ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPALE  Pre-Week Summary Lecture

AUDITING PRACTICE S. IRENEO  C. ESPENILLA

AP PREWEEK LECTURE
PART 1: Summary Lecture Notes
NOTE TO REVIEWEE:
These are guidelines and summarized financial accounting standards under Full PFRS which are generally the same under PFRS
for SMEs and PFRS for Small Entities. Comments in textboxes highlight provisions of PFRS SMEs and PFRS for Small Entities which
deviate from Full PFRS. Consider the following figure in determining which set of standards shall be applicable depending on the
size of an entity:

Is the reporting entity any of the following?

1. Required to file FS under Part II of SRC Rule 68 (e.g., publicly traded
entities)
2. In the process of filing its FS for the purpose of issuing any class of
instrument in a public market?
3. Public utility or holder of secondary license(s) issued by regulatory PUBLICLY
agencies (e.g., banks, trust companies, investment houses, etc.) ACCOUNTABLE
YES ENTITY/LARGE
ENTITY:
NO
FULL PFRS
ASSETS > 350M or LIABILITIES > 250M
YES
NO
MEDIUM ENTITY:
ASSETS > 100M to 350M or LIABILITIES > 100M to 250M
PFRS FOR SMEs
YES
NO
SMALL ENTITY:
ASSETS =3M to 100M or LIABILITIES =3M to 100M
PFRS FOR SMALL ENTITIES
YES (Effective January 1, 2019)
NO
ASSETS < 3M and LIABILITIES < 3M MICRO ENTERPRISE:
PFRS FOR SMALL ENTITIES OR
INCOME TAX BASIS

QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities (d) PFRS for Small Entities or Income Tax Basis - for each of the following scenarios:

1. ABC Financing, a trust and banking company with total assets of 2.99M and total liabilities at 2.99M
2. ABC Co., a manufacturing company with total assets of 2.99M and total liabilities at 2.99M
3. XYZ Trading, a publicly traded company with total assets of 3M and total liabilities of 100M
4. XYZ Co., a merchandising company with total assts of 3M and total liabilities of 100M
5. DEF Co., a manufacturing company with total assets of 2.99M and total liabilities at 3M
6. GHI Co., a property leasing company with total assets of 100M and total liabilities at 251M
7. JKL Co., a pharmaceutical company with total assets of 350M and total liabilities at 250M

PRESENTATION OF FINANCIAL STATEMENTS

A complete set of financial statements under PAS 1 shall include:
1. a statement of financial position as at the end of the period;
2. a statement of comprehensive income for the period;
3. a statement of changes in equity for the period;
4. a statement of cash flows for the period;
5. notes, comprising a summary of significant accounting policies and other explanatory information;
6. when applicable, a statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial statements.

I. STATEMENT OF FINANCIAL POSITION * minimum line items as per PAS 1

ASSETS
Current Assets (if presented according to liquidity)
(1) Cash and cash equivalents* (2) Trading securities/FA at FVPL/Marketable securities*
(3) Trade and other receivables* (4) Inventories* (5) Prepayments and other current assets
Noncurrent Assets
(1) Property, plant and equipment* (2) Intangibles* (3) Investment in associates and joint ventures*
(4) Investment property* (5) Financial assets (at amortized cost and at FVOCI/L)*
(6) Other long-term investments (e.g., Fund investments, Cash surrender value) (7) Deferred tax assets*
(8) Other assets (e.g., Noncurrent non-trade receivables)
LIABILITIES
Current Liabilities
(1) Trade and other payables* (2) Current provisions* (3) Financial liabilities at FVPL

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
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(4) Financial liabilities at amortized cost (Short-term borrowings, Current portion of long-term debt,
(5) Short term portion of a Finance lease liability) (6) Current tax liability (Income tax payable)*
Noncurrent Liabilities
(1) Noncurrent provisions* (2) Financial liabilities at amortized cost (Noncurrent portion of long-term debt,
(3) Long-term portion of a Finance lease liability) (4) Deferred tax liability*
STOCKHOLDERS’ EQUITY
Contributed Capital
(1) Paid-in Capital* (Issued, Subscribed, Share Dividends Declared)
(2) Additional Paid-in Capital (Excess over par, Treasury stock trans, other gains from capital transactions)
Less: Subscriptions receivable (if non-current)
Accumulated Profits
(1) Appropriated (Voluntary, Legal and Contractual) (2) Unappropriated
Accumulated OCI/L
(1) Accumulated Revaluation Surplus (2) Accumulated Unrealized Holding Gains/Losses on FA at FVOCI/L
(3) Accumulated Foreign Exchange Translation Gains/Losses (4) Accumulated Hedging Gains/Losses
(5) Accumulated Remeasurement Gains/Losses from Plan Asset and Accumulated Benefit Obligation
Less: Treasury shares at cost
(a) Additional separate line items should be provided for the following as per PAS 1, where necessary:
- Biological assets;
- Total assets classified as held for sale and assets included in disposal groups classified as held for sale under PFRS 5, Non-
current asset held for sale and discontinued operations;
- Liabilities included in disposal groups classified as held for sale under PFRS 5;
- Non-controlling interest, presented within equity.
(b) Subscriptions receivables are presented as current assets if collectible within 12 months after the balance sheet date, otherwise,
deducted from contributed capital,
(c) Treasury stocks are deducted at cost from total stockholders’ equity with an automatic accumulated profits appropriation equal
to the cost of the treasury shares (legal appropriation).

