Technological Institute of the Philippines

College of Business Education 

ccounting
Integration 
Auditing Problems (ACCTG 502)

Prof. U. C. Valladolid
2nd Semester, S.Y. 2019-2020
 

TABLE OF CONTENTS

 AUDITING PROBLEMS (ACCTG 502)

502)
Errors……………………………………………………………………...  2
Correction of Errors……………………………………………………………………... 
Cash & Cash Equivalents……………………………………..………………………... 
Equivalents……………………………………..………………………...   7

Receivables……………………………………………………...………………………...
Receivables……………………………………………………...………………………... 
Inventories……………………………………………………….………………………...    19
29
Investment……………………………………………………….………………………...  
Investment……………………………………………………….………………………... 37
PPE & Intangibles………………………………………………………………………... 
Intangibles………………………………………………………………………...  45
Liabilities…………………………………………………………………………………...   61
Shareholder’s Equity…………………………………………..………………………... 
Equity…………………………………………..………………………...  71
Financial Statements…………………………………………..………………………... 
Statements…………………………………………..………………………...  80
Financiall Statements & Reporting (STA)…………………..………………………... 
Financia (STA)…………………..………………………...  92
Financial Statements & Reporting (MC)…………………….………………………...   99

 
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 APPLIED
 APPL IED AUDITING
CORRECTION OF ERRORS 
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. John Paul ‘s December 31 yearend financial statements had the following errors:
December 31, 2018 December31, 2019
Ending inventory P13,500 understated P19,800 overstated
Depreciation expense 3,600 understated -
Unearned rental 5,000 understated -
Prepaid insurance - 8,000 understated
There were no other errors during the years 2018 or 2019 and no connections have been made for
any of the errors. (ignore income tax considerations).

1. What is the net effect of the errors on John Paul’s 2019 net income?
income?  
a. understated by P13,000 c. overstated by P20,300
b. overstated by P14,800 d. overstated by P25,300
2. What is the net effect of the errors in John Paul’s Decemb
December
er 31, 2019 accumulated profits balance?
profits  balance?
a. overstated by P11,800 c. understated by P20,300
b. overstated by P15,400 d. overstated by 25,300
3. What is the net effect of the errors in John Paul’s December 31, 2019 working capital?
capital?  
a. understated by P4,900 c. overstated by P11,800
b. understated by P8,000 d. understated by P20,300

2. The December 31 yearend financial statement of Ana co. contained the following errors:

December 31, 2018 December 31, 2019

Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -

 An insurance premium of P330,000 was prepaid in 2018 covering the years 2018, 2019,
2019, and 2020.
The entire amount was charged to expense in 2018. In addition, on December 31, 2019, a fully
depreciated machinery was sold for P75,000 cash, but the sale was not recorded in 2019. There
were no other errors during 2018 and 2019, and no corrections have been made for any of the errors.
Ignore income tax effects.
1. What is the total effects of the errors on Ana’s 2019 net income?
income?
a. P123,500 overstatement c. P192,500 understatement
b. P27,500 overstatement d. P177,500 understatement

2. What is the total effect of the errors on the amount of Ana’s working capital at December 31, 2019?
2019?  
a. P75,500 overstatement c. P225,500 understatement
b. P40,500 overstatement d. P144,500 understatement
3. What is the total effect of the errors on the balance of Ana’s retained earnings at December 31,
2019?
a.  P156,000 understatement c. P133,000 understatement
b. P87,000 overstatement d. P85,000 understatement

 
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3. Steven Inc. has been using the accrual basis of accounting. However, an examination of the records
reveals that some expenses and revenues have been handled on a cash basis by the inexperienced
bookkeeper of the company. Income statements prepared by the bookkeeper reported P145,000 net
income for 2018 and P185,000 for 2019. Further review of the records reveals that the following
items were handled improperly.
•   Rent of P6,500 was received from a lessee on December 31,2018. It was recorded as income
at that time even though the rentals pertain to 2019.
•   Salaries payables on December 31 have been consistently omitted from the records of the date
and have been recorded as expenses when paid in the following year. The salary accruals

recorded in this 31,

December manner
2017were: P5,500
December 31, 2018 7,500
December 31, 2019 4,700
•  Invoices for office supplies purchased have been charged to expense accounts when received.
Inventories of supplies on hand at the end of each year have been ignored and no entry has
been made to them.
December 31, 2017 P6,500
December 31, 2018 3,700
December 31, 2019 7,100
What is the corrected net income for 2018?
a. P133,700 b. P144,200 c. P146,700 d. P139,300

What is the corrected net income for 2019?

a. P184,700 b. P197,700 c. P185,600 d. P190,900

4. Allisson corp. reported the following amounts of net income for the years ended December 31, 2017,
2018, and 2019:

2017 P127,000
2018 150,000
2019 128,500

You are performing the audit for the year ended December 31, 2019. During your examination, you
discover the following errors:

•
   As aDecember31,
result of errors in the physical count, ending inventories were misstated as follows:
2018 P14,000 understated
December 31, 2019 23,000 overstated
•  On December 29, 2019 Allisson recorded as a purchase, merchandise in transit which cost
P15,000. The merchandise was shipped FOB Destination and had not arrived by December 31.
The merchandise was not included in the ending inventory.
•   Allisson records
records sales on the accrual bas
basis
is but failed to record sales account
account made
made near the end
of each year as follows:
2017 P4,000
2018 5,000
2019 3,500
•  The Company failed to record accrued office salaries as follows:
December 31, 2017 P10,000
December 31, 2018 14,000
•
  On March 1, 2018, a 10% stock dividend was declared and distributed. The par value of the

 
3
 

shares amounted to P10,000 and market value was P13,000. The stock dividend was recorded
as follows:
Miscellaneous expense 13,000
Common stock 10,000
Retained earnings 3,000
•  On July 1 2018, Allisson acquired a three-year insurance policy. The three-year premium of
P6,000 was paid on that date, and the entire premium was recorded as insurance expense.
•  On Jan.1, 2019, Allisson retired bonds with a book value of P120,000 for P106,000. The gain
was incorrectly deferred and is being amortized over 10 years as a reduction of interest expense
on other outstanding obligations.

What is the adjusted net income for the year ended December 31, 2017?
a. 133,000 b. 117,000 c. 121,000 d. 113,000

What is the adjusted net income for the year ended December 31, 2018?
a. 159,000 b. 187,000 c. 178,000 d. 179,000

What is the adjusted net income for the year ended December 31, 2019?
a. 129,600 b. 131,000 c. 104,400 d. 139,600

What adjusting entry should be made on December 31, 2019 to correct the error describe in 2nd
transaction?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases
 Accounts Payable 15,000 15,000
c. Accounts Payable 15,000
Cash 15,000
d. No adjusting journal entry is necessary

The adjusting entry on December 31, 2018 to correct the error described in the 5th transactions should
include a debit to
a. Common stock for P10,000 c. Additional paid in capital for P3,000
b. Retained Earnings for P16,000 d. Miscellaneous expenses for P3,000

5. Allisson corp. reported pretax incomes of P505,000 and P387,000 for the years ended December
31, 2018 and 2019, respectively. However, the auditor noted that the following errors had been made:

•  Sales for 2018 included amounts of P191,000 which had been received in cash during 2018,
but for which the related goods were shipped in 2019. Title did not pass to the buyer until 2019.
•  The inventory on December 31, 2018 was understated by P43,200
•  The company’s accountant, in recording interest expense entry on an annual basis: 
basis:  
Interest expense 75,000
Cash 75,000
The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They were
issued at a discount of P75,000 on January 1, 2018 to yield an effective interest rate of 7%.
•  Ordinary repairs to equipment had been erroneously charged to the Equipment account during
2018 and 2019. Repairs of P42,500 and P47,000 had been incurred in 2018 and 2019,
respectively. In determining depreciation charges, Allisson applies a rate of 10% to the balance
in the Equipment account at the end of the year.

 
4
 

What is the corrected pretax income for 2018?

a. 303,200 b. 225,300 c. 311,700 d. 307,450

What is the corrected pretax income for 2019?

a. 488,992 b. 480,042 c. 484,292 d. 575,392

6. The following information pertains to Ana co.’s depreciable assets:

assets:  

•  Machine X was purchased for P150,000 on January 1, 2014. The entire cost was expensed in
the year of acquisition. The estimated useful life of this machine is 15 years with no residual
value.
•  Machine Y cost P525,000 and was acquired on January 1, 2015. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight-line depreciation method
was used. On January 2, 2019, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25,000 residual value.
•   A building was purchased on January 3, 2016, for P3,000,000. The building was expected to
have a useful life of 20 years with no residual value. The straight-line depreciation method was
used. On January 1, 2019, a change was made to the sum of the years digit of depreciation. No
change was made to the estimated useful life and residual value of the building.

1. The adjusting entry on January 1, 2019 relative to machine X should include a credit to
a. accumulated depreciation of P60,000 c. machinery for P150,000
b. retained earnings for P100,000 d. no adjusting entry is necessary

2. What is the carrying value of machine Y on January 1, 2019?

a. P350,000 b. P325,000 c. P306,250 d. P525,000

3. What is
is the depreciation expense on machine Y for 2019?
a. P87,500 b. P77,083 c. P81,250 d. P41,667

4. What is the book value of the building

building at December 31, 2018?
a. P2,185,714 b. P2,550,000 c. P1,942,857 d. P2,266,667

5. What is the book value of the building

building at December 31, 2019?
a. P2,185,714 b. P2,550,000 c. P1,942,857 d. P2,266,667

7. Robi Corporation reported profit for the years 2018 and 2019 at P550, 000 and P700.000,
respectively. Your audit of the company’s accounts disclosed the need for adjustments as follows: 
follows:  
2018 2019
Overstatement of ending inventories due to error in pricing P 29,000 P 33,000
Omission of depreciation on newly-acquired equipment 15,000 15,000
Understatement of commission receivable 22,000 18,000
 A purchase of merchandise
merchandise was recorded the following
following year,
and also was not included in the ending inventory 60,000

1. The adjusted profit for 2019 was

a. P677,000 c. P710,000
b. P700,000 d. P737,000

 
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2. What is the effect of the foregoing errors on total assets at December 31, 2019?
a. P30,000 overstated c. P45,000 overstated
b. P36,000 overstated d. P66,000 overstated

3. What is the effect of the foregoing errors on retained earnings at December 31, 2018?
a. P22,000 overstated c. P67,000 overstated
b. P38,000 understated d. P82,000 overstated

8. Ventura Corporation
sum-of-the-years’
sum-of-the- purchased
years’-digits
-digits method machinery on January
and no salvage value to1,depreciate
2018 for 630,000.
the assetThe
forcompany used
the first two the
years
of its estimated six-year life. In 2020, Ventura changed to the straight-line depreciation method for
this asset. The following facts pertain:
2018 2019
Straight-line 105,000 105,000
Sum-of-the-years’
Sum-of-the- years’-digits
-digits 180,000 150,000

1. Ventura is subject
subject to a 40% tax rate. The cumulative effect of this accounting change on beginning
retained earnings is
a. 135,000 b. 120,000. c. 72,000. d. 0.
2. The amount that Ventura should report for depreciation
depreciation expense on its 2020
2020 income statement is
is
a. 120,000. b. 105,000. c. 75,000. d. none of the above.

9. On December
average 31, 2019
cost method to Dean Company
the FIFO changed
method. its method
This change of accounting
caused for inventory
the 2019 beginning from the
inventory to
increase by 420,000. The cumulative effect of this accounting change to be reported for the year
ended 12/31/2019, assuming a 40% tax rate, is
a. 420,000. b. 252,000. c. 168,000. d. 0.

10. Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be
2% of sales. Due to a technological advance in production at the beginning of year 3, Oak now
believes 1% of sales to be a better estimate of warranty costs. Warranty costs of 80,000 and 96,000
were reported in year 1 and year 2, respectively. Sales for year 3 were 5,000,000. What amount
should be presented in Oak’s
Oak’ s year 3 financial statements as warranty expense?
a. 50,000 b. 88,000 c. 100,000 d. 138,000

 
6
 

 APPLIED
 APPL IED AUDITING
CASH & CASH EQUIVALENTS 
PROF. U.C. VALLADOLID
Multiple Choice 
Choice 
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. The “CASH” account of Angel Corporation’s ledger on December 31, 2020 showed the following:
a. Petty cash fund (including P7,500 unreplenished
voucher of which P2,400 is dated January 3, 2021) P15,000

b. Redemption Fund Account –

Account –  PNB 500,000

c. Traveler’s check 
check  100,000

d. Money order 10,000

e. Treasury bill, purchased December 1, 2020 (due on Feb. 1, 2021) 50,000

f. Time deposit acquired December 31 due on March 31, 2021 50,000

g. 180-day Treasury bill, due March 15, 2021 120,000

h. Note receivable in the possession of a collecting agency 20,000

i. PNB –
PNB  –  Checking Account #211-009-091 325,900
 j. Cash on hand, including customer postdated check of P15,000
P15,000 23,000

k. Savings deposit, earmarked for acquisition of equipment 210,000

l. A check payable to San

San Ignacio Incorporated, dated January 5, 2021,
that was included in the December 31 PNB Checking Account

#211-009-091 50,000

m. Bond Sinking Fund (used to finance the maturing long-term

long-term obligation
on March 31, 2021) 150,000

n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)

o. Check #801 in payment to Accounts

Accounts Payable,
Payable, dated
dated Dec. 31, 2020
not mailed until January 5, 2021 20,000

p. Advances to Officers/Employees
Officers/Employees for Seminars
Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2021) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers,
Suppliers, da
dated
ted January
January 5, 2021 and
recorded December 31, 2020. 35,000
t. Customers’ certified checks 
checks  10,000
u. Pension Fund 150,000

TOTAL P 2,568,900

 
7
 

What Angel Corporation’s adjusted cash and cash equivalents balance aatt December 31, 2020 is:

a. 618,800 b.767,900 c. 673,800 d. 723,800 e. 768,800

2. The cash account of the Christine Corporation as of December 31, 2020 consists of the following:

On deposit in current account with Real Bank P 900,000

Cash collection not yet deposited to the bank 350,000
 A customer’s check
check returned by the bank
bank for insufficient
insufficient fund 
fund  150,000
 A check drawn by the Vice-President of the
Corporation dated January 15, 2021 70,000
 A check drawn by a supplier dated December
December 28, 2020
for goods returned by the Corporation 60,000
 A check dated May 31,2020 drawn by the Corporation against the
Scotia Bank in payment of customs duties. Since the importation
did not materialize, the check was returned by the customs
broker. This check was an outstanding check in the reconciliation
of the Scotia Bank account 410,000
Petty Cash fund of which P5,000 is in currency; P3,600
in form of employees’ I.O.U. s; and P1,400 is supported
by approved petty cash vouchers for expenses all dated
prior to closing of the books on December 31, 2020 10,000
Total 1,950,000
Less: Overdraft with Scotia Bank secured by a Chattel
mortgage on the inventories 300,000
Balance per ledger P1,650,000

 At what amount will the account “Cash”

“Cash” appear on the December
December 31, 2020 balance sheet? 
sheet? 
a) 1,315,000 c) 1,425,000
b) 1,495,000 d) 1,725,000

3. An examination on the morning of January 2, 2021 by the auditor for the Kaila Company discloses
the following items in the petty cash drawer:

Postage
Currencystamps
and coins P 220.00
1,156.60
IOUS from members of the office staff 1,210.00
 An envelope containing collections
collections for a gift for a departing
employee, with office names attached 350.00
Petty cash vouchers for miscellaneous expenses (including a
PCV for stamps purchased for 450.00) 985.00
Employee's check postdated January 15, 2021 1,500.00
Employee's check marked "DAIF" 1,890.00
Check drawn by Kaila Company to Petty Cash 3,450.00
P 10,761.60
The ledger account discloses a P10,500 balance for Petty Cash.

1. How much
much is the cash shortage or overage as of December
December 31, 2020?
a. P
b. P 41.60
308.40 c. P
d. P 88.40
658.40

 
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2. How much petty

petty cash fund shall be shown as part of "Cash"
"Cash" balance as of December 31, 2020?
a. P 10,761.60 c. P 4,606.60
b. P 1,156.60 d. P 5,141.60

4. You are making an audit of Joseph Company for the year ended December 31, 2020. The balance
of the petty cash account on December 31, 2020 was P15,000. Your count of the imprest cash fund,
made at 9:00 a.m. on January 3, 2021, in the presence of Ms. G. Gonzaga revealed:

Bills and Coins:

Denomination Quantity
1,000 2
500 4
100 14
50 16
20 10
10 19
5 17
1 25
0.50 21
0.25 28

Checks:
Date Maker Bank Amount
12-28-2020 Urquiola, employee PNB 3,000-
12-29-2020 Sta. Maria, employee Security Bank 1,500-
12-31-2020 L. Chua, customer Asia Trust 2,500-

01-02-2021 A. Bobadilla, customer FEBTC 3,200-

01-12-2021 C. German, employee Union Bank
(check received 12-28-2020) 1,500-
(These checks were all considered good when deposited after dates shown on the checks. The first
four checks were actually deposited January 3; the German check was deposited January 13; all five
checks proved to be good.)

Vouchers:
Date Voucher No. Particulars Amount

12-13-2020
12-28-2020 151
183 Freight
Suppliesout P 500-
300-
12-29-2020 184 Freight In 394.20
12-31-2020 189 Freight on cabinet 741.10
01-02-2021 001 Freight in 244.70

IOUs:
12-21-2020 S. Dechavez, employee 300-

Sales Invoices (for cash sales; collections handled by Ms. G. Gonzaga)

Inv. # 118 December 30 P 1,000.40
# 129 December 31 2,500-
# 133 January 2 3,200-

 
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(As a general rule, the petty cashier turns over the proceeds of cash sales to the general cashier
every Friday. Proceeds on these sales were recorded and deposited by the general cashier.)

Unused office supplies ? 40-

1. What is the cash shortage?

a. 750.40 b. 802.90 c. 910.40 d. 850.90
2. Adjusting entries for the petty cash fund includes a credit to:
a. Cash Shortage 802.90 b. Petty Cash Fund 4,738.20
c. Petty Cash Fund 4,538.20 d. Cash Shortage 850.90

5. You are making an audit of the Angel Corporation for the past calendar year. The balance of the
Petty Cash account at
at December 31, 2018 was P1,300. Your count of the imprest cash count
made at 8:30 am on January 3, 2019, in the presence of the petty cash custodian, revealed:

Currency and coins 571.38

Checks:
Date Maker Bank
12/28/2018 Macky, vice-president PNB 360.00
12/29/2018 Andy, employee DBP 60.00
12/31/2018 Bobot, customer RCBC 153.80
01/02/2019 Neil, customer PNB 121.36
01/10/2019 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 –
clerk – temporary
 temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency –
currency  – P28.80;
 P28.80; merchandise freight bills, P31.20.
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
Freight bill on merchandise purchases 29.36

IOU Dec. 21 Mabel, employee 36.00

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 turn over the proceeds of cash sales to the
general cashier on the 10th, 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.
stamps. The petty cashier handled postage
postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.

 
10
 

1. How much
much is the petty cash fund shortage at
at December
December 31, 2018?
a. P 216.39 b. P 123.83 c. P 98.03 d. P 95.03
2. The adjusted petty cash fund balance of Angel
Angel Corporation at December 31, 2018 is:
a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54
3. What is the amount of operating expenses found in the petty cash fund of Angel Corporation?
a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93
4. Excluding petty cash fund, the cash account of Angel Corporation is understated at December 31,
2018 by:
a. P 395.16 b. P 273.80 c. P 153.80 d. P 120.00

6. The cash in bank account of Happy Company disclosed a balance of P201, 000 as of December 31.
The bank statement as of December 31 showed a balance of P106,000. Upon comparing the bank
statement with cash records, the following facts were developed.

a. The company’s account was char gedged on December 26 for a customer’s uncollectible check
amounting to P30,000.
b. A two-month,
two-month, 17% P60,000 customer’s note dated October 25, discounted on November 25,
was dishonored on December 25, and the bank charged the company P62,000, which
included a protest fee of P2,000.
c.  A customer’s check
check for P15, 400 was entered as P14,500
P14,500 by both the depositor
depositor and the bank
but was later corrected by the bank.
d. Check No. 1 142 for P12,425 waswas entered in the cash disbursement
disbursement journal at P12,245 and
check no. 156 for P3,290 was entered as P32,900.
e. Bank service
service charges of P1,830 for December were not yet recorded on the books.
books.
f.  A bank memo stated that a customer’s note for P25,000 and interest
interest of P1,000 had been
collected on December 28; and the bank charged P500. (No entry was made on the books
when the note was sent to the bank for collection).
g. Receipts on December
December 31 for P24,000 were deposited
deposited on January 2
h. The following
following checks were outstanding on Dec.
Dec. 31:
No 123 P3,000 No 154 P4,000
143 2,000 157 6,000
144 7,000 159 7,000
147 3,000 169 5,000
i. A deposit of P20,000
P20,000 was recorded by by the bank on December 5,5, but it should have been
been
recorded for Happi Company rather than Happy Company
 j. Petty cash of P10,000 was included in
in the Cash in Bank
Bank balance.
k. Proceed from cash sales
sales of P60,000 for December 18 were stolen.
stolen. The company expects
expects to
recover this amount from the insurance company. The cash receipts were recorded in the
books, but no entry was made for the loss.
l. The Dec
December
ember 21 deposit included a check for P20,000 that had been returned on December
December
15 marked NSF. Happy Company had made no entry upon return of the check. The redeposit
of the check on December 21 was recorded in the cash receipts journal of Happy
Hap py Company as
a collection on account.

What is the total amount of cash should Happy Company report at year-end?
year -end?
a. P73,000 c. P42, 670
b. P93, 000 d. P83, 000
 

 
11
 

7. The Joshtin Company had a weak internal control structure over its cash transactions. Facts about
its cash position at November 30, 2020 were as follows:

The cash books showed a balance of P 1,890,162, which included undeposited receipts. A credit of
P 10,000 on the bank’s records did not appear on the
the books of the company. The balance per bank
statement was P 1,555,000. Outstanding checks were No. 62 for P 11,625, No. 183 for P 15,000,
No. 284 for P25,325, No. 8621 for P19,071, No. 8622 for P20,680, and No. 8632 for P14,528.

The cashier stole all undeposited receipts in excess of P 379,441 and prepared the following
reconciliation:

Balance per books, November 30, 2020 P 1,890,162

 Add: outstanding checks
8621 P 19,071
8622 20,680
8632 14,528 44,279
P 1,934,441
Less: Undeposited receipts 379,441
Balance per bank, November 30, 2020 P 1,555,000
Deduct: Unrecorded credit memo 10,000
True cash, November 30, 2020 P 1,545,000

Questions:

1. How much did the cashier steal?

a. 81,590 b. 71,950 c. 61,950 d. 71,590

2. What is the correct amount of cash to be shown on the statement of financial position on November
30, 2020?
a. 1,828,212 b. 1,448,771 c. 1,900,162 d. 1,934,441

8. The Sunshine Corporation engaged your services to audit its accounts. 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 over cash.
Your audit covers the period ended December 31, 2020. You made a cash count on January 15,
2021, and cash on hand on this date was determined to be P52,000. Examination of the
cashbooks and other evidences of transaction disclosed the following:
1. January 1 through 15, 2021 collections
collections per duplicate
duplicate receipts,
receipts, P199,000.
P199,000.

2. Total of duplicate deposit

deposit slips,
slips, all dated January 2 through 15, P110,000,
P110,000, includes
includes a deposit
deposit
representing collections of December 31.

