553,500 c. 543,600 d. 423,500
16. The Allowance for Doubtful Account to be reported in the audited balance sheet at
December 31, 2005 is
a. 110,070 b. 79,370 c. 79,170 d. 74,490
17. The Doubtful Accounts Expense to be reported in the audited income statement for year
2005 is
a. 58,070 b. 27,370 c. 27,170 d. 22,490
For questions 13 to 17, determine the adjusted amount to be use as a basis for
estimating uncollectible accounts in each age group.
170
a. (10,500) b. (4,500) c. 9,500 d. 4,500
PROBLEM
The accounts receivable subsidiary ledger of Pelin Corporation shows the following
information:
The allowance for doubtful accounts had a credit balance of P14,000 on December 31,
2004, before adjustment.
Questions
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2004?
a. P 14,000 b. P 24,795 c. P 38,795 d. P 52,795
2. The necessary adjusting journal entry to adjust the allowance for doubtful
accounts as of December 31, 2004 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P24,795.
c. A debit to doubtful accounts expense of P38,795.
d. A credit to allowance for doubtful accounts of P24,795.
PROBLEM
171
You are engaged in a financial statement audit of Pequit Co. for the calendar year
2004. Presented below are information to your audit of Trade Accounts Receivable and
the related Allowance of Doubtful Accounts.
1. Balance per books – Trade accounts receivable balance per general ledger as of
December 31, 2004, P428,400.
a. Petisme Trading – Invoice no. 1578 for P5,000, dated November 15, 2004 was
paid on December 26, 2004.
Audit Finding – Collection of P5,000 per OR 1256 dated December 27, 2004
was erroneously credited to Phala Company’s account in the subsidiary ledger.
b. Pineda Company – We never received the goods for which you are billing us
P8,000.
Audit Finding – Goods costing P5,200 were set aside on December 29, 2004 and
excluded from the physical inventory on December 31. Shipment was made on
January 3, 2005. Shipping company states that vessel was temporarily
stranded on the way to its destination.
c. Pinero, Pinky – This P10,000 advance was approved by the Board of Directors
at their September 30, 2004 meeting. It is payable in two equal annual
installment from date of receipt.
4. Sales with the option to return – Towards the end of the year, in an effort to
increase sales, management allowed its employees to market their products, under
a contract with option to return if not sold within 30 days. Sales to employees are
20% above cost, instead of the usual 30% to customers. Sales totaling P50,000
were made to employees in December 2004. Sixty percent (60%) of these sales
172
were subsequently returned in January 2005. The remaining unreturned sales are
considered sold.
5. Analysis of account – The allowance for doubtful accounts shows the following data
for 2004:
8. Review of collectibility – Collectibility of the accounts was reviewed with the credit
manager. It was mutually agreed to apply the following percentages to each age
after correcting the accounts.
Under 60 days 1% estimated uncollectible
61 – 90 days 5% estimated uncollectible
91 – 120 days 10% estimated uncollectible
Over 120 days P4,200 definitely uncollectible, remainder is 75%
collectible
* Excluding consignment sales which were fully collected after the balance sheet
date.
Questions
1. What is the effect of the confirmation reply received from Petisme Trading on the
total account balances in the “under 60 days” age category and on the total
Accounts Receivable?
Under 60 days Age Category Total Accounts Receivable
a. Increase No effect
b. Decrease Increase
c. Increase Decrease
173
d. No effect No effect
2. What is the effect of the confirmation reply received from Pineda Company on the
account balance of
Accounts Receivable Merchandise Inventory
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
3. What age category will be affected by the confirmation reply received from Ms.
Pinky Pinero?
a. 61 – 90 days c. Over 120 days
b. 91 – 120 days d. None of the age categories is affected
4. What course of action would you take regarding the sales to employees under a
special contract with option to return?
a. Make an adjustment to take up January 2005 sales returns in calendar
year 2004.
b. Reverse entries recording sales in December 2004 as this is obviously a
management fraud.
c. Recommend that management discontinue this arrangement as it is obviously
disadvantageous to the company.
d. Make no further adjustments and take no further action.
5. What is the cost of consigned goods what should be included in the December 31,
2004 inventory?
a. P 3,000 b. P 4,000 c. P 3,300 d. None
6. To obtain the adjusted amount which will be used as a basis for estimating the
uncollectible accounts in each age category, what should we do with the credit
balance in Podunas Commercial’s account?
a. Deduct from the unadjusted balance of appropriate age group.
b. Add to unadjusted balance of appropriate age group.
c. Ascertain from the given data whether it should be added or deducted.
d. Ignore
174
10.The adjusted balance of accounts receivable to be used as a basis for estimating
the uncollectible accounts in “over 120 days age group” is
a. P 30,200 b. P 28,200 c. P 26,000 d. P 24,000
12.The allowance for doubtful accounts to be reported in the audited balance sheet at
December 31, 2004 is
a. P 32,260 b. P 31,925 c. P 19,330 d. P 18,295
14.The net decrease in 2004 net sales resulting from audit adjustment is
a. P 48,000 b. P 42,200 c. P 38,200 d. P 34,200
15.The net increase in the 2004 ending inventory resulting from audit adjustments is
a. P 33,500 b. P 33,200 c. P 30,200 d. P 28,300
PROBLEM
You obtained the following information from the company’s general ledger.
(1) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2003.
Product was shipped in July 2003.
(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.
Questions
175
In audit engagements in which interim physical inventories are observed, a frequently
used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you
are to provide the answers to the following:
1. The gross profit ratio for eleven months ended May 31, 2003 is
a. 20% b. 30% c. 35% d. 25%
2. The cost of goods sold during the month of June, 2003 using the gross profit
ratio method is
a. P132,000 b. P148,000 c. P144,000 d. P160,000
3. The June 30, 2003 inventory using the gross profit method is
a. P264,000 b. P268,000 c. P340,000 d. P260,000
1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba
Company paid the account within the discount period. How much Moneba Company
paid to Lynn Company?
a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360
Answer - P 7,448
Buyer Seller
Purchases 12,000 Accounts Receivable 9,600
Cash 2,400 Cash 2,400
Accounts Payable 9,600 Sales 12,000
Accounts payable 2,000 Sales 2,000
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Purchases 2,000 Accounts Receivable 2,000
Accounts payable 7,600 Cash 7,448
Purch. Disc. 152 Sales Discount 152
Cash 7,448 Accounts Receivable 7,600
2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30
on January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount
period. How much discount was granted?
a. P 0 b. P 200 c. P 300 d. P 500
Answer - P 300
Buyer Seller
Jan . 5 No Entry Jan. 5 No Entry
Jan. 10 Purchases 25,000 Jan. 10 Notes Receivable 10,000
Notes payable 10,000 Accounts Receiv. 15,000
Accounts pay. 15,000 Sales 25,000
Jan. 15 Accounts pay. 5,000 Jan 15 Cash 5,000
Cash 5,000 Accounts receiv. 5,000
Date of Payment:
Accounts pay. 10,000 Cash 9,700
Cash 9,700 Sales discount 300
Purchase discount 300 Accounts reciev. 10,000
Discount : P15,000 x 2% = P300
3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted
from its account. How much Febryan Company paid to Lao Company?
a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500
Answer - P 18,500
Seller Buyer
Accounts receivable 18,500 Purchases 20,000
Transportation expense 1,500 Accounts payable 18,500
Sales 20,000 Cash 1,500
Cash 18,500 Accounts payable 18,500
Accounts receivable 18,500 Cash 18,500
4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on
January 15, 2006 from Rubenil Company The term of the shipment was fob shipping
point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410
Answer- P 5,260
Buyer Seller
Purchases 12,000 Accounts receivable 12,950
Freight-in 950 Sales 12,000
Accounts payable 12,950 Cash 950
Account payable 2,500 Sales 2,500
Purchases 2,500 Accounts receivable 2,500
Accounts payable 5,000 Cash 5,000
Cash 5,000 Accounts receivable 5,000
Accounts payable 5,450 Cash 5,260
Cash 5,260 Sales discount 190
177
Purchase discount 190 Accounts receivable 5,450
Discount – P12,000 – P2,500 = P9,500 x 2% = P190
Answer - P 10,000
Buyer Seller
Purchases 10,000 Accounts receivable 10,000
Freight-in 1,500 Sales 10,000
Accounts payable 10,000
Cash 1,500
Claims receivable 11,500
Purchases 10,000
Freight-in 1,500
6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight
cost was paid by Chan Company for P2,000. Casas Company acquired the machinery
three years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery.
Cash paid by Chan Company to Casas Company assuming the account was paid within
the discount period is
a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000
Answer - P 19,600
Buyer Seller
Machinery 50,000 Cash 25,000
Cash 25,000 Accounts recei. – others 25,000
Accounts payable – others 25,000 Accum. depreciation 18,000
Machinery 60,000
Gain on sale 8,000
Machinery 2,000
Cash 2,000
Accounts payable – others 5,000 Gain on sale 5,000
Machinery 5,000 Accounts recie. – others 5,000
Accounts payable – others 20,000 Cash 20,000
Cash 20,000 Accounts recie – others 20,000
If paid within the discount period:
Accounts payable – others 20,000 Cash 19,600
Cash 19,600 Gain on sale 400
Machienry 400 Accounts payable – others 20,000
7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Ariel
Company assume a five-year life of the building with no salvage cost. Two years later,
Ariel Company sold the building at P80,000 to Jaan Company.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a. Gain of P 20,000
b. Loss of P100,000
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c. Neither gain nor loss
d. Cannot be determined
Answer - P 20,000
Buyer Seller
Land 200,000 Cash 300,000
Building 100,000 Land and building 300,000
Cash 300,000
Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.
Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will
be overstated by:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000
179
Solution
1. P 20,000
2. 50,000
3. 70,000
4. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5. 5,000
6. 10,000
7. 90,000
8. 6,000
9. –
10. –
11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b 2. a 3. c
Problem 2
In the event of your audit, you found the following information related to the
inventories on December 31, 2006.
a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but
across the face of the report is the notation “Merchandise not of the same quality as
ordered, returned for credit, December 19”. The merchandise was included in the
inventory.
b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at
P35,000. The shipment was in loading dock waiting to be picked by the common carrier.
d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
2006. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2007.
e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.
180
Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c c. Cost of sales 35,000 Inventory 35,000
d d. No adjustment
Answer -
1. a 2. d 3. a 4. b 5. b
Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on
December 31, 2006. The following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was
shipped December 31, 2006 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2007, the
date when the customer made payment of the sold goods.
181
c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able
to sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.
d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.
e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost
of the merchandise was P6,400. The purchase was not recorded until payment was
made in January 2007 but the goods were included in the inventory as of December 31,
2006.
f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee,
on December 29, 2005. Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2006. Your
further investigation revealed that 50% of these goods were sold in 2006 and the on-
hand at December 31, 2006 were not yet reported in 2006 inventory.
2. What is the entry to adjust audit finding number “b” at December 31, 2006?
a. Inventory 15,000 c. Both A and B
Retained Earnings 15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000
3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at
December 31, 2006?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?
a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment is
given.
b. The company should reduced its purchases at December 31, 2006 since the
purchases being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.
5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the
book is not close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400
182
b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400
6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book
is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
b. Cost of sales 25,000 d. Retained Earnings 2,500
Sales 15,000 Inventory 12,500
Retained Earnings 25,000 Accounts Receivable 15,000
Accounts Receivable 15,000
Answer
1. b 2. d 3. d 4. b 5. a 6. d
Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on
December 31, 2006, amounted to P885,000. Your cut-off examination disclosed the
following information”:
1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on PRINCE’S loading dock waiting to be picked up by the common
carrier.
2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006.
3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2006.
4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec.
31, 2006 and had a cost of P25,000. Upon notification of receipt by the customer on
January 2, 2007, the company issued a sales invoice for P42,000.
6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2006, because the Accounts Payable copy of the receiving report was lost.
7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2006.
Question:
1. Sales at year-end is overstated by:
a. P 75,000 b. P 40,000 c. P 35,000 d. P 33,000
183
2. Purchases at year-end is understated by:
a. P 110,000 b. P 84,000 c. P 64,000 d. P 60,000
Solution
1. Sales 35,000
Accounts receivable 35,000
2. Inventory 50,000
Cost of sales 50,000
Purchases 50,000
Accounts payable 50,000
3. Inventory 20,000
Cost of sales 20,000
4. Inventory 26,000
Cost of sales 26,000
Sales 40,000
Accounts receivable 40,000
5. Inventory 25,000
Cost of sales 25,000
6. Purchases 60,000
Accounts payable 60,000
7. Inventory 4,000
Accounts payable 4,000
Answer:
1. a 2. a 3. c 4. d
Problem 5
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit
for the year ended December 31, 2006. The company uses a periodic inventory system.
The CPA did not observe the inventory count on December 31, 2006, as a result, a special
examination was made of the inventory records.
The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000;
sales, P400,000; net purchases, P160,000, and pretax income P51,000.
1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31,
2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006,
it was not included in the inventory.
2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.
3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing
Company and was excluded from the ending inventory. The merchandise was recorded
as a sale P25,000 when shipped to Valentin on December 29, 2006.
184
4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked “Hold for customer’s shipping instructions.” Investigation revealed that the
customer signed a purchase contract dated December 18, 2006, but that case was
shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded
on December 31, 2006.
5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2006. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in
inventory at cost, P1,000 because it was shipped on January 4, 2007.
6. Merchandise costing P15,600 was received on December 28, 2006. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the
related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.
7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2006, fob destination. The merchandise was excluded from the inventory.
8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2006. The goods had been specifically
segregated. According to the terms of the contract of sale, ownership will not pass until
actual delivery.
9. Merchandise that cost P15,000 was included in the ending inventory. The related
purchase has not been recorded. The goods had been shipped by the vendor fob
destination, and the invoice was received on December 30, 2006. The goods was
received on January 5, 2007.
10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2006, when the invoice was received.
11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2006. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2006.
Question:
Based on your analysis and the information above, answer the following:
185
a. P 43,000 b. P 35,000 c. P 30,000 d. P 22,000
Solution
Answer:
1. c 2. a 3. b 4. c 5.b 6. a
Problem 6
Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cut-
off, both the beginning and ending of each year, you discover the following facts:
a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.
186
End of the Year
c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.
Question:
Based on your analysis and the information above, answer the following:
2. How much is the adjusted balance of the Purchases account at December 31, 2006
assuming the amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200
Solution
a. Retained earnings 3,260
Purchases 3,260
b. Beginning inventory 4,100
Retained earnings 4,100
c. Purchases 7,260
Accounts payable 7,260
d. Inventory 3,600
Cost of sales 3,600
e. Inventory 1,500
Cost of sales 1,500
Purchases 1,500
Accounts payable 1,500
Answer: 1. c 2. c 3. c 4. a
Problem 7
A packing case containing product costing P8,160 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked “Hold for shipping instructions.” The customer’s order was dated December
18, but the case was shipped and the customer billed on January 10, 2007.
Merchandise costing P6,250 was received on December 28, 2006, and the invoice was
recorded. The invoice was marked “On Consignment.”
187
Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2006.
A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30. The customer was billed on that date and the machine
was excluded from inventory although it was shipped January 2, 2007. The machine
costs P25,000 and was sold for P45,000.
Merchandise costing P23,500 was received on January 3, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on
December 29, 2006, FOB destination.
Goods costing P15,000 were billed for P20,000 and delivered on December 20. The
goods were included in inventory because the sale was accompanied by a repurchase
agreement requiring JONES to buy back the inventory in February 2007.
Selected account balances before considering the effects of the above items are as follows:
Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000 b. P 165,000 c. P 150,000 d. P 125,000
3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150 b. P 68,000 c. P 67,200 d. P 65,000
Solution
1. Inventory 8,160
Cost of Sales 8,160
2. Accounts payable 6,250
Purchases 6,250
188
Cost of sales 6,250
Inventory 6,250
3. Inventory 7,200
Cost of sales 7,200
Purchases 7,200
Accounts payable 7,200
4. No adjustments
5. No adjustments
6. Cost of sales 11,000
Inventory 11,000
7. Sales 20,000
Accounts receivable 20,000
Answer:
1. b 2. c 3. a 4. d 5. d
Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information
was obtained from the company’s accounting records for the year ended December
31, 2006:
Inventory at December 31, 2006 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 2006) 1,870,000
Accounts payable at December 31, 2006 1,415,000
Net sales (sales less sales returns) 9,693,400
189
Included in the physical count were goods received from a vendor
on December 27, 2006. However, the related invoice for P36,000 was not
recorded because the accounting department’s copy of the receiving report
was lost.
Question:
Based on your analysis and the information above, answer the following:
Solution
Adjusting entry:
Cost of sales 64,000
Inventory 64,000
Inventory 93,400
Cost of sales 93,400
Purchases 93,400
Accounts payable 93,400
Inventory 27,000
Cost of sales 27,000
Inventory 49,000
Cost of sales 49,000
Sales 67,800
Accounts receivable 67,800
Inventory 17,740
Cost of sales 17,740
Inventory 31,200
Cost of sales 31,200
190
Purchases 36,000
Accounts payable 36,000
Inventory 8,000
Accounts payable 8,000
Answer:
1. b 2. c 3. a 4. c 5. b 6. d
Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Cruzada’s accounting records are as follows:
a. Parts held on consigment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada
Company’s warehouse on December 31, 2006 and in accounts payable at December 31,
2006.
b. P22,000 of parts which sere purchased from Deza Company and paid for in
December 2006 were sold in the last week of 2006 and appropriately recorded as sales
of P28,000. The parts were included in the physical count of goods in Cruzada’s
warehouse on December 31, 2006, because the parts were on the loading dock waiting
to be picked up by customers.
c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point,
on December 28, 2006, amounted to P34,000. The customers received the parts on
January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by
Cruzada Company on January 2, 2007.
e. Goods were in transit from Encabo Company to Cruzada Company on December 31,
2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2006.
191
2006, was received on January 3, 2007. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2006.
g. All of the purchases from Dacalos Company occurred during the last seven days of
the year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Cruzada’s policy is to pay invoices in time to
take advantage of all cash discounts, adjust inventory accordingly, and record accounts
payable, net of cash discount.
Questions:
1. The adjusted inventory is:
a. P 1,326,700 b. P 1,304,700 c. P 1,276,000 d. P 1,270,700
Solution
a. Cost of sales 155,000 Accounts payable 155,000
Inventory 155,000 Purchases 155,000
b. Cost of sales 22,000
Inventory 22,000
c. Accounts receivable 40,000
Sales 40,000
d. Inventory 210,000
Cost of sales 210,000
e. Inventory 25,000
Accounts payable 25,000
f. Inventory 2,000
Accounts payable 2,000
g. Accounts payable 5,300
Inventory 5,300
Answer:
1. b 2. b 3. c
Problem 10
Raffy Corporation reported income before income taxes as follows:
2005 P525,000
2006 630,000
The company uses the periodic inventory system. Ending inventories for 2005 and 2006
were properly recorded. The following additional information became available following an
analysis of the inventories:
(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy
Corporation in 2005 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 2006. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.
192
(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 2005 and was shipped by the supplier that day. The merchandise was not
included in the 2005 ending inventory and was not recorded as a purchase until 2006.
(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and
not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006
when the invoice was sent.
(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 2005.
(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 2005. These goods were not included in the
ending inventory of Raffy Corporation for 2005.
Question:
1. How much is the correct income before taxes for 2005?
a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590
Solution
a. Beginning inventory (COS) 7,350 2005 2006
Retained earnings – beg 7,350 Net income 525,000 630,000
(a) 7,350 ( 7,350)
b. Beginning inventory (COS) 3,000 (b) 3,000 ( 3,000)
Retained earnings – beg 3,000 ( 3,000) 3,000
(c) 4,260 ( 4,260)
Retained earnings – beg 3,000 (d) ( 4,950) 4,950
Purchases (COS) 3,000 (e) 6,750
( 6,750)
Adjusted NI 538,410 616,590
c. Sales 4,260
Retained earnings – beg 4,260
d. Retained earnings – beg 4,950
Beginning inventory (COS) 4,950
e. Beginning inventory (COS) 6,750
Retained earnings – beg 6,750
Answer:
1. c 2. b 3. c 4. a 5. b
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
6. The December 31 inventory was determined by a physical count on December 28
and based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
193
7. The 2006 ledger shows a sales balance of P20,000,000.
8. The company sells a mark-up of 20% based on sales.
9. The company recognizes sales upon passage of title to the customers.
10. All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000
Solution
For SI # 300 For SI # 307
Sales 50,000 Accounts receivable 74,500
Accounts receivable 50,000 Sales 74,500
For SI # 301 Cost of sales 59,600
Cost of sales 50,000 Inventory 59,600
Inventory 50,000 P74,500 x 80%
194
P62,500 x 80%
For SI # 304 For SI # 310
Sales 56,000 Accounts receivable 67,500
Accounts receivable 56,000 Sales 67,500
For SI # 305
Cost of sales 72,000
Inventory 72,000 (P90,000 x 80%)
Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000
(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 (8) _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400
Problem 12
On December 15, 2006, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.
As of December 31, 2006, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2006. The audit was for the year ended December 31, 2006.
In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2006, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped Date Billed Control Credited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07
Question:
Based on the information above and your analysis, answer the following
195
3. The sales at year-end is over/(under) by:
a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under
Solution
B Sales 101,400
Inventory 77,000
Accounts Receivable 101,400
Cost of goods sold 77,000
This item is a year-end sales cut-off error.
C Properly recorded; no AJE needed.
D Inventory 87,000
Cost of goods sold 87,000
(same as Item A)
E Accounts Receivable 64,500
Cost of goods sold 49,500
Sales 64,500
Inventory 49,500
This item is a year-end sales cut-off error.
Answer:
1. b 2. a 3. a 4. a
Problem 13
The following information was obtained from the balance sheet of LION INC.:
All operating expenses are paid by Lion Inc. with cash and all purchases of inventory
are made on account. Lion, Inc. sells only one product. All sales are cash sales
which are made for P100 per unit. Lion. Inc., purchases 1,500 units of inventory
196
per month and values its inventory using the periodic FIFO. The unit cost of
inventory during January 2006 was P65.20 and increased P0.20 per month during
the year. During 2006, payments to suppliers totaled P943,400 and operating
expenses totaled P440,000. The ending inventory for 2005 was valued at P65.00
per unit.
Question:
Based on the information above and your analysis, answer the following
Solution
Q1 & Q2
____________________Cash______________________
Beg. bal.200,000 Payment to supplier 943,400
NR collect 50,000 Ope. expenses 440,000
Sales 1,840,000 Ending balance 706,600
Q3 _______________Accounts Payable_________________
Payment to supplier 943,400 Beg. bal. 156,000
Ending balance 400,000 Purchases 1,193,400
Q5 6,150 beg. units + 18,000 purchased units – 18,400 sold units = 5,750 ending
197
1,250 x P66.80 = 83,500
Total P 385,900
Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customer’s tank truck. In
order to confirm or refuse these suspicions, Kitkat has collected the following data for the
past 10 working days.
Quantity Cost per
(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000
Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory
at the close of business on September 10.
Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000 b. 210,000 c. 200,000 d. 192,000
Answer
1 b 1,780,000 – (2,512,000/1.60) = 210,000 gallons
2 c 210,000 – 192,000 = 18,000 x P1.45 = P26,100
Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for
the year ended December 31, 2006. The following data were gathered:
Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory
accountant was as follows:
Questions:
198
1. Assuming cost percentage relationships are stated are correct, what will be the
adjustment on manufacturing cost at December 31, 2006?
a. Debit: Raw materials used 25,000
Credit Direct labor 25,000
b. Debit: Direct labor 25,000
Credit Raw materials used 25,000
c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000
Solution
1 b Per books Per audit Difference
Raw Materials Used P400,000 P375,000 P25,000 over
Direct Labor 275,000 300,000 P25,000 under
Factory Overhead 225,000 225,000 ---
Total P900,000 P900,000
1 c (60% of WIP, end) + 900,000 – WIP,end = 800,000
WIP, end = 100,000/40% = P250,000
Problem 16
Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES
account for the calendar year 2006: (All sales are mark-up at 30% based on sales
price)
SALES
12/31 Closing Entry P 1,411,100 Sales Register P 1,230,000
12/25 SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880 85,600
P 1,411,100 P 1,411,100
PURCHASES
Purchase Register P 740,000 12/31 Closing Entry P 792,500
12/27 RR#545 15,000
12/28 547 7,500
12/29 548 10,000
12/30 549 20,000 _______
P 792,500 P 792,500
You observed the physical inventory of goods in the warehouse on December 31, 2006 and
were satisfied that it was properly taken.
