APRE 102 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS

PRACTICE PROBLEMS 1

PROBLEM 1. During 2016 through 2018, the Black Jack Company completed several transactions affecting
long-lived assets. The company takes full year depreciation and amortization during the year of acquisition
and provides neither depreciation nor amortization in the year of disposal. A number of errors, as listed
below, were committed in recording several transactions.

1. The cost of installing a new computer system in 2017 was charged to expense. The computer
system is expected to be useful for 5 years.
2. In 2016, some office personnel were trained to use the new management information system at a
cost of P30,000, which was capitalized and subsequently amortized over a period of 5 years.
3. Interest cost on specific borrowings incurred to finance the construction of a building in 2017 was
charged to interest expense. The building has an estimated useful life of 40 years.
4. In 2017, land was brought for employees’ parking lot. The P120,000 directly attributable cost was
charged to expense.
5. The estimated dismantling cost of several manufacturing facilities constructed at the beginning of
2017, for which the enterprise incurs a constructive obligation, was not recognized. The
manufacturing facilities have a useful life of 20 years.

Determine the effects of each of the foregoing errors on the total assets at December 31, 2017, 2017 profit,
total assets at December 31, 2018 and 2018 profit. Use the following codes:

O – Overstated U – Understated NE – No effect

12/31/2017 Assets 2017 Profit 12/31/2018 Assets 2018 Profit

1.
2.
3.
4.
5.

PROBLEM 2. Prepare the audit adjusting entries assuming that these errors were discovered in the course
of your examination of the 2018 financial statements.

1. Failed to accrue wages, P160,000 at the end of 2017. Wages expense was charged when paid in
2018.
2. Accrued interest income of P48,000 in 2016 was recorded only when collected in January 2017.
3. An insurance premium covering three years starting April 1, 2017 was paid on March 31, 2017. All
of the P60,000 premium had been charged to insurance expense in 2017. No adjustments were
made in 2017 and 2018 related to this transaction.
4. Failed to record P25,000 and P28,000 unused office supplies at December 31, 2017 and 2018,
respectively. Cash expenditures of P45,000 and P52,000 were charged to the office supplies
expense account during the year 2017 and 2018, respectively.
5. Research and development costs of P120,000 were incurred early in 2017. They were capitalized
and amortized over a three-year period. Amortization was recorded in 2017 and 2018. None of the
development costs meet the criteria for capitalization.
6. On May 1, 2017, the company received P120,000 cash from a customer for services the company
is to perform evenly over a three-year period. Full amount was recorded as revenue in 2017 and
no adjustments were taken up at December 31, 2017 and 2018.
7. Unearned rent of P36,000 was not recorded at the end of 2017.
8. A capital expenditure of P1,500,000 at January 1, 2016 for office equipment (useful life, 5 years)
was erroneously charged to maintenance expense.