3. Cash book balance on December 31, 2020 is P465,000, representing both cash on hand and
cash in bank.

4. Bank statement for December

December shows a balance of P424,000.

5. Outstanding checks at December 31:

 
12
 

November checks: Number 183 P 4,500

198 12,500
December check: Number 252 6,000
254 4,000
280 52,000
301 9,000
319 25,000
6. Undeposited collections at December 31, P48,000.

7.  An amount of P19,000 representing proceeds of

of a customer’s note was credited by bank, but
is not yet taken up in the company’s books. 
books.  

8. Bank service charge for December, P1,500.

The company cashier presented to you the following reconciliation statement at December 2020,
which he prepared:
Balance per books, December 31, 2020 P 456,000
 Add: outstanding checks Number 252 P 6,000

254 4,000
280 25,000
301 900
319 15,000 50,900
Total P 506,900
Bank charges (1,500)
Undeposited collections (51,000)
Balance per bank P 454,400

1. How much is the amount of Cash shortage as of December 31, 2020?

a) 121,500 b) 123,500 c) 132,500 d) none of the above
2. How much is the additional shortage in January 2021?
a) 102,400 b) 85,000 c) 58,000 d) none of the above
3. Which is to be included in the audit adjusting entries at December 31, 2020?
a) Dr: Cash 1,600 b) Cr: Cash 106,000 c) Dr: Loss 123,500 d) none of the above

9. Your client, Ozz Company, presented you with the following data:
Bank balances
November 30 P 2,500,000
December 31 3,100,000

 
13
 

Bank receipts in December 2,300,000

Book balances
November 30 P 2,390,000
December 31 3,047,000
Book receipts in December 2,206,000
Deposits in transit
November 30 58,000
December 31 47,000
Outstanding checks

November
December 3031 97,000
46,000
NSF checks returned by bank (recorded by client in the
month following the return)
November 15,000
December 25,000
Bank service charges (recorded by client in the month following
the month the charge)
November 10,000
December 18,000
Note collected by bank (recorded by the client in the following month)
November 76,000
December 84,000
Erroneous bank charges (corrected by the bank in the following month)
November
December 30
31 25,000
37,000
Erroneous bank credits (corrected by the bank in the following month)
November 45,000
December 50,000

1) How much is the audit adjusted balance of receipts as of December 31?

a) 2,241,000 b) 2,214,000 c) 2,421,000 d) 2,124,000 e) none of the above

2) How much is the audit adjusted balance of disbursements as of December 31?

a) 1,576,000 b) 1,657,000 c) 1,765,000 d) 1,567,000 e) none of the above

3) Which is to be included in the audit adjusting entries for December 31?

a) Cr: Cash in Bank 19,000 b) Dr: Cash in Bank 83,000
c) Dr: Accounts Receivable 19,000 d) none of the above

10. The accountant for the Joshtine Company assembled the following data:

June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10, returned by bank
on July 16 marked NSF, and redeposited immediately;
no entry made on books for return or redeposit 8,250
Collection by bank of company's notes receivable 71,815 80,900

 
14
 

The bank statements and the company's cash records show these totals:

Disbursements in July per bank statement P218,373

Cash receipts in July per Joshtine's books 236,452

Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:

1. How much
much is the adjusted cash balance
balance as of June 30?

a.
b. P87,565
(P3,695) c. P107,082
d. P 15,822

2. How much iiss the adjusted

adjusted bank receipts for July?
July?
a. P253,787 c. P245,537
b. P214,802 d. P232,881

3. How much iiss the adjusted

adjusted book disbursements for July?
a. P220,767 c. P181,782
b. P212,517 d. P206,673

4. How much
much is the adjusted cash balance
balance as of July 31?
a. P137,817 c. P22,513
b. P112,335 d. P120,585

5. How much iiss the cash shortage as

as of July 31?
a. P 8,250 c. P196,144
b. P71,815 d. P 0

11. You are auditing the cash in bank account of Pamela Manufacturing Company as of December 31,
2020.
Your examination revealed the following:

From the bank statement:

Balance, December 1, 2020 P 876,750
Deposits (20) 9,153,760
Check (64) plus debit memos (8,524,300)
Service charges for new checks (2,250)
Balance, December 31, 2020 P 1,503,960
From the company’s records: 
records: 
CASH
Nov. 1 652,070 Nov. 30 CD 6,654,410
Nov. 30 CR 6,824,290 Dec. 1 –
 –  Bank reconciliation 38,400
Dec. 31 CR 9,198,720 Dec. 31 CD 8,574,610
CD
CD –
 – Cash
 Cash disbursements
CR
CR –
 – Cash
 Cash receipts

Your review of last month’s bank reconciliation

reconciliation and the current bank statement reveals the
following.

 
15
 

1. Outstanding checks: November 30, 2020 P254,720

December 31, 2020 335,610
2. Deposit in transit: November 30, 2020 164,220
December 31, 2020 209,180
3. Check no 359 for Office Repairs was written for P6,950 but recorded in the cash disbursements
 journal as P9,650. The bank
bank deducted the che
check
ck as P6,950. The error happened in November and
is not yet recorded as of December 31.

4. A check written on the account of the Pamplona Company for P5,830 was deducted by the bank
from the Pamela’s account. 
account. 
5. Included with the bank statement was debit memorandum dated December 31 for P24,750 for
interest on a note taken out by the Pamela Manufacturing Company on November 30.
6. The service charge for the new checks has not been recorded.
7. The November 30 bank reconciliation showed as reconciling items a service charge of P3,500
and a customer’s DAIF check for P34,900. 
P34,900. 
1. How much is the audit adjusted balance of Receipts as of December 31?
a) 9,198,720 b) 9,918,270 c) 9,891,720 d) 9,189,270 e) none of the above
2. How much is the audit adjusted balance of Disbursements as of December 31?
a) 8,601,610 b) 8,610,601 c) 8,601,601 d) 8,610,610 e) none of the above
3. Which is to be included in the audit adjusting entries?
a) Dr: Cash in Bank 2,700 c) Dr: Interest expense 24,750
b) Cr: Cash in bank 2,200 d) None of the above

12. Your audit senior instructed you to prepare a four-column proof of cash receipts and disbursements
for the month of December, 2020.

The bank reconciliation

r econciliation prepared by Joshtine Company
Company  at November 30 is reproduced below:

Unadjusted bank balance P96,800 Unadjusted

balance book P58,640
 Add: CM - Note
 Add: deposit in transit
transit 18,000 collected 40,320
Total 114,800 Total 98,960
Less outstanding checks: Less: DM bank charges
160
No. 276 P2,400
282 7,200
284 4,800
285 1,600 16,000 .
 Adjusted balance P98,800 Adjusted balance P98,800

The December bank statement, which has a beginning balance of P96,800, is reproduced below:

 
16
 

May Bank

 Account Name: Joshtine Company

Date Debits Credits
December 01 P18,000
December 02 P7,200 40,000
December 04 24,000
December 06 48,000
December 08 400,000 CM83
December 10 40,000 DM97

December 16
December 11 20,000 56,000
December 18 64,000
December 21 72,400
December 28 36,000 80,000
December 31 4,000 DM98 64,000 CM84
Totals P131,200 P842,400
DM97 –
DM97  –  Customer’s DAIF check CM83 – Note collected by the bank  
DM98  – Service
 – Service Charges CM84   – Account
CM84 – Account collected by the bank

The company’s cash receipts and cash disbursements journals for the month of December 2020 are
provided below:

Cash Receipts Journal Cash Disbursements Journal

Date OR No. Amount Date Check No. Amount
Dec. 01 415 P40,000 Dec. 01 286 P16,000
05 416 48,000 03 287 24,000
10 417 56,000 10 288 32,000
17 418 64,000 14 289 20,000
20 419 72,000 20 290 28,000
27 420 80,000 23 291 36,000
31 421 88,800 26 292 40,000
28 293 44,000
. 31 294 48,000
Total P440,800 Total P304,000

The company’s
company’s Cash in Bank ledger appears below:

Cash in Bank
Balance P58,640 12/31/2020 CDJ P304,000
12/01/2020 GJ 40,320
12/2020/2020 GJ 400,000
(CM83)
CM83)  
12/31/2020 CRJ 440,800

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:

1. How much
much is the outstanding
outstanding checks
checks as of De
December
cember 31, 2020?
a. P208,000 c. P216,800
b. P232,800 d. P224,000

 
17
 

2. How much iiss the adjusted

adjusted book receipts for December,
December, 2020?
a. P913,200 c. P904,800
b. P985,200 d. P771,600

3. How much
much is the adjusted book disbursements
disbursements for December, 2020?
2020?
a. P347,840 c. P348,000
b P332,000 d. P339,200

4. How much
much is the adjusted cash balance
balance as of December 31, 2020

a.
b. P664,000
P680,000 c. P688,800
d. P672,800

5. How much
much is the cash shortage as of December
December 31, 2020?
a. P24,240 c. P23,840
b. P15,840 d. P 0

 
18
 

 APPLIED
 APPL IED AUDITING
RECEIVABLES
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
question.  

1. Your audit of Kaila Corporation for the year ended December 31, 2020 revealed that the Accounts
Receivable account consists of the following:

Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts 
accounts  (80,000)
Notes receivable dishonored 240,000
Consignment shipments –
shipments – at
 at cost
The consignee sold goods costing P96,000 for P1P160,000.
60,000. A
10% commission was charged by the consignee and remitted
the balance to Kaila. The cash was re
received
ceived in January, 2021.
2021.
320,000
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000.
It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of
amount due from the consignee who is
is bonded. The company has not provided yet
yet for the 2020 bad
debt expense.

Based on the above and the result of your audit, determine the adjusted balance of following:

1. Trade accounts receivable

a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000

2. Allowance for doubtful accounts

a. P204,000 c. P172,000
b. P216,000 d. P179,200

3. Doubtful accounts expense

a. P264,000 c. P252,000
b. P220,000 d. P227,200

2. The accounts receivable subsidiary ledger of Jerome Corporation shows the following information:
Dec. 31, 2020 Invoice
Customer  Account balance Date Amount
Maybe, Inc. P140,720 12/06/2020 P56,000
11/29/2020 84,720
Perhaps Co. 83,680 09/27/2020 48,000
08/20/2020 35,680
Pwede Corp. 122,400 12/08/2020 80,000
10/25/2020 42,400
Perchance Co. 180,560 11/17/2020 92,560

 
19
 

10/09/2020 88,000
Possibly Co. 126,400 12/12/2020 76,800
12/02/2020 49,600
Luck, Inc. 69,600 09/12/2020 69,600
Total P723,360 P723,360

The estimated bad debt rates below are based on the Corporation’s receivable collection experience.
experience.  
 Age of accounts Rate
0 – 
 – 30 days 1%
31 –
31 –  60 days 1.5%

61 –
61 – 
91 –
91  –   120
90 days
days 3%
10%
Over 120 days 50%

The Allowance for Doubtful Accounts had a credit balance of P14,000 on December 31, 2020, before
adjustment.

Based on the foregoing, answer the following:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31,
2020?
a. P52,795 b. P24,795 c. P38,795 d. P14,000

2. The necessary adjusting journal entry to adjust

adjust the allowance for doubtful accounts as of
December 31, 2020 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 P38,795.
d. A credit
credit to allowance for doubtful accounts of P24,795.

3. In your audit of Joseph Co., you noted that the company’s statement
stat ement of financial position shows the
accounts receivable balance at December 31, 2019 as follows:

 Accounts receivable
receivable P3,600,000
 Allowance for doubtful accounts 72,000
P3,528,000

During 2020, transactions relating to the accounts were as follows:

•  Sales on account, P38,400,000.

•  Cash received from collection of current receivable totaled P31,360,000, after discount of
P640,000 were allowed for prompt payment.

•  Customers’ accounts of
of P160,000 were ascertained to be worthless and were written off.

•  Bad accounts previously written off prior to 2020 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.

 
20
 

•   Accounts receivable
receivable of P5,600,000
P5,600,000 have been pledged to a local bank on a loan of P3,200,000.
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.

Based on the above and the result of your audit, answer the following:

1. The accounts
accounts receivable as of
of December 31, 2020 is
a. P8,680,000 c. P4,240,000
b. P9,840,000 d. P8,640,000
2. The allowance for doubtful accounts as of
of December
December 31, 2020 is
a. P 8,000 c. P184,000
b. P136,000 d. P176,000

3. The net realizable

realizable value of accounts
accounts receivable as of December 31, 2020 is
a. P8,544,000 c. P8,504,000
b. P8,456,000 d. P4,104,000

4. If receivables are hypothecated against borrowings, the amount of receivables involved should
should be
a. Disclosed in the statements or notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss
loss is recognized betw
between
een the face
face value
and the amount of borrowings

4. The financial statements of Bulls Corporation included the following:

December 31, 2019 December 31, 2020

 Accounts Receivable
Receivable P 735,000
 Allowance for doubtful accounts 16,200
Sales on account P 4,500,000
Cash collected from customers 4,200,000

 Among the cash collections

collections was the full recovery of a P16,000 receivable from Robert Jawo, a
customer whose account had been written off as worthless late in 2019.

During 2020, it was necessary to write off uncollectible customers’

customers’ accounts
 accounts totalling P20,200.

On December 1, 2020, a customer settled his account by issuing to Bulls Corporation a 9% six-
month note for P250,000.

 At December 31, 2020, the accounts receivable

receivable included P100,800 past due ac
accounts.
counts. After
careful study of all past due accounts, the management estimated the probable loss contained
therein was 10%. In addition, 2% of the current accounts receivable might prove uncollectible.

1. What is the balance of Accounts Receivable as of Dec. 31, 2020?

a. P780,800 c. P821,200
b. P801,000 d. P1,051,000

2. What is the amount of the current accounts receivable that might prove to be uncollectible?
a. P13,600 c. P14,408
b. P14,004 d. P19,004

 
21
 

3. What is the balance of the allowance for uncollectible accounts before adjustments on December 31,
2020?
a. P4,000 c. P12,200
b. P12,000 d. P32,200

4. What is the balance of the allowance for uncollectible accounts after all necessary adjusting entries
on December 31, 2020?
a. P10,080 c. P14,004
b. P12,084 d. P23,680
 

5. Presented below is information related to the Accounts Receivable accounts of Ramil, Inc. during
the current year 2020.

a. An aging schedule of the accounts receivable as of December 31, 2020 is as f ollows:

% to be Applied After Correction

 Age Net Debit Balance
Balance
Made
Under 60 days P175,000 1%
61
61 –
 –  90 days 80,000 3%
91
91 –
 –  120 days 42,000 6%
Over 120 days 24,000 P4,200 definitely uncollectible remainder
estimated 25% uncollectible

b. The Accounts Receivable control account has a debit balance of P321,000 on December 31,
2020.

c. Two entries were made in the Uncollectible Accounts Expense account during the year: (1) a
debit on December 31 for the amount credited to Allowance for Uncollectible
Uncollectible Accounts as
provisions, (2) and a credit of 2,740 because of customer bankruptcy to write off which is related to
the 91-120-day category.

d. The Allowance for Uncollectible Accounts is as follows for 2020:

Date Particulars Debit Credit Balance

Jan. 1 Beginning balance 8,750
Nov. 3 Write off P2,740 6,010
Dec. 31 Provision (5% of P16,050 22,060
P321,000)

e. A credit balance exists in the Accounts Receivable (61

(61 –
 – 90
 90 days) of P4,800, which represents
an advance on a sales contract.

1. Compute the correct balances of Accounts

Accounts Receivable at Dec
December
ember 31, 2020.
a.)318, 860 b.)314, 060 c.) 325, 800 d.) 323, 060

2. Compute the correct amount of Uncollectible Accounts Expense for the year 2020.
a.)16, 050 b.)9,789 c.) 7, 049 d.) 16, 831 
831 

 
22
 

6. On January 2, 2020, a tract of land that originally cost P800,000 was sold by Angel CORPORATION.
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%:

Present value factor of 1 for 3 periods 0.75132

Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685

1. The gain on sale

sale of land on January 2,
2, 2020 is:
a. P 194,740 b. P 276,847 c. P 290,740 d. P 400,000

2. The interest income

income on the note
note receivable for the year ended December 31, 2020 using effec
effective
tive
interest method is:
a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474

3. How much
much cash will MYLENE CORPORATION
CORPORATION received
received from notes receivable?
receivable?
a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

7. Carla Received from a customer a one-year, P375,000 note bearing annual interest of 8%. After
holding the note for six months, Carla discounted the note at I-Bank
I -Bank at an effective interest rate of
10%.

Q1. How much should Carla receive from the bank?

a. 371,428.50 c. 392,857.50
b. 384,750.00 d. 405,000.00

Q2. If the discounting is treated as a sale, what amount of loss on discounting should Carla recognize?
a. 0 c. 9,750
b. 5,250 d. 20,250
 

8. Ramil Company assigned specific accounts receivable totaling P3, 100, 000 as collateral on a P2,
500, 000, 12% note from a certain bank on December 1,2020. The entity will continue to collect the
assigned accounts receivable. In addition to the interest on the note, the bank also charged a 5%
finance charge deducted in advance on the P2, 500, 000 value of the note. The December
collections of assigned accounts receivable amounted to P1, 000, 000 less cash discounts of P50,
000. On December 31, 2020, the entity remitted the collections to the bank in payment for the
interest accrued on December 31, 2020 and the note payable.

i. What is the carrying amount of note on December 31, 2020?

a. 1, 550, 000 c. 1, 600, 000
b. 1, 575, 000 d. 1, 757, 000

ii. What amount should

should be disclosed as
as the equity of Ramil Company
Company in assigned
assigned accounts on
December 31, 2020?
a. 425, 000 c. 495, 000
b. 475, 000 d. 525, 000
 

 
23
 

iii. What amount of ca

cash
sh was received
received from the assignment
assignment of accounts
accounts receivable on December 1,
2020?
a. 2, 000, 000 c. 2, 375, 0000
b. 2, 150, 0000 d. 3, 100, 000

9. Omar Co. required additional cash for its operation and used accounts receivable to raise such
needed cash, as follows:
•
  On December 1, 2020 Omar Company assigned on a non-notification basis accounts
receivable of P5,000,000 to a bank in consideration for a loan of 90% of the receivables
less a 5% service
service fee on the accounts assigned.
assigned. Omar signed a note
note for the bank loan.
loan. On
December 31, 2020, Omar collected assigned accounts of P3,000,000 less discount of
P200,000. Omar remitted the collections to the bank in partial payment for the loan. The
bank applied first the collection to the interest
interest and the balance to the principal. The agreed
interest is 1% per month on the loan balance.
•  Omar Co. sold P1,550,000 of accounts
accounts receivable for P1,340,000. The receivables had a
carrying amount of P1,470,000 and were sold outright on a nonrecourse basis.
•  On June 30, 2020, Omar Co. discounted (without recourse) at a bank a customer’s
P600,000, 6-month, 10% note note receivable dated April
April 30, 2020. The bank discounted the
note at 12% on the same date.

Based on the above and the result of your audit, answer the following:

1. In its December
December 31, 2020 statement of financial position, Omar should report note
note payable as a
current liability at
a. P1,745,000 c. P1,545,000
b. P2,250,000 d. P1,700,000

2. Omar Company’s equity in the assigned accounts receivable as of December 31, 2020 is
a. P255,000 c. P455,000
b. P300,000 d. P 0

3. The entry to record the sale of accounts

accounts receivable
receivable would include
a. A debit to Finance Charge of P210,000.
b. A debit to Allowance
Allowance for Doubtful Accounts of P80,000.
P80,000.
c. A credit to Accounts Receivable of P1,470,000.
d. A credit to Notes Payable of P1,550,000.

4. The proceeds from the note receivable

receivable discounted
discounted on June 30, 2020 is
a. P564,000 c. P604,800
b. P617,400 d. P576,000

10. The Cleo Company included the following in its notes receivable as of December 31, 2020:

Note receivable from sale of land P 880,000

Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

 
24
 

In connection with your audit, you were able to gather the following transactions during 2020 and
other information pertaining to the company’s notes
notes receivable:

▪  On January 1, 2020, Cleo Company sold a tract of land. The land, purchased 10 years ago,
was carried on Cleo Company’s books at a at  a value of P500,000. Cleo received a noninterest-
bearing note for P880,000. The note is due on December 31, 2021. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 10%.
▪  On January 1, 2020, Cleo Company finished consultation services and accepted in exchange a
promissory note with a face value of P1,200,000, a due date of December 31, 2022, and a stated
rate of 5%, with interest receivable at the end of each year. The fair value of the services is not
readily
is determinable
considered to haveand the note is not
an appropriate readilyrate
imputed marketable.
of interest Under the circumstances,
of 10%. circumstances, the note
▪  On January 1, 2020, Cleo Company sold equipment with a carrying amount of P1,600,000 to X
Company. As payment,
payment, X gave Cleo Company a P2,400,000
P2,400,000 note. The note bears an interest
interest
rate of 4% and is to be repaid in three annual installments of P800,000 (plus interest on the
outstanding balance). The first payment wa
wass received on December 31, 202 2020.
0. The market price
of the equipment is not reliably determinable.
determinable. The prevailing rate of interest for notes of this
type is 14%.

Based on the above and the result of your audit, answer the following: (Round off present value factors
to four decimal places and final answers to nearest hundred)

1. The consultation
consultation service
service fee revenue that should be recognized in 2020 is
a. P1,050,800 c. P 901,600
b. P1,095,800 d. P1,200,000
2. The gain on sale of equipment that should
should be recognized in 2020 is
a. P331,600 c. P412,400
b. P257,280 d. P800,000

3. The noncurrent notes receivable as of

of December
December 31, 2020 is
a. P2,605,706 c. P2,494,000
b. P1,825,800 d. P2,625,700

4. The current portion of

of long-term notes receivable
receivable as
as of December 31, 2020 is
a. P1,600,000 c. P1,468,200
b. P1,680,000 d. P 800,000

5. The interest
interest in
income
come to be recognized in 2020 is
a. P464,000 c. P459,500
b. P435,800 d. P156,000

11. Alex Company has the following transactions in 2020 involving notes receivable:

May 1 Received a P1,000,000, 90-day, 12% interest bearing note from A

Company in settlement of account.

1 Received a P1,500,000, six-month, 12% interest bearing note from B

Company in settlement of account.

Jul. 30 A Company defaulted on the P1,000,000 note.

 
25
 

 Aug. 1 Discounted the B Company note at a bank at 15%.

Sep. 1 Received a one-year noninterest bearing note from C Company in

settlement of a P600,000 account receivable. The face value of the note
was P660,000.

28 Collected the defaulted A Company note plus accrued interest at 12% per
annum on the total amount due.

Oct. 1 Received a P2,500,000, 90-day note from D Company. The note is for the
payment goods purchased and bears interest at 12%.
Nov. 1 B Company defaulted on the P1,500,000 note. Alex Company paid the
bank the total amount due plus P60,000 for protest fee and other bank
charges.

Dec. 30 Collected D Company note in full.

31 Collected from B Company in full including interest on the total amount due
at 12% since default date.

Based on the above and the result of your audit, answer the following:

1. The proceeds from discounted

discounted B Company note
note on August 1,
1, 2020 is
a. P1,530,375 c. P1,542,300
b. P1,487,062 d. P1,000,000
2. The amount collected on September 28,28, 2020 on the defaulted A Company
Company note is
a. P1,030,000 c. P1,050,000
b. P1,050,600 d. P1,081,500
3. The amount collected on December
December 31, 2020 on defaulted B Company
Company note is
a. P1,683,000 c. P1,681,800
b. P1,650,000 d. P1,680,000
4. The interest income to be re
recognized
cognized in 2020 related to these transactions
transactions is
is
a. P268,600 c. P223,600
b. P238,780 d. P193,600

12. Montreal Bank granted a loan to a borrower on January 1, 2020. The interest rate on the loan is 10%
payable annually starting December 31, 2020. The loan matures in five years on December 31, 2020.
The data related to the said loan are:
•  Principal Amount 8,000,000
•  Origination fee received from the borrower 1,250,000
•  Direct organization cost incurred 50,000

The effective rate on the loan after considering the direct organization cost incurred and the
origination fee is 15%.