199
When performing sales and purchases cut-off tests, you found that at December 31, 2006,
the last Receiving Report (RR) that had been used was No. 549 and that no shipments have
been made on any Sales Invoices (SI) with number larger than No. 878.
1. Included in the warehouse physical inventory at December 31, 2006 were chemicals
that had been purchased and received on Receiving Report No. 546 but for which an
invoice was not received until 2007. Cost was P14,500.
2. In the warehouse at December 31, 2006, were goods that had been sold and paid for by
the customer but which were not shipped out until 2007. They were all sold on Sales
Invoice No. 876.
3. On the evening of December 31, 2006, there were two shipments on ANTHONY
CORPORATION. First shipment was unloaded on January 3, 2007 and received on
Receiving Report No. 548. The freight was paid by the vendor. The second shipment
was loaded and sealed on December 31, 2006 but was not delivered until January 2,
2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by
the buyer.
6. Included in the physical inventory were chemicals exposed to rain while in transit
and deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had
been paid on the chemicals. This was recorded as purchases on 12/31/02
Questions:
1. The Sales at December 31, 2006 is:
s. Overstated by P 70,000 c. Overstated by P 155,600
b. Overstated by P 55,000 d. Overstated by P 15,000
200
a. Understated by P 17,000 c. Overstated by P1,200
b. Overstated by P 9,500 d. Understated by P12,500
Solution
1. Purchases 14,500
Accounts payable 14,500
SI # 546
2. Sales 15,000
Advances from customers 15,000
SI # 876
3. Accounts payable 10,000
Purchases 10,000
RR # 548
4. Inventory 14,000
Cost of sales 14,000
SI#878 - P20,000 x 70%
5. Sales 55,000
Accounts receivable 55,000
SI # 879
6. Claims Receivable 5,700
Purchases 5,500
Freight-in 200
7. Cost of sales 5,700
Inventory 5,700
8. Sales 85,600
Accounts receivable 85,600
SI # 880
Answer:
1. C 2. D 3. C 4. B 5. A 6. B
Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.
KAREN MAE CORPORATION
TRIAL BALANCE
March 31, 2007
Cash 200,000
Accounts receivable 400,000
Inventory, December 31, 2006 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
Accounts payable 237,000
Other expense accruals 102,000
Capital stock 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 266,000 ________
3,622,000 3,622,000
_______________________________________________________________
201
2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts
payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for
other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.
5. The companies insuring the inventory agreed that the corporation’s fire loss claim should
be based on the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The corporation’s audited financial statements
disclosed this information:
6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.
Questions:
1. Cash balance at April 15, 2007 is:
a. P 70,000 b. P 143,000 c. P 190,000 d. P 199,700
202
8. Estimated inventory as of April 15, 2007 is:
a. P 570,000 b. P 575,500 c. P 679,500 d. P 830,500
10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45% b. 55% c. 42.76% d. 56.23%
Solution
203
Allow. for bad debts 86,000
(P80,000 + P6,000)
1. Cash balance at April 15, 2007 is: d. P 199,700
2. Accounts Receivable balance at April 15, 2007 is: a. P 350,500
3. Inventory at April 15, 2007 is: c. P 58,000
4. Accounts payable at April 15, 2007 is: d. P 286,000
5. Sales as of April 15, 2007 is: b. P1,510,000
6. Net purchases as of April 15, 2007 is: d. P 650,500
7. Cost of Sales as of April 15, 2007 is: d. P 830,500
8. Estimated inventory as of April 15, 2007 is: a. P 570,000
9. Inventory loss at April 15, 2007 is: b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is: a. 45%
PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of
December 31, 2006:
Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750
During your audit, you noted that Jeanina held its cash book open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625 represents
collections from customers, net of 5% cash discounts.
a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.
b. Goods costing P54,375 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.
c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered to
the customer on January3, 2007. The terms of the invoice were FOB shipping point.
The goods were included in the 2006 ending inventory even though the sale was
recorded in 2006.
e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.
204
f. Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.
Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006.
1. Cash
a. P 240,800 b. P 173,500 c. P 170,250 d. P 167,150
2. Accounts receivable
a. P 727,150 b. P 641,000 c. P 637,125 d. P 563,500
3. Merchandise inventory
a. P 1,520,000 b. P 1,508,750 c. P 1,465,000 d. P 1,252,500
4. Accounts payable
a. P 1,197,725 b. P 1,153,975 c. P 1,150,875 d. P 1,143,250
5. Working capital
a. P 1,158,800 b. P 1,058,275 c. P 1,055,175 d. P 1,000,800
6. Current ratio
a. 2.00 b. 2.01 c. 1.84 d. 1.83
Solution
1. Accounts receivable 77,500
Cash 73,625
Sales discount 3,875
Sales 90,025
Cash 90,025
2. Cash 90,000
Purchase discount 3,100
Accounts payable 93,100
3.a Inventory 68,750
Cost of sales 68,750
3.b Inventory 54,375
Cost of sales 54,375
Purchases 54,375
Accounts payable 54,375
3.c Cost of sales 159,375
Inventory 159,375
3.d Inventory 32,500
Cost of sales 32,500
3.e Accounts payable 43,750
Purchases 43,750
Answer:
1. d 2. b 3. b 4. b 5. c 6. c
PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2006, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2006 instead of at June 30, 2006.
205
You obtained the following information from the company’s general ledger
(4) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
(5) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product
was shipped in July 2006.
(6) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.
Questions:
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you are to
provide the answers to the following:
4. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20% b. 25% c. 30% d. 35%
5. The cost of goods sold during the month of June, 23003 using the gross profit ratio
method is
a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000
6. The June 30, 2006 inventory using the gross profit method is
a. P 260,000 b. P 264,000 c. P 268,000 d. P 340,000
Solution
Q1 Beginning inventory 140,000
Purchases – adjusted 1,088,000 (P1,080,000 + P12,000 – P4,000)
TGAS 1,228,000
Ending inventory 220,000
Cost of goods sold 1,008,000
Sales 1,344,000
COS 1,008,000
Gross Profit 336,000 25%
Q2 Sales for the fiscal year ended June 30, 2003 P 1,536,000
Sales for the eleven months ended May 31, 2003 1,344,000
Sales for the month of June 30, 2003 P 192,000
Less: Sales of goods at cost 16,000
Sales with gross profit P 176,000
206
x Cost Rate 25%
Total P 132,000
Plus: Sale of goods at cost 16,000
Total Cost of Goods Sold for June 2003 P 148,000
Problem 20
You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of
December 31, 2005. The Abam’z Company manufactures tires with it sells to its subsidiary
at cost plus 30%. During the course of the audit, you discover that the balances of the
inter-company accounts are not reconciled. Following is a copy of part of the inter-company
ledger sheets:
A review of the inventory observation working papers discloses the following information:
207
2. No returned merchandise was received from Yamas Company during the month of
December 2005.
Questions:
1. What is the total unrecorded purchases of Yamas as of December 31, 2005?
a. P 29,900 b. P 20,900 c. P 14,700 d. P 11,000
Solution:
Abam’z Company and Yamas Company
Reconciliation of Inter-Company Accounts
Abam’z Yamas
Unadjusted balance 52,500 16,700
Abam’z shipments not recorded by Yamas
SI # 905 6,200
SI # 906 3,700
SI # 908 11,000
SI # 907 – not recorded by Abam’z 9,000
SI # 909 – recorded by Yamas although
there is no shipment made by Abam’z (8,200)
RG # 80 – not yet recorded by Abam’z (4,100)
Remittance from Yamas not yet recorded by
Abam’z ( 28,000) ______
Adjusted balance 29,400 29,400
Inventory Adjustments
December 31, 2005
Abam’z Yamas
Items to be added on inventory lists:
Cost of returned goods in transit
(4,100/130%) 3,154
Cost of purchases in transit –
SI # 906 3,700
SI # 908 _____ 11,000
Total addition to inventory 3,154 14,700
Adjusting Entry:
Book of Abam’z Book of Yamas
Accounts Receivable 9,000 Purchases 20,900
Sales 9,000 Accounts payable 20,900
208
SI # 907 SI # 905, 906, 908
Cash 28,000
Accounts Receivable 28,000
Cash in transit from Yamas
PART2
Problem 6
1. Physical inventory, taken December 31, 2004 under your observation showed that
cost was P265,000 and market value, P440,000. The inventory of January 1, 2004
showed cost of P390,000 and market value of P650,000..
2. The average gross profit rate was 40% of net sales.
3. The accounts receivables as of January 1, 2004 were P135,000. During 2004,
accounts receivable written off during the year amounted to P10,000. Accounts
receivables as of December 31, 2004 were P375,000.
4. Outstanding purchase invoices amounted to P500,000 at the end of 2004. At the
beginning of 2004 they were P375,000.
5. Receipts from customers during 2004 amounted to P3,000,000.
6. Disbursements to merchandise creditors amounted to P2,000,000.
Questions:
Problem 4
Rama Corporation uses the physical inventory system. You observed the taking of a
physical inventory on December 31, 2002. The total inventory cost per client’s list is
P376,000.
209
a. A review of quantities in the inventory list with those in the original inventory tags
disclosed that one inventory item should be 10 dozens instead of 10 units. The
price per client list is P100 per unit.
c. To ascertain that there was a proper cut-off, you reviewed purchases and sales
transactions a few days before and after December 31, 2002. You review disclosed
the following:
a. Purchase invoice for P15,000 physically counted on December 31, 2002, was
recorded in January 2003 voucher register.
b. Goods with an invoice price of P18,000 (cost P12,000) shipped to a customer
FOB destination on December 28, 2002, were in transit on December 31, 2002.
No entry was made to record the sale.
c. Merchandise costing P74,500 was consigned to Renegado Corporation on
December 24, 2002 Rama records consignment shipment on a memorandum
basis and bears the cost of shipping to consignees. As of December 31, 2002,
Renegado reported sales totaling P30,000 since December 24, and claimed
P6,000 as commission of 20% of sales. Renegado also claimed reimbursement
of P4,000 for freight paid on December 2002 and P500 for advertising expense
to be borne by Rama. No entry has been made on Rama’s books for the
consignment sales and the cost incurred by Renegado. You have verified that
as of December 31, 2002, the cost of consigned goods amounts to P59,600.
Having been appointed auditor only in May 2003, you were unable to physically
observe the taking of client’s inventory on December 31, 2002. However, you adopted
alternative means to verify this item. Through inquiry and review of the inventory
summary sheets and records, you became aware that the beginning inventory was
understated by P15,000. Other than this, you were satisfied as to the general
accuracy of the opening inventory.
Questions:
21.Inventories received from consignor will
a. Not be recorded but included in the inventories total.
b. Not be recorded but included in the notes to the balance sheet
c. Be recorded with a debit to inventories.
d. Either recorded or not recorded.
210
24.How much of the cost incurred by Renegado Corporation should be charged to
operating expenses?
a. P 10,500 b. P 7,300 c. P 6,500 d. P 6,000
Problem 5
The Jorilyn Corporation was organized on January 15, 2004, and started operation
soon thereafter. The Company cashier acted also as the bookkeeper had kept the
accounting records very haphazardly. The manager suspects him of defalcation and
engaged you to audit his account to find out the extent of the fraud if there is any.
On November 15, when you started the examination of the accounts, you find the cash
on hand to be P25,700. From inquiry at the bank, it was ascertained that the balance
of the Company’s bank deposit in current account on the same date was P131,640.
Verification revealed that the check issued P9,260 is not yet paid by the bank. The
corporation sells at 40% above cost.
Questions:
Based on the above and the result of your audit, compute for the following as of
November 15, 2004.
211
A B C D
29. Collections from sales 1,615,040 2,041,940 1,153,600 1,188,140
30. Payments for purchases 1,207,204 922,180 1,854,620 1,391,780
31. Total cash disbursements 3,273,400 2,625,984 2,810,560 2,340,960
32. Unadjusted cash balance 1,007,180 537,580 74,740 722,156
33. Cash shortage 389,500 859,100 574,076 0
PROBLEM 4
You have been engaged for the audit of the Violet Company for the year ended
December 31, 2004. The Violet Company is engaged in the wholesale chemical
business and makes all sales at 30% based on sales price.
Following are portions of the client’s sales and purchases accounts for the calendar
year 2002.
SALES
PURCHASES
SI – Sales Invoice
RR – Receiving Report
You observed the physical inventory of goods in the warehouse on December 31, 2004
and were satisfied that it was properly taken.
When performing a sales and purchases cutoff tests, you found that at December 21,
2004, the last receiving report that had been used No. 907 and that no shipments
have been made on any sales invoices with numbers larger than No. 709.
212
1. Included in the warehouse physical inventory at December 31, 2004, were
chemicals that had been purchased and received on receiving report No. 904 but
for which an invoice was not received until 2005. Cost was P89,000.
2. In the warehouse at December 31, 2004, were goods that had been sold and paid
for by the customer but which were not shipped out until 2005. They were all sold
on sales invoice No. 706 and were not inventoried.
3. On the evening of December 31, 2004, there were three cars on the Violet Company
siding:
(a) Car BR38162 was unloaded on January 2, 2005, and received on receiving
report No. 905. The freight was paid by the vendor.
(b) Car BAE74123 was loaded and sealed on December 31, 2004, and was
switched off the company’s siding on January 2, 2005. These goods were billed
on SI No. 708 and the freight was paid by Violet Company.
(c) Car BEH17943 was loaded and sealed on December 31, 2004, and was
switched off the company’s siding on January 2, 2005. The sales price was
P12,700 and the freight was paid by the customer. This order was covered by
SI No. 707.
4. Temporarily stranded at December 31, 2004, on a railroad siding were two cars of
chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice
No. 709 and the terms were FOB destination.
5. En route in the Violet Company on December 31, 2004, was a truckload of material
that was received on receiving report no. 910. The material was shipped FOB
destination and freight of P3,000 was paid by the Violet Company on January 4,
2005. However, the freight was deducted from the purchase price of P31,000.
6. Included in the physical inventory were chemicals exposed to rain while in transit
and deemed unsalable. Their invoice cost was P10,000 and freight charges of P700
had been paid on the chemicals.
Questions:
20.The total purchases for the year ended December 31, 2004 should be
a. P 3,814,000 b. P 3,725,000 c. P 3,714,000 d. P 3,704,000
21.The total sales for the year ended December 31, 2004 should be
a. P 4,195,700 b. P 4,152,700 c. P 4,072,700 d. P 4,060,000
213
23.The physical inventory count should be increased by
a. P 229,300 b. P 201,000 c. P 190,300 d. P 101,300
PROBLEM 7
Ms. Tonel, started Denise Company, a single proprietorship, several years ago. For a
number of years, her sister maintained the accounting records but early in the current
year she became seriously ill. Ms. Tonel consulted your accounting firm and your
partner told him, “You keep a record of your cash receipts and disbursements, and a
list of your assets and liabilities at the beginning and end of the year and we’ll prepare
financial statements for you at the end of the year.”
At the close of December 31, 2004, Ms. Tonel presented to you the following:
Jan. 1 Dec. 31
Cash 18,460 17,800
Notes receivable 15,000 2,000
Interest receivable 900 500
Accounts receivable 43,560 64,320
Inventory 38,900 43,400
Prepaid insurance 1,900 1,500
Equipment (net of accum. dep’n.) 124,000 136,000
Total Assets 242,720 265,520
214
Additional information:
1. Ms. Tonel reported that all accounts and notes receivable arose from merchandise
sales and that P1,400 of accounts receivable were written off during 2004.
2. Ms. Tonel estimated that P1,420 of the December 31 receivables will prove
uncollectible.
Questions:
The following accounts were included in the adjusted trial balance of Jeanina
Company as of December 31, 2003:
Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750
215
During your audit, you noted that Jeanina held its cash books open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2004 of P163,650 were recorded in the December 2003 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625
represents collections from customers, net of 5% cash discounts.
g. Goods valued at P68,750 are on consignment with a customer. These goods are
not included in the P1,512,500 inventory figure.
h. Goods costing P54,375 were received from a vendor on January 4, 2004. The
related invoice was received and recorded on January 6, 2004. The goods were
shipped on December 31, 2003, terms FOB shipping point.
i. Goods costing P159,375 were shipped on December 31, 2003, and were
delivered to the customer on January3, 2004. The terms of the invoice were
FOB shipping point. The goods were included in the 2003 ending inventory even
though the sale was recorded in 2003.
j. A P45,500 shipment of goods to a customer on December 30, terms FOB
destination are not included in the year-end inventory. The goods cost P32,500
and were delivered to the customer on January 3, 2004. The sale was properly
recorded in 2004.
k. The invoice for goods costing P43,750 was received and recorded as a purchase
on December 31, 2003. The related goods, shipped FOB destination were
received on January 4, 2004, and thus were not included in the physical
inventory.
l. Goods valued at P153,200 are on consignment from a vendor. These goods are
not included in the physical inventory.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of
the following as of December 31, 2003.
A B C D
1. Cash 240,800 170, 250 167,150 173,500
2. Accounts receivable 641,000 727,150 637,125 563,500
3. Merchandise inventory 1,252,500 1,508,750 1,520,000 1,465,000
4. Accounts payable 1,143,250 1,197,725 1,150,875 1,153,975
5. Working capital 1,055,175 1,158,800 1,058,275 1,000,800
6. Current ratio 2.00 2.01 1.84 1.83
216
CHAPTER 6 - Audit of Investments
Problem 1
The following data pertains to Rainbow Corporation’s investments in marketable securities:
Market Value
Cost 12/31/07 12/31/06
Trading P 150,000 P 155,000 P 100,000
Available-for-sale 150,000 130,000 126,000
Questions
1. What amount should Rainbow Corporation report as unrealized holding gain in its 2007
income statement?
a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,000
Solution
1. C
Market value – 1/1/07 P 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
2. A
Cost P 150,000
Market value – 12/31/07 130,000
Unrealized holding loss P 20,000
Problem 2
The following information pertains to Every Now and Then, Inc.’s portfolio of marketable
investments for the year ended December 31, 2007:
217
Held-to-maturity
Security ABC P 100,000 P 95,000
Trading Security
Security DEFP 150,000 P 100,000 155,000
Available-for-sale
Security GHI 190,000 165,000 P 175,000
Security JKL 170,000 175,000 160,000
Security ABC was purchased at par. All declines in fair values are considered to be
temporary.
Questions
1. The carrying value of security ABC at December 31, 2007 is
a. P 95,000 b. P 98,000 c. P 100,000 d. P 105,000
Solution
1. C Cost since the security is considered as held-to-maturity
2. D Market value at year-end
3. A Market value at year-end
4. C
Selling Price P 175,000
Cost 190,000
Loss P( 15,000)
5. A
Market value – 1/1/07 P 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
6. D
Cost P 170,000
Market value – 12/31/07 175,000
Holding gain P 5,000
Problem 3
At December 31, 2007, Maria Angela Corporation had the following investments that were
purchased during 2005, its first year of operations:
218
Trading Securities:
Security A 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000
No investments were sold during 2007. All securities except Security D and Security F are
considered short-term investments. None of the market changes is considered permanent.
Questions
13. The amount of investment to be reported as current assets is:
a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000
15. The unrealized gain (or loss) component of income before taxes is:
a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000
16. The unrealized gain (or loss) component of shareholders’ equity is:
a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000
Solution
1. B
Security A P 725,000 at mv
Security B 200,000 at mv
Security C 560,000 at mv
Security E 970,000 at cost
Total P 2,465,000
2. C
Security D P 865,000 at mv
Security F 412,000 at cost
Total P 1,277,000
3. A
Trading security – cost P 910,000
Trading security – mv 925,000
Holding gain P 15,000
4. B
Available-for-sales security – cost P 1,350,000
Available-for-sales security – mv 1,425,000
Holding gain P 75,000
Problem 4
Marc Corporation had investments in marketable debt securities costing P650,000 that were
classified as available-for-sale. On June 30, 2007, Marc Corporation decided to hold the
investments to maturity and accordingly reclassified them from the held-to-maturity
category on that date. The investments’ market value was P575,000 at December 31,
2006; P530,000 at June 30, 2007; and P490,000 at December 31, 2007.
219
Questions
1. What amount of loss from investments should Marc Corporation report in its 2007
income statement?
a. P 0 b. P 45,000 c. P 85,000 d. P 120,000
2. What amount should Marc Corporation report as net unrealized loss on marketable debt
securities in its 2007 statement of stockholders’ equity?
a. P 160,000 b. P 120,000 c. P 45,000 d. P40,000
Solution
Entry: Valuation allowance 75,000
Unrealized holding loss (SHE) 75,000
To close the valuation allowance of last year.
The following transactions took place in 2007 with respect to these holdings:
April 10 By proper resolution, there was a 3 for 1 stock split and Quiters
Company received 3,000 shares in addition to her original holdings.
July 10 Quiters Company received a P0.60 per share cash dividend and also rights to
subscribed to one share at P40 each for every five shares held. On this date,
shares of stock of NeverWin Company were selling ex-rights at P55 per share and
rights were selling at P2 each.
July 20 Quiters Company exercised all her rights by buying the new shares and paid
P36,000.
Nov. 15 Quiters sold 1,000 shares at P60 each, taken from those acquired in 2003, less
broker’s commission of P750.
Questions
1. The investment in stock at year-end is:
a. P 222,023 b. P 221,031 c. P 220,971 d. P 219,334
220
4. The gain on sale of investment at year-end is:
a. P 14,971 b. P 14,221 c. P 13,333 d. P 12,583
Solution
April 10 Memo entry
July 10 Cash 2,700
Dividend income 2,700
Investment in Stock Rights 8,070
Investment in stock 8,070
(2/57 x P230,000 = P8,070)
July 20 Investment in stock 44,070
Cash 36,000
Investment in stock rights 8,070
1999 Purchase
Nov 15 Cash (60,000 – 750) 59,250 1,000 140,000
Investment in stock 45,029 x 3 ______ Split
(1,000 rights/3,000 rights x P135,088) 3,000 140,000
Gain on sale 14,221 _____ ( 4,912) Stock rights
3,000 135,088
Answer:
1. C 2. B 3. C 4. B 5. A
Problem 6
Roelito Company has a fiscal year ending June 30. A summary of Roelito’s transactions in
the capital stocks of Joondee Company is presented below, except for several cash
dividends that have no bearing on the situation. In all transactions, Joondee Company uses
the specific certificate identification method.
The transactions in the Investment of Joondee Company common stock are as follows:
Sept 06, 2000 Purchased 500 shares of Joondee Company common, par P100 per share,
at a total cost of P48,500.
July 15, 2003 Converted 500 shares of Joondee Company preferred stock into 500
shares of Joondee Company common, in accordance with the conversion
privilege. The preferred shares originally cost P49,000, and the market
price at conversion date was P95 per share. The market price of the
common stock at July 15, 2003, was P101 per share. The transactions
had no commercial substance.
Aug. 07, 2005 Received additional shares of Joondee Company common in a two-for-one
stock split, in which the par value was reduced from P100 to P50 per
share.
Sept. 06, 2005 Purchased 1,000 share of Joondee Company common at a total cost of
P53,000.
Dec. 04, 2005 Exercised the option to receive Roelito share of common for each 10
shares held, in lieu of a cash dividend of P5.40 for each share held. The
market price of a share was P54.
221
Dec. 02, 2006 Received stock dividend equal to 20 percent of the common shares held.
Apr. 04, 2007 Received warrants representing the right to purchase at par Roelito share
of Joondee Company common for each ten shares of common owned. On
that date of the issuance of the warrants, the market price of the stock
ex-rights was P58, and the market price of the rights was P2 each.
Apr. 15, 2007 Roelito Company exercised the 1,000 rights applicable to the shares
purchased on September 6, 2005, and sold all remaining rights. The net
proceeds from the sale of the rights was P1.80 per right.
June 12, 2007 Sold 600 shares of Joondee Company common for P32,400 net. The
shares were identified as 500 of those purchased on September 6, 2005,
and 100 of those purchased April 15, 2007.
