AUDIT OF RECEIVABLES

PROBLEM NO. 1 In your audit of Sable Inc., you noted that the company’s statement of financial position
shows the accounts receivable balance at December 31, 2009 as follows:

Accounts receivable P3,600,000

Allowance for doubtful accounts (72,000)
P3,528,000

During 2010, transactions relating to the accounts were as follows:

 Sales on account. P38,400,000
 Cash received from collection of P640,000 were allowed for prompt payment
 Customer’s accounts of P160,000 were ascertained to be worthless and written off
 Bad accounts previously written off prior to 2010 amounting to P40,000 were recovered.
The company decided to provide P184,000 for doubtful accounts by journal entry at the
end of the year.
 Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of
P3,200,000. Collections of P1,200,000 were made on these receivables (not included in
the collections previously given) and applied as partial payment to the loan.

Question No. 1
The accounts receivable as of December 31, 2010 is?
a. P8,680,000
b. P9,840,000
c. P4,240,000
d. P8,640,000

Question No. 2
The allowance for doubtful accounts as of December 31, 2010 is?
a. P 8,000
b. P136,000
c. P184,000
d. P176,000

Question No. 3
The net realizable value of accounts receivable as of December 31, 2010 is?
a. P8,544,000
b. P8,456,000
c. P8,504,000
d. P4,104,000

PROBLEM NO. 2 On January 1, 2018, Gale Co. sold delivery equipment costing P1,000,000 with
accumulated depreciation of P150,000 in exchange for a 3-year, P1,800,000 noninterest-bearing note
receivable due as follows:
 Expected date of collection Amount of cash flow
Dec. 31, 2018 P1,000,000
Dec. 31, 2019 600,000
Dec. 31, 2020 200,000
P1,800,000

The prevailing rate of interest for this type of note is 12%

Question No. 4
How much is the gain or loss on sale of delivery equipment in 2018?
a. P 663,580
b. P 513,580
c. P1,513,580
d. P1,447,500

Question No. 5
How much is the interest income for 2018?
a. P181,630
b. P 83,425
c. P188,728
d. P122,500

Question No. 6
How much is the carrying amount of the note on December 31, 2018?
a. P695,210
b. P876,008
c. P178,635
d. P512,399

AUDIT OF INVENTORIES

PROBLEM NO. 3 Rodriguez Inc., owner of a trading company, engaged your services as auditor. There is
a discrepancy between the company’s income and the sales volume. The owner suspects that the staff is
committing theft. You are to determine whether or not this is true. Your investigations revealed the
following:

a. Physical inventory, taken December 31, 2010 under your observation showed that cost
was P265,000 and net realizable value, P244,000. The inventory on January 1, 2010
showed cost of P390,000 and net realizable value of P375,000. It is the corporation’s
practice to value inventory at “lower of cost of NRV.” Any loss between cost and NRV is
included in “Other Expenses”
b. The average gross profit rate was 40% of net of sales.
c. The accounts receivable as of January 1, 2010 were P135,000. During 2010, accounts
receivable written off during the year amounted to P10,000. Accounts receivable as of
December 31, 2010 were P375,000.
 d. Outstanding purchase invoices amounted to P300,000 at the end of 2010. At the
beginning of 2010 they were P375,000.
e. Receipts from customers during 2010 amounted to P3,000,000.
f. Disbursements to merchandise creditors amounted to P2,000,000.

Question No. 7
The total sales in 2010 is?
a. P3,240,000
b. P3,230,000
c. P3,250,000
d. P2,770,000

Question No. 8
The total purchases in 2010 is?
a. P2,000,000
b. P2,075,000
c. P1,950,000
d. P1,925,000

Question No. 9
The amount of inventory shortage as of December 31, 2010 is?
a. P106,000
b. P175,000
c. P100,000
d. P 0

PROBLEM NO. 4 Giuliana Co. entered into a purchase agreement on March 31, 2018, to purchase raw
materials. These materials are to be delivered on April 30, 2019. The company did not actually put these
materials into production until June 30, 2019. The contract price and the market price for these
materials are shown below:

Contract price 3/31/2018 P1,200,000

Market price 12/31/2018 1,000,000
Market price 04/30/2019 1,400,000
Market price 06/30/2019 1,600,000

Question No. 10
How much is to be recognized as loss on purchase commitment on December 31, 2018?
a. P300,000
b. P200,000
c. P400,000
d. P600,000

Question No. 11
On April 30, 2019, time of delivery, the company should record the raw materials at?
a. P1,200,000
b. P1,000,000
 c. P1,400,000
d. P1,600,000

AUDIT OF PROPERTY, PLANT & EQUIPMENT

PROBLEM NO. 5 The following items relate to the acquisition of a new machine by Carrie do Corporation
in 2010:

Invoice price of machinery P2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 70,000
Gratuity paid to operator of the old machine who was laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the process of installation 8,000
Testing costs before machine was put into regular operation 15,000
Salary of engineer for the duration of the trial run 40,000
Operating cost during first month of regular use 250,000
Cash allowance granted because the new machine proved to be of interior 100,000
quality

Question No. 12
How much should be recognized as cost of the new machine?
a. P1,985,000
b. P1,993,000
c. P1,930,000
d. P2,025,000

PROBLEM NO. 6 On January 1, 2018, Tomtit Co. started construction of a new office building. To finance
construction, Tomtit borrowed P15,000,000 specifically for the construction of the building. Interest
accruing on the load is 10%. However, a part of the borrowing is used for working capital and other
business needs during the year. Investment income earned on temporary investments of proceeds from
the borrowing amounted to P50,000 which was received in cash on October 1, 2018. Expenditures on
the building amounted to P50,000 which was received in cash was incurred evenly during the year.