1. What is the carrying amount of the loan receivable on January 1, 2020?

a. 3,544,000 c. 5,504,000
b. 4,600,000 d. 6,800,000
2. What is the interest income for 2020?
a. 1,709,000 c. 1,020,000
b. 1,907,000 d. 2,000,000

 
26
 

3. What is the carrying

carrying amount of the loan
loan receivable on Dece
December
mber 31, 2020?
a. 7,020,000 c. 6,200,000
b. 8,000,000 d. 5,100,000

13. Scotia Bank loaned P5,000,000 to MIJA Company on January 1, 2018. The T he terms of the loan require
principal payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and
interest payment are due on January 1, 2019. MIJA Company made the required payment
paymentss during
2019 and 2020. However, during 2020 MIJA Company
Company began to experience financi
financial
al difficulties,
requiring Scotia to reassess the collectability of tthe
he loan. On December 31, 2020, ScotiaScotia Bank
determines that the remaining principal payment will be collected but the collection of the interest is
unlikely. The present value of
of 1 at 8% is as follows:
For one period 0.93
For two periods 0.86
For three periods 0.79
Q1. What is the loan impairment loss on December 31, 2020?
a. 420,000 c. 630,000
b. 450,000 d. 0

Q2. What is the interest income to be reported by Scotia Bank in 2021?

a. 223,200 c. 240,000
b. 143,200 d. 0

14. You are engaged to perform an audit of the accounts of the Montreal CORPORATION
CORPORATION for the year
ended December 31, 2020, and have observed the taking of the physical inventory of the company
on December 27, 2020. Only merchandise shipped by the Montreal Corporation to customers up to
and including December 27, 2020 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 2020
and January 2021, respectively.

Sales Invoices
Date Amount Date Shipped

December 2020 (a) 12/23/2020 P 25,000 12/31/2020

(b) 12/27/2020 18,000 12/27/2020
(c) 12/30/2020 30,000 01/05/2021
(d) 12/22/2020 12,000 01/08/2021
(e) 12/28/2020 16,000 12/29/2020
(f) 12/03/2020 8,000 12/05/2020
(g) 12/31/2020 20,000 01/07/2021
(h) 12/31/2020 14,000 12/31/2020

January 2021 (i) 12/31/2020 7,500 12/29/2020

(j) 12/27/2020 11,000 01/04/2021
(k) 01/08/2021 9,000 01/09/2021
(l) 01/10/2021 5,000 12/31/2020

 
27
 

1. How much sales for month of December 2020 were erroneously recorded in January 2021?
a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000

2. How much sales for the month of January 2021 were erroneously recorded in December 2020?
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, 2020?
a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000

15. During your audit of the Joshtin COMPANY for the calendar year 2020, 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

NOTES RECEIVABLE DISCOUNTED

Sept. 1 Samson note, discounted at 15% 36,000 36,000
Nov. 1 Salazar note, discounted at 15% 75,000 111,000

INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 11,560.50

 All notes are trade note

notess receivable
receivable unless
unless otherwise specified. The Samson
Samson note was paid D
December31,
ecember31,
2020. Interest income is is credited only upon receipt
receipt of cash.

1. The accrued
accrued interest
interest income
income at
at December 31, 2020
2020 is:
a. P 2,748 b. P 3,018 c. P 3,120 d. P 4,200

2. The interest
interest expense at December 31, 2020 is:
a. P 1,875.00 b. P 2,185.50 c. P 4,060.50 d. P 11,560.50

3. The Notes
Notes Receivable at December 31, 2020 iis:
s:
a. P 141,000 b. P 159,000 c. P 216,000 d. P 252,000

4. The Notes Receivable –

Receivable – discounted
 discounted at December 31, 2020 is:
a. P 63,750 b. P 73,125 c. P 75,000 d. P111,000

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

 
28
 

 APPLIED
 APPL IED AUDITING
INVENTORIES 
PROF. U.C. VALLADOLID
Multiple Choice 
Choice 
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 statement of financial position.

1. Goods out on consignment at another company’s store  store  P800,000

2. Goods sold on installment basis 100,000
3. Goods purchased
purchased f.o.b. shipping point
point that are in transit at
December 31 120,000
4. Goods purchased f.o.b. destination that that are in transit
transit at December
31 200,000
5. Goods sold to another company, for which which our company has signed
signed
an agreement to repurchase at a set price
pr ice that covers all costs
related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold
sold f.o.b.
f.o.b. shipping
shipping point that are in transit
December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred
incurred for inventories that are routinely manufactured
40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started production, but
which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination
destination that are in transit at
December 31 40,000
19. Temporary investment in stocks and
and bonds that will be resold in the
near future 500,000

How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000

2. In connection with your audit of the Rosalina Manufacturing Company, you reviewed its inventory as
of December 31, 2020 and found the following items:

(a) A packing case containing a product costing P100,000 was standing in the shipping
shipping room when
the physical inventory was taken.
taken. It was not included in the inventory because it was marked
“Hold for shipping instructions.”
instructions.” The customer’s order was dated December
December 18, but the case
was shipped and the customer billed on January 10, 2021.

 
29
 

(b) Merchandise costing P600,000

P600,000 was received on December 28, 2020, and the invoic
invoicee was
recorded. The invoice was
was in the hands of the purchasing
purchasing agent; it was marked “On
consignment”.
consignment”.  

(c) Merchandise received on January 6, 202

2021,
1, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was
was made FOB shipping point on December 31,
2020. Because it was not on hand during the inventory
inventory count, it was not included.

(d) A special machine costing P200,000, fabricated to order for a particula

particularr customer, was
was finished
in the shipping room on December 30. The customer was billed for P300,000 on that date and
the machine was excluded from inventory although it was shipped January 4, 2021.
(e) Merchandise costing P200,000 was received
received on January 6, 2021, and the related purchas
purchasee
invoice was recorded January 5. The invoice showed the shipment
shipment was made on December
29, 2020, FOB destination.

(f) Merchandise costing

costing P150,000 waswas sold on an installment basis on December
December 15. The
customer took possession of the goods on that date. The merchandise was included in inventory
because Rosalina still holds legal
legal title. Historical experience suggests
suggests that full payment on
installment sale is received approximately 99% of the time.

(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included
included
in the inventory because the sale was accompanied by a purchase agreement requiring
Rosalina to buy back the inventory in February 2021.

Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2020?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

3. Joseph Sales Company uses the first-in, first-out method in calculating cost of goods sold for the
three products that the company handles. Inventories and purchase information
information concerning the
three products are given for the month of October.

Product C Product P Product A

Oct. 1 Inventory 50,000 units 30,000 units at 65,000 units at
at P6.00 P10.00 P0.90
Oct. 1-15 Purchases 70,000 units 45,000 units at 30,000 units at
at P6.50 P10.50 P1.25
Oct. 16-31 Purchases 30,000 units
at P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most recent purchase prices
by the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Joseph
decided to reduce its sales prices
prices on all items by 10%, effective November
November 1. Joseph’s selling cost
is 10% of sales price. Products C and P have a normal profit (af (after
ter selling costs) of 30% on sales
prices, while the normal profit on product A (after selling cost) is 15% of sales price.

Based on the above and the result of your audit, determine the following:

 
30
 

1. Total cost of Inventory at October

October 31 is
a. P565,000 c. P557,310
b. P655,500 d. P617,500

2. The amount of Inventory to be reported on the company’s statement of fina

financial
ncial position at October
31 is
a. P569,850 c. P559,350
b. P543,810 d. P595,350

3. The Allowance
Allowance for inventory
inventory write down at October 31 is
a. P 5,650 c. P85,650
b. P13,500 d. P60,150

4. The cost of sales

sales after loss on inventory write down for the month
month of October is
a. P1,298,500 c. P1,022,260
b. P1,290,650 d. P1,208,000

4. The management of Raindrops Company has engaged you to audit its 2020 financial statements.
The company’s accounting period ends on December 31. You verified
ve rified that on November 30, the
correct inventory level was 60,000 units. A review of the December purchases orders to various
suppliers showed the following. Only merchandise received up to December 31,2020 were
recorded as purchase by Raindrops.

Date of Quantity Date Date

Invoice Date Terms
Purchase order in Units Shipped Received
12-02-2020 01-04-2021 10,000 01-03-2021 01-04-2021 Shipping point
12-11-2020 01-04-2021 12,000* 12-22-2020 12-23-2020 Destination
12-14-2020 01-03-2021 14,000* 12-28-2021 01-03-2021 Shipping point
12-23-2020 12-26-2020 10,000 01-03-2021 01-04-2021 Shipping point
12-28-2020 01-10-2021 8,000 12-31-2020 1-10-2021 Destination
12-31-2020 01-10-2021 15,000 01-04-2021 01-11-2021 Destination

During the month of December, the company recorded the sale of 50,000 units at P125 selling
price per unit. This includes the sale of 14,000 units shipped to Rose Company, a consignee. A
letter received from Rose Company indicates that as of December 31, 2020, it had sold 10,000
units and was still trying to sell the remaining units.

Inventories presented on the client prepared statement of financial position pertain to inventories
actually on hand at yearend.

What is the number of units that should be included in the December 31, 2020 inventory?
a. P 40,000 c. P30,600
b. P35,000 d. P34,400

5. You were engaged by Alfredo Corporation for the audit of the company’s financial st
statements
atements for the
year ended December 31, 2020. The company is engaged in the wholesale business and makes makes all
sales at 25% over cost.

The following were gathered from the client’s accounting records:

records:  

 
31
 

SALES PURCHASES
Date Reference Amount Date Reference Amount
Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 865 60,000 12/28 RR #2059 36,000
12/28 SI No. 866 225,000 12/30 RR #2061 105,000
12/28 SI No. 867 15,000 12/31 RR #2062 63,000
12/31 SI No. 869 69,000 12/31 RR #2063 96,000
12/31 SI No. 870 102,000 12/31 Closing entry (4,500,000)
12/31 SI No. 871 24,000 P -
12/31 Closing entry (8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

 Accounts receivable P750,000

Inventory 900,000
 Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied
that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 2063 and that no shipments had been made on any
Sales Invoices whose number
number is larger than No. 868. You also obtained the following additional
information:
a) Included in the warehouse physical inventory
inventory at December 31 were goods which
which had been
purchased and received on Receiving Report No. 2060 but for which the invoice was not
received until the following
following year. Cost was P27,000.
P27,000.

b) On the evening
evening of December 31, there were two trucks in the company siding:
  Truck No. XXX 888 was unloaded on January 2 of the following year and received on
•

Receiving Report No.

No. 2063. The freight was pa
paid
id by the vendor.

•  Truck No. MGM 357 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoi
Invoice
ce No. 868.

c) Temporarily stranded at Dece

December
mber 31 at the railroad siding were two delivery trucks enroute to
 ABC Trading Corporation. ABC received the goods, which were sold on SalesSales Invoice No. 866
terms FOB Destination, the next day.

d) Enroute to the client on December 31 was a truckload of goods,goods, which was received on
Receiving Report No. 2064. The goods were shipped FOB Destination
Destination,, and freight of P2,000
was paid by the client. However, the freight was deducted from the purchas
purchasee price of P800,000.

Based on the above and the result of your audit, determine the following:

1. Sales for the year ended December 31, 2020

a. P8,100,000 c. P7,875,000
b. P7,725,000 d. P8,025,000

2. Purchases for the year ended December 31, 2020

a. P4,500,000 c. P5,631,000
b. P5,727,000 d. P4,527,000

 
32
 

3. Accounts receivable as of December 31, 2020

a. P330,000 c. P525,000
b. P555,000 d. P180,000

4. Inventory as of December 31, 2020

a. P1,452,000 c. P1,200,000
b. P1,221,000 d. P1,296,000

5. Accounts payable as of December 31, 2020

a. P600,000 c. P 531,000
b. P627,000 d. P1,827,000

6. The following accounts were included in the unadjusted trial balance of Alfredo Company as of
December 31, 2020:

Cash P 481,600
 Accounts receivable
receivable 1,127,000
Inventory 3,025,000
 Accounts payable 2,100,500
 Accrued expenses 215,500

During your audit, you noted that Alfredo held

held its cash books open after year-end. In addition, your
audit revealed the following:

1. Receipts for January 2021 of P327,300 were recorded in the December 2020 cash cash receipts
book. The receipts of P180,050 represent ccash
ash sales and P147,250 represent collec
collections
tions from
customers, net of 5% cash discounts.

2. Accounts payable
payable of P186,200 was paid in January 2021. The payments,
payments, on which discounts
discounts
of P6,200 were taken, were included in the December 2020 check register.

3. Merchandise inventory is valued at at P3,025,000

P3,025,000 prior to any adjustments. The following
information had been found relating to certain inventory transactions.

a. Goods valued at P137,500 are on consignment with a customer. These goods are not
included in the inventory figure.

b. Goods cos
costing
ting P108,750 were received
received from a vendor on January 4,
4, 2021. The related
related
invoice was received
received and recorded on January
January 6, 2021. The goods were shipped
shipped on
December 31, 2020, terms FOB shipping point.

c. Goods costing P318,750 were shipped on December 31, 2020, and were delivered to the
customer on January 3, 2021. The terms of the invoice
invoice were FOB shipping point. The
goods were included in the 2020 ending inventory even though the sale was recorded in
2020.

d. A P91,000 sh
shipment
ipment of goods
goods to a customer on December 30, terms FOB destination are
not included in the year-end inventory.
inventory. The goods cost P65,000 and were delivered to the
customer on January 3,3, 2021. The sale was properly
properly recorded in 2021.

 
33
 

e. The invoice for goods costing

costing P87,500 was received
received and recorded as a purchase
purchase on
December 31, 2020. The related goods, shipped FOB destination
destination were received on
January 4, 2021, and thus were not included in the physical inventory.

f. Goods valued at P306,400

P306,400 are on consignment
consignment from a vendor. These goods are not
included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2020:

1. Cash
a. P481,600 c. P334,300
b. P340,500 d. P346,700

2. Accounts receivable
a. P1,454,300 c. P1,127,000
b. P1,282,000 d. P1,274,250

3. Inventory
a. P3,017,500 c. P2,930,000
b. P3,040,000 d. P2,505,000

4. Accounts payable
a. P2,395,450 c. P2,286,500
b. P2,307,950 d. P2,301,750
5. Current ratio
a. P2.00 c. P1.84
b. P1.83 d. P2.01

7. Mavis, 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 suspects that the staff is
committing theft.
theft. You are to determine whether
whether or not this is true. Your investigati
investigations
ons revealed the
following.

1. Physical inventory,
inventory, taken December 31, 2020 under your observation showed
showed that cost
cost was
P265,000 and net realizable value (NRV), P244,000. The inventory on January 1, 2020 showed
cost of P390,000 and net realizable value of P375,000.
P375,000. It is the corporation’s
corporation’s practice to value
inventory at “lower of cost or NRV.”
NRV.” Any loss between cost and NRV NRV is included in “Other
expenses.”  
expenses.”

2. The average gross profit rate was 40% of net sales.

3. The accounts
accounts receivable as ofof January 1, 2020 were P135,000.
P135,000. During 2020, accounts
receivable written off
off during the year amounted to P10,000. Accounts receivable
receivable as of
December 31, 2020 were P375,000.

4. Outstanding purchase
purchase invoices
invoices amounted to P300,000
P300,000 at the end of 2020. At the beginning of
2020 they were P375,000.

5. Receipts from customers during 2020

2020 amoun
amounted
ted to P3,000,000.

 
34
 

6. Disbursements to merchandise creditors amounted to P2,000,000.

P2,000,000.

Based on the above and the result of your audit, determine the following:

1. The total sales in 2020 is

a. P3,240,000 c. P3,250,000
b. P3,230,000 d. P2,770,000

2. The total purchases in 2020 is

a. P2,000,000 c. P1,950,000
b. P2,075,000 d. P1,925,000
3. The amount of inventory
inventory shortage as of December 31, 2020 is
a. P106,000 c. P100,000
b. P175,000 d. P 0

8.  A recent fire severely damaged Penguin Company’

Company’ss administration building
building and destroyed many of
of
its financial records. You have been contracted by Penguin’s management to reconstruct as much
financial information as possible for the month of July. You learn that Penguin makes a physical
inventory count at the end of each month to determine monthly ending inventory values. You also
find out that the company applies the average cost method.

You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units
Total cost of goods available for sale in July 356,400
Cost of goods sold during July 297,000
Gross profit on sales for July 303,000
Cost of inventory, July 1 P0.35 per unit
The following are Penguin’s July purchases of merchandise: 
merchandise: 
Date Quantity Unit Cost
July 6 180,000 P0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45
1. Number of units on hand July 1
 A. 450,000 B. 848,571
C. 169,714 D. 300,000
2. Units sold during July
 A. 600,000 B. 300,000
C. 750,000 D. 450,000
3. Unit cost of inventory at July 31
 A. 0.35 B. 0.396
C. 0.419 D. 0.279

9. Dundas Mart uses the average retail inventory method. The following information is available for the
current year:

Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
Purchases 15,800,000 26,300,000

 
35
 

Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000

Based on the above and the result of your audit, answer the following:

1. The cost
cost ratio
ratio using
using the average retail inventory method is
is
a. 58.13% c. 62.00%
b. 61.07% d. 60.00%

2. The estimated ending inventory at retail is

a. P3,000,000 c. P2,800,000
b. P3,600,000 d. P3,650,000

3. The estimated ending inventory at cost is

a. P1,743,945 c. P1,832,143
b. P2,198,571 d. P1,800,000

4. The estimated cost of goods sold is

a. P15,267,857 c. P15,000,000
b. P14,901,429 d. P15,056,055

5. If the inventory at retail based on physical

physical count at December
December 31 is P1,700,000,
P1,700,000, the estimated
inventory shortage is
a. P780,000 c. P755,709
b. P793,929 d. P 0

10. On November 17, 2020, Matet Airways entered into a noncancelable commitment to purchase 3,000
barrels of aviation fuel for P9,000,000 on March 31, 2021. Matet entered into this purchase
commitment to protect itself against the volatility
volatility in the aviation fuel market. By December 31, 2020,
the purchase price of aviation
aviation fuel had fallen to P P2,200
2,200 per barrel. However, by March 31, 2021,
when Matet took delivery of the 3,000 barrels, the price of aviation fuel had risen to P3,100 per barrel.

Based on the above and the result of your audit, answer the following:

1. The loss
loss on purchase commitment on December
December 31, 2020 is
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0

2. The gain on purchase

purchase commitment on March
March 31, 2021 is
a. P2,700,000 c. P2,400,000
b. P 300,000 d. P 0

 
36
 

 APPLIED
 APPL IED AUDITING
INVESTMENT
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. Angel Co.'s portfolio of trading securities includes the following on December 31, 2020:

Cost Fair Value

15,000 ordinary shares of Kris Co. 1,431,000 1,251,000

30,000 ordinary shares of Tris Co. 1,638,000 1,710,000
3,069,000 2,961,000

 All of the above securities have been purchased in 2020. In 2021, Angel Co.
Co. completed the following
securities transactions:

Mar. 1 Sold 15,000 shares of Kris Co.Co. ordinary shares at P93, less brokerage commission
commission of
P13,500.
 April 1 Bought 1,800 ordinary shares of Ozz, Inc. at P135 plus commission, taxes, and other
transaction costs of P4,950.

The Angel Co. portfolio of trading securities appeared as follows on December 31, 2021:
Cost Fair Value
30,000 ordinary shares of Tris Co. 1,638,000 1,740,0001 
1,800 ordinary shares of Ozz, Inc. 247,950 225,0002 
1,885,950 1,965,000

1 Net of P19,500 estimated transaction costs that would be incurred on sale of the securities.
2 Net of P4,500 transaction costs blat would be Incurred on the sale of the securities.

1. What amount of unrealized gain on these securities should be reported in the 2021 income
statement?
a. 31,050 c. 84,000
b. 79,050 d. 36,000

2. What is
is the gain on the sale of Kris
Kris Co. ordinary shares on March
March 1,
1, 2021?
a. 144,000 c. 130,500
b. 27,000 d. 13,500
 

3. What amount should be reported as trading securities

securities in Angel's state
statement
ment of financial position on
December 31, 2021?
a. 1,965,000 c. 1,885,950
b. 1,989,000 d. 1,909,905

 
37
 

2. At December 31, 2020, Ivan, Inc. reported as financial assets at fair value though profit or loss the
following marketable equity securities:

Seattle Company ordinary share, P10 par, 2,000 shares P28,400

Grunge Co. preference share, P50, 1,200 shares P78,000

 An analysis of transactions during 2021 relating to the account “Trading Securities” reveals the
following:

•   A 20% bonus issue was

was declared by Seattle Co. when each ordinary share has a market value
of P12 per share. Ivans recorded the dividend as a debit to investment wi with
th a corresponding
credit to dividend income at the total market value of the shares received.
•  Subsequent to the receipt of the bonus issue, 400 shares of Seattle were sold at P12 per share,
the proceeds of the sale were credited to the account.
•   A 10% cash dividend from Grunge Company
Company was received and record
recorded
ed on January 15, 2021.
The said dividend was declared on December 15, 2020.
•  1,500 ordinary shares of Cobain, Inc.
Inc. were purchased during 2021 at P21 per share. Broker’s
Broker’s
commission of P2,800 was recorded as operating expenses.
•  800 shares of Nirvana Co. were purchased on April 1, 2021, for the purpose of affiliation.
Nirvana has 4,000 shares outstanding
outstanding throughout the year. The company does not intend to
sell the said shares in the near future. The shares were recorded at the purchas
purchasee price of P50
per share. Broker’s commission
commission of P5,400 was recorded as operating expenses.
expenses. Nirvana
Nirvana
reported net income of P50,000 during the year 2021.
•

•
   There were no other investments during the year.
Market value per share as of December 31, 2021 are as follows: Seattle ordinary, P14; Grunge
preference, P64; Cobain ordinary, P21; and Nirvana ordinary P52.
•  Related unadjusted account balances per books as of December 31, 2021 are as follows: Other
Operating Income P53,200 and Operating Expenses P764,000.
1. Trading Securities at December 31, 2021
a. P133,167 c. P104,800
b. P136,300 d. P135,000

2. Total Dividend Income for the year 2021

a. P7,800 c. P7,680
b. P6,000 d. 0

3. Investment in Associate as of December 31, 2021

a. P52,900 c. P41,000
b. P47,500 d. P52,000

4. What is the income from Associate in year 2021?

a. 2,500 c. 7,500
b. 72,500 d. 77,500

5. What is the Operating Expenses for the year 2021?

a. 769,400 c. 764,000
b. 758,600 d. 730,000

6. Unrealized Gain or Loss on Trading Securities taken to profit or loss?

a. P 5,533 c. 4,333
b. P 3,133 d. 1,200

 
38
 

3. On January 1, Year 3, Inna Corporation had 30,000 ordinary shares of NPE Company acquired
during Year 2 for a total consideration of P1,800,000, including P30,000 directly attributable costs.
On December 31, Year 2, the NPE shares were selling at P65 per share. I

In July Year 3, Inna Corporation received a 20% bonus issue. Subsequently, it sold 15,000 shares
at 70 per share. Market value of NPE ordinary at December 31, Year 3 was P72 per share.