Question
1. The entry to record the conversion of preferred stock to common stock on July 15, 2003
is:
a. Investment – preferred stock 47,500
Loss on conversion of stock 1,500
Investment – common stock 49,000
b. Investment – common stock 49,000
Investment – preferred stock 49,000
3. The cost of shares purchased through exercise of rights on April 15, 2007 is:
a. P 6,473 b. P 6,391 c. P 5,000 d. P 3,527
6. The audited balance of investment in common stock at December 31, 2007 is:
a. P 139,796 b. P 138,344 c. P 95,081 d. P 89,344
7. The number of rights Roelito Company received from Joondee Company is:
a. 39,600 rights b. 30,000 rights c. 3,960 rights d. 3,000 rights
222
8. The cost of the rights received is:
a. P 4,897 b. P 5,507 c. P 5,557 d. P 6,890
Solution
Sept 6, 2000 Investment – common 48,500
Cash 48,500
July 15, 2003 Investment – common 49,000
Investment – preferred 49,000
Aug 7, 2005 Memo entry
Sept 6, 2005 Investment – common 53,000
Cash 53,000
Dec 4, 2005 Investment – common 16,200
Dividend income 16,200
(shares outstanding – 3,000/10 = 300 shares x P54)
Dec 2, 2006 Memo entry
Apr 4, 2007 Stock rights 5,557
Investment – common 5,557
(Total investment to date – P166,700 x 2/60 = P 5,557)
Apr 15, 2007 Investment – common 6,473
Cash 5,000
Stock rights 1,473
(2/60 x 53,000 = P1,767 x 1,000 rights/1,200 rights)
Cash 5,328
Stock rights 4,084
(P5,557 – P1,473)
Gain on sale 1,224
Problem 7
On December 31, 2006, DreamBig Company reported as Available-for-sale securities:
Additional information:
On May, 2007, Attitude Company issued a 10% stock dividend when the market price of
its stock was P24 per share.
On November 1, 2007, Attitude Company paid a cash dividend of P0.75 per share.
On August 5, 2007, IstheKEY Company issued to all shareholders, stock rights on the
basis of one right per share. Market prices at date of issue were P13.50 per share (ex-
right) of stock and P1.50 per rights. DreamBig Company sold all rights on December 16,
2007 for net proceeds of P18,800.
223
On July 1, 2007, DreamBig Company paid P1,520,000 for 50,000 additional shares of
2Success Company’s common stock which represented a 20% investment in 2Success
Company. The fair value of all of the 2Success Company’s identifiable assets net of
liabilities was equal to their carrying amount of P6,350,000. As a result of this
transaction, DreamBig Company owns 30% of 2Success Company and can exercise
significant influence over 2Success Company’s operating and financial policies.
Market prices per share of the marketable equity securities which were all listed in the
stock exchange, were as follows:
At December 31
2006 2007
Attitude Company - common P 22 P 23
IstheKEY Company – common 15 14
2Success Company – common 27 29
Questions
1. The investment in Attitude Company common stock at year-end is:
a. P 126,500 b. P 125,000 c. P 120,875 d. P 113,000
224
a. P 3,600 b. P 2,800 c. P 1,200 d. P 0
8. The entry to adjust the dividend received from 2Success Company has:
a. A debit to Dividend Income.
b. A credit to Dividend Income.
c. A debit to Retained Earnings.
d. A debit to Investment in Equity.
Solution
Memorandum entry
Cash 4,125
Dividend income 4,125
Stock rights 16,000
Investment – IstheKey 16,000
(1.50/15 x P160,000)
Cash 18,800
Stock rights 16,000
Gain on sale of stock rights 2,800
Investment – 2Success 1,520,000
Cash 1,520,000
Investment – 2Success 35,000
Retained earnings 35,000
To record share of income from 2Success for 2006 (10% x P350,000)
Answer:
1. A 2. D 3. A 4. D 5. C 6. B 7. C 8. A
Problem 8
At December 31, 2006, ABARCA SUGAR CORPORATION properly reported as trading the
following equity securities:
Cost Market
Shan Lily Co., 1,000 shares, P2.40
convertible preferred stock 40,000 42,000
Azenith Corp., 6,000 shares of common 60,000 66,000
Ronette Co., 2,000 shares of common 55,000 40,000
225
On January 2, 2007, ABARCA SUGAR CORPORATION purchased 100,000 shares of Nagasaki
Ryuco Company common stock for P1,700,000, representing 30% of Nagasaki’s outstanding
common stock and an underlying equity of P!,400,000 in Nagasaki’ net assets on January 2.
ABARCA SUGAR had no other financial transactions with Nagasaki during 2006. AS a result
of ABARCA SUGAR’s ownership of Nagasaki, ABARCA SUGAR has the ability to exercise
significant influence over Nagasaki’s financial and operating policies.
January 18 - sold 2,500 shares of Azenith Corporation for P13 per share.
June 1 - sold 500 shares of Ronette Company, after a 10% stock dividend was
received, for P21 per share.
October 1 - converted 500 shares of Shan Lily Company’s preferred stock into 1,500
shares of Shan Lily’s common stock, when the market price was P60 per share for the
preferred stock and P21 per share for the common stock. The conversion has no
economic substance.
The following 2007 dividend information pertains to stock owned by ABARCA SUGAR:
February 14 - Ronette issued a 10% stock dividend, when the market price of
Ronette’s common stock was P22 per share.
April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2.40
preferred stock, to stockholder of record on March 9 and September 9, respectively.
Shan Lily did not pay dividends on its common stock during 2007.
June 30 - Azenith paid a P1.00 per share dividend on its common stock.
March 1, June 1, September 1, and December 1 - Nagasaki paid quarterly dividends of
P0.50 per share on cash of these dates. Nagasaki’s net income for the year ended
December 31, 2007 was P1,200,000.
At December 31, 2007, ABARCA SUGAR’s management intended to hold Nagasaki’s stock on
a long term basis with the remaining investments considered temporary. Market prices per
share of the marketable equity securities were as follows:
12/31/07 12/31/06
Shan Lily Co., preferred stock P 56 P 42
Shan Lily Co., common stock 20 18
Azenith Corp., common stock 11 11
Ronette Co., common stock 22 20
Nagasaki Ryuco, Co., common 16 18
All of the foregoing stocks are listed on major stock exchanges. Declines in market value
from cost would not be considered permanent.
Instruction: Based on the information above and other analysis as necessary, answer the
following question:
1. The cost per share of Shan Lily preferred at December 31, 2007 is:
a. P 13.33 b. P 20.00 c. P 40.00 d. P 60.00
2. The adjusted balance of Shan Lily preferred (cost) at December 31, 2007 is:
a. P 20,000 b. P 28,000 c. P 30,000 d. P 50,000
226
3. The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock
is:
a. 300 b. 500 c. 1,500 d. 3,000
4. The adjusted balance of Azenith common (cost) at December 31, 2007 is:
a. P 60,000 b. P 37,273 c. P 35,000 d. P 27,500
6. The adjusted balance of Ronette common (cost) at December 31, 2007 is:
a. P 55,000 b. P 46,900 c. P 42,500 d. P 41,250
7. The adjusted balance of Nagasaki common (cost) at December 31, 2007 is:
a. P 1,845,000 b. P 1,860,000 c. P 1,700,000 d. P 1,545,000
8. The total dividend income of ABARCA SUGAR at December 31, 2007 is:
a. P 8,400 b. P 5,900 c. P 5,300 d. P 0
9. The total income from investment of ABARCA SUGAR from Nagasaki at December 31,
2007 is:
a. P 145,000 b. P 160,000 c. P 345,000 d. P 360,000
10. ABARCA SUGAR’s income statement at December 31, 2007 will report a:
a. No unrealized gain/loss in market decline.
b. P7,000 unrealized loss in market decline.
c. P7,000 unrealized gain in market decline.
d. P23,400 unrealized gain in market recovery.
Solution
Jan 2 Investment – Nagasaki 1,700,000
Cash 1,700,000
Jan 18 Cash 32,500
MES – Azenith 25,000
Gain on sale 7,500
Feb 14 Memorandum entry
Apr 5 Cash 1,200
Dividend income 1,200
June 1 Cash 10,500
Loss on sale 2,000
MES – Ronette 12,500
June 30 Cash 3,500
Dividend income 3,500
Oct 1 Investment – common
Shan Lily 20,000
Investment – preferred
Shan Lily 20,000
Oct 5 Cash 1,200
Dividend income 1,200
March 1, June 1, September 1, and December 1 for Nagasaki shares
Cash 200,000
Investment – Nagasaki 200,000
(P0.50 x 100,000 shares = 50,000 x 4 quarters = P200,000
Dec 31 Investment – Nagasaki 360,000
Income from investment 360,000
(P1,200,000 x 30% = P 360,000)
Market Value Cost
Shan Lily preferred stock P 56 x 500 shares = P28,000 P20,000
Shan Lily common stock P 20 x 1,500 shares = 30,000 20,000
Azenith common P 11 x 3,500 shares = 38,500 35,000
227
Ronette P 22 x 1,700 shares = 37,400 42,500
P133,900 P117,500
Valuation Allowance__________
Recovery * 23,400 Beg. Bal. 7,000
_____ _____
Ending bal. 16,400
* squeeze figure
Answer:
1. C 2. B 3. C 4. C 5. B 6. C 7. B 8. B 9. D 10. D
Problem 9
An examination of the general ledger account of HOPE COMPANY discloses the following
trading securities:
Debit/
(Credit)
Jan. 10 Purchased 5,000 shares of Piltel common at P20 per share P 100,000
Mar 15 Purchased 2,000 of ABS-CBN common at P15 per share 30,000
Oct 5 Purchased additional 2,000 shares of Piltel common 36,000
Nov 4 Sold 2,000 stock rights ( 3,000)
P 163,000
Additional information:
1. The company received stock rights from Piltel common when the market values of Piltel
common stock and stock rights were P19 and P1 respectively. Each right entitles the
holder to acquire 1 additional share of common stock for P18 per share on or before
December 31, 2007.
2. The company exercised its rights to acquire 2,000 additional Piltel common shares on
October 5, 2007.
4. At the end of the year, shares were quoted in the stock exchange as follows:
Piltel Common P 18
ABS-CBN common 14
Question
1. Ending balance per audit of Piltel common at year-end is:
a. P 140,000 b. P 138,000 c. P 133,000 d. P 126,000
228
Solution
1. Stock rights 5,000
Investment – Piltel 5,000
(1/2 x P100,000)
2. OE: Investment – Pitel 36,000
Cash 36,000
CE: Investment – Piltel 38,000
Cash 36,000
Stock rights 2,000
Adj: Investment – Piltel 2,000
Stock rights 2,000
3. OE: Cash 3,000
Investment – Pittel 3,000
CE: Cash 3,000
Stock rights 2,000
Gain on sale of rights 1,000
Adj: Investment – Piltel 3,000
Stock rights 2,000
Gain on sale of rights 1,000
4. Loss on market decline 9,000
Allowance for market decline 9,000
MV Cost
Piltel P18 x 7,000 shares = P 136,000 P 133,000
ABS-CBN P14 x 2,000 shares = 28,000 30,000
P 154,000 P 163,000 = P9,000
5. Loss on expiration of the rights 1,000
Stock rights 1,000
Answer:
1. D 2. A 3. B 4. C 5. A 6. A
Problem 10
YPILAN Investment Company has the following transactions in the common stock of
CHERRY MAE Chemicals Corporation:
a. On January 7, 2000, YPILAN purchased 2005 shares of P100 par value common
stock at P110 per share.
b. The CHERRY MAE Chemicals Corporation was expanding and as of March 1, 2001,
issued to YPILAN 2,000 rights each permitting them to purchase one fourth share of
common stock at par. The bid price of these stocks on March 1, 2001 was P140. There
was no quoted price for the rights.
c. YPILAN was advised that they should use the rights. YPILAN thereafter paid for the
new shares on April 1, 2001, charging the payment to the Investment account. YPILAN
purchased 500 shares of stocks using the stock rights.
d. The accountant felt that the cash paid for the new shares was merely an assessment
since their proportionate share in CHERRY MAE Chemicals was not changed. He credited
all dividends (5% in December of each year) to the Investment Account until the debit
was fully offset.
e. In December, 2005, YPILAN received a 50% stock dividend from CHERRY MAE
Chemicals. The accountant did not make any entry for this dividend because the
company president expected to sell the shares received. They did sell the dividend
share in January, 2006 for P160 per share. Income was credited for the proceeds.
f. In December, 2006, the stocks were split on a two-for-one basis and the new shares
were issued at no-par value. YPILAN found that each new share was worth P5.00 more
229
than the P110 per share which they had paid for their original shares so it was decided
to debit the Investment account with the additional shares received at P110 per share
and to credit income for it.
g. In June, 2007, YPILAN sold one-half of then CHERRY MAE Chemicals holdings at
P100 per share. The proceeds was credited to the Investment account.
Questions
1. The balance in Investment in CHERRY MAE’s Chemicals account, per books, before
correction is
a. P 245,000 b. P 275,000 c. P 495,000 d. P 595,000
2. The correct balance of the Investment in CHERRY MAE Chemicals account as of June
30, 2007 is
a. P 90,000 b. P 180,000 c. P 245,000 d. P 250,000
3. The average unit cost of the stocks sold in January, 2006 at P160 per share is
a. P 110.00 b. P 100.00 c. P 90.00 d. P 72.00
4. The average unit cost of the no-par shares of stock sold in June 2007 is
a. P 108.00 b. P 72.00 c. P 50.00 d. P 36.00
5. As of June 30, 2007, the balance of stock holdings in CHERRY MAE Chemicals was
a. 2,500 shares b. 3,750 shares c. 4,000 shares d. 5,000 shares
8. The profit on the sale of the stock dividend shares received in December, 2005 is
a. P 200,000 b. P 120,000 c. P 110,000 d. P 75,000
9. The profit of YPILAN from the sale of the 2,500 shares in June 2007 is
a. P 250,000 b. P 160,000 c. P 125,000 d. P 75,000
Solution
230
(2) Investment account showing how the transactions should have been recorded:
01.31.06 Bal. 2,500 shares P180,000 June’07 Sold, 2,500 shs. 90,000
Dec.’06 Stock split,2,500 shs --
1. A
2. A
3. D P270,000 / 3,750 shares = P72.00
4. D P180,000 / 5,000 shares = P36.00
5. A 6. C 7. A
8. C Selling price, P160 less cost per share of P72 = P88 x 1,250 shares = P110,000
9. B Selling price, P100 less cost per share of P36 = P64 x 2,500 shares = P160,000
10. C P250,000 par x 5% x 4 years = P50,000
Problem 11
The Stock Investment account of YAP, Inc. showed the following details:
STOCK INVESTMENT
1/01 Beg. bal. (2,000 shrs) 40,000 2/28 Cash dividend 1,000
3/31 Purchased 300 shrs 4,500 4/01 Sale of stock rights 3,000
6/30 Sale of 230 shares 5,000
1. A cash dividend of P0.50 per share was received on Feb. 28. The adjusting entry is:
DEBIT CREDIT
a. Stock Investment 1,000 Dividend Income 1,000
b. Retained earnings 1,000 Dividend Income 1,000
c. Dividend income 1,000 Stock investment 1,000
a. None of the above
2. On March 15, stock rights were received entitling shareholders to purchase one share for
every five held at P15 per share. Market values on this date were: shares, P20; rights,
P5. The adjusting entry to recognize the cost allocated to the right is:
DEBIT CREDIT
a. Stock rights 8,000 Stock investment 8,000
b. Stock rights 10,000 Stock investment 10,000
c. Stock rights 5,000 Stock investment 5,000
b. none of the above
3. On March 31, 300 shares were purchased with the partial exercise of these rights.
The adjusting entry, after the adjustment in No. 14 above has been effected, is
DEBIT CREDIT
a. Stock investment 9,000 Stock rights 9,000
b. Stock investment 6,000 Stock rights 6,000
c. Stock rights 6,000 Stock investment 6,000
e. none of the above
231
4. On April 1, the remaining rights were sold for P3,000. The adjusting entry is:
DEBIT CREDIT
a. Stock investment 3,000 Gain on sale of rights3,000
b. Stock investment 3,000 Stock rights 2,000
Gain on sale of rights1,000
c. Stock investment 2,000 Stock rights 3,000
Loss on sale of rights 1,000
a. none of the above.
5. On June 30, 230 share were sold for P5,000 (use average cost method). The adjusting
entry is
DEBIT CREDIT
a. Cash 5,000 Stock investment 4,250
Gain on sale of stock 750
b. Stock investment 4,250 Gain on sale of stock 4,250
c. Stock investment 750 Gain on sale of stock 750
d. none of the above.
Answer
1. A 2. A 3. B 4. B 5. C
Problem 12
The INVESTMENT account, as of December 31, 2007, appearing in the records JOY
CORPORATION is as follows:
The audit working papers of the preceding year show that the account balances as of
January 1, 2007, consisted of the following:
232
Sucuahi Company chattel mortgage on machinery
5, P10,000 mortgage taken in September 2004 in settlement of a receivable, P10,000
1. In January 2007, 1,000 shares of the Ventanilla company common stock purchased
in May 2002 were sold for P21,364 net.
2. In March 2007, 500 shares of Don Dave common stock were purchased at P24 per
share plus brokerage, for P12,125.
3. In June 2007, the Suson Company paid a 100% stock dividend on common.
4. In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100
shares of Suson common stock, for which the president gave his check for P8,750 and a
letter in which he agreed to pay the balance upon demand of the treasurer of JOY
CORPORATION.
5. On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued
interest.
6. In September 2007, JOY CORPORATION received one year interest on the P10,000
chattel mortgage of Sucuahi.
Question
1. The adjusted balance of Gain or Loss of Sale/Redemption on
Investment at December 31, 2007 is:
a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,714
Solution
1. OE: Cash 21,364
Investment – Ventanilla 21,364
CE: Cash 21,364
Loss on sale 636
Investment – Ventanilla 22,000
(P22 x 1,000 shares)
Adj: Loss on sale 636
Investment – Ventanilla 636
2. No adjustment
233
3. Dividend income 10,000
Investment – Suson 10,000
4. OE: Cash 8,750
Investment – Suson 8,750
CE: Cash 8,750
Receivable – others 3,750
Investment – Suson 3,650
(P7,300 x 100/200)
Gain on sale 8,850
Adj: Investment – Suson 5,100
Receivable – others 3,750
Gain on sale 8,850
5. OE: Cash 22,083
Investment – Jasmin 22,083
CE: Cash 22,083
Investment – Jasmin 20,000
Gain on sale 2,000
Interest income 83
Adj: Investment – Jasmin 2,083
Gain on sale 2,000
Interest income 83
6. Investment – Sucuahi 500
Interest income 500
Answer:
1. A 2. C 3. A 4. B 5. A 6. B
Problem 13
Siacor Inc. acquired 30% of Lozano Co.’s voting stock for P200,000 on January 2, 2007.
Siacor’s 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozano’s operating and financial policies. During 2007, Lozano earned P80,000 and paid
dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June
30, 2008, and P200,000 for the year enden December 31, 2008. On July 1, 2008, Siacor
sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on
October 1, 2008.
1. Before income taxes, what amount should Siacor include in its 2007 income statements
as a result of investment?
a. P15,000 b. P24,000 c. P50,000 d. P80,000
2. In Siacor’s December 31, 2007 balance sheet, what should be the carrying amount of
this investment?
a. P200,000 b. P209,000 c. P224,000 d. P230,000
3. In its 2008 income statement, what amount should Siacor report as gain from the sale of
half of its investment?
a. P24,500 b. P30,500 c. P35,000 d. P45,500
Solution
1. B
P80,000 x 30% = P24,000
2. B
Purchase price 200,000
+ income from investment 24,000
- dividends ( 15,000)
Ending balance – 12/31/03 209,000
3. B
Beginning balance – 1/1/04 209,000
+ income from investment 30,000
(100,000 x 30%) _______
Balance – June 30 239,000
234
Selling price 150,000
Cost (239,000 x 1/2 ) 119,500
Gain on sale 30,500
Problem 14
During 2006, Marlisa Company purchased marketable equity securities as trading securities.
At December 31, 2006, the balance in the allowance to reduce marketable equity securities
to market was P23,000. Pertinent information at December 31, 2007 is as follows:
On January 1, 2007, Marlisa Company paid P700,000 for 100,000 shares of Louie Company
representing 30% of Louie’s outstanding common stock. The following computations was
made by Marlisa Company:
Purchase price P 700,000
30% equity in book value of Louie’s net
assets 500,000
Excess of cost over book value P 200,000
The excess cost over book value was attributed to goodwill. Louie reported net income for
the year ended December 31, 2007 of P300,000. Louie Company paid cash dividends of
P100,000 on July 1, 2007. As of December 31, 2007 Marlisa reported, in its balance sheet, a
P700,000 balance of an Investment of Louie Stocks.
Question
1. Marlisa Company’s December 31, 2007 balance sheet should report the marketable
equity securities at:
a. P 427,000 b. P 412,000 c. P 410,000 d. P 402,000
3. If Marlisa Company exercised significant influence over Louie Company, the amount of
net investment revenue Marlisa Company should report from its investment in Louie
would be
a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000
4. If Marlisa Company exercised significant influence over Louie Company, the carrying
value of its investment in Louie at December 31, 2007 would be
a. P 810,000 b. P 780,000 c. P 760,000 d. P 750,000
5. If Marlisa Company did not exercise significant influence over Louie Company and
properly accounted for the long-term, investment under the cost method. The amount of
net investment revenue Marlisa Company should report from its investment in Louie
would be
a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000
235
6. If Marlisa Company did not exercise significant influence over Louie Company and
properly accounted for the long-term investment under the cost method, the carrying
value of its investment in Louie at December 31, 2007 would be
a. P 780,000 b. P 750,000 c. P 700,000 d. P 500,000
Solution
For Marketable Equity Securities
Total Cost 425,000
Total Market 412,000
Required Allowance – Dec. 31 13,000
Less: Allowance – Jan. 1 23,000
Recovery 10,000
For Investment
If acquired significant influence
Investment 90,000
Income from investment 90,000
To record share of income from the investee (P300,000 x 30%)
Problem 15
On July 1 of the current year, AISAH Company acquired 25% of the outstanding shares of
common stock of Adonis Co., at a total cost of P1,400,000. The underlying equity (net
assets) of the stock acquired by AISAH Company was only P1,200,000. AISAH Company
was willing to pay more than book value for the Adonis Company stock for the following
reasons:
b. Adonis Company owned land with a current fair value of P600,000 more than its
carrying amount.
c. AISAH Company believed Adonis Company possessed enough goodwill to justify the
remainder of the cost.
Adonis Company earned net income of P1,080,000 evenly over the current year ended
December 31. On December 31, Adonis Company declared and paid a cash dividend of
P210,000 to common stockholders. Market value of Adonis Company’s share of the stock at
December 31 is P1,500,000. Adonis Company closes its accounting records on December
236
31. As of December 31, 2007, the Investment in Adinois common has a balance of
P1,400,000.
AISAH Company has a portfolio of current marketable equity securities. Information on cost
and market value is as follows:
Cost Market
December 31, 2006 P 950,000 950,000
December 31, 2007 840,000 820,000
AISAH Company has not recorded yet any allowance for market decline in its marketable
securities. Marketable Securities at December 31, 2007 has a balance of P840,000.
As of December 31, 2007, the Investment in bonds is recorded in the balance sheet at
P108,660.
Questions
1. The Investment in Adonis Company common at year-end is:
a. P 1,473,000 b. P 1,478,500 c. P 1,480,500 d. P 1,481,000
2. The income from investment in the Adonis Company common at year-end is:
a. P 131,000 b. P 133,500 c. P 159,250 d. P 185,500
Solution
Cost P 1,400,000
Net Asset Acquired 1,200,000
Excess over cost P 200,000
Undervalue of asset 180,000
(720,000 x 25%) ________
Implied Goodwill P 20,000
237
Adj # 1:Income from investment 2,000
Investment 2,000
Undervaluation of depreciable asset - P1,500
[(P120,000 x 25%) / 10 x 6/12)
Implied goodwill (P20,000/20 x 6/12) - 500
Total P2,000
Adj # 2:Investment 135,000
Income from investment 135,000
(P1,080,000/12 mos. x 6 mos. x 25%)
Adj # 3:Dividend income 52,500
Investment 52,500
(P210,000 x 25%)
Adj # 4:Unrealized loss in market decline 20,000
Allow. for unrealized loss in market decline 20,000
Cost - P840,000
Market - 820,000
Allow. –P 20,000
Adj # 5:Retained earnings (2005 & 2006) 3,213
Interest income (2007) 1,728
Investment 4,941
Answer:
1. C 2. B 3. A 4. A 5. C 6. c
Problem 16
Roxanne Company’s permanent investment consists of the following:
The cost and market value of these securities are presented here:
Cost Market
Sony Incorporate 80,000 90,000
Macky Corporation 60,000 60,000
Ruela Company 40,000 20,000
Additional information:
1. According to the company’s treasurer, investment in Paul bonds was acquired at the
beginning of the year with the intention of selling it when the need for additional working
capital arises. Interest at 8% is received annually every January 1. Accrued interest on
these bonds had been recorded. Effective interest rate for this type of securities is 10%.