Question No. 13
How much is the capitalizable borrowing cost?
a. P298,750
b. P300,000
c. P295,000
d. P595,000
PROBLEM NO. 7 The Quezon Manufacturing Company was incorporated on January 2, 2014 but was
unable to begin manufacturing activities until July 1, 2014 because new factory facilities were not
completed until that date.

The Land and Building Account at December 31, 2014 was as follows:
Date Particulars Amount
1/3 Land and building acquisition P1,108,000
1/15 Property taxes paid on the real property 20,000
2/05 Option payments 20,000
2/28 Cost of removal of the old building 22,000
3/1 Partial payment on new construction to induce the start construction 700,000
3/1 Legal fees paid 15,000
3/1 Insurance premium for 1 year (3/1/14 – 2/28/15) 24,000
6/1 Second payment on new construction 600,000
6/30 General expenses 60,000
7/1 Final payment of new construction 200,000
7/1 Construction gain 500,000
Total P3,269,000
12/31 Depreciation at one per cent of the balance (32,690)
Carrying value P3,236,310

Your audit investigation revealed the following information:

a. To accrue the land and building the company paid P108,000 cash and 10,000 shares of its
10% preference shares with par value of P100 per share. The shares were then selling at
P120 per share.
b. The property taxes paid was for two years covering 2013 and 2014.
c. P15,000 from the total option payments were for the property acquired while the balance
were for other real properties not acquired.
d. Legal fees covered the following: Cost of incorporation, P9,500; Examination of title covering
purchase of land, P4,000; Legal work in connection with the construction contract, P1,500.
e. General expenses covered the salaries for the period from Jan.1 to June 30 of the:
President P20,000
Plant superintendent while supervising the construction 12,000
Office staff 28,000
f. A gain on the construction was recognized for the difference of the actual payments made
to the contractor against the fair value of the asset upon completion.
g. The estimated useful life of the building is 25 years.

Question No. 14 & 15:

What is the adjusted balances of the following:
14. Land?
a. P1,350,000
b. P1,359,000
c. P1,337,000
d. P1,364,000
 15. Building?
a. 1,545,500
b. 1,521,000
c. 1,543,500
d. 1,500,500

Question No. 16
What is the correct depreciation expense on the building for the year 2014?
a. 30,910
b. 30,340
c. 30,270
d. 30,870

AUDIT OF INTANGIBLE ASSETS

PROBLEM NO. 8 A license is acquired July 1, 2007, for P450,000; where is has a legal life of 15 years, due
to rapidly changing environment, management estimates a useful life of only 5 years. Straight-line
amortization will be used. At January 1, 2008, management estimated that the recoverable amount of
the license is only P135,000. Amortization will be taken 3 years from that point.

On January 1, 2010, due to the change in general economic situations, the license now has fair
value of P540,000. The entity adopted the revaluation model to measure the license starting
January 1, 2010. The estimated remaining useful life is now believed to be 5 years.

Question No. 17
How much is the loss on impairment on January 1, 2008?
a. P270,000
b. P300,000
c. P225,000
d. P 0

Question No. 18
How much can be recognized as gain on impairment recovery in 2010?
a. P270,000
b. P180,000
c. P495,000
d. P315,000

Question No. 19
How much will be recognized as revaluation surplus on January 1, 2010?
a. P270,000
b. P180,000
c. P495,000
d. P315,000
PROBLEM NO. 9 Star-Class Co. purchased a 5-year fishing license for P200,000. The company expects to
renew the license at the end of the 5-year period for a further 5 years. The government has indicated
that they will re-grant the license to Star-Class Co.

Question No. 20
Assuming the costs associated with the renewal is P500, what is the amount to be recorded as
amortization for the first year?
a. P40,100
b. P20,050
c. P40,050
d. P20,000

Question No. 21
Assuming the costs associated with the renewal is P195,000, what is the amount to be recorded
as amortization for the first year?
a. P79,000
b. P39,000
c. P40,000
d.P20,000

AUDIT OF EQUITY

PROBLEM NO. 10 The shareholders equity account of Tiger Corporation, after its initial year of operation
in 2010 shows the following:
DATE PARTICULARS DEBIT CREDIT
Jan. 1 Issued 6,000 shares at par of P100 in exchange for real P600,000
property with a market value of P800,000; authorized
20,000 shares
Jan. 15 Sold 8,000 shares at P120 960,000
Mar. 10 Purchased 800 Tiger shares at P150 P120,000
May 15 Loss on sale of machinery P40,000
June 10 Sold 400 treasury shares 68,000
Dec. 31 Cash dividends declared payable January 15, 2011 80,000
Dec. 31 Profit for the year 316,000

Question No. 22
The adjusted share capital as of December 31, 2010 is?
a. P1,360,000
b. P1,560,000
c. P1,400,000
d. P1,340,000

Question No. 23
The total share premium as of December 31, 2010 is?
a. P360,000
b. P160,000
c. P368,000
d. P168,000

Question No. 24
The unappropriated retained earnings as of December 31, 2010 is?
a. P136,000
b. P156,000
c. P196,000
d. P144,000

Question No. 25
The adjusted total equity on December 31, 2010 is?
a. P1,944,000
b. P1,704,000
c. P1,744,000
d. P1,904,000