The shares were designated at Equity Investments at Fair Value through Other Comprehensive
Income.

1. What total amount shall be reported in profit or loss in the statement of comprehensive income for
Year 3?
a. P237,500 c. P612,000
b. P374,500 d. P0

2. How much total income shall be reported in profit or loss in the statement of comprehensive income
for Year 3 as a result of this investment?
a. P1,050,000 c. P1,512,000
b. P462,000 d. P0

3. At what amount should the investment be shown on December 31, Year 3 statement of financial
fin ancial
position?
a. P1,050,000 c. P1,512,000
b. P462,000 d. P0

4. What is the amount that will be shown in the equity section of the statement of financial position at
December 31, Year 3 relating to the investment account?
account?
a. P1,050,000 c. P1,512,000
b. P462,000 d. P252,000

4. Harry Corporation had the following portfolio of equity investment at fair value through other
comprehensive income at December 31, Year 2:

Purchase Price FV 12/31/Year 2

Jackson ordinary shares (5,000) 225,000 P250,000
Monterey preference (3,500) 133,000 140,000
Garcia ordinary shares (1,000) 180,000 178,000

On April 30, Year 3, Harry sold all the Jackson shares at P54 per share. In addition, on July 31,
Year 3, 3,000 of Barney Corporation shares were acquired at P59.

The December 31, Year 3 fair values were: Monterey, P135,000; Garcia, P190,000; and Barney,
P200,000.

Harry has the policy of transferring the equity account to retained earnings at the date
da te the equity
investment is derecognized.

1. How much gain or loss shall be recognized on the sale of Harry shares on April 30, Year 3?
a. P20,000 c. P30,000
b. P25,000 d. 0

 
39
 

2. What should be the cumulative balance of Unrealized Gains and Losses on Equity Investments
Investments at
December 31, Year 3?
a. P23,000 c. P33,000
b. P25,000 d. P35,000
 

5. On December 31, 2020, Daihatsu, Inc. reported as equity investments at fair value through other
comprehensive income the following equity securities:

 Alaska Corp., 5,000 ordinary

ordinary shares (a 1% interest) Cost
P125, 000 Fair Value
P 110, 000
Bahamas Corp., 10, 000 ordinary shares (a 2% interest)
160, 000 180, 000
Canada Corp., 25, 000 ordinary shares (a 10% interest) 700, 000 750, 000
Total P985, 000 P1, 040, 000

 Additional information:

On May 1, 2021, Alaska issued a 10% bonus issue, when, the market pr
price
ice of each share was P24.

On November 1, 2021, Alaska paid a cash dividend of P0.75 per share.

On July 1, 2021, Daihatsu paid P1, 520, 000(at fair value) for P50, 000 additional shares of Canada
Corporation’s ordinary shares which represented a 20% investment in Canada. The fair value of all
Canada’s identifiable assets net of liabilities was equal to their carrying amount of P6, 350, 0000. As
a result of this transaction, Daihatsu owns 30% of Canada and can exercise significant influence
over Canada’s operating and financial policies. 
policies. 

•  Daihatsu’s initial 10% interest of 25, 000 shares of Canada’s was acquired on January 2, 2016
for P700, 000. At that date, net assets of Canada totaled P5, 800, 000 and the fair value of
Canada’s identifiable assets net of liabilities was equal to their carrying amount. 
amount. 

Market prices per share of the equity securities, all listed on a national securities exchange, were as
follows:

December 31, 2021

 Alaska Corporation- ordinary P23

Bahamas Corporation-
Canada Corporation –
Corporation ordinary
 –  ordinary P19
P29

•  Canada reported Profit and paid dividends of:

Profit Dividends per share

Year ended 12/31/2020 P350, 000 None
Six months ended 6/30/2021 200, 000 None
Six months ended 12/31/2021 370, 000 P1.30

There were no other intercompany transactions

transactions between Daihatsu and Canada
Canada.. Daihatsu has the
policy of transferring to Retained Earnings the Unrealized Gains and Losses relating to equity
disposed of.

 
40
 

1. What is the balance of the Net Unrealized Gain or Loss on Equity Investments at fair value through
Other Comprehensive Income at December 31, 2020?
a. P126, 500 c. P55, 000
b. P10, 000 d. P0

2. What amount of dividend income shall be presented in the profit or loss section of the statement of
comprehensive income for the year 2021?
a. P4, 125 c. P36, 625
b. P12, 425 d. P48, 625

3. What amount, if any, should Daihatsu, Inc. report in its profit or loss as Income from Associate-
Associate-
Canada Corporation for the year ended December 31, 2021?
a. P131, 000 c. P 74, 000
b. P171, 000 d. P111, 000

4. At what amount should the Investment in Associate-Canada

Associate-Canada Corporation be reported in Daihatsu’s
December 31, 2021 statement of financial position?
a. P2, 313, 500 c. P2, 293, 500
b. P2, 353, 500 d. P2, 256, 500

5. At what amount should the equity Investments at Fair Value be shown on the statement of financial
position at December 31, 2021?
a. P1, 040, 000 c. P316, 500
b. P290, 00 d. P414, 000

6. What should be the balance of the Net Unrealized Gains or Losses on Equity Investments at
December 31, 2021?
a. P55, 000 c. P31, 500
b. P5, 000 d. P129, 000

7. What amount of total income or loss (realized or unrealized) shall be presented in profit or loss as a
result of the foregoing transactions?
a. P151, 000 c. P111, 000
b. P135, 125 d. P115, 125

6. At December 31, 2020, Maria Angela Corporation had the following investments
investments that were purchased
during 2019, its first year of operations:
Cost Fair Value
Trading Securities:
Security A 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000

Securities Available for Sale:

Security C 500,000 560,000
Security D 850,000 865,000
Totals 1,350,000 1,425,000

Securities to be Held to Maturity: Amort. Cost Fair Value

Security E 970,000 980,000
Security F 412,000 409,000
Totals 1,382,000 1,389,000

 
41
 

No investments were sold during 2020. None of the market changes is con
considered
sidered permanent.

Questions
1. The amount of investment
investment to be reported as current
current assets
assets is:
a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000 e. P 925 000

2. The amount of investment

investment to be reported as non-current
non-current assets is:
a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 2,807,000

3. The unrealized gain (or loss) component of

of income before taxes is:
a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000

4. The unrealized gain (or loss) component of shareholders’ equity is: 

is:  
a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000

7. On January 1, 2020 Piper Ltd bought 20% of the outstanding shares of Jason Construction Company
for 300,000,000 cash. At the date of acquisition of the shar es,
es, Jason’s net assets had a fair value of
900,000,000. Their book value was 800,000,000. The difference was attributable to the fair value of
Jason’s buildings and its land exceeding
e xceeding book value, each accounting for one-half of the difference
between the f air
air value and book value of Jason’s net assets. Jason’s net income for the year ended,
December 31, 2020, was 150,000,000. During 2020, Jason declared and paid cash dividends of
30,000,000. The buildings have a remaining life of 10 years.

1. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment
in Piper’s 2020 statement of financial position? 
position? 
a. 323,000,000 c. 322,000,000
b. 337,000,000 d. 338,000,000
 
2. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment
revenue in the income statement?
a. 30,000,000 c. 31,000,000
b. 29,000,000 d. 28,000,000
 

8. Jeffrey Company bought 20% of Cooper Corporation’s ordinary shares on January 1, 2020 for
P11,400,000. Carrying amount of Cooper’s net assets
assets at purchase date totaled P50
P50,000,000.
,000,000. Fair
value and carrying amounts were the same for all items except for plant and inventory, for which
fair values exceed their carrying amounts
amounts by P10,000,000 and P2,000,000 respectively. The plant
has a 5-year life. All inventory was sold during 2020. During 2020, Cooper reported profit of
P30,000,000 and paid a P10,000,000 cash dividend.

Based on the above and the result of your audit, answer the following:

1. What amount should Jeffrey report as net income

income related to this investment in
in 2020?
a. P5,200,000 c. P5,400,000
b. P6,200,000 d. P4,200,000

2. The carrying amount of Investment in Cooper Corporation

Corporation as of
of December 31, 2020
a. P14,600,000 c. P13,600,000
b. P14,800,000 d. P15,600,000

 
42
 

9. Your accounting firm was engaged as the auditor of Trishia Company for the examination of its
financial statements for the year ended December 31, 2020. In the course of your review, you
gathered the following information:
a. On May 1, 2019, the Trishia Company acquired P 400, 000 of XYZ Corporation 9% bonds bonds for P
440, 000, inclusive of accrued interest. Interest on bonds is payable semiannually on June 30
and December 31, and bonds mature on December 31, 2024 The XYZ bonds belong to a
portfolio of Trishia’s investments intended for profit taking opportunities, and this, are held for
trading.
b. On October 1, 2020, bonds the Trishia Company sold bonds of P 100, 000 for P 109, 000
inclusive of accrued interest.
c. On November 30, 2020, bonds of P 120, 000 were exchanged for 1, 000 shares of XYZ
Corporation P 100 per ordinary share. Interest was received on the date of exchange.

You obtained the following quoted prices of the securities:

December 31, 2019 XYZ bonds 107
November 30, 2020 XYZ ordinary share 140
December 31, 2020 XYZ bonds 108
December 31, 2020, XYZ ordinary shares 143

1. Interest revenue for the years ended December 31, 2019 and December
December 31, 2020
a. 24, 000 & 32, 850 b. 54, 000 & 51, 300 c. 72, 000 & 51, 300 d. 36, 000 & 51, 300
2. Net unrealized
unrealized gains and losses during 2019
2019 & 2020
a. 6,000 & 4, 800 b. 0 & 1, 800 c. 6, 000 & 1, 800 d. 4, 800 & 1, 800

3. Gains and losses on disposal of the investments

investments in 2020
a. 14, 100 gain b. 14, 100 Loss c. 11, 600 & (250) d. (11,600) & 2, 500
4. Carrying value of the investments
investments in bonds at December
December 31, 2019 and December 31,
31, 2020
a. 186, 600 & 140, 000 b. 11, 610 & 140, 000 c. 11, 610 & 107 d. 428, 000 & 194, 400

10. On June 1, 2019, Edna Corporation purchased as a long-term investment 4,000 of the P1,000 face
value, 8% bonds of Mayet Corporation. The bonds were purchased to yield 10% interest.
interest. Interest
is payable semi-annually on December
December 1 and June 1. The bonds mature
mature on June 1,1, 2025. Edna
uses the effective interest method of amortization.
amortization. On November 1, 2020, Edna sold the bonds for
a total consideration of P3,925,000. Edna intended to hold these bonds until they ma
matured,
tured, so year-
to-year market fluctuations were ignored in accounting for bonds.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors
to four decimal places)
1. The purchase price ofof the bonds on June 1, 2019 is
is
a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596

2. The interest income for the year 2019 is

a. P215,850 c. P212,829
b. P215,521 d. P211,612

3. The carrying amount of the investment

investment in bonds as of December 31, 2019 is
a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,491

 
43
 

4. The interest income for the year 2020 is

a. P306,608 c. P311,218
b. P310,715 d. P304,748

5. The gain on sale of investment

investment in bonds on November 1, 2020 is
a. P21,196 c. P 27,632
b. P80,235 d. P104,045

 
44
 

 APPLIED
 APPL IED AUDITING
PPE & INTANGIBL ES 
INTANGIBLES
PROF. U.C. VALLADOLID
Multiple Choice 
Choice 
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. You noted during your audit of Joseph Company that the company carried out a number of
transactions involving the acquisition
acquisition of several assets. All expenditures were recorded in the
following single asset account, identified as Property and equipment:
Property and equipment
 Acquisition price of land and building P 960,000
Options taken out on several pieces 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
P1,828,480

Based on property tax assessments, which

which are believed to fairly represent the relative values
involved, the building is worth twice
twice as much as the land. The machinery was subject to a 2% cash
discount, which was taken
taken and credited to Purchases Di
Discounts.
scounts. Of the two options, P6,000
P6,000 is
related to the building and land purchased and P10,000 related to those not purchased. The old
machinery was sold at book value.

Based on the above and the result of your audit, determine the adjusted balance of the following:
1. Land
a. P644,000 c. P326,000
b. P322,000 d. P424,000

2. Building
a. P 644,000 c. P1,044,000
b. P1,040,000 d. P 722,000

3. Machinery
a. P317,032 c. P323,400
b. P318,512 d. P321,832

2. Ivan Corp. uses different kinds of machines in its manufacturing process. It constructs some of
these machines itself and acquires others from the manufacturers. The following information
relates to two machines that it has recorded in 2020.

Machine A (purchased)

Cash paid for equipment 

equipment  P250,000 
P250,000 
Cost of transporting machine - insurance and transport 
transport   9,000  
9,000
Labor cost of installation by expert fitter   15,000  
15,000
Labor cost of testing equipment 
equipment  12,000  
12,000
Insurance cost for 2020 
2020  4,500  
4,500

 
45
 

Cost of training for personnel who will use the machine

machine   7,500 
7,500 
Cost of safety rails and platforms surrounding machine 
machine  18,000  
18,000
Cost of water devices to keep machine cool 
cool  24,000  
24,000
Cost of adjustments to machine during 2020 to make it operate more
efficiently 22,500 
22,500 

Machine B (self-constructed)

Cost of materials to construct machine 

machine  P210, 000 
000 
Labor cost to construct machine 129,000  
129,000
 Allocated overhead cost-electricity,
cost-electricity, fac
factory
tory space, etc. 
etc.  66,000  
66,000
 Allocated interest cost
cost of financing machine 
machine  30,000  
30,000
Cost of installation 
installation  36,000  
36,000
Profit saved by self-construction 
self-construction  45,000  
45,000
Safety inspection cost prior to use 
use  12,000  
12,000

1. What is the cost of machine

machine A?
a. P380,500 b. P358,000 c. P328,000 d. P350,500

2. What is the cost of machine B?

a. P471,000 b. P417,000 c. P483,000 d. P438,000

3. During 2020, Joshtin Company made the following property, plant and equipment expenditures:

Land and building acquired from Jerome Company 7,000,000

Repairs and reconditioning cost made to the building 250,000
Reconstruction of sidewalk and fences 100,000
Special tax assessment 50,000
Remodeling of office space including new partitions and walls 400,000

In exchange for the land and building acquired from Jerome, Joshtin issued 50,000 ordinary shares
of its P100 par value ordinary shares. On the date of purchase, the shares had a market value of
P140 per share and the land and building had a fair value of P2,000,000 and P6,000,000
respectively. During the year, Joshtin also received land from a shareholder to facilitate to relocation
of its main offices in the city. Joshtin paid P50,000 for the donated land transfer. The donated land
is fairly valued at P1,800,000. What is the total cost of the land acquisition?
a. P 4,100,000 b. P 3,900,000 c. P 3,850,000 d. P 3,600,000

4. In connection with your examination of the financial statements of the Angel Corporation for the
year 2021, the company presented to you the Property, Plant and Equipment section of its balance
sheet as of December 31, 2020 which consists of the following:

Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

The following transactions occurred during 2021:

 
46
 

  Land site number 102 was acquired for P4,000,000.

• P4,000,000. Additionally, to acquire the land Angel
Angel 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,
land, timber and gravel were recovered and sol
soldd for
P20,000.

   A second tract of land (site number 103) with a building was acquired for P1,200,000. The
•

closing statement indicated that the land value was P800,000 and the building value was
P400,000. Shortly after acquisition,
acquisition, the building
building was demolished
demolished at a cost of P120,000. A new
building was constructed for P600,000 plus the following costs:

Excavation fees P 44,000

 Architectural design fees 32,000
Building permit fee 4,000
Imputed interest on funds used during construction 24,000

The building was completed and occupied on September 1, 2021.

   A third tract of land (site number 104) was acquired for P2,400,000 and was put on the market
•

for resale.

  Extensive work was

• was done to a building occupied by Angel
Angel under a lease agreement. The total
cost of the work was P500,000, which consisted of the following:

 Amount Useful life

Particulars
Painting of ceilings P 40,000 One year
Electrical work 140,000 Ten years
Construction of extension to current working area
320,000 Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the current
working area.

  During December 2021, costs of P260,000 were incurred to improve leased office space.
• space. The
related lease will terminate on December 31, 2023, and is not expected to be renewed.

   A group
• group of new machines
machines was purchased
purchased under a royalty agreement
agreement which provides for payment
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 2021 were P52,000.

Based on the above and the result of your audit, compute for the following as of December 31, 2021:

1. Land
a. P8,400,000 b. P5,900,000 c. P5,480,000 d. P6,000,000

2. Buildings
a. P4,280,000 b. P3,880,000 c. P3,800,000 d. P4,000,000

3. Leasehold improvements
a. P2,720,000 b. P2,600,000 c. P2,560,000 d. P2,300,000

4. Machinery and equipment

a. P3,100,000 b. P3,108,000 c. P3,114,000 d. P3,166,000

 
47
 

5. You are engaged to examine the financial statements of the Joshtin Manufacturing Corp. for the year
ended December 31, 2020. The following schedules for property
property,, plant, and equipment and related
accumulated depreciation accounts
accounts have been prepared by your client. The opening balances agree
with your prior year’s audit working papers.

Joshtin Manufacturing Co.

 Analysis of Property, Plant, and Equipmen
Equipmentt and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2020

Cost
Final Per books
12-31-2019 Additions Retirement 12-31-2020
Land P450,000 P100,000 P- P550,000
Buildings 2,400,000 350,000 - 2,750,000
Machinery & equipment 2,770,000 808,000 520,000 3,526,000
P5,620,000 P1,258,000 P520,000 P6,826,000

 Accumulated Depreciation
Depreciation

Buildings P1,200,000 P103,000 P - P1,303,000

Machinery & equipment 546,500 313,600 - 860,100
P1,746,500 P416,600 P - P2,163,100

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on the
following estimated
estimated lives: Buildings –
Buildings – 25
 25 years, all other items 10 years.

b. The company
company entered into a lease contract for a derrick
derrick machine with annual rental of of
P100,000 payable in advance every April
April 1. The parties to the contract
contract stipulated that a 30-
day written notice
notice is required to cancel the lease.
lease. Estimated useful
useful life is 10 years. The
derrick was recorded under machinery and equipment at P808,000 and P60,600, 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 wa
wass P350,000 which was the
amount recorded. Company personnel constructed
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, 2020.
The expenditure was charged to land.

e. The P520,000 equipment under retirement column represent cash received on October 1,
2020 for a machinery bought on October 1, 2016 for P P960,000.
960,000. The bookkeeper recorded
depreciation expense of P72,000 on this machine in 2020.

f. The company’s president donated land and building appraised

a ppraised at P200,000 and P400,000
respectively to the company
company to be used as plant site.
site. The company began operating the plant
on September 30, 2020. Since no money was involved,
involved, the bookkeeper did not make an
anyy
entry for the above transaction.

Based on the above and the result of your audit, answer the following:

 
48
 

1. The carrying amount of the buildings on December

December 31, 2020 is
a. P1,820,250 b. P1,827,400 c. P1,816,250 d. P1,447,000

2. The carrying
carrying amount of the land on De
December
cember 31
31,, 2020
2020 is
a. P650,000 b. P750,000 c. P450,000 d. P545,000

3. The loss on the disposal of the machinery sold for P520,000 is

a. P56,000 b. P152,000 c. P80,000 d. P0

4. The carrying amount of the property, plant and equipment as of December

December 31, 2020 is
is
a. P3,860,750 b. P3,755,750 c. P3,955,750 d. P3,312,900

6. You obtain the following information pertaining to Red Co

Co..’s property, plant, and equipment for 2020
in connection with your audit of the company’s financial statements.

 Audited balances at December 31, 2019:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
 Accumulated depreciation –
depreciation – buildings
 buildings P 6,577,500
Machinery and equipment 22,500,000
 Accumulated depreciation –
depreciation –  
Machinery and Equipment 6,250,000
Delivery Equipment 2,875,000
 Accumulated Depreciation
Depreciation –
 –  
Delivery Equipment 2,115,000

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining –
declining – balance
 balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’
Sum-of-the- years’-digits
-digits 4 years
Leasehold Improvements Straight-line -

Transaction during 2020 and other information are as follows:

a. On January 2, 2020, Red purchased a new truck for P500,000

P500,000 cash and traded-in a 2-year-old
truck with a cost of P450,000 and a book value of P135,000.
P135,000. The new truck has a cash price of
P600,000; the market value of the old truck is not known.

b. On April
April 1,
1, 2020,
2020, a machine purchased for P575,000
P575,000 on April
April 1, 2015 was destroyed by fire.
Red recovered P387,500 from its insurance company.

c. On May 1, 2020, cost of P4,200,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years.
years. The related lease terminates
terminates on
December 31, 2026.

d. On July 1, 2020, machinery and equipment were purchased at a total invoice cost of P7,000,000;
additional cost of P125,000 for freight and P625,000 for installation were incurred.

 
49
 

e. Red determined that the delivery equipment comprising the P2,875,000 balance at January 1,
2020, would have been depreciated at a total amount of P450,000 for the year ended December
31, 2020.

The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute
depreciation to the nearest month.

Based on the above and the result of your audit, answer the following:

1. How much is the Accumulated depreciation –

depreciation – Buildings
 Buildings as of December 31, 2020?
a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700

2. How much is the Accumulated depreciation  –

 –   Machinery and Equipment as of December 31,
2020?
a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875

3. How much is the Accumulated depreciation –

depreciation – Delivery
 Delivery Equipment as of December 31, 2020?
a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000

4. How much is the Accumulated depreciation –

depreciation – Leasehold
 Leasehold Improvements as of December 31, 2020?
a. P420,000 b. P525,000 c. P350,000 d. P630,000

5. How much is
is the net gain (loss)
(loss) from disposal of assets for the year ended
ended December 31, 2020?
a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)

7. Your audit of Kimberlie Corporation for the year 2020 disclosed the following property dispositions:

Cost Acc. Dep. Proceeds Fair value Mode

Land P3,200,000 - 2,480,000 2,480,000 Condemnation
Building 1,200,000 - 288,000 - Demolition
Warehouse 5,600,000 880,000 5,920,000 5,920,000 Destruction by fire
Machine 640,000 256,000 72,000 576,000 Exchange
Delivery truck 800,000 380,000 376,000 376,000 Sale

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.
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 wi
with
th the intention of
demolishing the building, and this was accomplished
accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse
warehouse was destroyed by fire. The warehouse was purchased
purchased on January 2,
2003. On December 12, the insurance proceeds and otherother 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 P504,000
and cash of P72,000 was received.

 
50
 

Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

Based on the above and the result of your audit, compute the gain or loss to be recognized for each of
the following dispositions:

1. Land
a. P2,480,000 gainb. P3,200,000 loss c. P720,000 loss d. P0

2. Building
a. P288,000 gain b. P912,000 loss c. P1,488,000 loss d. P0

3. Warehouse
a. P1,200,000 gainb. P3,600,000 loss c. P320,000 gain d. P0

4. Machine
a. P24,000 gain b. P192,000 gain c. P18,000 gain d. P0

5. Delivery truck
a. P424,000 loss b. P44,000 loss c. P424,000 gain d. P44,000 gain

8. You are making your second annual examination of Tess Company. The Equipment account and its
related accumulated depreciation are shown below:
EQUIPMENT
01/01/2020 Balance P500,000 09/30/2020 Equipment 5 sold P54,000
04/01/2020 Purchased Equipment 9 100,000

 ACCUMULATED
 ACCUMULATED DEPRECIATION
DEPRECIATION –
 – EQUIPMENT
 EQUIPMENT
01/01/2020 Balance P312,500
12/31/2020 Depreciation 54,600

You obtained the following

f ollowing additional information:
•  The beginning balances agree with the balances in your last year’s working paper. 
paper. 
•  The company depreciates all items of equipment at 10% a year, rounded to the
nearest month.
•
  On April 1, 2020, the company purchased equipment Number 9 on account under the
credit terms of 2/10, n/30. The invoice price of P100,000 was paid on May 31,2020.
•  Installation Cost of P5,000 was incurred by the company on equipment no. 9; this
amount was charged by Tess to Repairs and Maintenance.
•  On September 30, 2020, the company sold equipment no. 5 for P54,000. Equipment
No. 5 purchased for P180,000 on March 30, 2013.