II. STATEMENT OF COMPREHENSIVE INCOME * minimum line items as per PAS 1

EXPENSES ACCORDING TO NATURE: EXPENSES ACCORDING FUNCTION:
Net Sales/Revenue* XX Net Sales/Revenue* XX
Other Income XX Cost of Sales (XX)
Total Income XX Gross Profit/Income XX
Expenses Other Income XX
Net Purchases XX Total Income XX
(Increase)/Decrease in Inventories (X)X Expenses:
Employee Benefits Costs XX Selling/Distribution Expenses XX
Depreciation Expense XX General/Administrative Expenses XX (XX)
Advertising Expense XX Total Operating Income/(Loss) XX
XX
Supplies Expense XX (XX) Finance Cost* (XX)
Total Operating Income/(Loss) XX Share from net income/net loss of
Finance Cost* (XX) Associate/Joint Ventures* X(X)
Share from net income/net loss of Non Operating Income/(Loss) X(X)
Associate/Joint Ventures* X(X) Net Income/(Loss) before Tax X(X)
Other Non-operating Income/(Loss) X(X) Income Tax (Expense)/Benefit* (X)X
Net Income/(Loss) before Tax X(X) Net Income/(Loss) after Tax from
Income Tax (Expense)/Benefit* (X)X Continuing Operations X(X)
Net Income/(Loss) after Tax from Post tax Income/(Loss) from Discontinued
Continuing Operations X(X) Operations* X(X)
Post tax Income/(Loss) from Net Income/(Loss) after tax* X(X)
Discontinued Operations* X(X)
Net Income/(Loss) after tax* X(X) Other Comprehensive Income/(Losses)
Revaluation Surplus, net of Tax* XX
Other Comprehensive Income/(Losses) Unrealized Holding Gains/(Losses),
Revaluation Surplus, net of Tax* XX net of Tax* X(X)
Unrealized Holding Gains/(Losses), Foreign Translation Gains/(Losses),
net of Tax* X(X) net of Tax* X(X)
Foreign Translation Gains/(Losses), Hedging Gains(Losses), net of Tax* X(X)
net of Tax* X(X) Remeasurement Gains(Losses) from
Hedging Gains(Losses), net of Tax* X(X) Plant Asset and Accum Ben. Oblig.,
Remeasurement Gains(Losses) from net of Tax* X(X) X(X)
Plan Asset and Accum. Ben. Oblig.,
Total Comprehensive Income/(Loss)* X(X)
net of Tax* X(X) X(X)
Total Comprehensive Income/(Loss)* X(X)

III. STATEMENT OF CHANGES IN EQUITY

Share Capital Reserves Accum. Profits
Balances, January 1 XX XX XX
Prior Period Adjustments
Change in Accounting Policy X(X)
Correction of Prior Period Errors X(X)
Issuance of shares (at above par/stated value) XX XX
Comprehensive income for the period
Net Income/(Loss) X(X)
Other Comprehensive Income/(Loss) X(X)
Dividends declaration (X) (X)
Losses from capital transactions (if APIC is not enough) (X)
Appropriations (Voluntary, Legal, Contractual) X (X)
Reversal of Appropriations __ (X) X
Balances, December 31 XX XX XX

IV. STATEMENT OF CASH FLOWS (INDIRECT METHOD)

CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME XX
NON-OPERATING (INCOME)/EXPENSES (X)/X
(Gains or losses from sale of assets, investment income/losses, etc.)

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NON-CASH (INCOME)/EXPENSES (X)/X
(Depreciation, Amortization, Bond premium/discount amortization, etc.)
CHANGES IN WORKING CAPITAL: (Increase)/Decrease (X)/X
(Changes in current assets including trading securities and current liabilities
excluding short term debt)
Net cash provided/(used) in operating activities X(X)

CASH FLOWS FROM INVESTING ACTIVITIES

PROCEEDS FROM SALE OF INVESTMENTS (except trading securities) XX
PROCEEDS FROM SALE OF NON-CURRENT ASSETS (e.g. PPE/Intangibles) XX
PURCHASE OF INVESTMENTS (except trading securities) (X)
PURCHASE OF NON-CURRENT ASSETS (e.g. PPE/Intangibles (X)
Net cash provided/(used) in investing activities X(X)
CASH FLOWS FROM FINANCING ACTIVITES
PROCEEDS FROM LOAN/ISSUANCE OF LONG-TERM DEBT SECURITIES XX
PROCEEDS FROM ISSUANCE OF SHARE CAPITAL XX
PROCEEDS FROM TREASURY SHARES REISSUANCE XX
PAYMENT OF DIVIDENDS (X)
PAYMENT OF LOANS/RETIREMENT OF LONG-TERM DEBT SECURITIES (X)
REACQUISITION OF SHARE CAPITAL (X)
Net cash provided/(used) in financing activities X(X)
Increase/(Decrease) in Cash and cash equivalents X(X)
Add: Cash and cash equivalents, January 1 XX
Cash and cash equivalents, December 31 XX
*Interest expense are presented as operating cash outflow (benchmark), or financing (allowed alternative)
**Interest income are presented as operating cash inflow (benchmark), or investing (allowed alternative)
***Dividend income are presented as operating cash inflow (benchmark), or investing (allowed alternative)
****Dividend payments are presented as financing cash outflow (benchmark), or operating (allowed alternative)