The fair market value of Paul Bonds at the end of the year is P 98,000.
2. As part of additional compensation, the company insured the life of its president for a
total coverage of P2 million pesos. Insurance premium paid during the year amounted
to P54,000. Increase in cash surrender value of 5,000 was credited to insurance
expense account.
238
3. Subsequent event review revealed that the year-end market decline of Ruela Company
stock was other than temporary.
Questions
1. The total Available-for-sale securities of Roxanne Company at year-end is:
a. P 170,000 b. P 180,000 c. P 185,000 d. P 268,000
Solution
Current MES
3-Year 8% P100,000 Paul bonds - P 96,500
Long-term Investment
Cash surrender value of life insurance - P 15,000
Long-term MES, at market - 170,000
Total - P185,000
ANSWER:
1. C 2. C 3. A 4.A 5. C
Problem 17
On January 1, 2007, Michelle Co. bought 30% of the outstanding common stock of Manila
Corporation. Michelle Co. accounts for this investment by the equity method. At the date of
acquisition of the stock, Manila Corporation’s net assets had a carrying value of
P11,800,000. Assets with an average remaining life of 5 years have a current market value
that is P2,600,000 in excess of their carrying values. The remaining difference between the
purchase price and the value of the underlying stockholders’ equity cannot be attributed to
any tangible asset. At the end of 2007, Manila Corporation reports net income of
P3,600,000. During the 2007, Manila Corporation declared and paid cash dividends of
P400,000. The balance of Michelle’s investment in Manila Corporation is P5,922,000 at
December 31, 2007.
Questions
1. What is the total adjustment to share of income for 2007?
a. P 198,000 b. P 156,000 c. P 256,000 d. P 562,000
Solution
Investment
Acquisition cost * 5,118,000 Amort. of
Share of income 1,080,000 depreciable
assets ** 156,000
Dividends *** 120,000
239
_________
6,198,000 276,000
Problem 18
The following entries were made by the accountant of LECIRAM COMPANY:
2007
Jan 2 Investment in bonds 11,120,000
Cash 11,120,000
Purchase of P10,000,000, 18% bonds at 102plus accrued interest and broker’s fee.
Bonds mature January 1, 2010.
Question
1. What is the total interest income on investment in bonds for 2007?
a. P 1,827,500 b. P 1,800,000 c. P 1,772,500 d. P 927,500
2. What is the carrying value of the investment in bonds at December 31, 2007?
a. P 11,092,500 b. P 10,247,500 c. P 10,200,000 d. P 10,192,500
240
3. What entry should be made to correct the acquisition entry on Jan. 2, 2007?
a. Interest income 900,000 c. Interest income 900,000
Investment in bonds 900,000 Interest Receivable 900,000
4. What is the adjusting entry to record the accrual of interest on December 31, 2007?
a. Interest receivable 900,000 c. Interest receivable 900,000
Interest income 900,000 Retained earnings 900,000
b. Interest income 900,000 d. No adjusting entry
Retained earnings 900,000
7. What adjusting entry should be made at December 31, 2007, to correct the investment in
common stock account?
a. Dividend income 50,000 c. Retained earnings 50,000
Invest. In CS 50,000 Invest. in CS 50,000
b. Retained earnings 50,000 d. No adjusting entry
Dividend income 50,000
Solution
Adjustments:
Jan 2 Interest income 900,000
Investment - bonds 900,000
Jan 3 No adjustments
July 1 Investment – preferred 200,000
Premium paid on
preferred stock 200,000
Dec 1 Dividend income 50,000
Investment – common 50,000
Dec 31 Premium paid on pref.
stock 200,000
Dividend income 200,000
Dec 31 Investment – common 50,000
Dividend income 50,000
Interest income 27,500
Investment – bonds 27,500
To record amortization of premium. (P220,000/8 years = P27,500)
Answer:
1. C 2. D 3. A 4. A 5. C 6. D 7. D
Problem 19
The following two subsidiary accounts reflect the marketable securities of HOPE COMPANY
for the year 2008:
241
DREAM BIG COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 10 Purchase 20,000 CD P 1,900,000
31 Raised to market
value, offset to
retained earnings GJ 100,000
Mar 30 Sale at P150 (10,000) CR P 1,500,000
June 10 Stock dividend at par 10,000 GJ 1,000,000
July 28 Sale at P110 10,000 _________ 1,100,000
TOTALS P 3,000,000 P 2,600,000
On January 2, 2008, HOPE COMPANY purchased 39,000 shares of GOB BLESS YOU
COMPANY’s 200,000 shares of outstanding common stock for P1,170,000. On that date,
the carrying value of the acquired shares on GOD BLESS YOU COMPANY’s books was
P810,000. HOPE COMPANY attributed the excess of cost over carrying amount to goodwill.
HOPE COMPANY’s policy is to amortize intangible over 10 years.
During 2008, HOPE COMPANY gained a seat on GOD BLESS YOU COMPANY’s board of
directors. GOD BLESS YOU COMPANY reported earnings of P800,000 for the year ended
December 31, 2008, and declared and paid cash dividends of P200,000 during 2008. On
December 31, 2008, GOD BLESS YOU COMPANY’s common stock was trading at P30 per
share.
Questions
1. The gain on sale of 10,000 shares of DREAM BIG COMPANY on March 30 is:
a. P 0 b. P 500,000 c. P 550,000 d. P 1,500,000
2. The gain on sale of 10,000 shares of DREAM BIG COMPANY on July 28 is:
a. P 150,000 b. P 337,500 c. P 525,000 d. P 625,000
3. The adjusted balance of the HOPE COMPANY’s Investment in DREAM BIG COMPANY on
December 31, 2008 is:
a. P 525,000 b. P 500,000 c. P 475,000 d. P 375,000
242
4. The gain on sale of 20,000 shares of AIM HIGH COMPANY on October 5 is:
a. P 300,000 b. P 314,500 c. P 350,000 d. P 1,028,500
5. The gain on sale of 20,000 shares of AIM HIGH COMPANY on November 10 is:
a. P 1,000,000 b. P 2,200,000 c. P 2,300,000 d. P 2,400,000
6. The adjusted balance of the HOPE COMPANY’s Investment in AIM HIGH COMPANY on
December 31, 2008 is:
a. P 1,000,000 b. P 1,200,000 c. P 1,300,000 d. P 1,500,000
7. The gain on investment of HOPE COMPANY from the Investment in GOD BLESS YOU
COMPANY at December is:
a. P 81,000 b. P 120,000 c. P 156,000 d. P 990,000
8. The adjusted balance of the HOPE COMPANY’s Investment in GOD BLESS YOU COMPANY
at December 31, 2008 is:
a. P 1,251,000 b. P 1,287,000 c. P 1,170,000 d. P 1,320,000
Solution
DREAM BIG COMPANY
Retained earnings 100,000
MES 100,000
OE: Cash 1,500,000
MES 1,500,000
CE: Cash 1,500,000
MES 950,000
Gain on sale 550,000
Adj: MES 550,000
Gain on sale 550,000
Dividend income 1,000,000
MES 1,000,000
OE: Cash 1,100,000
MES 1,100,000
CE: Cash 1,500,000
MES 475,000
Gain on sale 625,000
Adj: MES 625,000
Gain on sale 625,000
243
MES 3,300,000
CE: Cash 3,300,000
MES 1,000,000
Gain on sale 2,200,000
Dividend income 100,000
Adj: MES 2,300,000
Gain on sale 2,200,000
Dividend income 100,000
MES 150,000
Dividend income 150,000
Cash 39,000
MES 39,000
Answer:
1. C 2. D 3. C 4. C 5. B 6. D
7. B 8. B
Problem 20
The following are the transaction of DE GRACIA COMPANY for its Marketable Securities:
Marketable Securities
244
Nov 30 Proceeds from sale of stock rights 4,000
Additional Information:
2. Grace issued stock rights to stockholders entitling them to subscribe at par, 1 new
share for every 10 shares held on October 31, 2007. Market values at date of issuance
of rights were:
Stock, ex-right P72 per share
Stock rights 8 per share
3. The following commission were unpaid and unrecorded as at December 31, 2007:
P2,000 for the purchase of Grace stocks
P 70 for the purchase of De Gracia stocks
4. The following information was obtained relative to dividends which were not in the
books:
Company Date declared Kind Rate Remarks
Prince Company 12/15/07 Cash 20% Received 1/16/08
President Company 12/03/07 Stock 10% Received 1/19/08
Rhinna Company 01/15/08 Cash 10% Received 1/31/08
Question
1. The entry to adjust the March 15 transaction on the purchase of 1,000 share of Grace
common is:
a. Marketable securities 2,000
Commission expense 2,000
b. Marketable securities 2,000
Commission payable 2,000
c. Marketable securities 2,000
Cash 2,000
d. No adjustment
2. The entry to adjust the sale of 500 shares of El Salvador on April 30 is:
a. Marketable securities 372
Gain on sale of MS 372
b. Marketable securities 342
Cash 342
c. Marketable securities 342
Gain on sale of MS 342
245
d. No adjustment
3. The entry to adjust the purchase of 50 shares of De Gracia common on July 30 is:
a. Marketable securities 70
Commission payable 70
b. Treasury stock 7,070
Marketable securities 7,000
Commission payable 70
c. Treasury stock 7,000
Marketable securities 7,000
d. No adjustment
4. The entry to adjust the sale of 20 shares of Prince common on October 1 is:
a. Loss on sale of MS 650
Marketable securities 350
Interest income 300
b. Loss on sale of MS 350
Marketable securities 350
c. Loss on sale of MS 600
Marketable securities 300
Interest income 300
d. No adjustment
Solution
1. Marketable securities 2,000
Broker’s commission payable 2,000
To adjust the March 15 transaction.
2. Marketable securities 342
246
Gain on sale of MS 342
To adjust the April 30 transaction.
Selling price P 485
Cost 143
Gain on sale P 342
3. Treasury stock 7,070
Marketable Securities 7,000
Brokers’ commission payable 70
To adjust the July 30 transaction.
4. Loss on sale of MS 650
Marketable securities 350
Interest income 300
To adjust the October 1 transaction.
Selling price (P10,400 – P50) P 10,350
Cost of the bonds (P22,000/20 x 10) 11,000
Loss on sale P 650
5. Loss on sale of MS 100
Marketable securities 100
To adjust the Nov.15 transaction.
Selling price P 400
Cost 500
Loss on sale P 100
6. Stock rights 2,200
Marketable securities 2,200
To record the transaction that transpired on October 31.
Marketable securities 4,000
Stock rights 2,200
Gain on sale of Stock rights 1,800
To adjust the transaction on Nov. 30
Problem 21
In connection with your audit of the financial statement of the William Company for the
year 2007, the following investment in stock and dividend income accounts were presented
to you:
Investment in Stock
Debit Credit
June 18, 2006 10,000 shares common par
value P50, Samson Company 390,000
April 30, 2007 5,000 shares Samson Company
received as stock dividend 250,000
May 20, 2007 Sold 5,000 shares @ P25 125,000
Dec. 10, 2007 Sold 2,000 shares @ P60 120,000
Dividend Income
April 30, 2007 Stock dividend 250,000
Nov. 30, 2007 Samson Company common 50,000
247
The following information was obtained during your examination:
1. The balance in the investment in stock account at December 31, 2006 per your last
year‘s working papers, was P390,000.
Questions:
Based on the above and the result of your audit, answer the following:
1. How much is the gain (loss) on the May 20, 2007 sale?
a. P (70,000) b. P (5,000) c. P 5,000 d. P 0
3. How much is the total dividend income for the year 2007?
a. P 400,000 b. P 300,000 c. P 150,000 d. P 50,000
4. How much is the adjusted balance of investment in stock as of December 31, 2007?
a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000
5. How much is the Allowance for Unrealized loss as of December 31, 2007?
a. P 98,000 b. P 35,000 c. P 7,000 d. P 0
Solution
Adjustments
Dividend income 250,000
Investment 250,000
-------------------------------------------------
OE: Cash 125,000
Investment 125,000
CE: Cash 125,000
Loss on sale 5,000
Investment 130,000
Adj: Loss on sale 5,000
Investment 5,000
-------------------------------------------------
OE: Cash 120,000
Investment 120,000
CE: Cash 120,000
Investment 52,000
Gain on sale 68,000
Adj: Investment 68,000
Gain on sale 68,000
-------------------------------------------------
248
Computation for the dividend income:
P5 x 10,000 shares = P 50,000
10,000 shares x P50 x 20% = 100,000
Total = P 150,000
Answer:
1. B 2. A 3. C 4. A 5. D
Problem 22
Macky Corporation’s accounting records showed the following investment at January 1,
2007:
Common stock
Johny Corp (1,000 shares) P 10,000
Sony Corp (5,000 shares) 100,000
Real estate:
Parking lot (leased to Ruel Co.) 300,000
Other:
Trademark (at cost, less accumulated amortization 25,000
Total investment P435,000
Macky owns 1% of Johny and 30% of Sony. Maky’s directors constitute a majority of Sony’s
directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an
annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable
deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of
the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1 (for sales in July though
December of the prior year), and on September 1 for the sales in January through June of
the same year).
During the year ended December 31, 2007, Macky received cash dividends of P1,000 from
Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000
respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties
from Nappy:
March 1 September 1
2006 P3,000 P5,000
2007 4,000 7,000
Nappy estimated that sales of the trademark items would total to P20,000 for the last half
of 2007.
Questions
1. In Macky’s 2007 income statement, how much should be
reported for royalty revenue?
a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000
3. In Macky’s 2007 income statement, how much should be reported as the total
investment income?
a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000
Solution
1. D
Royalty revenue for the 1st half of 2007 P 7,000
249
Royalty revenue for the 2nd half of 2007 2,000 (P20,000 x 10%)
Total royalty revenue P 9,000
2. C
Annual rental revenue P 48,000
Nonrefundable deposit (50,000/10) 5,000
Total rental revenue P 53,000
3. C
Royalty revenue P 9,000
Rental revenue 53,000
Dividend income 1,000
Share of income from equity investment 45,000 (P150,000 x 30%)
Total investment income P 108,000
Problem 23
In January of year 1, Divine Power paid P400,000 for 10,000 shares of Thy Grace voting
common stock, representing 15% interest in Thy Grace. At this date, the net assets of Thy
Grace totaled P2,000,000. The fair values of Thy Grace’s identifiable assets and liabilities
were equal to their book values. Divine Power did not have the ability to exercise significant
influence over the operating and financial policies of Thy Grace. Divine Power received
dividend of P0.70 per share from Thy Grace on October, year 1. Thy Grace reported net
income of P250,000 for year ended December 31, year 1. The stock classified as available-
for-sale. Market price for the 10,000 shares was P450,000.
In July of year 2, Divine Power paid P1,500,000 for 30,000 additional shares of Thy Grace’s
voting shares, which represents a 25% interest in Thy Grace. The fair value of Thy Grace’s
identifiable assets, net of liabilities, was equal to their book values of P4,600,000. As a
result of this transaction, Divine Power has the ability to exercise significant influence over
the operating and financial policies of Thy Grace. Divine Power received dividend of P0.80
per share from Thy Grace on April, year 2, and P1.35 per share from Thy Grace on October,
year 2. Thy Grace reported net income for the six month ended July 31, year 2 for P200,000
and P300,000 for the year ended December 31, Year 2.
The market value of the stock at the end of Year 2 is P52.
Questions:
1. Amount of income from investment in Thy
Grace that should be reported by Divine Power in its year 1 Income Statement is:
a. P 7,000 b. P 37,500 c. P 57,000 d. P 87,500
Solution:
Year 1 AFS 400,000
Cash 400,000
Cash 7,000
Dividend income 7,000
250
Year 2 Cash 8,000
Dividend income 8,000
AFS 1,500,000
Cash 1,500,000
RE – beg 7,000
AFS 7,000
AFS – equity 37,500
RE – beg 37,500
Dividend income 8,000
AFS 8,000
Cash 54,000
AFS 54,000
AFS 30,000
Income from invest. 30,000
AFS 40,000
Income from invest. 40,000
Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.
Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000
2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,000
251
Solution
OE: Cash 20,000
Machinery 20,000
CE: Cash 20,000
Accumulated dep’n. 30,000
Machinery 40,000
Gain on sale 10,000
Adj: Accumulated dep’n 30,000
Machinery 20,000
Gain on sale 10,000
---------------------------------------------
OE: Machinery 90,000
Cash 90,000
CE: Machinery 100,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
Cash 90,000
Adj: Machinery 10,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
---------------------------------------------
1 A P350,000 – P20,000 + P10,000 -P50,000
2 B P290,000 x 10%
Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.
2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.
252
Solution
1. C OE: Land 300,000
Common Stock 150,000
APIC 150,000
Professional fees 20,000
Cash 20,000
CE: Land 380,000
Common stock 150,000
Cash 20,000
APIC 210,000
Adj: Land 80,000
APIC 60,000
Professional fees 20,000
2. A OE: Land 20,000
Cash 20,000
CE: Land 5,000
Taxes 15,000
Cash 20,000
Adj: Taxes 15,000
Land 15,000
Problem 3
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:
Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0 b. P 100,000 c. P 300,000 d. P 400,000
3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000
4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000 b. P 900,000 c. P 600,000 d. P
500,000
Solution
Muyan Kaya
1 D
253
2. D
3. D
4. A
Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
property, at which time the machineries will already be useless.
Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:
Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000
Solution
P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000
P600,000 – P60,000/9 years * x 6/12 = P30,000
*1,620,000 tons/180,000 = 9 years
1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated
2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated
3. A
4. B
Problem 5
In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:
Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000
254
The following transactions occurred during 2007:
1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation 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.
2. The second tract of land (site number 6) 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. The new building was constructed for P600,000 plus the following costs:
3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.
4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:
The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.
5. 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 2007 were P52,000.
Question
1. Land at year-end is
a. P 5,480,000 b. P 5,900,000 c. P 6,000,000 d. P 8,400,000
2. Buildings at year-end is
a. P 3,800,000 b. P 3,880,000 c. P 4,200,000 d. P 4,280,000
255
4. Machinery and equipment at year-end is
a. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,000
Solution
1. Land 4,300,000
Cash 4,300,000
Cash 20,000
Land 20,000
2. Land 1,320,000
Cash 1,320,000
Building 680,000
Cash 680,000
3. Land - investment 2,400,000
Cash 2,400,000
4. Operating expenses 40,000
Leasehold improvements 300,000
Cash 340,000
5. Machinery 314,000
Royalty expenses 52,000
Cash 366,000
Answer:
1. C 2. B 3. A 4. C
Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000
Additional information:
Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.
256
- Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.
- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.
- On August 30, 2006, Norie Company purchased new automobile for P25,000.
- On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.
- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.
Questions
3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000 b. P 2,351,000 c. P 2,387,000 d. P 2,388,500
4. The total depreciation expense to be reported on the income statement for the year
ended December 31, 2006 is:
a. P 138,000 b. P 185,402 c. P 221,404 d. P 245,065
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322
Solution
Entries:
Machinery and equipment 369,000
Cash 369,000
Automobile and trucks 25,000
Cash 25,000
Cash 23,500
Accumulated depreciation 24,750
Automobile and trucks 48,000
Gain on sale 250
Accumulated deprecation - 12/31/02 18,000
Depreciation - 9 mos. (P30,000 x 30% x 9/12) 6,750
Total 24,750
Cash 4,000
Accumulated depreciation 14,025
Machinery and equipment 17,000
Gain on sale 1,025
Depreciation 221,404
Accumulated depreciation - mach. 156,450
Accumulated depreciation - auto. 28,954
Accumulated depreciation - improv. 36,000
257
Automobile and trucks - CV of unsold item P 65,680 x 30% = 19,704
Sold item - 30,000 x 30% x 9/12 = 6,750
Current purchase P25,000 x 30% x 4/12= 2,500 28,954
Answer:
1. B 2. D 3. B 4. C 5. B
Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for
2005 is presented below:
Depreciation data:
Depreciation method Useful life
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.
c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.
Questions
258
Based on the information above, answer the following questions:
1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,000
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,000
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314
8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400 b. P 4,000 c. P 2,600 d. P 1,400
10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000 b. P 154,000 c. P 153,300 d. P 151,200
Solution
Entries:
a. Automobile Equipment 24,000
(cash paid, P20,000 plus P4,000 trade-in allow.)
Accum. Depreciation 12,600
Loss on trade-in 1,400
Automobile Equipment 18,000
Cash 20,000
* Trade in allowance is the difference between the cash price and the purchase
price of the equipment.
b. Cash 15,500
Accum. Depreciation 11,500
Machinery and equipment 23,000
Gain on asset disposal 4,000
c. Leasehold improvements 168,000
Cash 168,000
d. Machinery and equipment 310,000
Cash 310,000
259
Building: Book value 1/1/05 (P1,200,000 - P263,100) - P936,900
X declining rate (1/25 x 150%) 6% .
Depreciation for the year P 56,214
Plus; Accum. Depreciation - 1/1/05 263,100
Accum. Depreciation - 12/31/05 P319,314
ANSWER: 1. B 2. B 3. D 4. B 5. B
6. D 7. C 8. C 9. C 10. D
Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:
PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000
ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000
260
Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000
Questions
1. Property and equipment at year-end is:
a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000
Solution
OE: Cash 32,000
Other ope. income 32,000
CE: Cash 32,000
Accumulated dep’n 12,000
Property & equip. 40,000
Other ope. income 4,000
Adj: Accum. dep’n 12,000
Other ope. income 28,000
Property & equip. 40,000
-----------------------------------------------
Adj: Revaluation increment 124,000
Accumulated dep’n 6,000
Property & equipment 130,000
-----------------------------------------------
Per book depreciation - bldg 75,000
Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs)
Adjustment 3,000
Problem 9
The following information pertains to Marlisa Company’s delivery trucks:
261
12/31/06 Depreciation expense 300,000
a. On July 1, 2005, 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, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.
Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000
10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance
11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year budget and prior-
year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
262
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.
Solution
1. C
Cost of truck 3 800,000
Accumulated depreciation (P800,000 x 20% x 1.5) 240,000
Net book value 560,000
Trade-in allowance 50,000
Loss on trade-in 510,000
2. D
3. B (P850,000-(P850,000x20%x1.5)
4. B
Cost of truck 1 800,000
Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.) 360,000
Net book value 440,000
Trade-in allowance 150,000
Loss on trade-in 290,000
5. D
6. C [P1,000,000 - (1,000,000 x 20% x 9/12)]
7. A
Cost of truck 2 800,000
Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.) 280,000
Net book value 520,000
Selling price 600,000
Gain on sale 80,000
8. A ([P800,000 - (P800,000 x 20% x 3)]
9. C
Truck 1 (P800,000 x 20% 3/12) 40,000 -
Truck 2 - -
Truck 3 - -
Truck 4 (P800,000 x 20%) 160,000 800,000
Truck 5 (P850,000 x 20%) 170,000 850,000
Truck 6 (P1,000,000 x 20% x 9/12) 150,000 1,000,000
Truck 7 (P720,000 x 20% x 6/12) 72,000 720,000
Depreciation per audit 592,000 3,370,000
Depreciation per records 300,000
Understatement 292,000
10. D
11. B
Problem 10
Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for
2006 is presented below.
Depreciation data:
Depreciation method Useful life
263
Automotive equipment Sum-of-the-years-digits 4 years
Leasehold improvements Straight-line -
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash
and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The
new car has a cash price of P960,000; the market value of the trade-in is not know.
(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was
destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company.
(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2012.
(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.
(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
of P720,000 for the year ended December 31, 2006.
Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,040
264
9. What is the depreciation on leasehold improvements for 2006?
a. P 756,000 b. P 672,000 c. P 630,000 d. P 560,000
10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,000
Solution
1. C
Book Value, 1/1/06 (P48,000,000 - P10,524,000) P 37,476,000
150% declining-balance rate (1/25 x 150%) x 6%
Depreciation on building P 2,248,560
2. B
Cost of building P 48,000,000
Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772,560
Book value of building, 12/31/06 P 35,227,440
3. C
Balance, 1/106 P 36,000,000
Less: Machine destroyed by fire 920,000
Balance P 35,080,000
Depreciation 10%
3,508,000
Machine destroyed by fire (P920,000 x 10% x 3/12) 23,000
Purchased 7/1/06 (P12,400,000 x 10% x 6/12) 620,000
Total depreciation on machinery and equipment 4,151,000
4. D
Insurance recovery 620,000
Less: Book value of machine destroyed
(Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460,000
Gain on recovery from insurance company 160,000
5. C
Balance, 1/1/06 10,000,000
Add: depreciation for 2006 4,151,000
Total 14,151,000
Less: Machinery destroyed by fire (P920,000 x 10% x 5) 460,000
Accumulated depreciation - machinery and equip. 13,691,000
6. B
Depreciation on P4,600,000 balance on 1/1/06 (given) 720,000
Less: Depreciation on car traded-in, 1/1/06 (P720,000 x 2/10) 144,000 576,000
Car purchased, 1/2/06 (P960,000 x 4/10) 384,000
Total depreciation on automotive equipment for 2006 960,000
7. C
Book value of car traded-in (given) 216,000
Less: Trade-in allowance (P960,000 - P800,000) 160,000
Loss on trade-in 56,000
8. C
Cost of the machinery and equipment: Balance, 1/1/06 4,600,000
Car purchased, 1/2/06 960,000 Car traded in (720,000) 4,840,000
Accumulated depreciation: Balance, 1/1/06 3,384,000
Depreciation for 2006 960,000
Car traded in (P720,000 - P216,000) ( 504,000) 3,840,000
Book value of automotive equipment, 12/31/06 1,000,000
9. B
Cost of leasehold improvements 6,720,000
Divide by term of lease, 5/1/06 - 12/31/2012 80 mos
Depreciation per month 84,000
Depreciation, 5/1 - 12/31 (P84,000 x 8 mos) 672,000
10. C
Cost of leasehold improvements 6,720,000
Less: Accumulated depreciation (see No. 9) 672,000
Book value, 12/31/06 6,048,000
Problem 11
265
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.
EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
9.1.3 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000
1. The company depreciates equipment at 10% per year. The oldest equipment owned
is seven years old as of December 31, 2006.
2. The following adjusted balances appeared on your last year’s working papers:
Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.
Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000 b. P 500 c. P (1,000) d. P (500)
266
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000
Solution
OE: Cash 9,000
Equipment 1,000
Equipment 9,000
Cash 1,000
CE: Cash 9,000
Accum. dep’n 21,000
Loss on sale 1,000
Equipment 30,000
Cash 1,000
-------------------------------------------
Adj: Accum. dep’n 21,000
Loss on sale 1,000
Equipment 22,000
-------------------------------------------
Adj: Equipment 2,500
Repairs expense 2,500
-------------------------------------------
Adj: Accum. dep’n 1,950
Depreciation 1,950
Answer: 1. C 2. C 3. B 4. A 5. D
Problem 12
Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is
presented below:
267
Transactions during 2005 and other information:
On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2-
year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash
price of P520,000; the market value of the trade-in is not known.
On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by
fire. Eddie Vic recovered P155,000 from its insurance company.
On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were
incurred.
Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at
January 1, 2005, would have been depreciated at a total amount of P180,000 for the year
ended December 31, 2005.
Questions
1. Depreciation expense for building at December 31, 2005 is:
a. P 749,520 b. P 720,000 c. P 682,150 d. P 562,140
2. Depreciation expense for machinery and equipment at December 31, 2005 is:
a. P 1,049,250 b. P 1,037,750 c. P 1,032,000 d. P 877,000
7. Total book value of property, plant, and equipment at December 31, 2005 is:
a. P 19,141,110 b. P 19,021,100 c. P 18,983,250 d. P 18,953,730
9. The total cost of property, plant and equipment at December 31, 2005 is:
a. P 26,670,010 b. P 26,579,520 c. P 26,550,000 d. P 26,459,510
10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005
is:
a. P 7,648,910 b. P 7,596,270 c. P 7,506,300 d. P 7,408,890
Solution
268
Balance, 1.1.05 P2,631,000 P2,500,000 P846,000 P5,977,000
Add depreciation for 2005 562,140 1,037,750 290,000 1,889,890
P3,193,140 P3,537,750 P1,136,000 P7,866,890
Deduct acc. depr. related to
Mach, destroyed by fire
(5 x 10% x P230,000) 115,000
Car traded in (490,000 - 147,000) _________ _________ 343,000 458,000
Balance, 12.31.05 P3,193,140 P3,422,750 P 793,000 P7,408,890
SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended December 31, 2005
Building
Book value , 1/1/05 (P12,000,000 - P2,631,000) P9,369,000
150% declining balance rate (100% / 25) x 1.5 x 6%
Total depreciation on building P562,140
Automotive Equipment
Depreciation on P1,115,000 bal. on 1.1.05 P180,000
Deduct depr. on car traded in , 1.2.05
(SYD 3rd year 2/10 x P490,000) (98,000) 82,000
Depr. on car purchased , 1.2.05 (P520,000 x 4/10) 208,000
Total depreciation on automotive equipment 290,000
Total depreciation expense for 2005 P1,889,890
Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005
Gain on machine destroyed by fire
Insurance recovery P155,000
Book value of machine destroyed
(P230,000 - (5 x 10% x P230,000) 115,000 P40,000
Gain on car traded in on new car purchase
Book value of car traded in P147,000
Trade-in allowed (P520,000 - P350,000) 170,000 23,000
Total gain on asset disposals for 2005 P63,000
Problem 13
RUANN Service Center is wholly owned subsidiary of RUANN Stores. The company’s
function is to deliver furniture and appliances sold by the parent and to service
electronics and appliances, also sold by the parent company. RUANN Stores, the
parent, operates twelve retail outlets in a large metropolitan area. The service
center uses three delivery trucks and fifteen service vehicles for delivering goods
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and for making service calls related to large appliances and electronic equipment.
For small appliances and electronics, customers typically bring these to the service
center for repair.
The company depreciates all trucks on a straight-line basis, using a five- year life
and zero salvage value. One-half year’s depreciation is taken in the year of
acquisition and in the year of disposal.
During 2006, the following transactions and journal entries were completed by the
company:
2/2/06: Sold one delivery truck for P2,000. the truck was fully depreciated at
12/31/07.
Cash P2,000
Trucks P2,000
Questions
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1. The adjusted balance of Delivery Truck at December 31, 2006 is:
a. P 537,500 b. P 217,500 c. P 210,000 d. P
160,000
Solution
2/2/06 OE: Cash 2,000
Delivery truck 2,000
CE: Cash 2,000
AD - Del. truck 40,000
Loss on sale 8,000
Delivery truck 50,000
Adj: AD - del. truck 40,000
Loss on sale 8,000
Delivery truck 48,000
3/15/06 OE: Cash 8,000
Service truck 8,000
CE: Cash 8,000
AD - ser. truck 15,000
Loss on sale 2,000
Service truck 25,000
Adj: AD - serv. truck 15,000
Loss on sale 2,000
Service truck 17,000
12/31/06 Depreciation 11,250
AD - del. truck 11,000
AD - service truck 250
Del. truck Serv. truck
Per book 95,000 20,000 75,000
Per audit 106,250 31,000 75,250
Adjustment 11,250 11,000 250
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Disposed truck 5,000
Undisposed truck 20,000
(2 x P10,000)
Purchased during the year 6,000
(P60,000/5 x 1/2) ______
Total 31,000
Problem 14
You are engaged in the examination of the financial statements of the PAUL COMPANY and
are auditing the Machinery and Equipment Account and the related depreciation accounts
for the year ended December 31, 2005. Your permanent file contains the following
schedules:
ACCUMULATED DEPRECIATION
Year Balance 2004 2004 Balance
________ 12.31.03 Retirements Additions 12.31.04
1991-1994 P 784,000 P 210,000 P 16,000 P 590,000
1995 34,000 4,000 38,000
1996
1997
1998 214,500 39,000 253,500
1999
2000 185,500 53,000 238,500
2001
2002 63,000 42,000 105,000
2003
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2004 ________ _________ 28,500 28,500
P 1,281,000 P 210,000 P 182,500 P 1,253,500
a. The company uses a ten-year life for all machinery and equipment for depreciation
purposes. Depreciation is computed by the straight-line method. Six month’s
depreciation is recorded in the year of acquisition or retirement. For 2005, the company
recorded depreciation of P280,000 on machinery and equipment.
b. The Burnham grinder was purchased for cash from a firm in financial distress. The
chief engineer and a used machinery dealer agreed that the practically new machine was
worth P180,000 in the open market.
c. For production reasons, the new air compressor was installed in a small building
that was erected in 2005 to house the machine and will also be used for general storage.
The cost of the building, which has a 25-year life, was P500,000 and is included in the
P750,000 voucher for the air compressor.
d. The power lawnmower was delivered to the house of the company president for
personal use.
e. On June 1, the battery in a battery powered lift truck was accidentally damaged
beyond repair. The damaged battery was included at a price of P60,000 in the P420,000
cost of the lift truck purchased on July 1, 2002. The company decided to rent a
replacement battery rather than buy a new battery. The P32,000 expenditure is the
annual rental for the battery paid in advance, net of a P4,000 allowance for the scrap
value of the damaged battery that was returned to the battery company.
f. The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for
P150,000. The saw was in use until it was sold.
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machinery dealer that its market value. The casting machine had been purchased for
P500,000 on September 1, 2000.
Questions
1. The entry to record the adjustment of depreciation expense at December 31, 2005 is:
a. Depreciation expense 19,500
Accumulated depreciation 19,500
b. Depreciation expense 37,250
Accumulated depreciation 37,250
c. Accumulated deprecation 19,500
Depreciation expense 19,500
d. Accumulated depreciation 37,250
Depreciation expense 37,250
3. The entry to record the adjustment in “item c” at December 31, 2005 is:
a. Building 500,000
Machinery and equipment 500,000
b. Machinery and equipment. 750,000
Building 750,000
c. Machinery and equipment 500,000
Building 500,000
d. No adjustment
5. The total rental expense in item “h” at December 31, 2005 is:
a. P 45,000 b. P 90,000 c. P 125,000 d. none
7. The total accumulated depreciation of the machinery and equipment at December 31,
2005 is:
a. P 773,000 b. P 791,000 c. P 816,000 d. P 855,000
8. The accumulated depreciation of the machinery and equipment at December 31, 2005 is
overstated by:
a. P 480,500 b. P 462,500 c. P 437,500 d. P 398,500
9. The Total Machinery and Equipment (gross) at December 31, 2005 is:
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a. P 3,740,000 b. P 2,310,500 c. P 2,030,500 d. P 1,940,500
10. The net book value of Machinery and Equipment at December 31, 2005 is:
a. P 1,518,000 b. P 1,494,500 c. P 1,503,000 d. P 2,924,000
Solution
b. No AJE necessary
c. Buildings 500,000
Machinery & Equipment 500,000
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Problem 15
You are engaged in the examination of the financial statements of PATIENCE
CORPORATION for the year ended December 31, 2005. The chief accountant of the
client has prepared the accompanying analyses of the Property, Plant, and
Equipment and related accumulated depreciation accounts. You have traced the
beginning balances to your prior year’s audit working papers.
All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all
other items, 10 years. The company’s policy is to take one-half year’s depreciation on all
assets additions and disposals during the year.
PATIENCE CORPORATION
Analysis of Property, Plant, and Equipment, and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2005
1. On April 1, the company entered into a 10-year lease contract for a die-casting
machine, with annual rentals of P50,000 payable in advance every April 1. The lease is
cancelable by either party (60 day’s written notice is required), and there is no option to
renew the lease or buy the equipment at the end of the lease. The estimated service life
of the machine is 10-years with no residual value. The company recorded the die
casting machine in the Machinery and Equipment account at P404,000, the present
value at the date of the lease, and P20,200 applicable to the machine has been included
in depreciation expense for the year.
2. The company completed the construction of a wing on the plant building on June 30.
The service life of the building was not extended by this addition. The lowest
constructions bid received was P475,000, the amount recorded in the Building account.
Company personnel constructed the addition at a cost of P460,000 (materials,
P175,000; labor, P155,000; and overhead, P130,000).
3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by
the company and used as a packing lot for employees. The expenditure was charged to
the Land account.
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4. The amount shown in the Machinery and Equipment asset retirement column
represents cash received on September 5 upon disposal of a machine purchased in July,
1998 for P480,000. The chief accountant recorded depreciation expense of P35,000 on
this machine in 2005.
5. Davao City government donated land and building appraised at P1,000,000 and
P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1, the
company began operating the plant. Since no costs were involved, the chief accountant
made no entry for the above transaction.
Questions
1. PATIENCE CORPORATION’s Land balance at December 31, 2005 is:
a. P 5,725,000 b. P 5,225,000 c. P 4,725,000 d. P 4,225,000
3. PATIENCE CORPORAITON’s Machinery and Equipment balance at December 31, 2005 is:
a. P 4,090,000 b. P 3,590,000 c. P 3,370,000 d. P 3,110,000
9. PATIENCE CORPORATION’s Net Book Value of Building at December 31, 2005 is:
a. P 5,023,500 b. P 4,924,000 c. P 4,913,000 d. P 4,907,500
10. PATIENCE CORPORATION’s Net Book Value of Machinery and Equipment at December
31, 2005 is:
a. P 2,332,500 b. P 1,770,100 c. P 1,612,500 d. P 1,357,300
Solution
277
(2) Profit on Construction 15,000
Buildings ( 475,000 - 460,000) 15,000
Problem 16
You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior year’s audit working
papers.
Rabago Manufacturing Corporation
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST
Final Per Books
12/31/03 Additions Retirements 12/31/04
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Land P 450,000 P 100,000 P P 550,000
Buildings 2,400,000 350,000 2,750,000
Machinery/Equip 2,770,000 808,000 520,000 3,526,000
P 5,620,000 P1,258,000 P 520,000 P 6,826,000
ACCUMULATED DEPRECIATION
Final Per Books
12/31/03 Additions Retirements 12/31/04
a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building – 25 years, all other items 10 years.
b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.
c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.
d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
2004. The expenditure was charged to land.
e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
recorded depreciation expense of P72,000 on this machine in 2004.
f. Mr. Rabago, the company’s president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began
operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.
Questions
1. The balance of rent expense as of December 31, 2004 is:
a. P 0 b. P 25,000 c. P 75,000 d. P 100,000
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a. P 1,447,000 b. P 1,816,250 c. P 1,820,250 d. P 1,827,400
5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a. P 450,000 b. P 545,000 c. P 650,000 d. P 750,000
PART 2
Problem 17
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:
Land P 100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS P 740,000
The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
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annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.
You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.
At present, Crame Corporation’s office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.
Questions
1. The adjusted cost of land amounted to:
a. P 528,000 b. P 510,000 c. P 500,000 d. P 410,000
Solution
1. B
Cost of the land 500,000
Add: tilting cost 10,000
Total 510,000
2. C
Land improvement 190,000
Less: Accumulated depreciation 10,000 (P190,000/57 mos. x 3 mos.)
Carrying value 180,000
3. C
Depreciation - leasehold improvement 10,000
Depreciation - Equipment (P40,000/2) 20,000
Total per audit 30,000
Total per book 16,000
Understatement of depreciation 14,000
4. C
Net book value 64,000
Less: CV after impairment 40,000
Loss on impairment 24,000
Problem 18
On January 1, 2003, BLESSING COMPANY signs a 10-year noncancelable lease agreement
to lease a storage building from GRACE COMPANY. The following information pertains to
this lease agreement:
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a. The agreement requires equal rental payments of P720,000 beginning on January
1, 2003.
d. The lease is nonrevnewable. At the termination of the lease, the building reverts to
the lessor.
e. BLESSING COMPANY’s incremental borrowing rate is 12% per year. The lessor’s
implicit rate is not known by BLESSING COMPANY.
f. The yearly rental payment includes P24,705.10 of executory costs related to taxes
on the property.
The following present value factors are for 10 periods at 12% annual interest rate:
Questions
1. The minimum annual lease payment is:
a. P 744,705.10 b. P 720,000.00 c. P 695,294.90 d. P 0
Solution
1. C
Annual payment 720,000.00
Less: Executory costs 24,705.10
Minimum annual lease payment 695,294.90
2. B Present value of minimum lease payment - P695,294.90 x 6.32825 = P 4,400,000
3. C
Min. Annual
Payment__ Interest expense Carrying Value
4,400,000.00
1/1/03 695,294.90 - 3,704,705.10
12/1/03 695,294.90 444,564.61 3,453,974.81
12/1/04 695,294.90 414,476.98 3,173,156.89
4. C P4,400,000/10 years = P 440,000
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5. A
Cost P 4,400,000
Accumulated depreciation 880,000
Net book value P 3,520,000
Problem 19
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.
On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The company’s other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31.
Questions
17. The interest capitalized at the end of December 31, 2003 is:
a. P 113,100 b. P 145,000 c. P 150,000 d. P 200,000
18. The interest capitalized at the end of December 31, 2004 is:
a. P 145,132 b. P 159,632 c. P 290,263 d. P 319,263
19. The total cost of the Building at December 31, 2004 is:
a. P 3,535,132 b. P 4,190,131 c. P 4,480,263 d. P 4,535,263
20. The total interest expense at the end of December 31, 2003 is:
a. P 780,000 b. P 635,000 c. P 630,000 d. P 560,000
21. The total interest expense at the end of December 31, 2004 is:
a. P 460,737 b. P 489,737 c. P 620,368 d. P 634,868
Solution
1. B
Jan. 3 500,000 x 12/12 = 500,000
March 31 600,000 x 9/12 = 450,000
June 30 800,000 x 6/12 = 400,000 AAE
Oct 31 600,000 x 2/12 = 100,000 1,450,000 x 10% = P145,000 (Lower than the
actual cost of P580,000)
2. A
Beg bal. 2,500,000 x 6/6 = 2,500,000
145,000 x 6/6 = 145,000
Jan. 31 300,000 x 5/6 = 250,000
Mar 31 500,000 x 3/6 = 250,000
May 31 600,000 x 1/6 = 100,000 3,245,000 AAE
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General borrowing - 1,245,000 x 7.25% x 6/12 = 45,132
Interest to be capitalized 145,132 (Lower than the actual cost
of P580,000)
Average rate (general)
5,000,000 x 8% = P 400,000
3,000,000 x 6% = 180,000
580,000 / 8,000,000 = 7.25%
3. B
Total cost in the construction - P 3,900,000
Interest capitalized - 290,132
Total cost – building - P 4,190,132
4. B
Interest expense – 2003
Specific borrowing P 2,000,000 x 10% = 200,000
General borrowing P 5,000,000 x 8% = 400,000
P 3,000,000 x 6% = 180,000
Less: Interest capitalized = (145,000)
Total interest expense – 2003 = 635,000
5. D
Interest expense – 2004
Specific borrowing P 2,000,000 x 10% = 200,000
General borrowing P 5,000,000 x 8% = 400,000
P 3,000,000 x 6% = 180,000
Less: Interest capitalized = (145,132)
Total interest expense – 2003 = 634,868
Problem 20
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.
Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2003, and has an economic life of 10 years.
284
Questions
1. Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000
Problem 1
On the audit engagement for calendar year 2003, you handled the audit of Fixed
Assets of Myra Corporation. Plant Assets consists of:
Land P100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS P740,000
The land was acquired on October 1, 2003, at a cost of P500,000. Myra Corporation
made a cash down payment of P100,000 and signed a 18% mortgage note payable in
four equal annual installments of P100,000. The first interest and principal payment
is due on October 1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to perfect title to the property at a fee of
P10,000 which was charged to operating expenses.
You ascertained that due to obsolescence, computer with an original cost of P80,000
and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and , as a result, should have a carrying value of
only P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books for
2003 the company recorded depreciation of P16,000 for the said equipment.
285
At present, Myra Corporation’s office and warehouse are located in a rented building.
The rental contract was signed on July 1, 2003 and has a term of five years renewable
for another five years. On October 1, 2003, Myra Corporation spent P190,000 to
install walls and fixtures. The leasehold improvements have a useful life of five years.
No amortization has been booked as of December 31, 2003.
Questions:
1. The adjusted cost of land amounted to
a. 410,000 b. 528,000 c. 500,000 d. 510,000
Problem 2.
You noted during your audit of the Reolsyl Company that the company carried out a
number of transactions involving the acquisition of several assets. All expenditures
were recorded in the following single asset account, identified as Fixed Assets:
Fixed Assets
Acquisition price of land and building P960,000
Options taken out on several prices of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
1,828,480
Based on property tax assessments, which are believed to fairly represent the relative
values involved, the building is worth twice as much as the land. The machinery was
subject to a 2% cash discount, which was taken and credited to Purchase Discounts.
Of the two options, P6,000 related to the building and land purchased and P10,000
related to those not purchased. The old machinery was sold at book value.
Questions:
5. Land
a. P644,000 b. P322,000 c. P326,000 d. P424,000
6. Building
286
a. P1,044,000 b. P644,000 c. P1,040,000 d. P722,000
7. Machinery
a. P323,400 b. P318,512 c. P321,832 d. P317,032
Problem 3.
You audit of Hands to Heaven Corporation for the year 2004 disclosed the following
property dispositions:
Land
On January 15, a condemnation award was received as consideration for the forced
sale of the company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of
which 30% was allocated to the building on the corporate books. The real estate was
acquired with the intention of demolishing the building, and this was accomplished
during the month of August. Cash proceeds received in September represent the net
proceeds form demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on
January 2, 1996. On December 12, the Insurance proceeds and other funds were used
to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair
value of P504,0000 and cash of P720,000 was received.
Delivery truck
On November 13, the delivery truck was sold to a used car dealer.
Questions:
Base on the above and the result of your audit, compute the gain or loss to be
recognized for each of the following dispositions:
8. Land
a. P2,480,000 gain b. P3,200,000 loss c. P720,000 loss
d. P0
9. Building
287
a. P288,000 gain b. P912,000 loss c. P1,488,000 loss
d. P0
10. Warehouse
a. P1,200,000 gain b. P3,600,000 loss c. P320,000 gain
d. P0
11. Machine
a. P24,000 gain b. P192,000 gain c. P18,000 gain d. P192,000
loss
Problem 4.
Araullo Company’s property, plant and equipment and accumulated depreciation
balances at December 31, 20003 are:
Cost Accumulated Depreciation
Machinery and equipment P 1,380,000 P367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Depreciation is computed to the nearest month. Salvage values are immaterial except
for automobiles and trucks, which have estimated salvage value equal to 15% of cost.
a. Araullo entered into a 12-year operating lease starting January 1, 2001. The
leasehold improvements were completed on December 31, 2000 and the facility
was occupied on January 1, 2001.
b. On July 1, 2004, machinery and equipment were purchased at a total
invoice cost of P325,000. Installation cost of P44,000 was incurred.
c. On August 30, 2004, Araullo purchased new automobile for P25,000.
d. On September 30, 2004, a truck with a cost of P48,000 and a carrying
amount of P30,000 on December 31, 2003 was sold for P23,500.
e. On December 20, 2004, a machine with a cost of P17,000, a carrying
amount of P2,975,000 on the date of disposition, was sold for P4,000.
Questions:
13. The gain on sale of truck on September 30 is
a. P2,680 b. P6,500 c. P250 d. None
288
14. The gain on sale of machinery on December 20, 2004 is
a. P13,000 b. P2,725 c. P1,025 d. None
15. The adjusted balance of the property, plant and equipment as of December 31,
2004 is
a. P1,919,000 b. P2,307,000 c. P2,351,000 d.
P2,388,500
16. The total depreciation expense to be reported on the income statement for the
year ended December 31, 2004 is
a. P185,402 b. P138,000 c. P221,402 d. 245,065
17. The carrying amount of property, plant and equipment as of December 31,
2004 is
a. P1,567,497 b. P1,290,547 c. P1,578,547 d.