1. The correct cost of Equipment no. 9 is

a. P98,000 b. P100,000 c. P103,000 d. P105,000

2. The gain or loss

loss on sale of Equipment
Equipment no.
no. 5
a. P7,500 b. P(7,500) c. P9,000 d. P(9,000)

3. The Depreciation Expense b.

a. P60,300 forP53,225
the year 2020 c. P48,350 d. P42,300

 
51
 

4. The adjusted ledger balance of the equipment account at December 31,2020

31,2020 is
a. P418,000 b. P423,000 c. P425,000 d. P546,000

9. In the audit of the books of Trisha Company 

Company  for the year 2020, the following items and information
appeared in the Production Machines account of the auditee:

Date Particulars Debit Credit

2020
Jan. 01 Balance –Machines
 –Machines 1, 2, 3, and 4 at P90,000 each P 360,000
 Aug 31 Machine 5 198,000
Machine 1 P 3,000
Sept 30 Machine 6 96,000
Dec 01 Machines 7 and 8 at P216,000 each 432,000
Dec 01 Machine 2 21,000
31 Balance . 1,062,000
P1,086,000 P1,086,000

The Accumulated Depreciation

Depreciation account contained no entries for the year 2020. The balance on
January 1, 2020 per your audit, was as follows:

Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000

Based on your further inquiry and verification, you noted the following:

1. Machine 5 was
was purchased for cash; it replaced Machine 1, which was sold on this date for
P3,000.

2. Machine 2 was destroyed by the thickness of engine oil used leading

leading to explosion
explosion on
December 1, 2020. Insurance of P21,000 was recovered. Machine 7 was to replace Machine
2.

3. Machine 3 was traded in for Machine 6 at

at aann allowance
allowance of P12,000; the difference was paid
in cash and charged to Production Machine account.

4. Depreciation rate is recognized at 25% per annum.

Determine the adjusted balance of the Production Machine as of December 31, 2020 and
Depreciation Expense for the year 2020.

10. On January 1, 2020, Jerome Corporation purchased for P1,200,000, a tract of land (site number
143) with a building. Jerome paid a real estate broker’s commissi
commission
on of P72,000, legal fees of 12,000,
and title guarantee insurance of 36,000. The closing statement indicated that the land value was
P1,000,000 and the building value was P200,000. Shortly after acquisition, the building was razed
at a cost of P108,000

 
52
 52

Jerome entered into a P6,000,000 fixed-price contract with JADE Builders, Inc. on January 1, 2020
for the construction of an office building on land site number 143. The building was completed and
occupied on September 1, 2021. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints 42,000

 Architects’ fees for design and 
and supervision 164,000

The Building is estimated to have a 40-year life from the date of completion and will be depreciated
using the 150% declining method.

To finance construction costs, Jerome borrowed 1,000,000 with a 12% interest on January 1, 2020.
The loan was outstanding for the entire years of 2020 and an d 2021. The company’s other interest-
interest -
bearing debts include the following (also outstanding for the entire year of 2020 and 2021):

Principal Borrowing Costs

10% bank loan 2,800,000 280,000

10% long-term note 3,200,000 320,000
12% long-term loan 2,000,000 240,000
8,000,000 840,000

Expenditures of the project were as follows:

Date Expenditures

January 1, 2020 1,000,000

 April 1, 2020 500,000
October 1, 2020 800,000
December 31, 2020 900,000 3,200000
January 1, 2021 1,000,000
May 1, 2021 600,000
September 1, 2021 1,200,000

Based on the above data. Compute for the following:

1. Total cost of the land
a. 1,272,000 c. 1,120,000
b. 1,284,000 d. 1,428,000

2. Capitalizable borrowing cost for the year ended 2020

a. 180,375 c. 187,500
b. 225,000 d. 960,000

3. Capitalizable borrowing cost for the year

year ended 2021
a. 337,626 c. 560,000
b. 340,750 d. 369,126

4. Total cost of the building as of September 30, 2021

2021
a. 6,771,750 c. 6,832,001
b. 6,775,501 d. 6,724,001
 
5. Interest expense for the year 2021
a. 590,874 c. 622,374
b. 340,750 d. 619,25

 
 53

6. Depreciation Expense for the building in 2021

a. 84,050 c. 84,648
b. 85,400 d. 252,150
 

11. In connection with your audit of the Josef Mining Corporation for the year ended December 31, 2020,
you noted that the company purchased for P10,400,000 mining property estimated to contain
8,000,000 tons of ore. The residual value of the property
property is P800,000.

Building used in mine operations costs P800,000 and have estimated life of fifteen years with no
residual value. Mine machinery costs P1,600,000
P1,600,000 with an estimated residual value P320,000 after
its physical life of 4 years.

Following
Foll owing is the summary of the company’s operations for first year of operations.
operati ons.

Tons mined 800,000 tons

Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000

Inventories are valued on a first-in, first-out basis.

basis. Depreciation on the building is to be allocated as
follows: 20% to operating expenses,
expenses, 80% to production. Depreciation on machinery is chargeable
to production.

Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2020?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2020?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2020?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year eended
nded December 31, 2020?
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much
much is the maximu
maximum m amount that may be declared as dividends
dividends at the end of the
company’s first year of operations? 
operations?  
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467

12. During the current year, an entity incurred the following costs to develop and produce a routine,
low-risk computer software product:
Completion of detailed program design 1,300,000
Cost incurred for coding and testing to establish technological feasibility 1,000,000
Other coding costs after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product master 2,500,000
Packaging product 900,000

 
 54

1. What amount should be reported as inventory?

a. 2,500,000 c. 4,000,000
b. 3,400,000 d. 4,900,000
 
2. What total amount of the costs incurred should be expensed immediately?
a. 8,200,000 c. 6,700,000
b. 2,300,000 d. 4,400,000
 
3. What amount should be capitalized initially as software cost?
a. 5,400,000 c. 5,900,000
b. 3,700,000 d. 6,900,000
 

13. On December 31, 2018, Cleo Corporation acquired the following three intangible assets:

•   A trademark for P300,000. The trademark has

has 7 years
years remaining legal life. It is anticipated
anticipated that
the trademark will be renewed in the future, indefinitely, wi
without
thout problem.

•  Goodwill for P1,500,000. The goodwill is associa

associated
ted with Cleo’s Manufacturing
Manufacturing reporting unit.
unit.  

•   A customer
customer list for P220,000.
P220,000. By contract, Cleo has exclusive use of the list for 5 years. Because
of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2019, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate

generate cash flows of
 just P10,000 per year. The useful life of trademark still extends
extends beyond the foreseeable
foreseeable horizon.

b) The cash flows

flows expected to be generated by the Cleo
Cleo Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair vavalues
lues of the assets and liabilities
liabilities of the
Cleo Manufacturing reporting unit are as follows:

Book values Fair values

Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows

flows expected
expected to be generated
generated by the customer list are P120,000 in 2020 and P80,000
in 2021.

Based on the above and the result of your audit, determine the following: (Assume that the appropriate
discount rate for all items is 6%):
1. Total amortization for the year 2019
a. P73,333 b. P141,515 c. P116,190 d. P86,857

2. Impairment loss for the year 2019

a. P90,476 b. P133,333 c. P179,584 d. P0

3. Carrying value of Trademark

a. P300,000 b. asP257,143
of December 31, 2019c. P166,667 d. P120,416

 
 55

4. Carrying value of Goodwill as of December 31, 2019

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500

5. Carrying value of Customer list as of December

December 31, 2019
a. P220,000 b. P146,667 c. P176,000 d. P0

14. You are in the process of examining the intangible asset accounts of Jo Company and you
obtained the following information:

 A patent was purchased from Pizza Hot

Hot Company for P2,000,000
P2,000,000 on January 1, 2019. Jo
Company estimated the remaining useful life of the patent to be 10 years at the date of purchase.
The patent
patent was carried on Pizza Hot Company’s accounting records at a net carrying amount
amount of
P1,600,000 when Pizza Hot sold it to Jo Company.

During 2020, a franchise was purchased from Yellow Cob for P516,000. The terms of the payment
are as follows: P180,000 down payment on the date of the purchase, April 1,2020 and P336,000
one-year non-interest-bearing note due on April 1, 2021. Implicit interest in this transaction is 12%.
In addition, 5% of revenue from the franchise must be paid to Yellow Cob. Revenue from the
franchise for 2020 wasP2,500,000. Jo estimated on the date of purchase that the useful life was 10
years.

JO incurred the following expenditures relating to research and development activities in 2020:
Materials P42,000
Equipment 100,000
Indirect Cost 102,000

Jo estimates that these costs will be recouped by December 31, 2023. The materials and
equipment purchased have no alternative future uses.

During 2020, because of recent events in the field, Jo estimates that the remaining life of the patent
purchased on January 1, 2019 is only 5 years from January 1, 2020. The company takes a full
year’s amortization or depreciation on assets acquired during the year.
year.  

1. The amortization of the patent for the year 2020 is

a. P200,000 c. P333,000
b. P288,000 d. P360,000
2. Total research and development
development expense to be shown in the 2020 statement
statement of
of comprehensive
income is
a. P244,000 c. P144,000
b. P164,000 d. P48,800
3. The carrying Value of the Franchise
Franchise at December 31,
31, 2020 is
a. P360,000 c. P432,000
b. P370,000 d. P444,000
4. The total amount that
that will be charged against
against revenue for 2020 related
related to the franchise is
a. P192,000 c. P161,000
b. P182,000 d. P200,000
5. The amortized cost of the Notes
Notes Payable on December
December 31, 2020 is
a. P300,000 c. P327,000
b. P309,000 d. P336,000

 
 56

15. Coney Corporation was incorporated on January 3, 2018. The corporation’s financial statements for
its first year of operations were not examined by a CPA. You have been engaged to audit the financial
statements for the year ended December 31, 2019, and your audit is substantially completed. The
corporation’s trial balance appears below: 
below:  

Coney CORPORATION
CORPORATION
Trial Balance
December 31, 2019
Cash P 15,000
 Accounts receivable
receivable 73,000
 Allowance for Uncollectible
Uncollectible accounts
accounts P 1,460
Inventories 50,200
Machinery 82,000
Equipment 37,000
 Accumulated Depreciation
Depreciation 26,200
Patents 128,200
Leasehold Improvements 36,100
Prepaid Expenses 13,000
Organization Costs 32,000
Goodwill 30,000
Licensing Agreement no.1 60,000
Licensing Agreement no.2 56,000
 Accounts Payable 73,000
Unearned Revenue 17,280
Share Capital 300,000
Retained Earnings (January 1, 2019) 159,060
Sales 720,000
Cost of goods sold 475,000
Selling and general expenses 180,000
Interest expense 9,500
Other operating expenses 20,000
Totals P1,297,000 P 1,297,000

The following information relates to accounts that may yet require adjustment:

•  Patents for Coney’s manufacturing process were acquired on January 1, 2019, at cost of
P93,500.

•
   An additional P34, 700 was spent in December 2019 to improve machinery covered by the
patents and charged to the Patents account.

•  Depreciation on fixed assets

assets has been properly recorded for 2019 in accordance with Coney’s
practice, which provides a full year’s depreciation for property on hand June 30 and no
depreciation otherwise. Coney uses the straight-line method for all depreciation and
amortization and 17- year life on its patents.

•  On January 3, 2018, Coney purchased licensing agreement no. 1, which was believed to have
an unlimited useful life. The balance in the licensing agreement no. 1 accounts include its
purchase price of P57,000 and expenses of 3,000 related to the
t he acquisition.

 
 57

•  On January 1, 2019, Coney purchases licensing agreement no. 2, which has a life expectancy
of 10 years. The balance in the licensing agreement no.2 includes its purchase price P54,000
and P6,000 in acquisition expenses, but it has been reduced by a credit of P4,000 for the
advance collection of 2020 revenue from the agreement.

•  In late December 2019, an explosion caused a permanent 70% reduction in the expected
revenue producing value of licensing agreement no. 1, and in January 2020, a flood caused
additional damage that rendered the agreement worthless.

•  The balance in the goodwill account includes (a) the P18,000 paid December 2018, for an
advertising program that was estimated to help increase Coney’s sales
sales over
 over a period of 4 years
following the disbursement, an (b) legal expenses of P12,000 incurred for Coney’s incorporation
on January 3, 2018.

•  The leasehold improvements account includes (a) P15,000 cost of improvements with a total
estimated useful life of 12 years, which Coney, as tenant, made leased premises in January
2018, (b) movable assembly line equipment costing P15,000 that was installed in the leased
premises in December 2019, and (c) real estate taxes of 6,100 paid by Coney in 2019, which
under terms of the lease should have been paid by the landlord. Coney paid its rent full during
2019. A ten-year non-renewable lease was signed January 3,2018, for the leased building that
Coney used in manufacturing operations.

•  The balance in the organization costs account includes costs incurred during the organizational
period. The corporation has exercised its option to amortize organization costs over a 60-month
period for income tax purposes and wishes to amortize these for accounting purposes on same
basis.

1. What is the amortization of patents for manufacturing processes at December 31, 2019?
a. P7, 541 b. P5,500
c. P3, 458 d. P2,041
2. Impairment loss on licensing agreement no. 1 account is
a. P42,000 b. P39,900
c. P 0 d. P18,000
3. Adjustment on leasehold improvements account will include a credit on leasehold improvement of
a. P15, 000 b. P8,900
c. P 21, 100 d. P6,100

16. As the recently appointed auditor for Shawn Company, you have been asked by your senior in charge
to examine the entity’s intangible assets. The trial balance submitted to you by Shawn listed the
following intangible assets account at December 31, 2020:

Patents P 920,000
Trademarks 220,000
Franchise 900,000
Organization costs 40,000
Goodwill 450,000

You obtained the following additional information:

 
 58

1. The patents were

were purchased by the company on January 1, 2018 for P1,000,000.
P1,000,000. At the date of
purchase, the patents were assessed to have an estimates useful life of 10 years, although it
will expire on December 31, 2033. Amortization was made by the company for years 2018 and
2019, based on its 10-year life. In 2020, the company successfully defended the patents in an
infringement suit; the decision was rendered by the court on December 28, 2020. Legal fees of
P120, 000 were incurred and capitalized by the company in 2020.
2. At December
December 31, 2020, the company assessed the economic benefits expected expected to be derived
from the patents. Because of new products and processes introduced in the market, it is believed
that these patents would provide annual cash inflow of P140, 000 for the next 5 years. The
company’s appropriate discount rate is 10%. Since there is no homogeneous market for these
patents, their selling price is not reliably determinable.
3. The balance of the Trademarks account represents
represents its purchase
purchase price of P150,
P150, 000 paid on
January 1, 2018 and P70, 000 of legal costs incurred during the current year 2020 for the cost
of infringement suit filed by the company against its competitor. The trademark was originally
believed to have an indefinite useful life, hence no amortization was taken up by the company
for years 2018 and 2019. Because of new products introduces in the market the trademark is
now believed to benefit the company up to the end of 2022.
4. The franchise account represents
represents the total cash paid to acquire it on January 1, 2019, P200,
000 plus the P800, 000 face value of the promissory note issued on the same date, reduced by
2019 amortization of P100, 000. The P800, 000 promissory note was non-interest bearing,
payable in four annual installments of P200, 000 due every December 31 starting December 31,
2019. All installment payments up to December 31, 2020 have been made on due date. Implicit
interest rate on the note is 10% based on the equivalent cash price of the franchise when
purchased
5. The organization costs represent
represent the unamortized
unamortized portion
portion of the costs
costs of drafting and registering
the corporate charter and the costs incurred in the shareholders’
shareho lders’ meetings during the process
of incorporation, reduced by amortization taken up in 2018 through 2019. The corporation opted
to amortize the organization costs over five years for tax purposes and applied the same
treatment for accounting purposes.

1. Carrying amount of patents at December 31, 2019 is

a. P704, 000 b. P800, 000
c. P896, 000 d. P 1, 000,000
2. Total expenses recognized in 2020 relating to trademark
a. 120, 000 b. 70, 000
c. 20, 000 d. 50, 000

3. Interest
a. P49,expense
738 on notes payable 2020 b. P63, 398
c. P80, 000 d. P71, 429
4. Correct cost of franchise
a. P633, 980 b. P1,000,000
c. P 800, 000 d. P833, 980
5. An adjustment on organization cost includes a debit to
a. Retained earnings 40, 000 c. Retained earnings 8, 000
b. Organization cost 40, 000 d. Organization costs 8,000
 

17. Steven Company, an entity belonging to the category of small and medium- sized entities, was
formed in January 2017 and is preparing its financial statements under IFRS for the first time at the
end of 2019. You found the following accounts relating to intangible assets

 
 59

Patents P1,200,000
Copyright 1,400,000
Trade name 1,500,000
Computer software 400,000
Start-up Costs 300,000
Intellectual capital 2,000,000
Goodwill 900,000

You discovered the following up on your further investigation:

1. The patents were acquired on January 2, 2, 2019 and were expected to provide uniform
uniform economic
benefits over their estimated useful life of 12 years. The purchase price was P1,150,000 and
P50,000 was incurred to register the patent in the name of Steven.
2. The copyright is is expected to be of benefit
benefit to Steven for an indefinite period
period of time. At December
31, 2019, there was no indication of impairment for the copyright.
3. The software was purchased by the entity and was installed on June 30, 2019. The software is
expected to be used for 5 years, at the end of which it is expected to be replaced.
4. Steven Company believed that the competencies
competencies of its its administrative
administrative and sales staff were
were a
company’s part of competitive advantage; hence, the board of directors resolved to capitalize
these as intellectual capitals with a credit to share premium.
5. The goodwill account was was the result of an acquisition in January 2018 of a micro- enterprise
enterprise
operating at a profit. You were satisfied that the assets and liabilities acquired were recorded at
their fair values. Steven Company did not record amortization, as it believed that the acquisition
of Steven will provide economic benefits for an indefinite period of time.

1. Adjustment to patents includes a credit to patents accounts

a. P50, 000 b. P100, 000
c. P120, 000 d. P 0
2. Amortization of computer software
a. P80,000 b. P40, 000
c. P60, 000 d. P20,000

 
 60

 APPLIED
 APPL IED AUDITING
LIABILITIES
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. Emerson Machineries operates a mechanical company which have the following transactions:
•  The beginning of the year Accounts Payable was P150,000. Purchases on trade accounts
during the year were P975,000 and payments on account were P915,000.
• 
The Company
systems. incurs substantial
As of December costs
31, 2019, it is for electricity
estimated thattoP82,500
run its ofstores and has
electricity air conditioning
been used,
although the monthly billing for December has not yet been received.
•  The company a cash balance of P118,000
•  Depreciation for tax purposes was P43,000
•  Emerson machineries sells service plans for as low as P25 per month. However, it requires its
customers to repay on a 6-month increments. As of the year-end P562,500 has been collected
for 2020 web hosting plans.
•  The entity acquired asset amounting to P86,000 using its cash before coming up to the year-
end balance
•  Emerson’s service plans are subject to sales taxes and Emerson collected P97,500 during the
year. All of these amounts have been remitted to taxing authorities, with the exception of P7,500
that is due to be paid at January, 2020.
•  The company has total bank loans of P2,250,000. The debt bears interest at 6% payable
monthly. As of December 31, 2019, all interest has been paid, with the exception of accrued
interest for the last half of December.
•  Emerson had income for operations amounting to P457,000
•  The company’s bank loans (P2,250,000) are all due on June 30, 2020. However, on December
31,2019, Emerson has a firm lending agreement with the bank to renew and extend P1,500,000
of this amount on a 5-year basis.

1. How much
much would be the amount of Accounts Payable?
a. P90,000 c. P210,000
b. P916,125 d. P150,000
 
2. What would be the amount of
of interest payable?
a. P5655 c. P5545
b. P5535 d. P5625
 
3. What would be the amount
amount of current liabilities?
a. P1,618,125 c. P1,605,000
b. P 860,625 d. P 845,625
 

2. JP, INC., a dealer of household appliances, sells washing machines at an average price of P8,100.
The company also offers to each customer a separate 3-year warranty contract for P810 that
requires the company to provide periodic maintenance services and to replace defective parts.
During 2018, JP sold 300 washing machines
machines and 270 warranty contracts for cash. The company
estimates that the warranty costs are P180 for parts and P360 for labor.

 Assume sales occurred

occurred on December 31, 31, 2018. JP policy is to recognize
recognize income from the
warranties on a straight-line basis. In 2019, JP incurred actual costs rela
relative
tive to 2018 warranty
sales of P18,000 for parts and P36,000 for labor.
  
61

1. What liability relative to these transactions would appear on the December 31, 2018, statement of
financial position and how would it be classified?
Current Noncurrent
a. P145,800 P72,900
b. P72,900 P72,900
c. P72,900 P145,800
d. P0 P218,700

2. What amount
amount of
of warranty
warranty expense would be reported for 2018?
a. P18,000 b. P 0 c. P 36,000 d. P54,000

3. What liability relative to the 2018

2018 warranties would be reported on December 31, 2019, and how
would it be classified?
Current Noncurrent
a. P145,800 P72,900
b. P72,900 P72,900
c. P72,900 P145,800
d. P145,800 P0

3. Gisel Co. includes one coupon in each box of laundry soap they sell. Customers receive a towel in
exchange for 10 coupons and a remittance of P15. Each towel costs 20. Gisel estimates that 50%
of coupons will be redeemed. Data for 2018 and 2019 are as follows
2018 2019
Boxes of laundry sold 450,000 500,000
Towel purchased 25,000 37,000
Coupons redeemed 150,000 230,000

1. What is the premium expense for 2018?

a. 15,000 c. 1,125,000
b. 112,500 d. 45,000
 
2. What amount of estimated
estimated premium liability will be reported on December
December 31, 2018?
a. 37,500 c. 25,000
b. 35,000 d. 30,000
 
3. What amount of estimated
estimated premium liability will be reported on December
December 31, 2019?
a. 9,500 c. 31,000
b. 10,500 d. 47,500
 

4. In the packages of its products, Alyssa, INC. includes coupons that may be presented at retail
stores to obtain discounts on other Alyssa products.

Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for
handling costs. Alyssa honors requests for coupon redemption by retailers up to 3 months after the
consumer expiration date. Alyssa estimates that 60% of all coupons issued will ultimately be
redeemed. Information relating to coupons issued by Alyssa during 2019 is as follows:
Consumer expiration date 12/31/2019
Total payments to retailers 12/31/2019 165,000
Liability for unredeemed coupons 12/31/2019 99,000
  
62

1. The total face amount of coupons issued in 2019 is

a. P 600,000 c. P 400,000
b. P 440,000 d. P 240,000

2. Coupons expense at year-end is

a. P 440,000 c. P 264,000
b. P 400,000 d. P 240,000

3. Estimated liability for unredeemed coupons is

a. P 219,000 c. P 99,000
b. P 123,000 d. P 3,000

5. Rosa, president of the Valla Company, has a bonus arrangement with the company under which she
receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year,
the net income before deducting either the provision for income taxes or the bonus is P4,650,000.
The bonus is deductible for tax purposes, and the tax rate is 32%.