V. NOTES TO FINANCIAL STATEMENTS

ORDER OF PRESENTING THE NOTES
A. Statement of compliance with PFRS.
B. Summary of significant accounting policies used.
C. Supporting information or computation for line items presented in the financial statements.
D. Other disclosures, such as contingent liabilities, unrecognized contractual commitments and nonfinancial disclosures.

FOR MEDIUM ENTITIES (PFRS for SMEs):

Generally the same components of a complete set of financial statements as full PFRS with the following exceptions:
- If an entity has no other comprehensive income items, it may present a Statement of Income and Retained Earnings (SIRE),
provided further, that the only change to equity during the period arise from profit or loss, payment of dividends, correction
of prior period errors and changes in policies.
- Unrealized Holding Gains or Losses from Investment at Fair Value are not recognized in the Other Comprehensive
Income/Losses for SMEs.

FOR SMALL ENTITIES (PFRS for Small Entities):

Generally the same components of a complete set of financial statements as full PFRS with the following exceptions:
- Statement of Income in lieu of Statement of Comprehensive Income (as there are no Other Comprehensive Income or
Losses for Small Entities)
- If the only changes to equity in the current period or any comparative period presented in the FS arise from profit or loss,
payment of dividends, correction of prior period error and changes in accounting policy, the entity may present a single
Statement of Income and Retained Earnings (SIRE) in lieu of the Statement of Income and Statement of Changes in Equity

QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities - for each of the following scenarios:
1. An entity whose complete set of financial statements included a Statement of Income and Retained Earnings
(which included gain on the remeasurement of PPE at the BS date under FMV Method reported in the
profit/loss), a Statement of Financial Position, a Statement of Cash Flows and Notes to Financial Statements.
2. An entity whose complete set of financial statements included a Statement of Comprehensive Income (which
included an unrealized holding gain on FA at FMV and Revaluation Surplus on PPE, both reported as
components of Other Comprehensive Income/Losses), Statement of Changes in Equity a Statement of
Financial Position, a Statement of Cash Flows and Notes to Financial Statements.
3. An entity whose complete set of financial statements included a Statement of Comprehensive Income (which
included Unrealized Holding Gain on all FA at FMV reported in the profit or loss as it is only allowed to report
such in the profit or loss and Revaluation Surplus reported as a component of Other Comprehensive
Income/Losses), Statement of Changes in Equity a Statement of Financial Position, a Statement of Cash Flows
and Notes to Financial Statements.

2. CORRECTION OF ERRORS
- Where the requirement is the EFFECT OF ERRORS TO NET INCOME:
1. Consider all Current Period Errors (Counter Balancing* or Non-counter balancing**)
2. Consider all Immediate Prior Year Counter Balancing Errors
3. Ignore all Prior Years’ Non-counter balancing errors

* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and the year following the
year of incurrence shall be:

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NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued income, Inventory, DIRECT INDIRECT
end, AR/Sales, Advances to suppliers)
Counter Balancing Error in a LIABILITY
(e.g. Unearned income, Accrued expense, INDIRECT DIRECT
AP/Purchases, Advances from customers)
** The effect of a NON-COUNTERBALANCING ERROR in net income of the year of incurrence and the year following
the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Non-Counter Balancing Error in an ASSET DIRECT NO EFFECT
Non-Counter Balancing Error in a LIABILITY INDIRECT NO EFFECT
- Where the requirement is the EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’ net income)
- Where the requirement is the EFFECT OF ERRORS TO WORKING CAPITAL (CURRENT ASSETS – CURRENT LIAB)
1. Consider all errors affecting current assets and current liab. as of the end of the current period only.
2. The error in the current asset is DIRECTLY related to the WC (overstated current asset means
overstated WC, and vice versa)
3. The error in the current liability is INVERSELY related to the WC (overstated current liability means
understated WC, and vice versa)

3. CASH/ACCRUAL AND SINGLE ENTRY

For CASH-ACCRUAL PROBLEMS related to SALES and PURCHASES:
Accounts Receivable/ Advances from Advances to Accounts Payable/
Notes Receivable-Trade Customers Suppliers Notes Payable-Trade
Beg. Bal (AR/NR) XXX XXX Beg. Bal. (Advanc.) Beg. Bal (Advanc.) XXX XXX Beg. Bal (AP/NP)
Sales on Account XX XX Collections Payments XX XX Purchase on Acc.
(Accrual basis) (Cash basis) (Cash basis) (Accrual basis)
Recoveries of** XX Sales discounts Purchase discounts XX
prev. write offs XX XX Sales returns* Purchase returns* XX
XX Sales allowances Purchase allowance XX
XX Write offs
End. Bal (AR/NR) XXX XXX End. Bal (Adv) End Bal. (Adv.) XXX XXX End Balance
*excluding refunded sales return to customers *excluding refunded purchase returns
**included in the analysis only if collections from suppliers
included the said recovery

