University of Perpetual Help System Dalta

APPLIED AUDITING RJ CARASCO

MIDTERM

Magnolia corp. invested its excess cash in equity securities during 2017. The business model forthese investments is to profit from trading on
price changes
(A.) As of dec 31 2017, the equity investment portfolio consisted of the following:
Investment quantity cost fair value
Lj inc 1,000 shares 90,000 126,000
Polland co. 2,000 shares 240,000 252,000
Alabang corp 2,000 shares 432,000 360,000
Totals 762,000 738,000
1. In the dec 31 2017 statement of financial position, what should be reported as carrying amount of the investment
a. 738,000 b. 690,000 c. 762,000 d. 810,000
2. In the 2017income statement, what amount should be reported as unrealized gain or loss
a. Unrealized gain of 24,000 c. Unrealized loss of 72,000
b. Unrealized loss of 24,000 d. Unrealized gain of 48,000
(B.) During the year 2018, magnolia corp. sold 2,000 shares of polland co. for 229,200 andpurchased 2,000 more of lj inc and 1,000 shares of
dwarfy company. On the dec 31 2018,
Magnolias equity securities portfolio consisted of the following
Investment quantity cost fair value
Lj inc 1,000 shares 90,000 120,000
Lj inc 2,000 shares 198,000 240,000
Dwarfy company 1,000 shares 96,000 72,000
Alabang corp 2,000 shares 432,000 132,000
Total 816,000 564,000
3. What is the gain or loss on the sale of polland co. investment
a. 10,800 gain b. 10,800 loss c. 22,800 gain d. 22,800 loss
4. What is the carrying amount of the investment on dec 31 2018
a. 816,000 b. 888,000 c. 564,000 d. 492,000
5. What is the amount of unrealized gain or loss should be reported in the income statement of the year ended dec 31 2018
a. 252,000 unrealized gain
b. 252,000 unrealized loss
c. 216,000 unrealized gain
d. 216,000 unrealized loss
(C.) During the year 2019, magnolia sold 3,000 shares of lj shares ,inc for 239,400 and 500shares of dwarfy company at a loss of 15,200. On dec
31 2019, magnolias equity investmentportfolio consisted of the following.
Investment quantity cost fair value
Dwarfy company 500 shares 48,000 36,000
Alabang corp 2,000 shares 432,000 492,000
Totals 480,000 528,000
6. What should be reported as a loss on sale of trading securities in 2019?
a. 120,600 b. 64,800 c. 48,600 d. 136,800
7. What amount of unrealized gain or loss should be reported in the income statement of theyear ended dec 31 2019
a. 360,000 unrealized gain
b. 360,000 unrealized loss
c. 48,000 unrealized gain
d. 48,000 unrealized loss
8. In the dec 31 2019 statement of financial position, what should be reported as carrying amount of trading securities?
a. 480,000 b. 468,000 c. 528,000 d. 540,000

9. It is any contract that gives rise to both a financial asset of one entity and a financial liability or an equity instrument of another entity
a. Financial instrument
b. Equity instrument
c. Debt instrument
d. Derivative instrument

10. A financial asset is any asset that is (choose incorrect answer)

a. Cash
b. Contractual right to receive cash or another financial asset fromanother entity
c. A contractual right to exchange financial instruments under conditionsthat are potentially unfavorable
d. An equity of another entity

II.
The Anda Company is on a calendar year basis. The following data were found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had beenexcluded from the inventory, and further testing
revealed that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately returned.
c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been segregated in the warehouse for shipment to a
customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.
d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly statement from Hermie Company listed those
materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at P80,000.
e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on December 31. However, this
inventory was found to be included in the final inventory. The sale was properly recorded in 2017.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as FOB destination. The sale
had not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet. However, these materials costing
P170,000 had been included in the inventory count, but no entry had been made for their purchase.
h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according
to the supplier’s invoice which had arrived at December 31. Further inspection of the client’s records revealed the following December 31, 2018
balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, P5,050,000; Net purchases, P2,300,000;
Net income, P510,000.

Based on the above and the result of your audit, determine the adjusted balances of following as
of December 31, 2018:
1. Inventory
2. Accounts payable
3. Net sales
4. Net purchases
5. Net income

PROBLEM NO. 5
Balungao Company engaged you to examine its books and records for the fiscal year endedJune
30, 2018. The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2018 but also the copy of company’s
balance sheet and income statement as at said date. The following data appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2017 P 500,000
Add Purchases 3,600,000
Total goods available for sale 4,100,000
Less Inventory, June 30, 2018 700,000
Cost of goods sold P3,400,000

The beginning and ending inventories of the year were ascertained thru physical count except that no reconciling items were considered. Even
though the books have been closed, your working paper trial balance show all account with activity during the year. All purchases are FOB
shipping point. The company is on a periodic inventory basis.
In your examination of inventory cut-offs at the beginning and end of the year, you took note of the following:

July 1, 2017
a. June invoices totaling to P130,000 were entered in the voucher register in June. The corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received during June.

June 30, 2018

c. Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and
the goods were received in July. The invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in June but the goods were
not received until July.
e. Invoices totaling P108,000 (the corresponding goods for which were received in June) were
entered the voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June 30 and the goods delivered
at that time. Book entries relating to the sales were made in June.

Based on the above and the result of your cut-off tests, answer the following:
1. How much is the adjusted Inventory as of July 1, 2017?
2. How much is the adjusted Purchases for the fiscal year ended June 30, 2018?
3. How much is the adjusted Inventory as of June 30, 2018?
4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30, 2018?
5. The necessary compound adjusting journal entry as of June 30, 2018 would include a net adjustment to Retained Earnings of

At December 31, 2017, 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
On January 2, 2018, 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 2017. 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.
During 2018, ABARCA SUGAR disposed of the following securities:
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 wasreceived, 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 2018 dividend information pertains to stock owned by ABARCA SUGAR:
February 14 - Ronette issued a 10% stock dividend, when the market price ofRonette‟s common stock was P22 per share.
April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2.40preferred stock, to stockholder of record on March 9 and
September 9, respectively.Shan Lily did not pay dividends on its common stock during 2018.
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 ofP0.50 per share on cash of these dates. Nagasaki‟s net
income for the year endedDecember 31, 2018 was P1,200,000.

At December 31, 2018, 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, 2018 is:
2. The adjusted balance of Shan Lily preferred (cost) at December 31, 2018 is:
3. The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock is:
4. The adjusted balance of Azenith common (cost) at December 31, 2018 is:
5. The sale of Ronette common on June 1 resulted to a:
6. The adjusted balance of Ronette common (cost) at December 31, 2018 is:
7. The adjusted balance of Nagasaki common (cost) at December 31, 2018 is:
8. The total dividend income of ABARCA SUGAR at December 31, 2018 is:
9. The total income from investment of ABARCA SUGAR from Nagasaki at December 31,2018 is:
10. ABARCA SUGAR‟s income statement at December 31, 2018 will report a:

END