1. The amount of Maria Rosa’s bonus is 

is 
a. P 465,000.00 b. P 364,285.71 c. P 339,270.39 d. P 296,069.42

2. The appropriate provision for income

income tax for the year is
a. P 1,488,000.00 b. P 1,393,258.43 c. P 1,371,428.57 d. P 1,379,433.48

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

6. Joseph CORP. has been producing quality disposable diapers for more than two decades. The
company’s fiscal year runs from April 1 to March 31. The following information relates to the
obligations of Joseph as of March 31, 2019.

Bonds Payable
Joseph issued P10,000,000 of 10% bonds on July 1,2017. The prevailing market rate of interest for
these bonds was 12% on the date of issue. The bonds will mature on July 1, 2027. Interest is paid
semiannually on July 1 and January 1. Joseph uses the effective interest rate method to amortize
bond premium or discount.

The following present value factors are taken from the present value tables:
Present value of 1 at 12% for 10 periods 0.32917
Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12% for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6% for 20 periods 11.46992
  
63

Notes Payable
Joseph has signed several long-term notes with financial institutions. The maturities of
these notes are given in the schedule below. The total unpaid interest for all of these
notes amounts to P600,000 on March 31, 2019.
Due Date Amount Due
 April 1, 2019 P400,000
July 1, 2019 600,000
October 1, 2019 300,000
January 1, 2020 300,000
 April 1, 2020 –
2020 –  March 31,2021 1,200,000
 April 1, 2021 –
2021 –  March 31,2022 1,000,000
 April 1, 2022 –
2022 –  March 31,2023 1,400,000
 April 1, 2023 –
2023 –  March 31,2024 800,000
 April 1, 2024 –
2024 –  March 31,2025 1,000,000
P7,000,000
Estimated Warranties
Joseph has a one-year product warranty on some selected items in its product
line. The estimated warranty liability on sales made during the 2017-2018 fiscal year and still
outstanding as of March 31, 2018, amounted to P180,000. The warranty costs on sales made from
 April 1, 2018, through March 31,2019,
31,2019, are estimated
estimated at P520,000. The actual
actual warranty costs
costs
incurred during the current 2018-2019 fiscal year are as follows:
Warranty claims honored on 2017-2018 sales P180,000
Warranty claims honored on 2018-2019 sales 178,000
Total warranty claims honored P358,000

Other Information

1. Trade Payables 
Payables 
 Accounts payable
payable for supplies,
supplies, good and services purchased on open account amount
amount
to P740,000 as of March 31, 2019.

2. Payroll Related Items 

Items 
 Accrued salaries and wages P300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000
Total P404,000

3. Miscellaneous Accruals 
Accruals 
- Other accruals not separately classified amount to P150,000 as of March 31,2019.
31,2019.

4. Dividends
- On March 15, 2019, Joseph’s board of directors declared a cash dividend of P0.20
per ordinary share and a 10% share dividend. Both dividends were to be
distributed on April 12, 2019, to the shareholders of record at the close of business
on March 31, 2019. Data regarding Joseph ordinary share capital are as follows:

Par value P5.00 per share

Number of shares issued and outstanding 6,000, 000 shares

Market values of ordinary shares:

March 15,2019 P22.00 per share
March 31,2019 21.50 per share
 April 12, 2019 22.50 per share
  
64

1. How much was received by Joseph from the sale

sale of the bonds on July 1, 2017?
a. P8,852,960 c. P10,500,000
b. P10,000,000 d. P10,647,040

2. What is the current portion of Joseph’s notes payable at March 31, 2019? 
2019?  
a. P2,800,000 c. P1,300,000
b. P1,600,000 d. P3,800,000

3. The balance of the estimated warranties payable at March 31, 2019 is?
a. P342,000 c. P520,000
b. P 18,000 d. P180,000

4. On March 31, 2019, Joseph’s statement of financial position would report total current liabilities of
a. P5,286,000 c. P5,336,000
b. P4,386,000 d. P5,642,000

5. On March 31, 2019, Joseph’s statement of financial position would report total noncurr ent
ent liabilities
of
a. P14,389,350 c. P14,370,783
b. P14,352,217 d. P14,252,960

7. In the course of your examination of the liability accounts of Constancia Company, you found that
the entity on January 2, 2019 issued at a premium bonds payable with a face value of P500,000.
The premium was erroneously credited by the company to Interest Income. The bonds are payable
December 31, 2026 and pay interest semi-annually on June 30 and December 31. You instructed
your audit staff to compute the premium amortization using the interest method and he provided you
with the following:

Premium amortization from January 2, 2019 to June 30, 2019 P 1,562

Bond carrying value as of June 30, 2019 555,738
Total interest paid on bonds for the year 2019 (payments made
on June 30 and December 31) 70,000

1. The annual
annual stated
stated interest
interest rate on the bond is
is
a. 10% c. 12%
b. 11% d. 14%
 
2. The effective
effective annual
annual interest
interest rate on the bonds
bonds iiss
a. 10% c. 12%
b. 11% d. 14%

3. The premium amortization on the bonds payable

payable for
for 2019 is
a. P3,124 c. P5,574
b. P3,218 d. P8,022

4. The interest
interest expense on the bonds
bonds for 2019 is
is
a. P61,978 c. P66,876
b. P66,782 d. P70,000
  
65

8. On January 1, 2019, an entity leased a building from a lessor with the following pertinent information.
 Annual rental payable at the end of each year 1,000,000
Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62
1. What is is the cost of the right of use
use asset?
asset?
a. 4,500,000 c. 4,700,000
b. 4,400,000 d. 4,600,000
 
2. What is is the lease
lease liability
liability on December
December 31, 2019?
a. 3,510,000 c. 3,950,000
b. 3,169,000 d. 3,719,000

9. OPERATING LEASE- LESSOR

Ivan Company, a lessor, leased an equipment under an operating lease. The lease term is 5 years
and the lease payments are made in advance on January 1 of each year as shown in the following
schedule:
January 1, 2017 1,000,000
January 1, 2018 1,000,000
January 1, 2019 1,400,000
January 1, 2020 1,700,000
January 1, 2021 1,900,000
Total rentals 7,000,000

1. What is the rent income for 2017?

a. 1,000,000 c. 2,000,000
b. 1,400,000 d. 1,500,000
2. On December 31, 2018, what amount should be recognized as accrued rent receivable?
a.700,0000 c.400,000
b.800,000 d. 0

10. SALES TYPE LEASE- LESSOR

 An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity
expects a 12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2019, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000
Residual value –
value –  unguaranteed 600,000
Initial direct cost 200,000
 Annual rental payable in advance
advance 900,000
Useful life and lease term 8 years
  
66

Implicit interest rate 12%

PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2019

1. What is
is the gross
gross investment
investment in the lease?
lease?
a. 7,800,000 c. 6,600,000
b. 7,200,000 d. 6,900,000

2. What is
is the net investment in the lease?
a. 5,004,000 c. 5,500,000
b. 5,244,000 d. 5,740,000
3. What is the total financial revenue?
a. 2,196,000 c. 2,556,000
b. 2,796,000 d. 1,956,000
4. What amount should be recognized
recognized as interest income for 2019?
a. 600,480 c. 536,760
b. 492,480 d. 521,280
5. What amount of cost of goods sold should be recognized
recognized in recording
recording the lease?
a. 3,260,000 c. 3,740,000
b. 3,500,000 d. 3,460,000

11. An entity provided the following pension plan information:

Projected benefit obligation –
obligation –  January 1, 2019 3,500,000
Fair value of plan assets –
assets –  January 1, 2019 2,800,000
Pension benefits paid during the year 250,000
Current service cost for 2019 1,750,000
Past service cost for 2019 (vesting period 5 years) 425,000
 Actual return on plan assets
assets 180,000
Contribution to the plan 1,500,000
 Actuarial loss due to change in assumptions
assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%

1. What is the employee benefit expense

a. 2,245,000 expense for the current year?
year? c. 2,525,000
b. 1,905,000 d. 1,750,000
2. What is the net remeasurement
remeasurement loss for the current year?
a. 200,000 c. 300,000
b. 100,000 d. 400,000
3. What is the projected
projected benefit obligation on December
December 31, 2019?
a. 5,550,000 c. 5,775,000
b. 5,075,000 d. 5,975,000
4. What is the fair value
value of plan assets
assets on December
December 31, 2019?
a. 4,480,000 c. 4,300,000
b. 4,230,000 d. 4,050,000
5. What amount should be reported as accrued benefit
benefit cost on December
December 31, 2019?
a. 1,745,000 c. 1,045,000
b. 1,750,000 d. 700,000
  
67

12. Brad Company provided the following information for the current year:
Current service cost 520,000
 Actual return 810,000
Interest expense 590,000
Interest income 350,000
Loss on settlement 240,000
Past service cost 360,000
Contribution 1,500,000

1. What is the employee benefit expense?

a. 1,710,000 c. 1,350,000
b. 1,470,000 d. 1,360,000

2. What is
is the remeasurement gain or los
losss on plan assets?
assets?
a. 460,000 loss c. 220,000 loss
b. 460,000 gain d. 220,000 gain

3. What is the total defined benefit cost?

a. 820,000 c. 740,000
b. 900,000 d. 960,000

4. What is the prepaid or accrued benefit cost for the year?

a. 600,000 c. 140,000
b. 600,000 d. 140,000

13. Jeffrey Company is experiencing financial difficulty and is negotiating trouble debt restructuring
with its creditors to relieve
r elieve its financial stress. Jeffrey has a P5,000,000 note payable to Metrobank.
The bank is considering acceptance of an equity interest in Jeffrey Company in the form of 400,000
ordinary shares with a fair value of P12 per share. The par value of the ordinary share is P10 per
share.

1. If the issue
issue of equity is treated as a conversion
conversion of an
an existing debt,
debt, what is
is the amount of gain to be
reported by Jeffrey in its profit or loss statement as a result of the restructuring?
a. None b. P200,000 c. P 500,000 d. P1,000,000

2. If the issue
issue of equity is treated as an extinguishment
extinguishment of an existing debt
debt instrument, what amount of
gain or loss should Jeffrey Company report in its profit or loss statement as a result of the
restructuring?
a. None b. P200,000 c. P 500,000 d. P1,000,000

14. Mhel Company has the following loans payable scheduled to be repaid in February of the next
year. The company’s accounting year ends on December 31.
31.  
The company intends to repay Loan1 for P100,000 when it comes due in February. In the following
October, the company intends to get a new loan for P80,000 from the same bank.
The company intends to refinance Loan 2 for P150,000 when it comes due in February. The
refinancing agreement of P180,000 will be signed in April, after the financial statements for this
year have been authorize for release.
  
68

The company intends to refinance Loan 3 for P200,000 before it comes due in February. The
actual refinancing for P175,000 took place in January before the financial statements for this year
have been authorize for issue.
 As of December 31, of this year, the total current liabilities to be reported on the company’s statement
of financial position should be:
a. 0 c. 350,000
b. 250,000 d. 450,000

 As of December 31, of this year, the total noncurrent liabilities to be reported on the company’s
statement of financial position should be:
a. 0 c. 350,000
b. 250,000 d. 450,000

15. Cooper Company reported taxable income of P8,000,000 in the income tax return for the first year
of operations.

Temporary differences between financial income and taxable income for the first year are as
follows:
Tax depreciation in excess of book depreciation 800,000
 Accrual for product liability
liability claim in excess of actual
actual claim 1,200,000

Reported
Installmentinstallment sales income in excess of taxable
sales income 2,600,000
Income tax rate 30%

1. What is the deferred tax asset at year-end?

a. 240,000 c. 780,000
b. 360,000 d. 0

2. What is the deferred tax liability at year-end?

a. 1,020,000 c. 240,000
b. 780,000 d. 0

3. What is the deferred tax expense for the first year?

a. 1,380,000 c. 660,000
b. 1,020,000 d. 360,000
4. What is the total tax expense for the first year?
a. 3,060,000 c. 2,580,000
b. 2,400,000 d. 2,220,000

16. Chet Consulting sometimes performs services for which it receives payment at the conclusion of
the engagement, up to six months after services commence. Chet recognizes service revenue for
financial reporting purposes when the services are performed. For tax purposes, revenue is
reported when fees are collected. Service revenue, collections and pretax accounting income for
2017-2020 are as follows:

Year Service Revenue Collections Pretax Accounting Income

2017 650,000 620,000 186,000
  
69

2018 750,000 770,000 250,000

2019 715,000 700,000 220,000
2020 700,000 720,000 200,000

There are no differences between accounting

accounting income and taxable income other than the temporary
difference described above. The enacted tax rate for each year is 40%.

1. What should be reported as income tax payable for 2017?

a. 62,400 c. 620,000
b. 156,000 d. 186,000

2. What should
should be reported as income
income tax payable for 2018?
a. 270,000 c. 250,000
b. 108,000 d. 750,000

3. What should be reported as income tax payable for 2019?

a. 205,000 c. 82,000
b. 220,000 d. 700,000

4. What should
should be reported as income
income tax payable for 2020?
a. 200,000 c. 700,000
b. 220,000 d. 88,000
  
70

 APPLIED
 APPL IED AUDITING
SHAREHOLDER’S EQUITY 
EQUITY 
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question. 
question. 

1. The following data were compiled prior to preparing the balance sheet of the Angel Corporation as
of December 31, 2020:

 Authorized ordinary stock,

stock, P100 par value P4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000

Stock warrants
Treasury stock,outstanding
at cost 200,000
144,000
Unissued ordinary stock 800,000

Compute for the following:

 A B C D
Ordinary Stock Issued 4,000,000 3,200,000 3,056,000 3,680,000

Share Premium (APIC) 320,000 1,400

1,400,000
,000 1,320,000 1,200,000
 Appropriated Retained Earnings 400,000 544,000 1,000,000 -
Total Stockholders’ Equity 
Equity  6,760,000 6,640,000 6,480,000 6,240,000
Legal Capital 3,200,000 3,680,000 3,560,000 4,000,000

2. The “shareholders’ equity” account

account of Facundo Corporation, after its initial year of operation in 2020
shows the following:
Date Particulars Debit Credit
Jan. 1 Issued 6,000 shares at par of P100 in
exchange for real property with a market
value of P800,000; authorized 20,000 P600,000
shares
Jan. 15 Sold 8,000 shares at P120 960,000
Mar. 10 Purchased 800 Facundo shares at P150 P120,000
May 15 Loss on sale of machinery 40,000
June 10 Sold 400 treasury shares 68,000
Dec. 31 Cash dividends declared payable January 15, 80,000
2021
Dec. 31 Profit for the year 316,000
  
71

Based on the information presented above and the result of your audit, answer the following.
1. The adjusted share capital
capital as
as of
of De
December
cember 31 2020 is
a. P1,360,000 c. P1,400,000
b. P1,560,000 d. P1,340,000

2. The total
total share premium as of
of December
December 31 2020 is
a. P360,000 c. P368,000
b. P160,000 d. P168,000

3. The unappropriated retained earnings

earnings as of December 31 2020 is
a. P196,000 c. P136,000
b. P156,000 d. P144,000

4. The adjusted
adjusted total equity on December 31, 2020 is
a. P1,944,000 c. P1,744,000
b. P1,704,000 d. P1,904,000

5. The book value per share of Facundo Corporation

Corporation on December 31, 2020 was
a. P140.00 c. P128.20
b. P132.22 d. P125.29

3. Following is the stockholders’ equity section of Jerome Corporation’s balance sheet at December
31, 2019:

Ordinary Stock, P10 par value; authorized 1,500,000 shares; issued and
outstanding 900,000 shares P9,000,000
Share Premium 750,000
Retained Earnings 2,700,000
Total Stockholders’ Equity 
Equity  P12,450,000

Transactions during 2020 and other information relating to the stockholders’ equity accounts were
as follows:

•  On January 26, Jerome reacquired 75,000 shares of its ordinary stock for P11 per share.

• 
On April 4, Jerome sold 45,000 shares of its treasury stock for P14 per share.
•  On June 1, Jerome declared a cash dividend of P1 per share, payable on July 15, 2020 to
stockholders of record on July 1, 2020.

•  On August 15, each stockholder was issued one stock right for each share held to purchase two
additional shares of stock for P12 per share. The rights expire on October 31, 2020.

•  On September 30, 150,000 stock rights were exercised when the market value of the stock was
P12.50 per share.

•  On November 2, Jerome declared a two for one stock split-up and charged the par value of the
stock from P10 to P5 per share. On November 20, shares were iissued
ssued for the stock split.
  
72

•  On December 5, 60,000 shares were issued in exchange for a secondhand equipment.

equipment. It
originally cost P600,000, was carried by the previous owner at a book value of P300,000, and
was recently appraised at P390,000.

•  Net income for 2020 was P720,000.

Based on the above and the result of your audit, determine the following as of December 31, 2020:
1. Ordinary stock
a. 12,600,000 b. 10,800,000 c. 10,050,000 d. 12,300,000

2. Share premium
a. 1,485,000 b. 1,575,000 c. 3,825,000 d. 1,275,000

3. Unapproriated retained earnings

a. 2,550,000 b. 2,422,500 c. 2,220,000 d. 2,190,000

4. Total stockholders’ equity 

equity 
a. 16,425,000 b. 14,295,000 c. 16,095,000 d. 16,065,000

4. Angel Corporation was authorized at the beginning of 2018 with 300,000 authorized shares of P100,
par value ordinary stock.
stock. At December
December 31, 2018, the stoc
stoc kholders’ equity section of Angel was as
follows:

Ordinary Stock, par value P100 per share; authorized 300,000 shares; issued
30,000 shares P3,000,000
Share Premium 300,000
Retained Earnings 450,000
Total Stockholders’ Equity 
Equity  P3,750,000

On June 15, 2019, Angel issued 50,000 shares of its

its ordinary stock for P6,000,000.
P6,000,000. A 5% stock
dividend was declared on September 30, 2019 and issued on November 10, 2019 to stockholders
of record on October 31, 2019. Market value of ordinary stoc
stockk was P110 per share on declaration
date. The net income of Angel for the year ended December 31, 2019 was P475,000.

During 2020, Angel had the following transactions;

March 1 Angel reacquired 3,000 shares of its ordinary stock for P95 per share.

May 31 Angel sold 1,500 shares of its treasury stock for P120 per share.

 August 10 Issued to stockholders one stock right for each share held to purchase two additional
shares of ordinary stock for P125 per share. The rights expire on December 31, 2020.

September 15 25,000 stock

stock rights
rights were exercised when the market
market value of ordinary stock was P130
per share.

October 31 40,000 stock rights were exercised when the market value of the ordinary stock was
P140 per share.

December 10 Angel declared a cash dividend of P2 per share payable on January

January 5, 2021 to
stockholders of record on December 31, 2020.
  
73

December 20 Angel retired 1,000 shares of its

its treasury stock and reverted them to an
an unused basis.
On this date, the market value of the ordinary stock was P150 per share.

December 31 Net income for 2020 was P500,000.

Based on the above and the result of your audit, determine the following as of December 31, 2020:
1. Ordinary stock
a. 21,400,000 b. 21,300,000 c. 14,800,000 d. 21,250,000

2. Share premium
a. 4,627,500 b. 3,007,500 c. 4,632,500 d. 4,592,500

3. Retained earnings
a. 600,000 b. 565,000 c. 557,000 d. 560,000

4. Treasury stock
a. 10,000 b. 47,500 c. 50,000 d. 0

5. In connection with your audit of the Trisha Corporation, you were able to obtain the following
information pertaining to the corporation’s equity accounts.
accounts.  

Trisha Corporation has 32,000 shares of P2 par value ordinary stock authorized. Only 75% of these
shares have been issued, and of the shares issued,
issued, only 22,000 are outstanding. On December 31,
2019, the stockholders’ equity section revealed that the balance in share premium in Excess of Par
Value –
Value  – ordinary
 ordinary was P832,000, and the Retained Earnings
Earnings balance was P220,000. The Treasury
stock was purchased at an average price of P37.50 per share.

During 2020, Trisha had the following transactions:

Jan. 15 Trisha issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative preference stock;
4,000 shares are authorized

Feb. 01 Trisha sold 3,000 shares of newly issued P2 par value ordinary stock at P42 per share.

Mar. 15 Trisha declared a cash dividend on ordinary stock of P0.15 per share, payable on April 30
to all stockholders of record on April 1

 Apr. 15 Trisha reacquired 400 shares of its ordinary stock for P43 per share.

Employees exercised 2,000 stock

stock options granted in 2019. When the options were granted,
each option entitled the employees to purchase 1 share of ordinary stock for P50 per share.
The share price on the date of grant was also P50
P50 per share. Trisha issued new shares
shares to
the employees.

May 01 Trisha declared a 10% stock dividend to be distributed on June 1 to stockholders of record
on May 7. The market price of the ordinary stock
stock was P50 per share on May 1.

31 Trisha sold 300 treasury shares reacquired on April 15 and an additional 400 shares

costing
was P57P15,000 that had been on hand since the beginning of the year. The selling price
per share.
  
74

Sept.15 The semiannual cash dividend on ordinary stock was declared, amounting to P0.15 per
share. Trisha also declared the yearly dividend on preference stock. Both are payable on
October 15 to stockholders of record on October 1.

Net income for 2020 was P100,000.

Based on the above and the result of your audit, determine the balances of the following as of
December 31, 2020:
1. Preference stock
a. 86,000 b. 80,000 c. 90,000 d. 84,000

2. Ordinary stock
a. 63,320 b. 183,320 c. 23,320 d. 58,000

3. Additional paid in capital

a. 1,175,680 b. 1,195,680 c. 1,068,000 d. 1,099,680

4. Treasury stock
a. 64,300 b. 92,200 c. 77,200 d. 75,000

5. Total retained earnings

a. 74,756 b. 183,250 c. 99,756 d. 174,756

6. You were able to gather the following information in connection with your audit of Tintin Corporation:

•  On January 1, 2018, Tintin

T intin Corporation granted share options to officers and key employees for
the purchase of 30,000, P10 par value, ordinary
ordinary shares of the ccompany
ompany at P25 per share. The
options are exercisable within a 5-year period beginning January 1, 2020 by grantees still in the
employ of the company, and expiring December 31, 2024. The service period for this award is
2 years. The fair value option pricing model determined total compensati
compensation
on expense to be
P525,000. The share was selling at P35 at the time the options werewere granted.
•  On April 1, 2019, 3,000 options were terminated when the employees resigned from the
company. The market value of ordinary share was P35 P35 per share on this date.
•  On March 31, 2020, 18,000 option shares were exercised when the market value of ordinary
share was P40 per share.

Based on the above and the result of your audit, determine the following:
1. Compensation expense in 2018
a. 525,000 c. 236,250
b. 262,500 d. 150,000
2. Net compensation expense in 2019
a. 262,500 c. 120,000
b. 210,000 d. 150,000
3. The exercise of
of the 18,000 options
options will result
result in a credit to Share
Share premium - excess over par of
a. 585,000 c. 270,000
b. 620,000 d. 450,000
4. Share premium
premium - share op
options
tions as
as of December 31, 2020

a. 0
b. 90,000 c.
d. 472,500
157,500
  
75

7. The stockholders’ equity section of the Joseph Inc. showed the following data on December 31,
2019: ordinary stock, P3 par, 450,000 shares authorized, 375,000 shares issued and outs
outstanding,
tanding,
P1,125,000; share premium in excess of par, P10,575,000; share premium from stock options,
P225,000; Retained earnings, P720,000. The stock options were granted to key executives
executives and
provided them the right to acquire 45,000 shares of ordinary stock
stock at P35 per share. Each option
has a fair value of P5 at the time the options were granted.