For CASH – ACCRUAL PROBLEMS related to item of INCOME and EXPENSES (e.g. rental income and expense, royalty
income and expense and other similar items)
Accrued Income/Unearned Income Prepaid Expense/Accrued Expense
Beg bal. (Acc Inc.) XX XX Beg bal. (Unear. Inc.) Beg bal. (Prep.) XX XX Beg bal (Acc. Exp)
Recog. Income Collection of cash Payment of cash Recogn. of Exp.
(Accrual basis) XX XX (Cash basis) (Cash basis) XX XX (Accrual basis)
End bal. (Acc Inc.) XX XX End bal. (Unear. Inc.) End bal. (Prep.) XX XX End bal. (Acc. Exp)
Note: if the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning and ending
balances, simply place in the beginning balance if it is net decrease (since this indicates that the beginning is higher than ending
bal.) or place in the ending bal if it is net increase (since this indicates that ending bal. is higher than the beginning bal.).

4. CASH
FOR CASH COUNT PROBLEMS:
1. Identify the accountability:
a. If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger
b. If Undeposited Collections, the accountability is total undeposited collections per books/records adjusted
further for any unrecorded collections (based on additional information of the problem)
If there is no direct information about collections per records, accountability is collections per Official Receipts,
Cash receipt vouchers or other documents evidencing collections.
c. Other collections not intact (e.g. return of expense advance, collection for charities or any other purposes
and assumed to have been included among currencies on hand. If the said collections for
any other purpose is in tact, the same shall be ignored in the cash count.
2. Identify valid supports to the accountability as presented in the problem
a. For Petty Cash Fund, acceptable valid support shall include:
- Bills and Coins, Replenishment Check, cashable Accommodated/Cashed Checks (Valid cash items)
- Unreplenished Petty Cash Expense Vouchers (Adjusted to various expense accounts)
- Employee IOUs (Adjusted to receivables)
- Post dated/NSF Checks (Assumed to be an accommodated checks to be adjusted to receivable)
* unused postage is not a valid support where the accountability is the Petty Cash Fund
b. For Undeposited Collections
- Bills and Coins, Money Orders and Bank Drafts
- Depositable Customer Collection Checks as of the count date (Postdated, stale and NSF collection checks as
of the count date are not recorded as collection, thus should not be included as valid support)
- Any evidence of the use of collections to pay certain expenses (e.g. Unused postage stamps)

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FOR BANK RECONCILIATION PROBLEMS:
BANK BOOK
Unadjusted Balance XX XX (b) Unadjusted Balance
Deposits in Transit/ Unrecorded Bank Credits
Undeposited Collections XX XX (Note and interest collection by bank,
Customer payments to bank, Loan proceeds)
Outstanding Checks (excluding (XX) (XX) Unrecorded Bank Debits
certified checks) (BSC, NSF Checks, Note/Loan and interest
payments directly thru bank)
Bank errors XX(XX) XX(XX) Book Errors
Adjusted Balance XX (a) XX(c) Adjusted Balance
(a): the adjusted balance per bank shall be the CORRECT CASH BALANCE
(a) – (b): the net adjustment to cash shall be the difference between the unadjusted balance per books and the adjusted
balance per bank
(a) – (c): the cash shortage/overage shall be the difference between the two adjusted balances
SHORTAGE if: Bank < Book; OVERAGE if: Bank > Book

FOR PROOF OF CASH PROBLEMS (Adjusted Balance Method):

Beg. Receipts Disburse. End
Unadjusted balance per bank XX XX XX XX
Deposits in transit, beginning XX (XX)
, end XX XX
Outstanding checks, beginning (XX) (XX)
, end XX (XX)
Bank Errors (Receipt, beg is over) (XX) (XX)
(Receipt, beg is under) XX (XX)
(Disbursement, beg is over) XX (XX)
(Disbursement, beg is under) (XX) (XX)
(Receipt, end is over) (XX) (XX)
(Receipt, end is under) XX XX
(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Bank errors in the previous month, not yet X(X) X(X)
corrected by the current month
Bank errors in the current month, corrected in (XX) (XX)
the current month (overstatement error)**
Adjusted Balances XX XX XX XX
Beg. Receipts Disburse. End
Unadjusted balance per book XX XX XX XX
Unrecorded credit, beginning XX (XX)
, end XX XX
Unrecorded debit, beginning (XX) (XX)
, end XX (XX)
NSF check, beginning (XX) (XX)
NSF check, end XX (XX)
NSF check received and redeposited the
same period (not recorded by book)* XX XX
Book Errors (Receipt, beg is over) (XX) (XX)
(Receipt, beg is under) XX (XX)
(Disbursement, beg is over) XX (XX)
(Disbursement, beg is under) (XX) (XX)
(Receipt, end is over) (XX) (XX)
(Receipt, end is under) XX XX
(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Book error in the previous month, not yet X(X) X(X)
corrected by the current month
Bank errors in the current month, corrected in (XX) (XX)
the current month (overstatement error)**
Adjusted Balances XX XX XX XX