P1,617,322
PROBLEM 2
You are engaged in the examination of the financial statements of the Madle
Corporation for the year ended December 31, 2002. The schedules for the property,
plant, and equipment and the related accumulated depreciation accounts which follow
have been prepared by the client. You have checked the opening balances to your prior
year’s audit workpapers. Your examination reveals the following information:
1. All equipment is depreciated on the straight-line basis (no salvage value taken into
consideration) using the following estimated lives: building 25 years, all other items
10 years. The company’s policy is to take one-half year’s depreciation on all asset
acquisitions and disposals during the year.
2. The company completed the construction of a wing on the plant building on June
30. The useful life of the building was not extended by this addition. The lowest
construction bid received was P17,500 the amount recorded in the Buildings
account. Company personnel were used to construct the addition at a cost of
P16,000 (materials P7,500, labor P5,500 and overhead P3,000).
3. On August 18, P5,000 was paid for paving and fencing a portion of land owned by
the company and used as a parking lot for employees. The expenditure was
capitalized to the Land account.
4. The amount shown in the Machinery and Equipment asset retirement column
represents cash received on September 4 upon disposal of a machine purchased 4
years ago in July for P48,000. The bookkeeper recorded depreciation expense of
P3,500 on this machine in 2002.
5. Sydney City donated land and building appraised at P10,000 and P40,000,
respectively, to the Madle corporation for a plant. On September 1, the company
began operating the plant. Because no costs were involved, the bookkeeper made
no entry to record the transaction.
289
MADLE CORP.
Analysis of Property, Plant, and Equipment, and of
Related Accumulated Depreciation Accounts
Year Ended December 31, 2001 2002
Accumulated Depreciation:
Buildings P 60,000 P 5,150* P 65,150
Machinery 173,250 39,220 212,470
P233,250 P44,370 P 277,620
Prepare the formal journal entries that you suggest at December 31, 2002 to adjust
the accounts for the transactions noted previously. Disregarded income tax
implications. The books have not been closed. Computations should be rounded off to
the nearest peso.
Questions:
11. The (over) understatement of depreciation expense on buildings in 2002 is
a. P(317) b. P317 c. P(1,117) d. P1,117
16. The adjusted balance of the accumulated depreciation – machinery and equipment
is
a. P212,470 b. P201,370 c. P193,270 d. P192,170
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a. P22,000 b. P(2,800) c. P19,200 d. P2,800
PROBLEM 6
TOYONGAN CORPORATION, a manufacturer of steel products, began operations on
Oct 1, 2001. The accounting department of TOYONGAN has started the fixed-asset
and depreciation schedule presented below. You have been asked to assist in
completing this schedule. In addition to ascertaining that the data already on the
schedule are correct, you have obtained the following information from the company’s
records and personnel:
1. Depreciation is computed from the first of the month of acquisition to the first
of 5the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation.
TOYONGAN paid P8,200,000 for the land and building together. At the time of
acquisition, the land had an appraised value of P900,000, and the building had an
appraised value of P8,100,000.
3. Land B was acquired on Oct 2, 2001, in exchange for 2,500 newly issued
shares of TOYONGAN’s common stock. At the date of acquisition, the stock had a
fair value of P50 per share. Also on that date, the land had a fair value of
P750,000. During Oct. 2001, TOYONGAN paid P160,000 to demolish an existing
building on this land so it could construct a new building.
TOYONGAN CORPORATION
FIXED ASSET AND DEPRECIATION SCHEDULE
For fiscal year ended September 30, 2002 and September 30, 2003
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Bldg. B Under P3,200,000
Construc. to date --- SLM 30 - ?
Donated 150%
Equipment 10/02/01 ? P30,000 Declining 10 ? ?
Macssh. A 10/02/01 P1,500,000 P60,000 SYD 8 P320,000 ?
QUESTIONS:
41. Cost of Land A
a. P8,100,000 b. P7,380,000 c. P900,000 d. P 820,000
48. Depreciation expense Donated equipment, for year ended Sep.30, 2002.
a. P 45,000 b. P 40,500 c. P 38,250 d. P 30,000
49. Depreciation expense Donated equipment, for year ended Sep.30, 2003.
a. P 45,000 b. P 40,000 c. P 38,925 d. P 38,250
PROBLEM 6
At the beginning of 2001, Princess Janea Technology, Inc., acquired the Joed
Corporation for P350 million. In additional to cash, receivables, and inventory, the
following allocations were made:
The plant and equipment are depreciated over an 8-year useful life on a straight-line
basis. There is no estimated residual value. The purchased technology is estimated to
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have a 6-year useful life, no residual value, and is amortized using the straight-line
method.
At the end of 2003, a change in business climate indicated to management that the
operational assets of Joed might be impaired. The following amounts have been
determined:
Goodwill:
Fair value of Joed Corporation P 300 million
Fair value of Joed Corp.’s net assets (excluding goodwill) 250 million
Book value of Joed’s net assets (including goodwill) 310 million *
* After first recording any impairment losses on plant and equipment and the
patent.
Questions:
22. How much is the impairment loss of plant and equipment at the end
of 2003?
a. P 10 million b. P 15 million c. P 25 million d. 40 million
23. How much is the impairment loss of purchased technology at the end
of 2003?
a. P 15 million b. P 20 million c. P 25 million d. 30 million
24. How much is the implied value of Goodwill at the end of 2003?
a. P 50 million b. P 60 million c. P 80 million d. P 10 million
25. How much is the impairment loss of Goodwill at the end of 2003?
a. P 0 million b. P 70 million c. P 30 million d. P 20 million
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a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher
covered a cash transfer to the factory payroll bank account for the pay period ended
December 28, 2007. The payroll cash transfer was made January 3, 2008, and payroll
checks covering this pay period were distributed to factory employees on January 4,
2008.
Questions
1. Accounts payable at year-end is
a. Overstated by P716,940 c. Overstated by P516,940
b. Overstated by P666,940 d. Overstated by P466,940
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4. The current liability of the company at year-end is
a. Overstated by P340,000 c. Understated by P200,000
b. Overstated by P140,000 d. Understated by P 60,000
Solution
1. Accounts payable 380,000
Salaries payable 380,000
2. Accounts payable 180,000
Loans payable 100,000
Interest payable 80,000
3. Accounts payable 50,000
AP – others 50,000
4. Accounts payable 65,480
Income tax payable 65,480
5. Accounts payable 41,460
Notes payable 40,000
Interest payable 1,460
6. Cash 200,000
Accounts payable 200,000
Answer:
1. C 2. A 3. B 4. C
Problem 2
In conjunction with your firm’s examination of the financial statements of Ronryan Company
as of December 31, 2007, you obtained from the voucher register the information shown in
the work paper below.
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received, 1/3/08 84,000 Inventory
The accruals made on December 31, 2007 were reversed effective January 1, 2008.
Review the data given above and prepare adjusting journal entries to correct the accounts
on December 31, 2007. Assume that the company follows FOB terms for recording
inventory purchases.
Questions
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4. The entry to adjust item #13
a. Machinery 254,000 c. No adjustment
AP – others 254,000
b. AP – others 254,000 d. No adjustment since payment
Machinery 254,000 was made on Jan. 15, 2008
Solution
1. No Adjustment
2. Insurance expense 1,000
Prepaid insurance 1,000
3. No Adjustment
4. No Adjustment
5. No Adjustment
6. Prepaid subscription 5,000
Dues and subscription 5,000
7. No adjustment
8. Accounts payable 111,000
Inventory 111,000
9. No adjustment
10. No adjustment
11. No adjustment
12. No adjustment
13. Machinery 254,000
AP – others 254,000
14. No adjustment
Answer:
1. B 2. D 3. D 4. A 5. C
1. Altagracia owns a small warehouse located on the banks of a river in which it stores
inventory worth approximately P250,000. Altagracia is not insured against flood losses.
The river last overflowed its banks 200 years ago.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
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3. On October 30, 2007, a safety hazard related to one of Altagracia’s toy products was
discovered. It is considered probable that Altagracia will be liable for an amount in the
range of P50,000 to P250,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
4. On November 29, 2007, Altagracia initiated a lawsuit seeking P125,000 in damages from
a patent infringement.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
5. On December 15, 2007, a former employee filed a lawsuit seeding P50,000 for unlawful
dismissal. Altagracia’s attorneys believe the suit is without merit. No court date has
been set.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
6. On December 12, 2007, Conchita guaranteed a bank loan of P500,000 for its president’s
personal use.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
8. On January 5, 2008, inventory purchased FOB shipping point from a foreign country was
detained at that coutnry’s border because of political unrest. The shipment is valued at
P750,000. Altagracia’s attorneys have stated that it is probable that Altagracia will be
able to obtain the shipment.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
10. On February 14, 2008, the BIR assessed Altagracia an additional P200,000 for the 2001
tax year. Altagracia’s attorneys and tax accountants have stated that it is likely that the
BIR will agree to a P150,000 settlement.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
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Solution
1. C No adjustment nor disclosure
2. A Accrue at P50,000
3. A Accrue at P50,000
4. B No adjustment – only disclosure for gain contingency
5. C No adjustment nor disclose
6. A No adjustment – disclosure is required
7. B Only disclosure – subsequent events
8. A Accrue since it is probable
9. B Only disclosure – subsequent events
10. A Accrue at P150,000
Questions
1. The amount of Maria Rosa’s bonus is
a. P 465,000.00 b. P 364,285.71 c. P 339,270.39 d. P 296,069.42
3. The entry to record the bonus (which will be paid in the following year) is
a. Bonus expense 296,069.42
Bonus payable 296,069.42
b. Bonus expense 339,270.39
Bonus payable 339,270.39
c. Bonus expense 465,000.00
Bonus payable 465,000.00
d. No entry
Solution
1. Answer: D
B = 10% (P4,650,000 – B – T)
T = 32% (P4,650,000 – B)
B = 10% (P4,650,000 – B – (32% x P4,650,000 – B)
= 10% (P4,650,000 – B – (P1,488,000 - .32B)
= 10% (P4,650,000 – B – P1,488,000 + .32B
= P465,000 - .10B – P148,800 + .032B
= P316,200 - .068B
1.068B = P316,200
= P296,097.42
2. Answer: B
T = 32% (P4,650,000 – P296,067.42)
= P1,393,258.43
3. Answer: A
Bonus expense 296,097.42
Bonus payable 296,097.42
Problem 5 - PREMIUMS
In the packages of its products, ALONDRA, INC. includes coupons that may be presented at
retail stores to obtain discounts on other Alondra products. Retailers are reimbursed for the
face amount of coupons redeemed plus 10% of that amount for handling costs. Alondra
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honors requests for coupon redemption by retailers up to 3 months after the consumer
expiration date. Alondra estimates that 60% of all coupons issued will ultimately be
redeemed. Information relating to coupons issued by Alondra during 2007 is as follows:
Questions
1. The total face amount of coupons issued in 2007 is
a. P 600,000 b. P 440,000 c. P 400,000 d. P 240,000
Solution
Coupons issued 400,000 – squeezed figure
X 60%
Coupons to be redeemed 240,000 Answer:
Plus: Handling cost (10%) 24,000 1. C 2. C 3. C
Total Cost 264,000
Less: payment 165,000
Estimated liability 99,000
MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank
to restructure its P3 million note outstanding. The presented note has 3 years remaining
and pays a current rate of interest of 10%. The present market rate for a loan of this nature
is 12%. The note was issued at its face value.
Presented below are four independent situations. Determine the journal entry that Mariana
would make for each of the following types of debt restructuring.
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2. NALOOY Bank agrees to accept land in exchange for relinquishing its claim on
this note. The land has a book value of P2,000,000 and a fair value of P2,500,000.
a. Notes payable 3,000,000
Land 2,500,000
Gain on debt restructuring 500,000
b. Notes payable 3,000,000
Land 2,000,000
Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c. Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
d. No adjustment
3. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores
does not have to pay any interest on the note over the 3-year period.
a. Interest payable 300,000
Gain on debt restructuring 300,000
b. Loss on debt restructuring 300,000
Interest expense 300,000
c. Interest expense 900,000
Gain on debt restructuring 900,000
d. No adjustment
4. NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require
interest only in the second and third year at a rate of 10%.
a. Notes payable – old 3,000,000
Notes payable – new 2,400,000
Gain on debt restructuring 600,000
b. Notes payable- old 3,000,000
Notes payable – new 3,000,000
c. Notes payable – old 3,000,000
Notes payable – new 2,600,000
Gain on debt restructuring 400,000
d. No adjustment
Solution
1. B
Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
2. C
Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
3. D No Adjustment
4. A
Notes payable – old 3,000,000
Notes payable – new 2,400,000
Gain on debt restructuring 600,000
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The December 31 trial balance of the Ruel Corporation includes, among others, the
following:
Questions
1. What is the amount of the current liabilities on December 31?
a. P 190,000 b. P 184,000 c. P 178,000 d. P 170,000
Solution
Long-term Notes – which are payable in annual installment
of P10,000 on February 1 of each year P 10,000
Rental income received in advance 16,000
Notes payable, which are trade notes, with the exception of P20,000
Notes payable to bank on June 30 of the following year 60,000
Accounts payable which include account with debit balance of P2,000 82,000
Accounts Receivable, which include accounts with credit balances
of P10,000 and past due accounts of P6,000 on which a loss
of 80% is anticipated 10,000
Merchandise Inventory, which includes goods held for consignment,
P8,000, and goods received on December 31 of P12,000; neither
of these items having been recorded as a purchase 12,000
TOTAL CURRENT LIABILITIES P 190,000
Answer:
1. A 2. Long-term liability – P50,000
Problem 8
Abam Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates the obligations of the company as of March 31,
2007.
Notes payable
Abam has signed several long- term notes with financial institutions. The maturities of these
notes are given below. The total unpaid interest for all of these notes amount to P340,000
on March 31, 2007.
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July 31, 2007 900,000
September 1, 2007 450,000
February 1, 2008 450,000
April 1, 2008- March 31, 2011 2,700,000
P5,100,000
Estimated warranties:
Abam has one year product warranty on some selected items. The estimated warranty
liability on sales made during the 2005-2006 fiscal year and still outstanding as of March
31, 2006, amounted to P252,000. The warranty costs on sales made from April 1, 2006 to
March 31, 2007 are estimated at P630,000. The actual warranty costs incurred during 2006-
2007 fiscal year as follows:
Trade payables
Accounts payable for supplies, goods and services purchases on open account amount to
P560,000 as of March 31, 2007.
Dividends
On march 10, 2007, Abam’s board of directors declared a cash dividend of P0.30 per
common share and a 10% common stock dividend. Both dividends were to be distributed on
Aptil 5, 2007 to common stockholders on record at the close of business on March 31, 2007.
As of March 31, 2007, Abams has 5 million, P2 par value common stock shares issued and
outstanding.
Bonds payable
Abams issued P5,000,000, 12% bonds, on October 1, 2001 at 96. The bonds will mature on
October 1, 2011. Interest is paid semi- annually on October 1 and April 1. Abams uses
straight line method to amortize bond discount.
Based on the forgoing information, determine the adjusted balances of the following as of
March 31, 2007:
Questions
24. Estimated warranty payable
a. P252,000 b. P345,000 c. P630,000 d. P882,000
Solution
1. B
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Total Warranty Expense 882,000
Less: Paid warranty 537,000
Est. liability 345,000
2. D
Discount on BP (P5M x 4%) 200,000
Amortization (200,000/120 x 66) 110,000
(Oct. 1, 1998 – March 31, 2004) ______
Unamortized discount on BP 90,000
3. D P5M x 12% x 6/12 = P300,000
4. C
Notes payable 2,400,000
Interest payable 640,000 (340,000 + 300,000)
Est. liability 345,000
Trade payable 560,000
Dividends payable 1,500,000
Total Current Liability 5,445,000
5. D
Notes payable 2,700,000
Bonds payable 4,910,000
Total 7,610,000
BONDS PAYABLE
Problem 9
On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of
P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1.
On the date of issue, investors were willing to accept an effective interest of 6%.
Questions
2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective
interest amortization method, LACEA COMPANY recorded interest expense for the 6
months ended June 30, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884
3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6
months ended December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791
5. A bond issue sold at a premium is valued on the statement of financial position at the
a. Maturity value.
b. Maturity value plus the unamortized portion of the premium.
c. Cost at the date of investment.
d. Maturity value less the unamortized portion of the premium.
Solution
1. B
If nominal rate is less than the yield rate, there is discount
If nominal rate is more than the yield rate, there is premium
2. D
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Date Interest expense Interest paid Amortization Carrying Value
1,062,809
July 2007 31,884 35,000 3,116 1,059,693
December 2007 31,791 35,000 3,209 1,056,484
July 2008 31,695 35,000 3,305 1,053,179
Interest expense = Carrying value of the note X yield rate x 6/12
Interest paid = Face value of the note X nominal rate x 6/12
Amortization = Interest expense – Interest paid
Carrying value – end = Carrying value – beg. – Amortization
3. D 4. D 5. B
Problem 10
The following data were obtained from the initial audit of Popoy Company:
Treasury Bonds
Redemption price and interest to date
on 100 bonds permanently retired –
October 1, 2008 109,000 109,000
Questions
1. What should be the correct original entry to account for the issuance of bonds at January
1, 2007?
DEBIT CREDIT
a. Cash 522,500 Bonds Payable 500,000
Discount on BP 22,500
b. Cash 500,000 Bonds Payable 500,000
c. Cash 522,500 Bonds Payable 500,000
Premium on BP 22,500
d. Cash 522,500 Bonds payable 522,500
2. The adjusting entry to accrue interest on bonds payable at December 31, 2007?
DEBIT CREDIT
a. Cash 37,500 Interest income 37,500
b. Interest expense 37,500 Interest payable 37,500
c. Interest receivable 37,500 Interest income 37,500
d. Interest expense 37,500 Interest income 37,500
3. The reversing entry related to accrual on bond interest expense at January 1, 2008?
DEBIT CREDIT
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a. Interest income 37,500 Cash 37,500
b. Interest payable 37,500 Interest expense 37,500
c. Interest payable 37,500 Retained earnings 37,500
d. Retained earnings 37,500 Interest expense 37,500
5. The reversing entry related to accrual on bond interest expense at January 1, 2009?
DEBIT CREDIT
a. Interest income 37,500 Cash 37,500
b. Interest payable 30,000 Interest expense 30,000
c. Interest payable 15,000 Interest expense 15,000
d. Interest income 37,500 Interest expense 37,500
6. The adjusting entry that should have been made to amortize on bond premium at
December 31, 2007?
DEBIT CREDIT
a. Premium on BP 2,500 Interest expense 2,500
b. Premium on BP 2,500 Retained earnings 2,500
c. Premium on BP 2,250 Interest expense 2,250
d. Premium on BP 2,250 Retained earnings 2,250
7. The correcting entry to adjust for the error related to amortization on bond premium in
2008 is?
DEBIT CREDIT
a. Premium on BP 2,500 Retained earnings 2,500
b. Premium on BP 2,500 Interest expense 2,500
c. Premium on BP 4,875 Interest expense 2,375
Retained earnings 2,500
d. Premium on BP 4,875 Retained earnings 4,875
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Solution
1. C Cash 522,500
Bonds payable 500,000
Bond premium 22,500
2. B Interest expense 37,500
Interest payable 37,500
3. B Interest payable 37,500
Interest expense 37,500
4. D Interest expense 37,500
Cash 37,500
5. B Interest payable 30,000
Interest expense 30,000
6. A Bond premium 2,500
Interest expense 2,500 (P22,500/108 x 12 = P2,500)
7. C Bond premium 4,875
Retained earnings 2,500 (P22,500/108 x 12 = P 2,500)
Interest expense 2,375 (P22,500/108 x 9 = P 1,875
4/5 x P22,500/108 x 3 = 500)
8. A OE: Treasury Bonds 109,000
Cash 109,000
CE: Bonds payable 100,000
Bond premium 3,625
Interest expense 3,750
Loss on retirement 1,625
Cash 109,000
Adj: Bonds payable 100,000
Bond premium 3,625
Interest expense 3,750
Loss on retirement 1,625
Treasury Bodns 109,000
Problem 10
When the LUAYON MANUFACTURING COMPANY was expanding its metal window division, it
did not have enough capital to finance the expansion. So, management sought and
received approval from the board of directors to issue bonds. The company planned to
issue P5,000,000 of 8 percent, five-year bonds in 2007. Interest would be paid on June 30
and December 31 of each year. The bonds would be callable at 104, and each P1,000 bond
would be convertible into 30 shares of P10 par value common stock.
On January 1, 2007, the bonds were sold at 96 because the market rate of interest for
similar investment was 9 percent. The company decided to amortize the bond discount by
using the effective interest method.
On July 1, 2009, management called and retired half the bonds, and investors converted the
other half into common stock. As inducement, the company agrees to pay additional
P100,000 to the holders of the convertible bonds.
Questions
1. Carrying value of the bonds at December 31, 2007 is:
a. P 4,840,000 b. P 4,832,720 c. P 4,832,000 d. P 4,816,000
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5. Additional paid-in capital in the conversion of bonds is:
a. P 1,706,234 b. P 1,793,766 c. P 1,693,766 d. P 1,684,225
Solution
July 1, 2009 Bonds payable 2,500,000
Loss on bond retirement 156,235
Discount on BP 56,235
Cash 2,600,000
Bonds payable 2,500,000
Debt conversion expense 100,000
Discount on BP 56,235
Common stock 750,000
APIC 1,693,765
Cash 100,000
Date Interest expense Interest paid Amortization Carrying Value
4,800,000
June 2007 215,000 200,000 16,000 4,816,000
December 2007 216,720 200,000 16,720 4,832,720
June 2008 217,472 200,000 17,472 4,850,192
December 2008 218,259 200,000 18,259 4,868,451
June 2009 219,080 200,000 19,080 4,887,531
Answer: 1. b 2. b 3. c 4. d 5. c
6. d 7. a 8. c 9. d
Problem 11
In connection with your firm’s annual examination of the December 31, 2007 financial
statements of the NUNEZA CORPORATION, your have been assigned the duty of auditing
long-term liabilities for the year ended December 31, 2007. In the course of performing
your work, you obtain the following evidence and information related to a new bond issue
sold during 2007:
1. NUNEZA floated a new issue of P800,000 par value, 15-year, 10 percent bonds during
the latter half of the second quarter of the year.
2. The new bond issue was dated July 1, 2007 and it was sold on that date for P689,872.
This price provided an effective interest rate on the bond issue of 12 percent.
3. Interest on a new bond issue was payable semiannually on January 1 and July 1.
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4. NUNEZA paid P12,000 cash for printing, legal, and other fees in connection with the
issuance of the bonds.
5. The NUNEZA CORPORATION accounts related to this new bond reflect these bond
transactions as follows:
Bond Payable, 2007 Issue
CR 7/1/07 P 800,000
Solution
1. B P12,000/15 x 6/12 = P400
2. A 3. D 4. A
Date Interest expense Interest paid Amortization Carrying Value
689,872
December 2007 41,392 40,000 1,392 691,264
July 2008 41,476 40,000 1,476 692,740
December 2008 41,564 40,000 1,564 694,304
5. C Per record - P 4,071
Per audit - 1,392
Adj. - P 2,679
6. C (P12,000 – P400)
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Problem 12
On July 1, 2007 Salem Corporation issued P2,000,000 of 7% bonds payable in 10 years.
The bonds pay interest semiannually. Each P1,000 bond includes a detachable stock
purchase right. Each right gives the bondholder the option to purchase for P30, one share of
P1 par value common stock at any time during the next 10 years. The bonds were sold for
P2,000,000. The value of the stock purchase rights at the time of issuance was P100,000.
Questions
1. How many warrants were issued?
a. 2,000,000 b. P 66,667 c. 20,000 d. 2,000
2. If the bondholder will exercise all his rights, the additional paid-in capital will be
a. P 158,000 b. P 150,000 c. P 58,000 d. P 0
Solution
Cash 2,000,000
Discount on bonds payable 100,000
Bonds payable 2,000,000
Common stock warrants outstanding 100,000
Proceeds 2,000,000
Less: Cost of Warrants 100,000
Cost of the bonds 1,900,000
Problem 13
Friendly Corporation issued P500,000, 6%, nonconvertible bonds with detachable stock
purchase warrants. Each P1,000 bond carried 20 detachable stock purchase warrants, each
of which called for one share of friendly common stock, par P50, at the specified option
price of P60 per share. The bonds sold at 106, and the detachable stock purchase warrants
were immediately quoted at P1 each on the market.