The following transactions occurred during 2020:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31, 2019. The
market price per share was P44 at this time.

 Apr. 1 The company issued bonds of P3,000,000 at par, giving each P1,000 bond a
detachable warrant enabling the holder to purchase two shares of stock at P40 each
for a 1-year period. The bonds would sell at P996 per P1,000 bond without
without the
warrant.

July 1 The company issued rights to stockholders (one right on each share, exercisable
within a 30-day period) permitting holders to acquire one share at P40 with every
10 rights submitted.
submitted. All but 9,000 rirights
ghts were exercised
exercised on July 31, and the
additional stock was issued.

Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised.

Dec. 1 The market price per share dropped to P33 and options came due. Because the
market price was below the option price, no remaining options were exercised.

Dec. 31 Net income for 2020 was P375,750.

Based on the above and the result of your audit, determine the following as of December 31, 2020:
1. Ordinary stock
a. 1,165,950 b. 1,250,775 c. 1,275,075 d. 1,273,050

2. Total share premium

a. 12,629,175 b. 11,283,300 c. 12,329,475 d. 12,604,200

3. Retained earnings
a. 870,750 b. 1,095,750 c. 1,287,000 d. 981,225

4. Total stockholders’ equity 

equity 
a. 13,545,000 b. 15,000,000 c. 14,676,000 d. 14,973,000

8. Shawn financial and operating circumstances warrant that Shawn Company undergo a quasi-
reorganization at December 31, 2020. The following information ma
mayy be relevant in accounting for
the quasi-organization.
Inventory with a fair value of P2,000,000 is currently recorded in the accounts at its cost of
P2,500,000.

Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000 net of accumulated
depreciation.
  
76

Individual stockholders contribute P4,000,000 to create share premium to facilitate the

reorganization. No new shares of stock are issued,
issued, although control of a majority of the company’s
outstanding stock passes to the company’s creditors.
creditors .
The par value of the ordinary share is reduced from P25 to P5
Immediately before those events, the stockholders’ equity section appears as follows: 
follows:  
Ordinary share (P25 par value, 100,000
shares authorized and outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000
 After the quasi-organization, the Share premium should
should have a balance of
a. 2,750,000 c. 3,750,000
b. 3,250,000 d. 1,750,000

9. The Retained Earnings account of Trisha company follows:

Date Item Debit Credit

01-01-2019 Balance 485,000
03-31-2019 Dividends declared 200,000
12-31-2019 Profit for the year 324,000
04-01-2020 Share Premium 150,000
06-30-2020 Gain on sale of treasury shares 100,000
09-30-2020 Dividends declared 300,000
12-31-2020 Profit for the year 4 51,000
12-31-2020 Appraisal increase of land 300,000
12-31-2020 Balance 1,310,000
1,810,000 1,810,000
The only other shareholder's equity account in the books of the company as of December 31, 2020
is ordinary share capital, which has a balance of P2,000,000. This is composed of 20,000 issued
shares with par value of P100. All of these shares are outstanding as of December 31, 2020.

1. The correct balance of Retained Earnings as of December 31, 2020 is

 A. 760,000 B. 860,000 C. 1,060,000 D. 1,310,000

2. Additional Paid in Capital is

 A. 100,000 B. 150,000 C. 250,000 D. 550,000

3. Total shareholder's Equity is
 A. 2,710,000 B. 2,760,000 C. 3,010,000 D.3,310,000

10. In connection with your audit of the balance sheet of the Guts Company on December 31, 2020, the
Liability side of the Balance Sheet shows following items:
Current Liabilities P571,000
Bonds Payable 600,000
Reserve for bond retirement 320,000
6% Cumulative Preference Stock, P100 par value (liquidation value,
val ue, P115 per share);
 Authorized, 6,000 shares;
shares; issued, 4,000 shares;
shares; in treasury, 600 shares 400,000

Ordinary Stock,
8,000 P100 par value, authorized, 20,000 shares; issued and outstanding,
shares 800,000
Premium on Preference Stock 150,000
  
77

Premium on Ordinary Stock 165,000

Retained Earnings 458,600
Treasury Preference Stock, at cost 84,000

REQUIRED:
1. Compute for the total stockholders’ equity as of December 31, 2020. 
2020.  
2. Compute for the book value per share of each class
class of stock
stock as of December 31, 2020.
3. Assuming the preference stock is participating,
participating, compute for the book value per share of
of each class
class
of stock as of December 31, 2020.

11. The year-end audit of the records of Kaila Farms disclosed a shortage in cash amounting to
P600,000. The treasurer had concealed the fraud by increa
increasing
sing inventories by P300,000
P300,000,, land by
P100,000 and accounts receivable by P200,000.

Faced with prosecution, the treasurer offered to surrender 6,000 Kaila Farms shares owned by him.
The board of directors accepted the offer, with the agreement that the treasurer would pay any
deficiency between the shortage
shortage and the book value of the shares, after adjusting for the fraud. The
corporation would in turn pay the excess, if any, of the book value over the shortage.

 As of December 31, 2020, there were 40,000 ordinary shares issued and outstanding with a par
value of P100; Retained earnings as of January 1, 2020 was P1,600,000 and net income from 2020
operations was P1,400,000.

REQUIRED:
Considering the above information, answer the following:
1. What would be the book value
value per share for purposes of the agreement?
a. P175 b. P206 c. P150 d. None of these

2. How much would the company

company pay
pay the treasurer, if any?
a. P450,000 b. P300,000 c. P636,000 d. None of these

3. Assuming further the company distributes

distributes the 6,000 shares as dividend to the remaining
stockholders, what would be the balance of the Retained earnings as of December 31, 2020?
a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these

12. Presented below is the stockholder’s equity of the comparative balance sheet of Pembo
P embo co. on
December 31, 2020 and 2019:

Dec. 31, 2020 Dec. 31,2019

12% Preferred stock, P100 par P 165,000 P 135,000

Paid in capital in excess of par –
par  –  preferred 26,800 18,400
Common stock, P10 par* 821,200 799,200
Paid in capital in excess of par –
par  –  common 128,600 117,600
Paid in capital from treasury stock 3,600 1,600
Retained earnings 942,400 792,920
Total stockholder’s equity 
equity  P 2,087,600 P 1,864,720

*Par value after June 1, 2020 stock split

  
78

Pembo had 32,500 common stock outstanding at December 31,2018.

The following stockholders’ equity

equity transactions were recorded in 2019 and 2020:

2019
May 1 Sold 4,500 common shares for P24 par value P20
June 30 Sold 350 preferred shares for P124, par value P100
 Aug. 1 Issued an 8% stock
stock dividend on common stock. The
The market
value of the stock was P30 per share.
Sept. 1 Declared cash dividends of 12% on preferred stock
and P3 on common stock
Dec. 31 Net income for the year is P632,400

2020
Jan. 31 Sold 1,100 common shares for P30
May 1 Sold 300 preferred shares for P128
June 1 Issued a 2-for-1 split of common stock. The par value of
common stock was reduced t oP10 per share
Sept. 1 Purchased 500 common shares for P18 to be held as treasury stock.
Oct. 1 Declared cash dividends of 12% on preferred stock and P4
per share on outstanding common stock
Nov. 1 Sold 500 shares of treasury stock for P22

What is Pembo’s
Pembo’s basic earnings per share for 2019? 
2019? 
a. 8.25 c. 16.07
b. 8.04 d. 16.49

What is Pembo’s net income for 2020? 

2020?  
a. 475,960 c. 497,760
b. 456,160 d. 495,760

What is Pembo’s basic
Pembo’s basic earnings per share for 2020?
a. 5.81 c. 5.82
b. 6.06 d. 6.05
  
79

 APPLIED
 APPL IED AUDITING
FINANCIAL STATEMENTS 
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. Statement of financial position 

position 

The following
December 31, unadjusted sections ofto the
2019 were presented you.Statement of Financial Position of the Loeb Inc. as at

Cash P 85,000
 Accounts receivable
receivable 282,400
Merchandise inventory 92,000
Deferred charges 8,600
Current assets P468,000

Trade accounts payable, net of P5,000 debit balance P125,000

Interest payable 3,000
Income tax payable 12,000
Money claims of Union pending final decision 45,000
Mortgage payable due in four annual installments 100,000
Current liabilities P285,000
 A review of the above indicate that the Cash account of P85,000 included a customer’s check
returned by the bank marked NSF amounting to P1,250; and employee’s IOU of P2,000; and
P10,000 deposited with the courts for a case under litigation.

 Accounts receivable totaling P282,400 is composed of: Customers, debit balances  –  – P181,400;
 P181,400;
 Advances to subsidiaries  – 
 –  P20,000; Advances to suppliers  – –   P15,000; Receivables from Loeb
officers –
officers  – P18,000;
 P18,000; Allowance for Bad Debts –
Debts  – (P8,000);
 (P8,000); and selling price of merchandise invoiced
at 140% of cost but not yet delivered  – 
 –  P56,000 (The goods were not included in Merchandise
Inventory).

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The correct total of Current Assets
Assets on Dec
December
ember 31, 2019 is
a. P410,150 c. P413,400
b. P415,150 d. P418,400

2. The correct total of Current Liabilities

Liabilities on December 31, 2019 is
a. P170,000 c. P145,000
b. P160,000 d. P215,000

2. Statement of financial position 

position 

In connection with your audit of the Steven Co. for the year 2019, you were able to gather the
following accounts are from the unadjusted trial balance of the company on December 31, 2019:
  
80

Cash P170,000
 Accounts receivable
receivable 525,000
 Allowance for bad debts
debts 4,000
Notes receivable 180,000
Prepaid rent expense 10,000
Trading securities 150,000
Merchandise inventory 450,000
 Accounts payable 242,500
Note payable 100,000
 Accrued expenses 22,000
Bonds payable (due semi-annually in June and December
at P30,000) 300,000
Income tax payable 30,000
SSS and HDMF premiums payable 12,000
Withholding tax payable 9,000
Mortgage payable, due July 31, 2021 200,000
Contingent liability 80,000

 Additional information:
•   Cash consists of:

Cash in bank per bank statement (outstanding checks, P12,000) P167,000

Petty cash, including unreplenished petty cash expense vouchers of P150) 500
Customer’s advance deposit in check dated January 15, 2020 2,500
P170,000

•   Accounts receivable includes

includes P125,000 selling price of goods sent on consignment at 125% ooff
cost and not included in the inventory.

•  Notes receivable include notes discounted of P80,000.

•   Accounts payable includes P40,000 cost of purchases in transit FOB destination but not
included in the inventory. It also includes customer’s
customer’s advance deposit in check
check dated January
15, 2020 of P2,500.

•  The Note Payable is a promissory note dated October 1, 2019, due March 31, 2020 with 18%
interest p.a. This is in connection
connection with a loan from a Chubby Bank. Accrued expenses exclude
exclude
the interest payable on the note.
QUESTIONS:
Based on the above and the result of your audit, determine the amounts
amount s to be presented in Steven’s
statement of financial position as of December 31, 2019 for the following:
1. Cash
a. P167,500 c. P155,500
b. P155,350 d. P157,850

2. Trade and other receivables

a. P496,000 c. P576,000
b. P500,000 d. P498,500

3. Total current assets

a. P1,363,850 c. P1,361,350
b. P1,321,250 d. P1,261,350
  
81

4. Trade and other payables

a. P243,000 c. P277,500
b. P247,500 d. P250,000

5. Total current liabilities

a. P437,500 c. P433,000
b. P440,000 d. P377,500

3. Statement of financial position 

position 

The following statement of financial position is submitted to

t o you for inspection and review.

Kimberlie Corporation
Statement of Financial Position
December 31, 2019
 Assets
Cash P 180,200
 Accounts receivable
receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P2,988,600

Liabilities and Equity

Miscellaneous liabilities P 14,400
Loan payable 304,800
 Accounts payable 301,000
Share capital 536,000
Paid in capital 1,832,400
Total liabilities and equity P2,988,600

In the course of the review, you find the following data:

(a) The possibility

possibility of uncollectible accounts on accounts receivable has not been considered.
It is estimated that uncollectible accounts will total P19,200.

(b) The amount

amount ooff P180,000 representing the cost
cost of large-scale
large-scale newspaper
newspaper advertising
campaign completed in 2019 has been added to the inventory because it is believed that
this campaign will
will benefit sales of
of 2020. It is also found
found that inventories
inventories include
merchandise of P65,000 received on December 31 and has not been recorded as a
purchase.

(c) The books show that property,

property, plant
plant and equipment have a cost
cost of P2,227,200 with
accumulated depreciation of P720,000. However, these balances include fully depre
depreciated
ciated
equipment of P340,000 that has been scrapped and is no longer on hand.

(d) Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current
advances of P23,600 made to company officials.

(e) Loan payable

payablof
installments e P25,000.
represents a loan from the bank that is payable in regular quarterly
  
82

(f) Income tax payable not shown is estimated at P73,000.

(g) Deferred tax liability arising from temporary differences totals P178,200. This liability was
not included in the statement of financial position.

(h) Share capital consists of 6%, par P20, 25,000 preference shares and 36,000
36,000 ordinary
ordinary
shares, par value P1.

(i) Share capital have been issued for a total consideration of P1,134,400; the amount received
in excess of the par values
values of the shares has been reported as Paid in capital. Profit and
dividends were recorded in Paid in capital.

QUESTIONS:
Based on the above and the result of the audit, determine the adjusted amounts of the following:
1. Current assets
a. P1,347,200 c. P1,217,200
b. P1,282,200 d. P1,462,200

2. Noncurrent assets
a. P1,530,800 c. P1,507,200
b. P1,190,800 d. P1,167,200

3. Total assets
a. P2,878,000 c. P2,473,000
b. P2,789,400 d. P2,813,000

4. Current liabilities
a. P512,000 c. P577,000
b. P504,000 d. P600,600

5. Noncurrent liabilities
a. P383,000 c. P204,800
b. P406,600 d. P433,000

6. Total liabilities
a. P983,600 c. P895,000
b. P716,800 d. P960,000

7. Equity
a. P1,853,000 c. P2,096,200
b. P1,918,000 d. P2,368,400

4. Statement of comprehensive income 

income 

The alphabetical list of items that may be relevant in the preparation of a statement of comprehensive
income of Kimberlie Corporation is provided below:

 Actuarial gains on defined benefit

benefit pension plans recogn
recognized
ized outside profit or loss P 1,333
Decrease in inventories of finished goods and work in progress 107,900
Depreciation and amortization
Employee benefits expense expense 17,000
43,000
Exchange differences gain on translating foreign operations 10,667
  
83

Finance costs 18,000

Gains on property revaluation 3,367
Income tax expense 32,000
Income tax relating to components of other comprehensive income 9,334
Loss for the year from discontinued operations 30,500
Other expenses 5,500
Other income 11,300
Raw material and consumables used 92,000
Revenue 355,000
Share of other comprehensive income of associates (Unrealized loss
on available-for-sale financial assets) 700
Share of profit of associates 30,100
Unrealized gain on available-for-sale financial assets 26,667
Unrealized loss on derivatives in an effective cash flow hedge 4,000
Work performed by the entity and capitalized 15,000

QUESTIONS:
Based on the above and the result of the audit, determine the following:
1. The profit for the year
a. P65,500 c. P 96,000
b. P64,800 d. P281,300

2. The other comprehensive income for the year

a.
b. P93,500
P32,700 c.
d. P28,700
P28,000

3. Total comprehensive income for the year

a. P93,500 c. P94,200
b. P92,800 d. P28,000

5. Statement of comprehensive income 

income 

In your audit of Kristine Company’s statement of comprehensive income for the year ended
December 31, 2019, you noted that
that company reported profit of P10
P10,000,000.
,000,000. You raised questions
about the following amounts that had been included in profit:

Unrealized loss on decline in value of available for sale securities P 500,000

Loss on write-off of inventory due to a government ban net of tax 1,500,000
 Adjustment of profit of prior year net-debit 2,000,000
Loss from expropriation of property, net of tax 3,500,000
Exchange differences gain on translating foreign operations 4,500,000
Realized revaluation surplus 1,000,000

The loss from expropriation was unusual in occurrence in Kristine’s line of business.
bus iness.

QUESTIONS:
Based on the above and the result of the audit, answer the following:
1. Kristine Company’s 2019 statement of comprehensive income should report profit at
a. P9,000,000 c. P7,000,000
b. P6,500,000 d. P8,500,000
  
84

2. Kristine Company’s 2019 statement of comprehensive income should total comprehensive income
at
a. P12,000,000 c. P5,000,000
b. P11,000,000 d. P4,000,000

6. Income statement  

The bookkeeper for the Kristine Company prepared the following income statement and retained
earnings statement for the year ended December 31, 2019:

Kristine Company
December 31, 2019
Expense and Profits

Sales (net) P1,568,000

Less: Selling expenses (156,800)
Net sales 1,411,200
 Add: Interest revenue 18,400
 Add: Gain on sale of equipment
equipment 25,600
Gross sales revenue 1,455,200
Less: Costs of operations
Cost of goods sold P960,800
Correction of overstatement in last year’s income due
income due to
error (net of P13,200 income tax credit) 30,800
Dividend costs (P4 per share for 8,000 ordinary shares) 32,000
Loss due to earthquake 33,600 (1,057,200)
Taxable revenues 398,000
Less: Income tax on income from continuing operations ( 99,840)
Net income 298,160
Miscellaneous deductions
Loss from operations of discontinued Segment X44 (net of
P7,200 income tax credit) 16,800
 Administrative expenses
expenses 134,400 ( 151,200)
Net revenues P 146,960

Kristine Company
Retained Revenue Statement
For the Year Ended December 31, 2019

Beginning retained earnings P474,400

Gain on sale of Segment X44 (net of P10,800 income taxes) 25,200
Recalculated retained earnings 499,600
 Add: Net revenues 146,960
646,560
Less: Interest expense ( 27,200)
Ending: retained earnings P619,360

The preceding account balances

balances are
 are correct but have been incorrectly classified in certain instances.
  
85

QUESTIONS:
Based on the above and the result of the audit, answer the following:
1. The income from continuing
continuing operations for the year ended December 31, 2019 is
a. P207,760 c. P299,200
b. P199,360 d. P226,560

2 The income (loss) from

from discontinued
discontinued operations
operations for the year ended December
December 31, 2019 is
a. P 8,400 c. P25,200
b. (P16,800) d. P 0

3. The profit for the year ended December 31, 2019 is

a. P234,960 c. P209,760
b. P307,600 d. P207,760

4. The balance of retained earnings as of December

December 31, 2019 should be
a. P619,360 c. P650,160
b. P646,560 d. P709,360

7. Statement of financial position and Income statement

Kelly Company was organized

organized on January 1, 2019. On the same date, 25,000, P100 par vvalue,
alue,
ordinary shares were issued in exchange for property, plant and equipment valued at P3,000,000
and cash of P1,000,000. The following data summarize
summarize activities for 2019:

a) Profit for the year ended December 31, 2019 was P1,000,000.

b) Raw materials on hand on December 31 were equal to 25% of

of raw materials
materials purchased.

c) Manufacturing costs were distributed as follows:

Materials used 50%

Direct labor 30%
Factory overhead 20% (includes depreciation of building, P100,000)

d) Goods in process remaining in the factory on December 31 were equal to 1/3 ooff the goods

finished and transferred to stock.

e) Finished goods remaining in stock on December 31 were equal to 25% of the cost of goods
sold.

f) Operating expenses were 30% of sales.

g) Cost of goods sold was 150% of the operating expenses total.

h) Ninety percent of sales were collected during 2019. The balance was considered collectible.
collectible.

i) Seventy five percent of the raw materials purchased were paid

paid for. There were
were no expense
accruals or prepayments at the end of the year.
  
86

QUESTIONS:
Based on the above and the result of the audit, compute for the following:
1. Sales for the year ended December 31, 2019
a. P4,000,000 c. P2,000,000
b. P5,000,000 d. P3,000,000

2. Total manufacturing cost for the year

year ended December 31, 2019
a. P4,166,667 c. P 666,667
b. P3,000,000 d. P2,850,000

3. Cash as of December 31, 2019

a. P1,900,000 c. P650,000
b. P1,150,000 d. P500,000

4. Total current assets

assets as of December 31, 2019
a. P4,000,000 c. P2,575,000
b. P2,600,000 d. P3,861,111

5. Total liabilities
liabilities and equity
equity aass of
of December
December 31, 2019
a. P5,761,111 c. P5,500,000
b. P5,750,000 d. P5,475,000

8. Statement of cash flows 

flows 

Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One
statement that the entity
entity is anxious to ha
have
ve prepared is a statement of cash flow
flows.
s. Financial
statements of Kelly Corporation for 2019 and 2018 are provided below.

Statements of Financial Position

12/31/2019 12/31/2018
Cash P153,000 P 72,000
 Accounts receivable
receivable 135,000 81,000
Merchandise inventory 144,000 180,000

Property, plant and equipment (net of accumulated

depreciation of P120,000 and P114,000 as of 12/31/2019
and 12/31/2018 respectively) 108,000 246,000
P540,000 P579,000

 Accounts payable P 66,000 P 36,000

Income taxes payable 132,000 147,000
Bonds payable 135,000 225,000
Share capital 81,000 81,000
Retained earnings 126,000 90,000
P540,000 P579,000
  
87

Income Statement
For the Year Ended December 31, 2019

Sales P3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses P225,000
 Administrative expenses
expenses 72,000 297,000
Income from operations 171,000

Interest
Profit expense
before taxes 27,000
144,000
Income taxes 36,000
Profit P 108,000

The following additional data were provided:

1. Dividends for the year 2019 were P72,000.

2. During the year, equipment

equipment was sold for P90,000. This equipment
equipment cost
cost P132,000
P132,000 originally
originally
and had a book value of P108,000 at the time
time of sale. The loss on sale was incorrectly
incorrectly
charged to cost of sales.

3. All deprec
depreciation
iation expense
expense is in the selling expense category.

QUESTIONS:
Based on the above and the result of your engagement, you are asked to provide the following
information) for the year ended December 31, 2019, for Kelly Corporation:
1. The net cash provided by operating activities is
a. P153,000 c. P108,000
b. P 90,000 d. P 75,000

2. The net cash provided (used) by investing

investing activities
activities is
a. (P132,000) c. P 18,000
b. P 90,000 d. P(108,000)

3. Under the direct method, the cash received from customers is

a. P3,204,000 c. P3,096,000
b. P3,150,000 d. P3,165,000
4. Under the direct
direct method, the total ta
taxes
xes paid is
a. P36,000 c. P15,000
b. P21,000 d. P51,000

5. The net cash provided (used) by financing activities

activities is
a. (P 90,000) c. P18,000
b. (P162,000) d. P72,000

9. Statement of cash flows 

flows 

In connection with your audit of the IVAN Corporation for the year ended December 31, 2019, the
following financial information were presented.
  