NSF Cheks:
(a) An NSF check which is recorded correctly during the current period is no longer a reconciling item.
(b) An NSF check which is recorded as a reduction against the receipts for the period shall be added to both receipt and disbursement columns per
books. (cash ending balance is unaffected)
(c) An NSF check received from the bank and redeposited during the same period shall no longer be included in the proof of cash statement if receipt
and redeposit were recorded in the books correctly, otherwise if the same was not recorded in the book, the item shall be added to both the receipt
and disbursement columns per books, alternatively deducted from both the receipt and disbursement columns per bank. (cash bal. is unaffected)

Bank and book errors:

(a) Error in the current month not yet corrected – if the error is in recording receipt, the correction is in the receipt column; if the error is in recording
disbursement, the correction is in the disbursement column.
(b) Error in the current month corrected in the current month – if the error is in recording receipt (over), the correction will be recorded as a
disbursement, thus the reconciliation is a reduction from both receipt and disbursement columns. If the error is in recording disbursement (over),
the correction will be recorded as a receipt, thus the reconciliation is also a reduction from both receipt and disbursement columns.
*Notice that if the error, whether receipt or disbursement is an understatement error, the correction will be recorded also in receipt or disb.,
thus a current month error that is understatement, whether receipt or disb. is no longer a proof-of-cash reconciling item.
(c) Error in the prior month, corrected in the current month – If the prior month error is an understatement in receipt the correction is recorded by
adding to cash, thus the reconciliation is a reduction in the receipt column in the current month. If the prior month error is an overstatement in
receipt, the correction is recorded by deducting from cash, thus the reconciliation is a reduction in the disbursement column in the current moth. If
the prior month error is an understatement in disbursement, the correction is recorded by deducting from cash, thus the reconciliation is a reduction
in the disbursement column in the current month. If the prior month error is an overstatement in disbursement, the correction is an addition to cash,
thus the reconciliation is a reduction from the receipt column in the current month.
(d) Error in the prior month, not yet corrected – If the prior month error is yet to be corrected in the current month, the reconciling item will be in
the cash balance of the prior month (first column) and in the current month (last column)

5. RECEIVABLES
FOR AGING OF ACCOUNTS RECEIVABLE PROBLEMS:
- The aging schedule should be based on and should agree with the subsidiary ledger
- The aging schedule should be adjusted first with all possible adjustments before a required allowance is
computed. Possible adjustments include:

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a. Adjustment to both the GL and SL (thus to Aging)
- additional write-off of accounts
- unrecorded sale/over recorded sale; unrecorded collections
- credit balance in accounts receivable (adjusted to advances from customers)
b. Adjustment to SL only (no adjusting entry required, but Aging schedule may be adjusted)
- sales/collections already recorded in the GL but not yet in the SL
- posting errors
c. Adjustments to GL only - will not affect the aging schedule anymore (e.g. sales/collections
not yet recorded by the GL but already posted to the SL)
- The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted balance of the
accounts receivable gross of the required allowance.
- If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an additional adjustment should be
in place to correct the general ledger to equal the Adjusted Balance of the subsidiary ledger. The adjustment is either
debited or credited to SALES account
- To compute for the Bad Debt Expense for the period, the adjusted balance per computation is compared to the
unadjusted balance. (Do not forget to consider write-off of accounts receivable, recoveries of previously written-off
accounts and interim bad debt provisions, if there are any):
Allowance for Bad Debt Expense
Beginning Balance
Dr: Write-off of Receivables (including Cr: Recovery of Previous Write-off
additional write-off per audit) Cr:Bad Debt Expense (Squeeze)
Required Ending Balance

FOR LOANS RECEIVABLE PROBLEMS (SIMILAR TO FINANCIAL ASSET AT AMORTIZED COST)

INITIAL MEASUREMENT:
Initial measurement of loans receivable shall be at fair market value, which shall be the net initial investment or the net cash
given-up on the loan transaction. More specifically, the net initial investment shall be:
Principal amount of the loan xx
Add: Origination costs* xx
Less: Origination fees** (xx)
FMV of the loan/Initial investment xx
*Origination costs are costs that are directly attributed to the loan transaction such as brokers’ fees & commissions, prof. fees
(e.g.to lawyers for drafting debt agreements or to accountants for assessment of any asset collateral on the loan).
**Origination fees are origination costs chargeable to the debtor as per the debt agreement. It can be an amount higher or lower
than the actual origination cost incurred.