Questions
310
2. The entry to record the subsequent exercise of the 10,000 stock purchase warrants is
a. Cash 600,000
Premium on BP 20,000
Bonds payable 500,000
Additional paid-in capital 120,000
b. Cash 500,000
Common stock 500,000
c. Cash 600,000
Common stock 500,000
Additional paid-in capital 100,000
d. Cash 600,000
CS warrants outstn. 10,000
Common stock 500,000
Additional paid-in capital 110,000
3. Assuming the Goode Company did not exercise the 10,000 stock purchase warrants in
questions above, what is the entry for Goode Company (the investor) in the acquisition
of the bonds (including the stock purchase warrants).
a. Investment in bonds 500,000
Cash 500,000
b. Investment in bonds 500,000
Invest. in warrants 30,000
Cash 530,000
c. Investment in bonds 530,000
Cash 530,000
d. Investment in bonds 470,000
Cash 470,000
4. The entry in the subsequent sale to another investor of half of the stock purchase
warrants at P1.50 each is
a. No adjustment
b. Cash 7,500
Gain on sale 7,500
c. Cash 750
Investment in bonds 500
Gain on sale 250
d. Cash 7,500
Investment in bonds 5,000
(P1 x 10,000 x 1/2)
Gain on sale 2,500
5. The entry in the Subsequent exercise of the remaining half of the stock purchase
warrants (by tendering them to Friendly Corporation). The market value of the stock
was P62 per share is
a. Investment in stock 305,000
Cash 300,000
(10,000 warrants x ½ x P60)
Investment in bonds 5,000
b. Investment in bonds 305,000
Cash 305,000
c. Investment in stock 300,000
Cash 300,000
311
d. Investment in bonds 5,000
Investment in stock 300,000
Cash 305,000
Solution
1. B Cash 530,000
Bonds payable 500,000
Premium on bonds payable 20,000
Common stock warrants outstanding 10,000
2. D Cash 600,000
CS warrants outstanding 10,000
Common stock 500,000
APIC 110,000
3. C Investment in bonds 530,000
Cash 530,000
4. D Cash 7,500
Investment in bonds 5,000
(P1 x 10,000 x ½)
Gain on sale 2,500
5. A Investment in stock 305,000
Cash 300,000
(10,000 warrants x ½ x P60)
Investment in bonds 5,000
Problem 14
In your initial audit of EMILIA CORP., you find the following ledger account balances.
Treasury Bonds
10/1/07 CD P1,100,000
Bond Discount
1/2/05 CD P 500,000
The bonds were redeemed for permanent cancellation on October 1, 2007, at 107 plus
accrued interest.
Questions
1. Adjusted balance of bonds payable on December 31, 2007.
a. P 5,000,000 b. P 4,000,000 c. P 3,900,000 d. P 3,000,000
312
4. Gain or loss on bond redemption.
a. P 170,000 b. P 142,500 c. P 127,500 d. P 97,500
Solution
Retained earnings 100,000
Bond discount 100,000
Retained earnings 300,000
Interest expense 300,000
--------------------------------------------------------------
OE: Treasury bonds 1,100,000
Cash 1,100,000
CE: Bonds payable 1,000,000 * 1/5 x P500,000 = P100,000
Interest expense 30,000 100,000/120 x 33 (27,500)
Loss on early extinguishment Unamortized disc.
of debt 142,500 for the P100,000
Bonds discount 72,500 * bond P 72,500
Cash 1,100,000
Adj: Loss on early extinguishment
of debt 142,500
Interest expense 30,000
Bonds payable 1,000,000
Bonds discount 72,500
Treasury bonds 1,100,000
----------------------------------------------------------------
Interest expense 240,000
Interest payable 240,000
----------------------------------------------------------------
Interest expense 47,500
Bonds discount 47,500
P100,000 bond / 10 years x 9/12 = P 7,500
P400,000 bond / 10 years = 40,000
P47,500
Answer:
1. B 2. D 3. D 4. B
Problem 15
At December 31, 2006, the Core Corporation had the following liability and equity
account balances:
The bonds were issued on December 31, 2005, for P2,689,000 to yield 10%.
The bonds mature on December 31, 2012. Interest is payable annually on
December 31. The Corporation uses the effective interest method to amortize
bond premium.
313
At December 31, 2006, the corporation had 1,000,000 authorized shares of P10
par common stock.
Questions
1. How much is the bond premium amortization for 2007?
a. P 7,381 b. P 6,710 c. P 6,500 d. P 6,100
2. What is the carrying value of the bonds payable on December 31, 2007?
a. P 2,689,000 b. P 2,682,900 c. P 2,676,190 d. P 2,668,809
5. What is the long-term portion of the note payable to bank as of December 31, 2007?
a. P 2,000,000 b. P 1,600,000 c. P 1,400,000 d. P 1,000,000
Solution
Interest Interest Carrying
Paid Expense Amort. Value
Dec. 31, 2005 2,689,000
2006 275,000 268,900 6,100 2,682,900
2007 275,000 268,290 6,710 2,676,190
2008 275,000 267,619 7,381 2,668,809
Answer:
1. B 2. C 3. C 4. C 5. B
6. Notes Payable P2,000,000 x 9% x 2/12 = P 30,000
Bonds payable 268,290
Total 298,290
Problem 16
The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus
accrued interest. The bonds were dated July 1, 1999; interest payable semiannually on
January 1 and July 1; redeemable after June 30, 2004 to June 30, 2007, at 101, and
thereafter until maturity at 100; and convertible into P10 par value common stock as
follows:
Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.
From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.
314
After June 30, 2007, at the rate of 4 shares for each P1,000 bond.
The bonds mature 10 years form their issue date. The company adjust its books monthly
and closes its books as of December 31 each year.
2005
July 1 P2,000,000 of bonds were converted into stock.
2006
Dec 31P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued
interest. These were immediately retired.
2007
July 1 The remaining bonds were called for redemption and accrued interest
was paid. For purposes of obtaining funds for redemption and business
expansion, an P8,000,000 issue of 7% bonds was sold at 97. These
bonds are dated July 1, 2007, and are due in 20 years.
Questions
1. What is the carrying value of bonds payable at December 31, 1999?
a. P 5,747,280 b. P 6,000,000 c. P 5,753,760 d. P 5,749,440
3. In recording the bond conversion on July 1, 2005, how much should be credited to the
additional paid-in capital account?
a. P 1,796,320 b. P 1,965,440 c. P 1,845,440 d. P 1,865,440
5. What is the carrying value of the bonds reacquired on December 31, 2006?
a. P 989,200 b. P 957,880 c. P 1,010,800 d. P 981,700
Solution
October 1, 1999 Cash 5,882,280
Discount on Bond payable 252,720
Bonds payable 6,000,000
Interest expense 135,000
Dec. 31, 1999 Interest expense 6,480
315
Discount on Bond Payable 6,480
P 252,720/117 x 3 = P6,480
Interest expense 270,000
Interest payable 270,000
July 1, 2005 Bond payable 2,000,000
Discount on bonds payable 34,560
Common stock 100,000
Additional paid-in capital 1,865,440
Dec. 31, 2005 Bonds payable 1,000,000
Interest expense 45,000
Loss on retirement 3,300
Discount on bonds payable 10,800
Cash 1,037,500
July 1, 2007 Bonds payable 3,000,000
Interest expense 135,000
Loss on retirement 25,920
Discount on bonds payable 25,920
Cash 3,135,000
Answer:
1. C 2. C 3. D 4. A 5. A
6. B 7. B 8. A
Problem 17
From the following accounts and supplementary information, prepare working papers and
any adjusting entries covering your audit of bonds payable in connection with your first
examination of the Corporation, as of December 31, 2007.
DR CR Balance
January 1, 2002 CR P500,000.00 P500,000.00
Bond Premium
DR CR Balance
January 1, 2002 CR P 25,000.00 P 25,000.00
Treasury Bonds
DR CR Balance
October 1, 2007 CD P104,500.00 P104,500.00
DR CR Balance
January 1, 2007 CDP 15,000.00 P 15,000.00
July 1, 2007 CD 15,000.00 30,000.00
The treasury bonds were purchased at a price of 103 plus accrued interest through a
broker. The bonds are not to be reissued and the client asked you to prepare an adjusting
entry writing off the bonds.
Questions
1. The December 31, 2007 Bonds Payable is
a. P 500,000 b. P 450,000 c. P 400,000 d. P 395,500
316
2. The December 31, 2007 Bond Premium is
a. P 20,050 b. P 16,000 c. P 15,000 d. P 14,750
Problem 18
In the course of your initial examination of the accounts of Paul Company, you obtain the
following information related to the company’s bonds payable as of December 31, 2007:
Treasury Bonds
10/01/2007 Balance - P 540,000 Dr
Bond Premium
01/01/2006 Balance - P 200,000 Cr
The treasury bonds were acquired at a price of 105 plus accrued interest. The treasury
bonds will be available for reissuance.
Questions
Based on the information presented above and the result of your audit, answer the
following:
1. The adjusted balance of the bonds payable account as of December 31, 2007 is:
a. P 4,000,000 b. P 3,500,000 c. P 3,460,000 d. P 3,360,000
317
2. The adjusted balance of the treasury bonds account as of December 31, 2007 is:
a. P 540,000 b. P 525,000 c. P 500,000 d. P 0
3. The unadjusted balance of the bond premium account as of December 31, 2007 should
be
a. P 200,000 b. P 160,000 c. P 140,000 d. P 0
4. The total bond interest expense that should be reported by the company for the year
2007 is
a. P 480,000 b. P 472,750 c. P 465,000 d. P 457,250
6. The carrying value of the bonds payable as of December 31, 2007 should be
a. P 4,000,000 b. P 3,860,000 c. P 3,640,000 d. P 3,360,000
Solution
OE: Treasury bonds 540,000
Cash 540,000
CE: Bonds payable 500,000
Bonds premium 20,250
Interest expense 15,000
Loss on retirement 4,750
Cash 540,000
Proceeds = Principal x 105 + {x (12%) (3/12)}
540,000 = x (105) + .03x
540,000 = 1.03x
500,000 =x
500,000/4,000,000 x 200,000 = 25,000 Discount
( 4,750) 25,000/300 x 57
20,250 Unamortized Bonds Premium
Adj: Bonds payable 500,000
Bonds premium 20,250
Interest expense 15,000
Loss on retirement 4,750
Treasury Bonds 540,000
Problem 19
In the course of your initial examination of the accounts of Maricel Company, you obtain the
following information related of the company’s bonds payable as of December 31, 2004.
318
value bonds purchased at
90 and retired P 2,700,000
Questions
Based on the above and the result of your audit, answer the following:
2. How much is the carrying amount of bonds payable as of December 31, 2004?
a. P 3,000,000 b. P 3,030,000 c. P 2,970,000 d. P 2,955,000
3. How much is the total interest expense for the year ended December 31, 2004?
a. P 390,000 b. P 375,000 c. P 360,000 d. P 345,000
Solution
Entry – retirement of bonds
OE: Bonds payable 2,700,000
Cash 2,700,000
CE: Bonds payable 3,000,000
Gain on retirement 255,000
Discount on bonds payable 45,000
Cash 2,700,000
(3M/6M x 300,000 = 150,000/10 x 3 = P45,000 unamortized)
Adj: Bonds payable 300,000
Gain on retirement 255,000
Discount on bonds payable 45,000
Problem 20
On January 1, 2007, CPA NAKO company issued eight-year bonds with a face value of
P2,000,000 and a stated interest rate of 6% payable semiannually on June 30 and
December 31. The bonds were sold to yield 8%. Table values are:
319
Present value of 1 for 10 periods at 4% 00.534
Present value of annuity of 1 for 8 periods at 6% 6.210
Present value of annuity of 1 for 8 periods at 8% 5.747
Present value of annuity of 1 for 10 periods at 3% 12.561
Present value of annuity of 1 for 10 periods at 4% 11.652
Questions
1. The present value of the principal is
a. P 1,068,000 b. P 1,080,000 c. P 1,246,000 d. P 1,254,000
Solution
1. B P2,000,000 x .54 = P1,080,000
2. B P2M x 6% x 6/12 = P60,000; P60,000 x 11.652 = P699,120
Problem 21
In connection of your audit of the liabilities of Cring-Cring Company, you noted that on
December 31, 2006. The company issued P2,000,000 8% serial bonds. To be repaid in the
amount of P400,000 each year. Interest is payable annually on December 31. The bonds
were issued to yields 10% a year. The bond proceeds were P1,902,800 based on the
present value at December 31, 2006 of five annual payments as follows:
The company uses the effective method in amortizing bond premium or discount.
Questions:
1. How much is the amortization of discount for 2007?
a. P 19,440 b. P 30,326 c. P 47,770 d. P 97,200
2. How much is the carrying value of the bonds payable as of December 31,
2007?
a. P 1,933,080 b. P 1,665,920 c. P 1,633,080 d. P 1,533,586
Solution
PV
Principal Interest Total factors Total PV
320
400,000 128,000 528,000 0.82645 6
372,65
2009 400,000 96,000 496,000 0.75131 0
316,91
2010 400,000 64,000 464,000 0.68301 7
268,23
2011 400,000 32,000 432,000 0.62092 7
1,903,26
Total Present Value 0
2,000,00
Face value 0
96,74
Discount on BP 0
Int.
Int. paid exp. Amort Principal Book
Paymen
t Value
1,903,26
0
30,32 1,533,58
2007 160,000 190,326 6 400,000 6
25,35 1,158,94
2008 128,000 153,359 9 400,000 5
19,89 778,83
2009 96,000 115,894 4 400,000 9
13,88 392,72
2010 64,000 77,884 4 400,000 3
7,27
2011 32,000 39,272 2 400,000 -
Problem 22
The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus
accrued interest. The bonds were dated July 1, 1999; interest payable semiannually on
January 1 and July 1; redeemable after June 30, 2004 to June 30, 2007, at 101, and
thereafter until maturity at 100; and convertible into P10 par value common stock as
follows:
Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.
From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.
After June 30, 2007, at the rate of 4 shares for each P1,000 bond.
The bonds mature 10 years form their issue date. The company adjust its books monthly
and closes its books as of December 31 each year.
2005
July 1 P2,000,000 of bonds were converted into stock.
2006
Dec 31P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued
interest. These were immediately retired.
2007
321
July 1 The remaining bonds were called for redemption and accrued interest
was paid. For purposes of obtaining funds for redemption and business
expansion, an P8,000,000 issue of 7% bonds was sold at 97. These
bonds are dated July 1, 2007, and are due in 20 years.
Questions
1. What is the carrying value of bonds payable at December 31, 1999?
a. P 5,747,280 b. P 6,000,000 c. P 5,753,760 d. P 5,749,440
3. In recording the bond conversion on July 1, 2005, how much should be credited to the
additional paid-in capital account?
a. P 1,796,320 b. P 1,965,440 c. P 1,845,440 d. P 1,865,440
5. What is the carrying value of the bonds reacquired on December 31, 2006?
a. P 989,200 b. P 957,880 c. P 1,010,800 d. P 981,700
Solution
October 1, 1999 Cash 5,882,280
Discount on Bond payable 252,720
Bonds payable 6,000,000
Interest expense 135,000
Dec. 31, 1999 Interest expense 6,480
Discount on Bond Payable 6,480
P 252,720/117 x 3 = P6,480
Interest expense 270,000
Interest payable 270,000
July 1, 2005 Bond payable 2,000,000
Discount on bonds payable 34,560
Common stock 100,000
Additional paid-in capital 1,865,440
Dec. 31, 2005 Bonds payable 1,000,000
Interest expense 45,000
Loss on retirement 3,300
Discount on bonds payable 10,800
Cash 1,037,500
July 1, 2007 Bonds payable 3,000,000
Interest expense 135,000
Loss on retirement 25,920
Discount on bonds payable 25,920
Cash 3,135,000
Answer:
1. C 2. C 3. D 4. A 5. A
322
6. B 7. B 8. A
Problem 23
On January 1, 2005, GEOFFREY Inc. issued P100,000, 10%, 10-year bonds when the
market rate of interest was 8%. Interest is payable on June 30 and December 31. The
following financial information is available.
Sales P300,000
Cost of Sales 180,000
Gross profit 120,000
Interest expense ?
Depreciation expense (14,500)
Other expenses (82,000)
Net income ?
All purchases of inventory are on account. Other expenses are paid for in cash.
4% 5%
PV of 1 0.4564 0.3769
PV of an ordinary annuity of 1 13.5903 12.4622
The company uses the straight-line method for amortizing premiums and discounts.
Questions:
1. What is the carrying value of bonds on January 1, 2005?
a. P 113,592 b. P 100,000 c. P 86,408 d. P 112,223
323
Solution
1. A Present value / carrying value of bonds on January 1, 2003:
P100,000 x 0.4564 P45,640
P100,000 x 5% = P5,000 x 13.5903 67,592
Total P113,592
2. C Cash paid for interest (P100,000 x 10%) P 10,000
3. D Face Value P100,000
Premium on bonds (P13,592 – P1,359) 12,333
Carrying value, December 31, 2005 P112,233
4. A Nominal Interest (P100,000 x 10%) P 10,000
Premium amortization (P13,592 / 10 years) (1,359)
Interest expense P 8,641
Dec.31 55,000
Problem 6
In connection with the audit of the company’s financial statements for the year ended
December 31, 2004 the Camille Corporation presented to their records. This is the first
time the company has been audited. The company issued serial bonds on April 1, 2001.
Your audit showed the following details of the issue and the accounts as of December 31,
2004.
Total face value P2, 000,000
Date of bond March 1, 2001
Total proceeds P2, 742,400
Interest rate 12% per annum
Interest payment date March 1
Maturity dates and amount
Since the corporation had excess cash, bonds o0f P400,000 scheduled to be retired on
March 1, 2006 were retired on April 1, 2004 at 98%.
324
Serial Bonds Payable
3/1/04 VR P 400,000 4/1/01 CR P 2,742,400
4/1/04 VR 396,000
Interest Expense
3/1/04 VR P 240,000
Questions:
Based on the information presented above and the result of your audit, answer the
following.
1. The adjusted balance of the bonds payable accounts as of December 31, 2004 is
a. P 2,000,000 b. P 1,600,000 c. P 1,942,400 d. P 1,200,000
4. The bond interest expense that should be reported by the corporation for the year
2004 is
a. P 67,208 b. P 63,801 c. P 65,600 d. P 45,960
Solution -
Computation of amortization rate
325
*Peso months x amortization rate
**term of 96 months (8 x 12) less 1 month after date of bonds
1. D
Bonds payable (P2,000,000 –P400,000 – P400,000) 1,200,000
2. B
Total proceeds 2,742,400
Less accrued interest payable (P2,000,000 x 12% x 1/12) 20,000
Issue price 2,722,400
Less face value 2,000,000
Total bond premium 722,400
Less:
Amortization:
Prior years (2001 and 2003) 396,000
Current year (2004)
Bonds retired on maturity 4,800
(P400,000 x 0.006 x 2 mos.)
Bonds retired prior to maturity 7,200
(P400,000 x 0.006 x 3 mos.)
Remaining bonds 86,400 98,400 494,400
(P1,200,000 x 0.006 x 12 mos.)
Unamortized premium cancelled on bonds retired prior to maturity 55,200
(P400,000 x 0.006 x 23 mos.) .
Unamortized bond premium, 12/31/04 172,800
Alternative computation:
Remaining Amortization Unamortized
Maturity date Amount months rate premium
March 1, 2005 400,000 2 0.006 4,800
March 1, 2006 - - 0.006
March 1, 2007 400,000 26 0.006 62,400
March 1, 2008 200,000 38 0.006 45,600
March 1, 2009 200,000 50 0.006 60,000
1,200,000 172,800
3. B
Accrued interest (P1,200,000 x 12% x 10/12) 120,000
4. C
Interest expense
Remaining bonds (P1,200,000 x 12%) 144,000
Bonds retired on maturity
(P400,000 x 12% x 2/12) 8,000
Bonds retired prior to maturity
(P400,000 x 12% x 2/12) 12,000
Bond premium amortization for 2004
(see computation in no. 2) (98,400)
65,600
5. A
Retirement price (P400,000 x 98%) 392,000
Less carrying value of bonds retired:
Face value 400,000
Add unamortized bond premium, 4/1/04 to 2/28/06
(P400,000 x .006 x 23mos.) 655,200 455,200
Gain on early retirement of bonds 63,200
326
CHAPTER 9 – Audit of Shareholders’ Equity
Problem 1
You have been assigned to the audit of Aguillon Inc., a manufacturing
company. You have been asked to summarize the transactions for the year
ended December 31, 2004, affecting shareholders’ equity and other related
accounts. The shareholders’ equity section of Aguillon’s December 31, 2003,
balance sheet follows:
Shareholders’ Equity
Contributed capital:
Ordinary share P2 par value, 500,000 shares authorized,
90,000 shares issued, 88,790 shares outstanding P 180,000
Paid-in capital in excess of par 1,820,000
Paid-in capital from treasury share
22,500
Total contributed capital P2,022,500
Retained earnings 324,689
Total contributed capital and retained earnings P2,347,189
Less: Cost of 1,210 shares of treasury share 72,600
Total shareholders’ equity P2,274,589
You have extracted the following information from the accounting records
and audit working papers.
2004
Jan. 15 Aguillon reissued 650 shares of treasury share for P40 per share. The 1,210
shares of treasury share on hand at December 31, 2001, were purchased in one block in
2001. Aguillon used the cost method for recording the treasury shares purchased.
Feb. 2 Sold 90, P1,000, 9% bonds due February 1, 2005, at 103 with
one detachable share warrant attached to each bond. Interest is
payable annually on February 1. The fair market value of the
bonds without the share warrants is 97. The detachable warrants
have a fair value of P60 each and expire on February 1, 2005.
Each warrant entitles the holder to purchase 10 shares of
Ordinary share at P40 per share.
327
Mar. 6 Subscriptions for 1,400 shares of Ordinary share were issued at
P44 per share, payable 40% down and the balance by March 20.
20 The balance due on 1,200 shares was received and those shares
were issued. The subscriber who defaulted on the 200 remaining
shares forfeited the down payment in accordance with the
subscription agreement.
Solution
Jan 15 Cash (650 shares x P40) 28,000
Paid-in capital from treasury share 13,000
Treasury Share 39,000
Cost of treasury share: P72,000/1,210 shares = P60 per share
Cost of shares sold: 650 shares x P60 = P 39,000
Feb 2 Cash (P90,000 x 103) 92,700
Discount on bonds payable 2,700
Bonds payable 90,000
Ordinary share warrants 5,400
Price of bonds without warrants attached: 97 x P90,000 = P87,300
Value of detached warrants: 90 x P60 = P 5,400
Because value of bonds plus value of detachable warrants is equal to the total issuance price (P87,300 +
P5,400 = P92,700), the value assigned to the bonds and warrants is the fair value of each.
328
Mar 6 Cash 24,640
Ordinary share subscription receivable 36,960
Ordinary share subscribed 2,800
Paid-in capital in excess of par 58,800
Mar 20 Cash 31,680
Ordinary share subscription receivable 31,680
Mar 20 Ordinary share subscribed 2,400
Ordinary share 2,400
Mar 20 Ordinary share subscribed 400
Paid-in capital in excess of par 8,400
Ordinary share subscription receivable 5,280
Paid in capital from forfeited share subscription 3,520
Nov 1 Cash (550 s P40) 22,000
Ordinary share warrants (55 x P60) 3,300
Ordinary share 1,100
Paid-in capital in excess of par 24,200
Answer:
1. D 2. B 3. C 4. C 5. D 6. B 7. D 8. D
Problem 2
The shareholder’s equity of the Amongan Lumber Co. on June 30, 2004, was
as follows:
Contributed capital:
5% preference share, P50 par, cumulative, 30,000 shares issued,
dividends 5 years in arrears P1,500,000
Ordinary share, P30 par, 100,000 shares issued 3,000,000
P4,500,000
Deficit from operations (600,000)
Total shareholder’s equity P3,900,000
329
Oct. 1 10,000 shares of preference share were called at P55 plus dividends
for 3 months at 5%. Share was formally retired.
Nov. 10 60,000 shares of new ordinary share were sold at P65.
Dec. 31 Net income for the 6 months ended on this date was P400,000. (Assume that
revenues and expenses were closed to a temporary account, Income summary. Use this
account to complete the closing process.) The semiannual dividend was declared on
preference shares, and a P0.75 dividend on ordinary shares, dividends being payable
January 20, 2003.