88

IVAN Corporation
Statements of Financial Position
December 31, 2019 and 2018

2019 2018
 Assets
Cash and cash equivalents P 45,000 P 15,000
 Accounts receivable
receivable 75,000 37,500

Inventory
 Available-for-sale securities
securities 30,000
285,000 22,500
285,000
Property, plant and equipment (net of accumulated
depreciation of P75,000 and P90,000 as of December 31,
2019 and 2018, respectively) 105,000 247,500
Intangible asset, net 15,000 22,500
Total assets P555,000 P630,000

Liabilities
 Accounts payable P 75,000 P187,500
Income taxes payable 30,000 15,000
Deferred taxes payable 45,000 30,000
Total liabilities 150,000 232,500

Equity
Share capital 97,500 97,500
Retained earnings 307,500 300,000
Total equity 405,000 397,500
Total liabilities and equity P555,000 P630,000

IVAN Corporation
Income Statement
For the year ended December 31, 2019

Sales P450,000
Cost of sales (150,000)
Gross profit 300,000
 Administrative and selling expenses (30,000)
Interest expense (30,000)
Depreciation of property, plant and equipment (30,000)
 Amortization of intangible
intangible asset (7,500)
Dividend income 45,000
Profit before income taxes 247,500
Income tax expense (60,000)
Profit P187,500

 Additional information:

•  The company pays salaries and other employee dues before the end of each month. All
administration and selling expenses incurred were paid before December 31, 2019.

• 
Dividend before
received incomeDecember
comprised 31,
dividends
2019. received
receiv ed from
Dividends available-for-sale
received
receiv securities.
ed were classified Thissting
was
under investing
inve
activities in last year’s statement of cash flows. 
flows.  
  
89

•  Equipment with a carrying amount P112,500 and cost of P157,500 was sold for P112,500.

•  The company declared and paid dividends of P180,000 to its shareholders during 2019.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cash collections from customers
a. P450,000 c. P487,500

b. P412,500 d. P367,500
2. Cash paid to suppliers and employees
a. P270,000 c. P300,000
b. P330,000 d. P450,000

3. Cash paid for income taxes

a. P30,000 c. P45,000
b. P75,000 d. P90,000

4. Net cash provided by operating activities

a. P82,500 c. P52,500
b. P37,500 d. P 0

5. Net cash used

used in
a. P22,500 in in
investing
vesting and financing activities c. P52,500
b. P67,500 d. P 0

10. Statement of cash flows 

flows 

Financial statements for Ivan Company are given below:

Ivan Company
Statement of Financial Position
January 1, 2019
 Assets Liabilities and Equity
Cash P 240,000 Accounts payable P 114,000
 Accounts receivable
receivable 216,000
Buildings and equipment 900,000
 Acc. depreciation (300,000) Share capital 690,000
Patents 108,000 Retained earnings 360,000
P1,164,000 P1,164,000

Ivan Company
Statement of Cash Flows
For the Year Ended December 31, 2019

Cash flows from operating activities

Net income P300,000
 Adjustments to reconcile
reconcile net income to net cash provided
provided
by operating activities:
activities:
  
90

Depreciation - buildings and equipment P 90,000

Gain on sale of equipment (36,000)
 Amortization of patents
patents 12,000
Increase in accounts receivable (96,000)
Increase in accounts payable 48,000 18,000
Net cash provided by operating activities 318,000

Cash flows from investing activities

Sale of equipment 72,000
Purchase of land (150,000)
Purchase of buildings and equipment (288,000)
Net cash used by investing activities (366,000)

Cash flows from financing activities

Payment of cash dividend (90,000)
Sale of ordinary shares 240,000
Net cash provided by financing activities 150,000
Net increase in cash 102,000
Cash, January 1, 2019 240,000
Cash, December 31, 2019 P342,000

 Additional information:

• 
 Accumulated depreciation on the equipment sold was
was P84,000.
•   All items that should be included in the cash flow statement were properly included.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. When the equipment
equipment was sold, the Buildings
Buildings and Equipment account
account received a credit of
a. P72,000 c. P156,000
b. P84,000 d. P120,000

2. The carrying amount of the buildings and equipment

equipment at December 31, 2019 is
a. P912,000 c. P762,000
b. P726,000 d. P876,000

3. The total
total assets
assets at December 31, 2019 iiss
a. P1,662,000 c. P1,650,000
b. P1,512,000 d. P1,578,000

4. The total
total equity
equity at December 31, 2019 iiss
a. P1,500,000 c. P1,416,000
b. P1,350,000 d. P1,488,000
  
91

 APPLIED
 APPL IED AUDITING
FINANCIAL STATEMENTS AND REPORTI
REPORTING
NG 
PROF. U.C. VALLADOLID
Problem

1.  Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One
statement that the entity
entity is anxious to ha
have
ve prepared is a statement of cash flows. Financial
statements of Kelly Corporation for 2019 and 2018 are provided below.

Statements of Financial Position

12/31/2019 12/31/2018
Cash P153,000 P 72,000
 Accounts receivable
receivable 135,000 81,000
Merchandise inventory 144,000 180,000
Property, plant and equipment (net of accumulated
depreciation of P120,000 and P114,000 as of 12/31/2019
and 12/31/2018 respectively) 108,000 246,000
P540,000 P579,000

 Accounts payable P 66,000 P 36,000

Income taxes payable 132,000 147,000
Bonds payable 135,000 225,000
Share capital 81,000 81,000
Retained earnings 126,000 90,000
P540,000 P579,000

Income Statement
For the Year Ended December 31, 2019

Sales P3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses P225,000
 Administrative expenses
expenses 72,000 297,000
Income from operations 171,000
Interest expense 27,000
Profit before taxes 144,000
Income taxes 36,000
Profit P 108,000

The following additional data were provided:

1. Dividends for the year 2019 were P72,000.

2. During the year, equipment

equipment was sold for P90,000. This equipment
equipment cost
cost P132,000
P132,000 originally
originally
and had a book value of P108,000 at the time of sale. The loss on sale was incorrectly
incorrectly
charged to cost of sales.

3. All deprec
depreciation
iation expense
expense is in the selling expense category.
category.
  
92

Based on the above and the result of your engagement, you are asked to provide the following
information) for the year ended December 31, 2019, for Kelly Corporation:
1. The net cash provided by operating activities is

2. The net cash provided (used) by investing

investing activities is

3. Under the direct method, the cash received from customers is

4. Under the direct

direct method, the total taxes paid is

5. The net cash provided (used) by financing

financing activities
activities is

2. Following is the stockholders’ equity section of Angel Corporation’s

Corporation’s balance sheet at December 31,
2018:

Ordinary stock, P10 par value; authorized 1,500,000 shares; issued and
outstanding 900,000 shares P9,000,000
Share Premium 750,000
Retained earnings 2,700,000
Total stockholders’ equity
equity P12,450,000

Transactions
as follows: during 2019 and other information relating to the stockholders’ equity accounts were

•  On January 26, Angel reacquired 75,000 shares of its ordinary stock for P11 per share.

•  On April 4, Angel sold 45,000 shares of its treasury stock for P14 per share.

•  On June 1, Angel declared a cash dividend of P1 per share, payable on July 15, 2019 to
stockholders of record on July 1, 2019.

•  On August 15, each stockholder was issued one stock right for each share held to purchase
two additional shares of stock for P12 per share. The rights expire on October 31, 2019.

•  On September 30, 150,000 stock rights were exercised when the market value of the stock
was P12.50 per share.

•  On November 2, Angel declared a two for one stock split-up and charged the par value of
the stock from P10 to P5 per share. On November 20, shares were issued for the stoc
stockk
split.

•  On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It

originally cost P600,000, was carried by the previous owner at a book value of P300,000,
and was recently appraised at P390,000.

•  Net income for 2019 was P720,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Ordinary stock
  
93

2. Share Premium

3. Unapproriated retained earnings

4. Total stockholders’ equity 

equity 

3. The following statement of financial position is submitted to you for inspection and review.

Kimberlie Corporation
Statement of Financial Position
December 31, 2019
 Assets
Cash P 180,200
 Accounts receivable
receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P2,988,600

Liabilities and Equity

Miscellaneous liabilities P 14,400

Loan payable
 Accounts payable 304,800
301,000
Share capital 536,000
Paid in capital 1,832,400
Total liabilities and equity P2,988,600

In the course of the review, you find the following data:

(a) The possibility

possibility of uncollectible accounts on accounts receivable has not been considered.
It is estimated that uncollectible accounts will total P19,200.

(b) The amount

amount of P180,000 representing the cost of llarge-scale
arge-scale news
news paper advertising
campaign completed in 2019 has been added to the inventory because it is believe that this
campaign will benefit sales of
of 2020. It is also found that inventories include merchan
merchandise
dise
of P65,000 received on December 31 and has not been recorded as a purchase.
(c) The books show that property,
property, plant
plant and equipment have a cost of P2,227,200
P2,227,200 with
accumulated depreciation of P720,000. However, these balances include fully depreciated
equipment of P340,000 that has been scrapped and is no longer on hand.

(d) Miscellaneous liabilities of P14,400 represent salaries payable of P38,000,

P38,000, less non current
advances of P23,600 made to company officials.

(e) Loan payable represents a loan from the bank that is payable in regular
regular quarterly
installments of P25,000.

(f) Income tax payable not shown is estimated at P73,000.

(g) Deferred tax liability arising from temporary differences totals P178,200. This liability was
not included in the statement of financial position.
  
94

(h) Share capital

capital consists
consists of 6%, par P20, 25,000 preference shares and 36,000 ordinary
shares, par value P1.

(i) Share capital have been issued for a total consideration of P1,134,400; the amount received
in excess of the par values
values of the shares has been reported as Paid in capital. Profit and
dividends were recorded in Paid in capital.

QUESTIONS:
Based on the above and the result of the audit, determine the adjusted amounts of the following:
1. Current assets

2. Noncurrent assets

3. Total assets

4. Current liabilities

5. Noncurrent liabilities

6. Total liabilities

7. Equity

4. The bookkeeper for the Kristine Company prepared the following income statement and retained
earnings statement for the year ended December 31, 2019:

Kristine Company
December 31, 2019
Expense and Profits

Sales (net ) P1,568,000

Less: Selling expenses (156,800)
Net sales 1,411,200
 Add: Interest revenue 18,400
 Add: Gain on sale of equipment
equipment 25,600

Less:Gross
Costssales revenue
of operations 1,455,200
Cost of goods sold P960,800
Correction of overstatement in last year’s income due
income due to
error (net of P13,200 income tax credit) 30,800
Dividend costs (P4 per share for 8,000 ordinary shares) 32,000
Loss due to earthquake 33,600 (1,057,200)
Taxable revenues 398,000
Less: Income tax on income from continuing operations ( 99,840)
Net income 298,160
Miscellaneous deductions
Loss from operations of discontinued Segment X44 (net
of P7,200 income tax credit) 16,800
 Administrative expenses
expenses 134,400 ( 151,200)
Net revenues P 146,960
  
95

Kristine Company
Retained Revenue Statement
For the Year Ended December 31, 2019

Beginning retained earnings P474,400

Gain on sale of Segment X44 (net of P10,800 income taxes)
25,200
Recalculated retained earnings 499,600
 Add: Net revenues 146,960
646,560
Less: Interest expense ( 27,200)
Ending: retained earnings P619,360

The preceding account balances

balances are
 are correct but have been incorrectly classified in certain instances.

Based on the above and the result of the audit, answer the following:
1. The income from continuing
continuing operations for the year ended December 31, 2019 is

2 The income (loss) from

from discontinued
discontinued operations
operations for the year ended December
December 31, 2019 is

3. The profit for the year ended December 31, 2019 is

4. The balance of retained earnings as of December

December 31, 2019 should
should be

5. You were engaged by Jerome Company to audit its financial statements for the first time. In
examining the books, you found out that certain adjustments had been overlooked at the end of 2018
and 2019. You also discovered
discovered that other items
items had been improperly
improperly recorded. These omissions
and other failures for each year are summarized below:
12/31/2019 12/31/2018
Salaries payable P780,000 P873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
 Advances from customers
customers (Collections from 561,000 470,400
customers had been recorded as sales but should
have been recognized as advances from
customers because
the following year) goods were not shipped until
Machinery (Capital expenditures had been 522,000 564,000
recorded as repairs but should have been charged
to Machinery; the depreciation rate is 10% per
year, but depreciation in the year of expenditure is
to be recognized at 5%)

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the net effect of the errors on the 2018 profit?
2. What is the net effect of the errors on the 2019 profit?
3. What is the net effect of the errors on the company’s working capital at Decem
December
ber 31, 2019?
4. What is the net effect of the errors on the balance of the company’s retained earnings at December
31, 2019?
  
96

6. An entity reported the following data for the current year:

Net sales 9,500,000

Cost of goods sold 4,000,000
Selling expenses 1,000,000
 Administrative expenses
expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated
as a cash flow hedge 400,000
Increase in projected benefit obligation due to
actuarial assumptions 300,000
Foreign translation adjustment –
adjustment  –  debit 100,000
Revaluation surplus 2,500,000

1. What amount
amount should
should be reported as income from continuing operations?

2. What net amount should

should be recognized in other comprehensive income
income for the year?

3. What net amount in OCI should be presented

pr esented as “may not be recycled to profit or loss?
loss?  
  
97

 
  
98

 APPLIED
 APPL IED AUDITING
FINANCIAL STATEMENTS AND REPORTI
REPORTING
NG 
PROF. U.C. VALLADOLID
Multiple Choice 
Choice 
Identify the letter of the choice that best completes the statement or answers the question.
question.  

2.  Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One
statement that the entity
entity is anxious to have prepared is is a statement of cash flows.
flows. Financial
statements of Kelly Corporation for 2019 and 2018 are provided below.
Statements of Financial Position

12/31/2019 12/31/2018
Cash P153,000 P 72,000
 Accounts receivable
receivable 135,000 81,000
Merchandise inventory 144,000 180,000
Property, plant and equipment (net of accumulated
depreciation of P120,000 and P114,000 as of 12/31/2019
and 12/31/2018 respectively) 108,000 246,000
P540,000 P579,000

 Accounts payable P 66,000 P 36,000

Income taxes payable 132,000 147,000
Bonds payable 135,000 225,000
Share capital 81,000 81,000
Retained earnings 126,000 90,000
P540,000 P579,000

Income Statement
For the Year Ended December 31, 2019

Sales P3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses P225,000
 Administrative expenses
expenses 72,000 297,000
Income from operations 171,000
Interest expense 27,000
Profit before taxes 144,000
Income taxes 36,000
Profit P 108,000

The following additional data were provided:

1. Dividends for the year 2019 were P72,000.

2. During the year, equipment

equipment was sold for P90,000. This equipment
equipment cost
cost P132,000
P132,000 originally
originally
and had a book value of P108,000 at the time of sale. The loss on sale was incorrectly
charged to cost of sales.
3. All deprec
depreciation
iation expense
expense is in the selling expense
expense category.
  
99

Based on the above and the result of your engagement, you are asked to provide the following
information) for the year ended December 31, 2019, for Kelly Corporation:
1. The net cash provided by operating activities is
a. P153,000 c. P108,000
b. P 90,000 d. P 75,000

2. The net cash provided (used) by investing

investing activities is
a. (P132,000) c. P 18,000
b. P 90,000 d. P (108,000)

3. Under the direct method, the cash received from customers is

a. P3,204,000 c. P3,096,000
b. P3,150,000 d. P3,165,000

4. Under the direct

direct method, the total taxes paid is
a. P36,000 c. P15,000
b. P21,000 d. P51,000

5. The net cash provided (used) by financing

financing activities
activities is
a. (P 90,000) c. P18,000
b. (P162,000) d. P72,000

2. Following is the stockholders’ equity section of Angel

of  Angel Corporation’s
Corporation’s balance sheet at December 31,
2018:

Ordinary stock, P10 par value; authorized 1,500,000 shares; issued and
outstanding 900,000 shares P9,000,000
Share Premium 750,000
Retained earnings 2,700,000
Total stockholders’ equity 
equity  P12,450,000

Transactions during 2019 and other information relating to the stockholders’ equity accounts were
as follows:

•  On January 26, Angel reacquired 75,000 shares of its ordinary stock for P11 per share.

•  On April 4, Angel sold 45,000 shares of its treasury stock for P14 per share.

•  On June 1, Angel declared a cash dividend of P1 per share, payable on July 15, 2019 to
stockholders of record on July 1, 2019.

•  On August 15, each stockholder was issued one stock right for each share held to purchase
two additional shares of stock for P12 per share. The rights expire on October 31, 2019.

•  On September 30, 150,000 stock rights were exercised when the market value of the stock
was P12.50 per share.

•  On November 2, Angel declared a two for one stock split-up and charged the par value of
the stock from P10 to P5 per share. On November 20, shares were issued for the stock
stock
split.
  
100

•   On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It

originally cost P600,000, was carried by the previous owner at a book value of P300,000,
and was recently appraised at P390,000.

•   Net income for 2019 was P720,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Ordinary stock

a. P12,600,000 b. P10,800,000 c. P10,050,000 d. P12,300,000

2. Share Premium
a. P1,485,000 b. P1,575,000 c. P3,825,000 d. P1,275,000

3. Unapproriated retained earnings

a. P2,550,000 b. P2,422,500 c. P2,220,000 d. P2,190,000

4. Total stockholders’ equity 

equity 
a. P16,425,000 b. P14,295,000 c. P16,095,000 d. P16,065,000

3. The following statement of financial position is submitted to you for inspection and review.

Kimberlie Corporation
Statement of Financial Position
December 31, 2019
 Assets
Cash P 180,200
 Accounts receivable
receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P2,988,600

Liabilities and Equity

Miscellaneous liabilities P 14,400
Loan payable 304,800
 Accounts payable 301,000
Share capital 536,000
Paid in capital 1,832,400
Total liabilities and equity P2,988,600

In the course of the review, you find the following

f ollowing data:

(a) The possibility

possibility of uncollectible accounts on accounts receivable has not been considered.
It is estimated that uncollectible accounts will total P19,200.

(b) The amount

amount of P180,000 representing the cost of llarge-scale
arge-scale news
news paper advertising
campaign completed in 2019 has been added to the inventory because it is believe that this
campaign will benefit sales of
of 2020. It is also found that inventories
inventories include merchandise
of P65,000 received on December 31 and has not been recorded as a purchase.
  
101

(c) The books show that property,

property, plant
plant and equipment have a cost
cost of P2,227,200 with
accumulated depreciation of P720,000. However, these balances include fully depre
depreciated
ciated
equipment of P340,000 that has been scrapped and is no longer on hand.

(d) Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current
advances of P23,600 made to company officials.

(e) Loan payable

payable represents a loan from the bank that is payable in regular quarterly
installments of P25,000.

(f) Income tax payable not shown is estimated at P73,000.

(g) Deferred tax liability arising from temporary differences totals P178,200. This liability was
not included in the statement of financial position.

(h) Share capital consists of 6%, par P20,

P20, 25,000 preference shares and 36,000 ordinary
shares, par value P1.

(i) Share capital have been issued for a total consideration of P1,134,400; the amount received
in excess of the par values
values of the shares has been reported as Paid in capital. Profit and
dividends were recorded in Paid in capital.

QUESTIONS:

Based
1. on theassets
Current above and the result of the audit, determine the adjusted amounts of the following:
a. P1,347,200 c. P1,217,200
b. P1,282,200 d. P1,462,200

2. Noncurrent assets
a. P1,530,800 c. P1,507,200
b. P1,190,800 d. P1,167,200

3. Total assets
a. P2,878,000 c. P2,473,000
b. P2,789,400 d. P2,813,000

4. Current liabilities
a. P512,000 c. P577,000
b. P504,000 d. P600,600

5. Noncurrent liabilities
a. P383,000 c. P204,800
b. P406,600 d. P433,000

6. Total liabilities
a. P983,600 c. P895,000
b. P716,800 d. P960,000

7. Equity
a. P1,853,000 c. P2,096,200
b. P1,918,000 d. P2,368,400
  
102

4. The bookkeeper for the Kristine Company prepared the following income statement and retained
earnings statement for the year ended December 31, 2019:

Kristine Company
December 31, 2019
Expense and Profits

Sales (net ) P1,568,000

Less: Selling expenses (156,800)

Net sales
 Add: Interest revenue 1,411,200
18,400
 Add: Gain on sale of equipment 25,600
Gross sales revenue 1,455,200
Less: Costs of operations
Cost of goods sold P960,800
Correction of overstatement in last year’s income due to
error (net of P13,200 income tax credit) 30,800
Dividend costs (P4 per share for 8,000 ordinary shares) 32,000
Loss due to earthquake 33,600 (1,057,200)
Taxable revenues 398,000
Less: Income tax on income from continuing operations ( 99,840)
Net income 298,160
Miscellaneous deductions

Loss from
of P7,200 operations
income of discontinued Segment X44 (net
tax credit) 16,800
 Administrative expenses
expenses 134,400 ( 151,200)
Net revenues P 146,960

Kristine Company
Retained Revenue Statement
For the Year Ended December 31, 2019

Beginning retained earnings P474,400

Gain on sale of Segment X44 (net of P10,800 income taxes)
25,200
Recalculated retained earnings 499,600
 Add: Net revenues 146,960
646,560
Less: Interest expense ( 27,200)
Ending: retained earnings P619,360

The preceding account balances

balances are
 are correct but have been incorrectly classified in certain instances.

Based on the above and the result of the audit, answer the following:
1. The income from continuing
continuing operations for the year ended December 31, 2019 is
a. P207,760 c. P299,200
b. P199,360 d. P226,560

2 The income (loss) from

from discontinued
discontinued operations
operations for the year ended December
December 31, 2019 is
a. P 8,400 c. P25,200
b. (P16,800) d. P 0
  
103

3. The profit for the year ended December 31, 2019 is

a. P234,960 c. P209,760
b. P307,600 d. P207,760

4. The balance of retained earnings as of December

December 31, 2019 should be
a. P619,360 c. P650,160
b. P646,560 d. P709,360

5. You were engaged by Jerome Company to audit its financial statements for the first time. In
examining the books, you found out that certain adjustments had been overlooked at the end of 2018
and 2019. You also discovered
discovered that other items
items had been improperly
improperly recorded. These omissions
omissions
and other failures for each year are summarized below:
12/31/2019 12/31/2018
Salaries payable P780,000 P873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
 Advances from customers
customers (Collections from 561,000 470,400
customers had been recorded as sales but should
have been recognized as advances from
customers because goods were not shipped until
the following year)
Machinery
recorded as(Capital
repairs expenditures hadbeen
but should have beencharged 522,000 564,000
to Machinery; the depreciation rate is 10% per
year, but depreciation in the year of expenditure is
to be recognized at 5%)

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the net effect of the errors on the 2018 profit?
a. Understated by P775,800 c. Understated by P1,236,600
b. Overstated by P165,000 d. Overstated by P80,400

2. What is the net effect of the errors on the 2019 profit?

profit?
a. Understated by P376,500 c. Understated by P320,100
b. Overstated by P324,300 d. Overstated by P380,700
3. What is the net effect of the errors on the company’s working capital at Decem
December
ber 31, 2019? 
2019?  
a. Understated by P301,800 c. Understated by P265,800
b. Overstated by P119,400 d. Overstated by P820,200

4. What is the net effect of the errors on the balance of the company’s retained earnings at December
31, 2019?
a. Understated by P155,100 c. Understated by P265,800
b. Overstated by P930,900 d. Understated by P855,900

6. An entity reported the following data for the current year:

Net sales 9,500,000

Cost of goods sold 4,000,000
  
104

Selling expenses 1,000,000

 Administrative expenses
expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated
as a cash flow hedge 400,000

Increase in projected benefit obligation due to

actuarial assumptions 300,000
Foreign translation adjustment –
adjustment  –  debit 100,000
Revaluation surplus 2,500,000

1. What amount
amount should
should be reported as income from continuing operations?
a. 3,100,000
b. 2,300,000
c. 1,800,000
d. 2,900,000

2. What net amount should

should be recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c.
d. 3,400,000
800,000

3. What net amount in OCI should be presented

pr esented as “may not be recycled to profit or loss?
loss?  
a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000