BALANCE SHEET MEASUREMENT

Loans receivable shall be measured at the balance sheet date at amortized cost, which shall be:
Initial amount recognized/FMV at initial recognition xx
Less: Principal collections (xx)
Less: Amortization of premium on loan or xx
Add: Amortization of discount on loan (xx)
Less: Impairment loss*, if any (xx)
Amortized cost xx
*IMPAIRMENT LOSS OF LOANS RECEIVABLE
Carrying value of the Loans and Receivable** XX
Less: Present value of expected cash to be recovered
using the ORIGINAL EFFECTIVE INTEREST RATE (XX)
Impairment Loss/Bad Debt Expense XX.
**include accrued interest as a general rule.

*IMPAIRMENT RECOVERY
PV of remaining future cash flows as revised
as a result of impairment recovery, if any XX
Less: Amortized cost based on the remaining
future cash flows at original effective interest (XX)
Gain on recovery – IS* XX
Where maximum impairment recovery shall be to the extent of the Amortized cost of the
investment had there been no impairment.

BALANCE SHEET MEASUREMENT UNDER THE EXPECTED CREDIT LOSS (ECL MODEL)
Credit loss arises when a debtor fails to pay some or all of the contractual payments, including instances of late payment. IFRS 9
adopts an expected loss model for the recognition of impairment losses on financial assets that are measured at amortized cost
and financial assets with contractual cash flows measured at fair value through other comprehensive income. The general
approach, the entity recognizes the expected loss for a financial asset in accordance with the requirements for:
STAGE 1: INITIAL RECOGNITION Entry: Subsequent interest
As soon as a financial asset is originated, 12- 12-Month ECL Loss/Expense XX income shall remain to
month credit loss is recognized in the P&L (PV of Estimated Credit Allowance XX be based on:
with an allowance being established. Loss*Probability of Default) Gross CV of
Receivables*Eff. %
STAGE 2: SIGN. INC. IN CREDIT RISK Entry: Subsequent interest
If the credit risk increases significantly but AT THE BS DATE Loss/Expense XX income shall remain to
that do not have objective evidence of a Life-time ECL Allowance XX be based on:
credit loss event and the resulting credit (PV of Estimated Credit (Increase from the Gross CV of
quality is not considered to be low credit Loss*Probability of Default) previous allowance Receivables*Eff. %
risk, life-time ECL is recognized. balance)
STAGE 3: OBJECTIVE EVIDENCE OF
If there is objective evidence that the IMPAIREMENT EXISTS Entry: Subsequent interest
receivables are impaired (E.g. probability of Impairment Loss Loss/Expense XX income shall now be
insolvency, significant financial difficulties of (CV/Amortized Cost Allowance/ based on:
the debtor and default, significant delay in Less: PV of New Future Cash Receivable XX Net CV of
payments) Flows at Original Effective Receivables*Eff. %
Rate)

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
6. INVENTORY
FOR CUT-OFF PROBLEMS:
1. Determine validity of the Sales or Purchase Transaction*
2. Determine whether Sales/AR or Purchases/AP has been recorded in the Sales or Purchases Journals.
(Based on the recording of the related sales/purchase invoice)
3. Determine whether inventories were Excluded or Included in the year-end physical count**
If it is a Valid Sale, the Receivable should be recorded, the Inventory should be excluded.
If it is not a Valid Sale, the Receivable should not be recorded, the Inventory should be included.
If it is a Valid Purchase, the Payable should be recorded, the Inventory should be included.
If it is not a Valid Purchase, the Payable should not be recorded, the Inventory should be excluded.

*VALIDITY OF SALES/PURCHASE TRANSACTION:

In considering the validity of Sale or Purchase transaction, consider the following items:
As a rule of thumb assumption, a Sale is valid upon delivery and a Purchase is valid upon receipt.
Exceptions to the rule of thumb assumption:
A. Goods in Transit
- FOB Shipping Point/FOB Seller or Seller’s Location include as inventory of buyer (plus freight in)
- FOB Destination/FOB Buyer or Buyer’s Location include as inventory of seller (exclude freight out)
- Cost of insurance and freight (CIF) include as inventory of buyer upon delivery to carrier
- Free Alongside (FAS) the Vessel include as inventory of buyer upon possession of the carrier
(exclude freight cost to Vessel, include freight cost from Vessel to Customer)
B. Special Sale/Purchase Agreement
a. With delivery/receipt but not yet valid sale/purchase
1. Consignment agreement – Valid upon sale of consignee to third-party customer
2. Inventory financing/Park sale/Product financing – generally, loan agreement only.
1. Bill and hold agreement (e.g. Special Order from customers)
Segregated goods – mere segregation of goods does not exclude the same from the seller’s inventory,
unless the problem identified that sale is covered by a special sale agreement.

**DETERMINING WHETHER INVENTORIES ARE INCLUDED OR EXCLUDED FROM THE COUNT:

If the problem did not indicate whether goods under consideration has been included or excluded from the count, the following
assumptions are to be made:

SALES CUT-OFF
Deliveries on/before the count date: EXCLUDED
Deliveries after the count date: INCLUDED

COUNT DATE

Receipts on/before the count date: INCLUDED Receipts after the count date: EXCLUDED

PURCHASES CUT-OFF
1. All deliveries (on sale) made on or before the count date are excluded from the count, all deliveries made after the count
date are included in the count, unless otherwise stated by the problem.
2. All receipt (on purchases) of goods on or before the count date shall be included in the count, all receipts after the count
date are excluded from the count, unless otherwise stated by the problem.