Questions
Based on the information above, answer the following questions:
Solution
July 1 Ordinary share, P30 par 3,000,000
Ordinary share, P60 stated value 1,500,000
Exchanged 100,000 shares of old ordinary share with a par value of P30 for 25,000 shares of new
ordinary share with a stated value of P60.
330
SHAREHOLDERS’ EQUITY
Contributed Capital
5% preference share 1,000,000
Ordinary share 6,000,000
Paid-in capital in excess of stated value – ordinary 300,000
Total 7,300,000
Retained earnings (accumulated since July 1, 2002) 243,750
Total Shareholders’ Equity 7,543,750
On July 1, 2004, 100,000 shares of ordinary share, P30 par, were exchanged for 25,000 shares of ordinary share
with a P60 stated value, thus creating additional paid-in capital. Such paid-in capital was applied to the elimination
of a P600,00 deficit on this date and also the liquidation of dividends in arrears on preference share of P900,000
through the issue of 15,000 shares of new ordinary. Earnings since July 1, 2004, were P400,000. Charges for
dividends since this date were P106,250, and the call premium on 10,000 shares of preference share redeemed
was P50,000, resulting in a retained earnings balance of P243,750.
Answer:
1. B 2. D 3. B 4. C
Problem 3
Alcain COMPANY’s shareholders’ equity account balance at December 31, 2003,
were as follows:
Ordinary share 800,000
Additional paid-in capital 1,600,000
Retained earnings 1,845,000
a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares
were issued and outstanding.
b. On March 5, 2004, Alcain acquired 5,000 shares of its ordinary share for
P10 per share to hold as treasury share. The shares were originally
issued at P15 per share. ALCAIN uses the cost method to account for
treasury share. Treasury share is permitted in Alcain’s state of
incorporation.
331
e. Alcain’s net income for 2004 was P240,000.
Questions
Based on the information above and other analysis as necessary, answer the
following question:
12. Alcain’s Additional paid-in capital balance at December 31, 2004 is:
a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000
Problem 4
Ashary COMPANY is a publicly held company whose shares are traded in the over the
counter market. The shareholders’ equity account at December 31, 2003, had the following
balances:
Preference share, P100 par value. 6% cumulative;
5,000 shares authorized; 2,000 shares issued
and outstanding P 200,000
Ordinary share, P1 par value; 150,000 shares
authorized; 100,000 issued and outstanding 100,000
Additional paid-in capital 800,000
Retained earnings 1,586,000
Transactions during 2004 and other information relating to the shareholders’ equity account
were as follows:
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The land had a carrying value on Keith’s books of P135,000, and the assessed value for
property taxes of P90,000.
March 1, 2004 – Purchased 5,000 shares of its own ordinary share to be held as
treasury for P14 per share. Ashary uses the cost method to account for treasury share.
Transactions in treasury share are legal in Ashary’s state of incorporation.
May 10, 2004 – Declared a property dividend of marketable securities held by Ashary to
ordinary shareholders. The securities had a carrying value of P600,000, fair value on
relevant dates were:
October 1, 2004 – Reissued 2,000 shares of treasury share for P16 per share.
November 4, 2004 – Declared a cash dividend of P1.50 per share to all ordinary
shareholders of record November 15, 2004. The dividend was paid on November 25,
2004.
December 20, 2004 – Declared the required annual cash dividend on preference share
for 2004. The dividend was paid on January 5, 2005.
January 16, 2005 – Before closing the accounting records for 2004, Ashary became
aware that no amortization had been recorded for 2004 for a patent purchased on July
1, 2003. The patent was properly capitalized at P320,000 and had an estimated useful
life of eight years when purchased. Ashary’s income tax rate is 30%.
Questions
1. The total additional paid-in capital at year-end is:
a. P 881,000 b. P 877,000 c. P 922,000 d. P 934,000
Solution
Feb 1 - Land 143,000
Ordinary share 13,000
APIC – CS 130,000
Mar 1 - Treasury share 70,000
Cash 70,000
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May 10 - Retained earnings 600,000
Property dividend payable 600,000
Oct 1 - Cash 32,000
Treasury share 28,000
APIC – TS 4,000
Nov 4 - Retained earnings 165,000
Cash 165,000
Dec 20 - Retained earnings 12,000
Dividends payable 12,000
Dec 31 - Retained earnings 14,000
Income tax payable 6,000
Patents 20,000
Dec 31 - Income summary 838,000
Retained earnings 838,000
Answer:
1. D 2. A 3. C 4. A 5. B
Problem 5
During your audit of Asumbra Company for the year 2004, its initial year of
operations, you find the following entries in its “Shareholders’ Equity” account:
____________________SHAREHOLDERS’
EQUITY___________________
Jan. 01Issuance of 150,000 shares of capital share, P10 par;
authorized 500,000 shares in exchange for real
estate property with a market value of P2 million
1,500,000
Questions
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1. The adjusted balance of the “Shareholders’ Equity” account of the
company’s balance sheet as of December 31, 2004 is:
a. P 4.36 million b. P 4.46 million c. P 4.76 million d. P 4.91
million
2. The book value per share of the company’s share as of December 31,
2004 is
a. P 14.44 b. P 14.00 c. P 13.12 d. P 12.82
Solution
Land 2,000,000
Ordinary share 1,500,000
APIC 500,000
Cash 2,400,000
Ordinary share 2,000,000
APIC 400,000
Treasury share 300,000
Cash 300,000
Retained earnings 100,000
Loss on sale 100,000
Cash 170,000
Treasury share 150,000
APIC – TS 20,000
Retained earnings 200,000
Cash 200,000
Answer:
1. C 2. B
Problem 6
You are auditing the balance sheet of the Ballares Company on December 31, 2004, which
has the following items on the equity side of the balance sheet:
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Questions
1. Total shareholders’ equity as of December 31, 2004 is:
a. P 2,035,000 b. P 5,535,000 c. P 7,500,000 d. P 9,535,600
3. The book value per share of ordinary share as of December 31, 2004 is:
a. P 203.55 b. P 187.52 c. P 172.50 d. P 165.00
Solution
1 D. Reserve for bond retirement P1,600,000
6% cumulative Preference share 1,850,000
Ordinary share 4,000,000
Premium on preference share 100,000
Premium on ordinary share 673,000
Retained earnings 1,312,600
Total shareholders’ equity P9,535,600
Less equity identified to preference share
Liquidation value (18,500 shares x P110) 2,035,000
Problem 7
On January 1, 2003, the shareholders’ equity of Bantaya Company’s balance
sheet revealed the following information:
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share of ordinary share. At the time of conversion, the ordinary share
had a market value of P42 per share.
g. Net income for 2003 was P660,000 and for 2004, P890,000.
Questions
1. The total preference share at December 31, 2003 is:
a. P 600,000 b. P 625,000 c. P 651,400 d. P
667,500
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a. P 548,600 b. P 600,000 c. P 625,000 d. P
651,400
Solution
2003
Treasury share 495,000
Cash 495,000
Preference share 200,000
Ordinary share 25,000
Additional paid-in capital 175,000
Subscription receivable 132,000
Cash 198,000
Subscribed ordinary share 50,000
Additional paid-in capital 280,000
Income summary 660,000
Retained earnings 660,000
2002
Cash 112,200
Subscription receivable 112,200
Subscribed ordinary share 42,500
Ordinary share 42,500
Subscribed ordinary share 7,500
Additional paid-in capital 42,000
Subscription receivable 19,800
APIC – forfeiture of share 29,700
Cash 500,000
Treasury share 330,000
Additional paid-in capital 170,000
Retained earnings 51,400
Preference share 51,400
Income summary 890,000
Retained earnings 890,000
Answer:
1. A 2. B 3. D 4. B 5. A 6. D 7. D 8. C 9. A 10. C
Problem 8
You are a senior accountant responsible for the annual audit of Calunsag Company for the
year ended December 31, 2003. The information available to you is presented below. You
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may assume that any pertinent information not presented below has already been checked
found satisfactory.
The books have not been closed, but all adjusting entries which the company expects to
make have been posted. Their trial balance shows a P60,000 net profit for the year.
NOTE: The balance at 12/31/02 agrees with last year’s working papers.
2. The Additional paid-in capital balance of Calunsag Company at December 31, 2003 is:
a. P 1,000 b. P 500 c. P 0 d. cannot be
determined
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3. The Retained Earnings – January 1, 2003 balance of Calunsag Company is:
a. P 155,000 b. P 154,500 c. P 135,000 d. P 134,500
5. The Retained Earnings – December 31, 2003 balance of Calunsag Company is:
a. P 182,500 b. P 175,000 c. P 172,500 d. P 152,500
Solution
Adj: Retained earnings 500
Additional paid-in capital 500
OE: Cash 530,000
Accum. dep’n 370,000
Retained earnings 10,000
Building 910,000
CE: Cash 530,000
Accum. dep’n 370,000
Loss on sale 10,000
Building 910,000
Adj: Loss on sale 10,000
Retained earnings 10,000
Adj: Repairs 2,000
Retained earnings 2,000
Adj: Loss on market decline 30,000
Retained earnings 30,000
Answer:
1. B 2. B 3. D 4. A 5. D
Problem 9
You were engaged by Catacutan Company, a publicity held company whose
shares are traded in the Philippines Share Exchange, to conduct an
examination of its 2004 financial statements. You were told by the
company’s controller that there were numerous equity transactions that took
place in 2004. The shareholders’ equity accounts at December 31, 2003, had
the following balances:
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January 6, 2004 – issued 22,500 shares of ordinary share to Difficult
Company in exchange or land. On the date issued, the share had a
market price of P16.50 per share. The land had a carrying value of
P201,000, and an assessed value for property taxes of P135,000.
January 31, 2004 – Sold 1,350, P1,000, 12% bonds due January 31,
2006, at 98 with one detachable share warrant to each bond. Interest is
payable annually on January 31. The fair value of the bonds without the
share warrants is 95. The detachable warrant entitles the holder to
purchase 10 shares of ordinary share at P10 per share.
March 15, 2004 – 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.
August 30, 2004 – Reissued 3,000 shares of treasury share for P20
per share.
September 14, 2004 – There were 945 warrants detached from the
bonds and exercised.
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January 8, 2005 – Before closing the accounting records for 2004.
Catacutan became aware that no amortization had been recorded for
2003 for a patent purchased on July 2, 2003. The patent was properly
capitalized at P480,000 and had an estimated useful life of eight years
when purchased. Catacutan is subject to 32% regular corporate income
tax. The appropriate correcting entry was recorded on the same day.
Questions
Based on the foregoing and the result of your audit, answer the following :
1. By how much should the retained earnings be decreased as a result of the property
dividend declaration on April 30, 2004?
a. P 950,000 b. P 920,000 c. P 910,000 d. P 0
2. How much is the total dividends declared on preference and ordinary share in 2004?
a. P 2,294,900 b. P 2,263,900 c. P 2,254,900 d. P
2,200,900
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Allocated Cost of the warrants 40,500
Feb 22 - Treasury share 180,000
Cash 180,000
Feb 28 - Cash 273,000
Subscription receivable 273,000
Subscribed ordinary share 21,000
APIC 525,000
Mar 15 - Cash 234,000
Subscription receivable 234,000
Subs. ordinary share 18,000
Ordinary share 18,000
Subs. Ordinary share 3,000
APIC 75,000
Subscription receivable 39,000
APIC – forfeiture of share 39,000
Apr 30 - Dividends/RE 910,000
Inventory 910,000
Aug 30 - Cash 60,000
Retained earnings 12,000
Treasury share 72,000
Sep 14 - Cash 94,500
Ordinary share warrants 28,350
Ordinary share 9,450
APIC 113,400
Nov 30 - Dividends/RE 1,290,900
Cash 1,290,900
Dec 15 - Dividends 54,000
Dividends payable 54,000
Dec 31 - Retained earnings 20,400
Income tax payable (32%) 9,600
Patents 30,000
Income summary 1,860,900
Retained earnings 1,860,900
Answer:
1. C 2. C 3. C 4. C 5. A 6. C 7. C 8. A
Problem 10
The Ceniza Company engaged Mr. Coliseo, a CPA, in 2003 to examine its
books and records and to make whatever adjustments are necessary.
RETAINED EARNINGS
Balance
Date Particular Debit Credit Debit Credit
2001
Jan. 1 Balance
580,000
Dec. 31 Net income for the year 310,000
890,000
2002
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Jan 31 Dividends paid 140,000
750,000
Apr. 3 Paid in capital in excess of par 90,000
840,000
Aug. 30 Gain on retirement of preference
Share at less than issue price 64,500
904,500
Dec. 31 Net loss for the year 205,000 699,500
2003
Jan 31 Dividends paid 100,000
599,500
Dec. 31 Net loss for the year 165,500 434,000
b. Dividends had been declared on December 31, 2001 and 2002 but had
not been entered in the books until paid.
f. The merchandise inventoried at the end of 2002 and 2003 did not
include merchandise that was then in transit shipped FOB shipping point.
These equipments of P43,400 and P32,600 were recorded a purchases in
January 2003 and 2004, respectively.
Questions
Based on the above audit findings, the adjusted balances of the following
are: (Disregard tax implication)
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1. Retained earnings, 12/31/00
a. P 860,000 b. P 850,900 c. P 790,900 d. P
760,900
Solution
2001 2002 2003
Unadjusted net income/(loss) 310,000 (205,000) (165,500)
Adjustments:
“c” – Depreciation (120,000) (120,000) (40,000)
“d” – Error in charging to expense 30,000
Depreciation (20,000) (80,000)
“e” – Understatement of inv. – 2001 64,000 (64,000)
Understatement of inv. - 2003 44,500
“f” – Understatement of inv. - 2002 43,400 (43,400)
Understatement of inv. – 2003 32,600
Under. of purchases – 2002 (43,400) 43,400
Under. of purchases – 2003 ___________ ___________ (32,600)
Adjusted Net income 254,000 (379,000) (241,000)
Plus: Retained Earnings – beg unadj. 580,000
Prior period adjustment
Error in charging to expense 360,000
Unrecorded depreciation (80,000)
Retained Earnings – beg adjusted 860,000 974,000 495,000
Less: Dividends (140,000) (100,000) _________
Retained earnings – end 974,000 495,000 254,000
Answer:
1. A 2. C 3. B 4. A 5. D 6. A 7. D
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Problem 11
The shareholders’ Equity of Cosare Corporation at December 31, 2003,
showed
An audit disclosed that the treasurer was short in his cash to the extent of P50,000.
He had concealed his shortage by increasing inventory values by p15,000; land
values by P20,000 and accounts receivables- trade by P15,000
Upon discovery of the shortage, the Treasure offered to surrender at book value
500 shares of the Capital Share which he owns in the settlement of the shortage.
The board of directors accepted his offer and remitted cash to the Treasurer for any
excess value over shortage. The treasurer’s 500 shares, after being acquired by the
company were distributed pro – rata to the remaining shareholders.
Questions
1. What amount of money should the company pay the Treasurer?
a. P 50,000 b. P 25,000 c. P 15,000
d. P 0
Solution
Inventory 15,000
Land 20,000
Accounts receivable 15,000
Cash 50,000
Treasury share 75,000
Inventory 15,000
Land 20,000
Accounts receivable 15,000
Cash 25,000
Retained earnings 75,000
Treasury share 75,000
Answer:
1. B 2. A
Problem 12
You have been engaged to audit the financial statements of Cuajotor
Corporation for the calendar year 2003. The company was organized on
January 2, 2002 and has not been audited before.
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The following items relating to equity and income statement accounts appear
in your Working Balance Sheet (WBS) and Working Income Statement (WIS)
The company mortgage its land to the Philippine National Bank for P180,000 on
September 1, 2003. The mortgage liability is payable in 18 semi-annual
installments of P10,000 plus accrued interest of 18% to date. The first
installments due March 1, 2004.
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Jan. 1 Balance, 4,500 shares issued P450,000
Mar. 1 Sold 500 shares at P120 per share 60,000
Nov. 1 Assessment on shareholders P10 per share 50,000
Dec. 31 Balance P 560,000
8. Provision for income tax - The income tax rate is 30%. There are no
permanent differences between financial and taxable income.
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Required: For each item below, determine the amount per audit that should
appear in your working balance sheet and working income statement.
Assume that client approves all adjustments.
Questions
1. Capital share issued
a. P 580,000 b. P 550,000 c. P 510,000 d. P
500,000
3. Long-term liabilities
a. P 230,000 b. P 190,800 c. P 180,000 d. P
160,000
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Solution
Long-term liability 20,000
Mortgage Payable – current 20,000
Problem 13
Listed below are the transactions that affected the shareholders’ equity of Christian Paul
Corporation during the period 2003-2005. At December 31, 2002, the corporation’s
accounts included:
(P in 000s)
Ordinary share, 315 million shares at P1 par P 315,000
Paid-in capital – excess of par 1,890,000
Retained earnings 2,910,000
350
a. November 2, 2003, the board of directors declared a cash dividend of P0.80 per share
on its ordinary shares, payable to shareholders of record November 16, to be paid
December 2.
g. The reported net income of Christian Paul was P990 million, P1,185
million, and P1,365 million for 2003, 2004, and 2005, respectively.
Questions
26. The Retained earnings of Christian Paul Corporation at the
end of 2005 is: (P in 000s)
a. P 5,276,700 b. P 5,276,600 c. P 5,112,600 d. P
5,095,850
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28. The Ordinary share of Christian Paul Corporation at the end of
2005 is: (P in 000s)
a. P 495,750 b. P 495,000 c. P 330,750 d. P
330,000
Solution
(in 000’s)
A. Retained earnings 252,000
Cash 252,000
B. Retained earnings 3,900
Investment – HTM 3,900
C. Retained earnings 330,750
Ordinary share 15,000
APIC 300,000
Cash 15,750
D. Retained earnings 264,000
Cash 264,000
E. Retained earnings 165,000 Ordinary share, old 330,000
Ordinary share 165,000 OR Retained earnings 165,000
Ordinary share, new 495,000
F. Retained earnings 321,750
Cash 321,750
Answer:
1. P 5,112,600 2. C 3. B 4. P 7,797,600
Problem 14
VELASCO COMPANY was formed on July 1, 2000. It was authorized to issue
300,000 shares of P20 par value ordinary share and 100,000 shares of 8
percent P50 par value, cumulated and nonparticipating preference share.
VELASCO COMPANY has a July 1 – June 30 fiscal year.
Ordinary share
Prior to the 2002-2003 fiscal year, Velasco Company had 110,000 shares of
outstanding ordinary share issued as follows:
1. 95,000 shares were issued for cash on July 1, 2000, at P62 per share.
2. On July 24, 2000, 5,000 shares were exchanged for a plot of land
which cost the seller P140,000 in 1994 and had an installment market
value of P440,000 on July 24, 2000.
3. 10,000 shares were issued on March 1, 2001; the shares had been
subscribed for P84 per share on October 31, 2001.
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During the 2002-2003 fiscal year, the following transactions regarding
ordinary share took place:
October 1, 2002
Subscriptions were received for 10,000 shares at P92 per share. Cash of
P184,000 was received in full payment for 2,000 shares and share
certificates were issued. The remaining subscription for 8,000 shares
were to be paid in full by September 30, 2004, at which time the
certificates were to be issued.
Velasco Company purchased 2,000 shares of its own share on the open
market at P78 per share. Velasco Company uses the cost method for
treasury share.
Velasco Company sold 500 shares of its own ordinary share that it had
purchased on November 30, 2002, for P42,000.
Preference share
Velasco Company issued 50,000 shares of preference share at P88 per share
on July 1, 2001.
Cash Dividends
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12/15/02 - P2.00 per share
No cash dividends were declared during June 2003, due to the company’s
liquidity problem.
Retained Earnings
In March of 2002, Velasco Company received a loan from Davao Bank. The
bank requires Velasco Company to establish a sinking fund and restrict
retained earnings for an amount equal to the sinking fund and restrict
retained earnings for an amount equal to the sinking fund deposit. The
annual sinking fund payment of P100,000 is due on April 30 each year, the
first payment was made on schedule on April 30, 2003.
Questions
1. What is the balance of the ordinary share account at June 30, 2003?
a. P 2,352,000 b. P 2,350,000 c. P 2,320,500 d. P
2,320,500
2. What is the balance of the Treasury Share account at June 30, 2003?
a. P 156,000 b. P 124,800 c. P 117,000 d. P
114,000
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a. P 13,736,000 b. P 13,116,000 c. P 13,000,000 d. P
12,900,000
Solution
Cash 5,890,000
Ordinary share 1,900,000
APIC 3,990,000
Land 440,000
Ordinary share 100,000
APIC 340,000
Cash 840,000
Ordinary share 200,000
APIC 640,000
Cash 184,000
Ordinary share 40,000
APIC 144,000
Subscription receiv. 736,000
Subscribed CS 160,000
APIC 576,000
Treasury share 156,000
Cash 156,000
Retained earnings 572,000
(110,000 + 2,000 – 2,000 x 5% x P104)
Ordinary share 110,000
APIC 462,000
Cash 42,000
Treasury share 39,000
APIC – TS 3,000
Cash 4,400,000 Dividends:
Preference share 2,500,000 Ordinary share
APIC – PS 1,900,000 12/15/01 110,000 x .60 = P 66,000
6/15/02 110,000 x .60 = 66,000
Retained earnings 432,000 Preference share
Cash 432,000 12/15/01 50,000 x 2 = 100,000
6/15/02 50,000 x 2 = 100,000
Income summary 80,000 12/15/02 50,000 x 2 = 100,000
Retained earnings 80,000 Total 432,000
RE – unappropriated 100,000
RE – appropriated 100,000
Answer:
1. B 2. C 3. D 4. B 5. C 6. A
Problem 15
On April 1,1994, the Jen-Jen, inc. issued P6,000,000 of 7% convertible
bonds w/ interest payment dates of April and Oct. 1. The bond were sold ion
July 1,1994, and mature on April 1, 2014. The bond discount totaled
P319,950. The bond contract entitles the bondholders to received 10 shares
of P20 par value ordinary share in exchange for each P1,000 bond. On April
1, 2004, the holders of the bonds with total face value of P750,000 exercised
their conversion privilege. On July 1, 2004, the company reacquired at 125,
bonds with a face value of P375,000.
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Issued and outstanding, 187,00 shares P
3,750,000
Premium on ordinary share 1,875,000
1. How much the total cash received from the sale of the
P6,000,000 bonds on April 1, 1994?
a. P 6,000,000 b. P 5,680, 050 c. P 5,785,050 d. P 5,820, 050
Solution
4/1/94 Cash 5,785,050 (squeezed figure)
Discount on BP 319,950
Bonds payable 6,000,000
Interest expense 105,000
10/1/94 Interest expense 210,000
Cash 210,000
12/31/94 Interest expense 105,000
Interest payable 105,000
Interest expense 8,100
Discount on BP 8,100
(P319,950/237 x 6 = P8,100)
4/1/04 Bonds payable 750,000
Discount on BP 20,250
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APIC 579,750
6/1/04 Bonds payable 375,000
Loss on retirement 103,622
Discount on BP 9,872
Cash 468,750
Answer:
1. C 2. C 3. D 4. C 5. B
PART 2
Problem 3
During your regular annual audit of Rockets Company for the year ended December 31,
2004, you obtain the following evidence and data relative to your examination of the bonds
payable and related accounts.
Client is authorized to issue 20,000 bonds with par value of P1,000 each. Bonds are dated
May 1, 2001 and are due May 1, 2011. Interest at 12% per annum is due semiannually
every May and November 1.
The December 31, 2003 balance of P9,500 represents proceeds form issuance of 10,000
bonds on November 2, 2002.
Interest expense
CR Cash receipts entry for issuance of P2,000 bonds for a total of P2,100,000 on July 1,
2004. Trustee’s remittance statement attached
Entry Recorded
Cash P2,140,000
Bonds payable P2,100,000
Interest expense 40,000
CV- 120 Cash payments to trustee for November 1, 2003 through April 30, 2004
interest. Paid check to trustee attached.
CV-531 Cash Payment to trustee for May 1. 2004 through October 31, 2004 interest.
Paid check to trustee attached.
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REQUIRED:
1. Adjusting journal entries as December 31, 2004.
2. Compute for the adjusted balances of the following as of December 31, 2004:
a. Bonds Payable
b. Bonds discount
c. Bond Premium
d. Accrued interest
e. Interest expense
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