FOR INVENTORY ESTIMATION PROBLEMS:

1. Gross Profit Method
Cost of Goods Available for Sale (Actual)* XX
Less: Cost of Sales (Estimate)** (XX)
Estimated ending inventory XX
*COGAS is actual that is consider all items included in the computation of Cost of goods available for sale
(Inventory, beg + Purchases + Freight-in – Purch discount – Purch returns & allow + Dept transfer in
– Dept transfer out – Abnormal spoilage, breakage, shrinkage)
**COS is estimated by:
Gross Sales x Cost Rate (if GP is based on sales)
Gross Sales / Selling Price Rate (if GP is based on cost)
***For the purpose of estimating Cost of Sales:
Assume that all sales were made under the normal GP rate thus, when computing Gross Sales:
- Ignore sales discount to customers
- Add back special discounts to Gross Sales (e.g. Employee Discounts)
- Deduct sales returns from Gross Sales
- Ignore sales allowances (Deduct if Sales returns and allowances as single account is provided)
- Normal spoilage, breakage, shoplifting losses shall be added back to gross sales at selling price

2. Retail Method
Cost of Goods Available for Sale (at Retail) (a) XX
Less: Cost of Sales (at Retail)=Gross Sales (b) (XX)
Estimated ending inventory (at Retail) XX
Multiply by: Cost rate (LCA or Ave) (c) x%
Estimated ending inventory (at Cost) XX
Cost Retail
Beginning Inventory XX XX
Add: Purchases XX XX
Freight-in XX
Less: Purchase allowance (XX)
Purchase discount (XX)
Purchase returns (XX) (XX)

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
Add: Departmental transfer-in or Debit XX XX
Less: Departmental transfer-out or Credit (XX) (XX)
Less: Abnormal spoilage/breakage/shrinkage (XX) (XX)
Add: Mark-ups, net of cancellations XX
(c)
COGAS under CONSERVATIVE/LCA XX / XX x% Cost rate under Lower of Cost
or Average (Conservative)
Less: Mark-downs, net of cancellations (XX)
(c)
COGAS under AVERAGE APPROACH XX / XX(a) x% Cost rate under Average
Retail
Gross Sales XX
Less: Sales Return (XX)
Add: Special Discounts (Employee Disc) XX
Normal Spoilage/Breakages/Shoplifting losses XX
Sales/ Cost of Sales at Retail XX(b)
* For FIFO Average, simply disregard in the computation the cost % the beginning inventories:
Cost% = COGAS @ Cost – Beg inventory at Cost or Net Purchases @ Cost
COGAS @ Retail – Beg inventory at Retail Net Purchases @ Retail
FOR INVENTORY VALUATION PROBLEMS:
Inventories shall be valued at lower of COST or NRV:
a. COST shall be measured through
1. SPECIFIC IDENTIFICATION/Perpetual
2. FIFO/Periodic - the cost shall be computed as: (# Inventory on hand * Cost of latest purchases)
3. FIFO/Perpetual – the computation of cost shall be the same as FIFO/Periodic
4. AVE/Periodic (aka WEIGHTED AVERAGE): (# of Inventory on hand * WA unit Cost)
WA unit Cost = COGAS / # of GAS
5. AVE/Perpetual (aka MOVING AVERAGE): (# of Inventory on hand * MA unit Cost)
The average cost is recomputed after every purchase transaction. The last Moving average unit cost shall be
used for the computation of the inventory cost at year end.
b. Net realizable value shall be:
1. Finished goods/Merchandise Inventory = Est. Selling Price – Est. cost to sell
2. Work-in-process inventory = Est. Selling Price – Est. cost to complete – Est. cost to sell
3. Raw materials and Supplies – The NRV is the Current Replacement Cost (Current Purchase Price).
Written down only if the finished goods to which they are related to are also written down.
Notes:
1. The DIRECT WRITE-OFF METHOD is used in instances where the company holds inventories that are not relatively the same from
year-end to year-end. Thus, there shall be no chances to recover any loss on write-down from one year over the next. If NRV is
lower than the cost, the difference is automatically the loss on write-down for the year. (which is either added to cost of sale or
recognized as a separate loss in the statement of comprehensive income)
2. The ALLOWANCE METHOD is used in instances where the company holds inventories that are relatively the same from one year-
end to another. Thus, there shall be a possibility of recovery from inventory write-down from one year, unto the next year. The
difference between cost and NRV, where NRV is lower becomes the required allow. for inventory write-down (similar to allow for
bad debts), to determine how much is the loss during the period, the increment from the unadjusted balance of the account shall
be determined. Thus, if cost is lower the NRV, required balance is zero/nil, any unadjusted credit balance of the
account shall be recognized as gain from recovery in the income statement (or deducted from cost of sale)
Allowance for Inventory Write-down
Beginning Balance
Dr Adjustment for Gain on Recovery (or Cr Adjustment for Loss on write-down for
reduction from COS) the period (or addition to COS)
Required Ending Balance
FOR MEDIUM ENTITIES (PFRS for SMEs):
Generally the same as full PFRS.

FOR SMALL ENTITIES (PFRS for Small Entities, Section 21 Impairment of Assets):
Generally the same as full PFRS with the following exceptions:
- BS Meas.: Lower of Cost or Market Value, where the difference if market value is lower recognized in the profit or loss.

QUICK TEST:
1. ABC Corporation, a Merchandising Co. reported the following inventory items as of December 31, 2021:
Item A – Cost P900,000; Estimated Selling Price P1,200,000; Cost to Sell 20% of Selling Price.
Item B – Cost P600,000; Estimated Selling Price P800,000; Cost to Sell 30% of Selling Price.
Item C – Cost P400,000; Estimated Selling Price P380,000; Cost to Sell 10% of Selling Price.
Assuming ABC Corporation is a Medium Entity which uses PFRS for SMEs, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000
2. Assuming ABC Corporation is a Small Entity which uses PFRS for Small Entities, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
7. INVESTMENTS
FOR INVESTMENT IN EQUITY SECURITIES (SHARES):
a) Control Exists (>50% equity in voting shares, that is ordinary shares) – Investment in Subsidiary
b) Significant Influence exists (20% - 50% in voting shares, that is ordinary shares)
– Investment in Associate (Equity Method)
c) No Ctrl nor Sign. Infl. - Financial Asset at Fair Value
c.1) FA at Fair value through profit or loss (PFRS 9) (aka Trading Securities)
c.2) FA at Fair value through OCI/L (PFRS 9) (aka Available for Sale Security)

Investment in Associate/Equity Method

- At cost adjusted for share in the post acquisition changes in the net assets (capital) of the associate
Beginning Balance (Cost of Acquisition including transaction cost) XX
Share from Dividends (XX)
Share in net income/(net loss)** XX(XX)
Share in the other comprehensive income/(losses) of the associate XX(XX)
Ending Balance
**Share in net income or net loss:
Associates Net income or Net loss XX
Multiply by % of interest x% XX
Adjusted for: Excess of acquisition cost over book value
Depreciable asset understatement/remaining life (XX)
Adjusted share in net income XX
• Excess of Acquisition cost over Fair value of identifiable asset (Goodwill) shall not be included in the computation of share
in net income/loss, except if there is an impairment.
• Excess of fair value over book value of non-depreciable asset (e.g. land) shall not be included in the computation of share
in net income/loss, except if there is an impairment.
• If the acquisition cost is lower than the FMV of identifiable asset, the negative excess shall be included (added) in the share
in the net income in the year of acquisition.
• If investment was acquired other than at the beginning of the year, share from net income should be proportionate over
the number of months the investment had been held.

CESSATION (Disposal of shares to the extent that the company losses significant influence)
Realized Gain(Loss) Unrealized Gain(Loss) Total
Proceeds from the portion disposed (net of trans. cost) XX XX
Add: FMV of the remaining portion not sold and reclassified XX XX
Total XX
Less: CV of the investment in associate prior to cessation (XX)* (XX)** (XX)
Gain/(loss) on cessation, before recycling of OCI/OCL X(X) X(X) X(X)
Recycling of Other Comp Income/(Loss) X(X)* X(X)** X(X)
Gain/(loss) on Cessation (Recognized in the Profit or Loss) X(X) X(X) X(X)
*Prorated based on the portion sold **Prorated based on the portion retained and reclassified

DEEMED SALE/DILUTION (Happens when the company’s interest in associate decreases because of the issuance of the
associate of additional shares to other parties, with the company not participating on such new issuance)
Deemed share from the increase in the associates
net assets as a result of the issuance of shares
(Proceeds from issue of new shares*% of interest, after dilution) XX
CV of the investment deemed sold:
CV*(% decrease in interest/% original interest) (XX)
Gain/(loss) on deemed sale, before recycling of OCI/L X(X)
Recycling of Other Comp Income/(Loss) X(X)
Gain/(loss) on deemed sale/ Dilution gain(loss) X(X)

STEP-ACQUISITION OF INVESTMENT IN ASSOCIATE

If as a result of acquiring additional shares of stocks, the entity acquired significant influence in the investee company,
the transition from investment in financial asset at fair market value (no significant influence) to investment in associate (with
significant influence) shall be accounted for under the FAIR MARKET VALUE APPROACH (PFRS 3-BASED APPROACH):
- The initial cost of the investment shall be the sum of the current fair value of the original investment (original
investment shall be measured at its current fair value) and the cost of the new investment.

FOR MEDIUM ENTITIES (PFRS for SMEs, Sec. 14: Investment in Associate)
SMEs have an option in accounting for investment in Associate between and among the following methods:
a. Equity method (almost similar to full PFRS with specific distinctions:
- Goodwill identified under equity method is treated separately and is amortized (if indefinite, use 10 years)
- Under equity method, accounting policies of the associate are adjusted to that of the investor (thus there
will be no recognition of the share from unrealized holding gains/losses from financial assets to other
comprehensive income/loss)
b. At cost less impairment, provided there is no published price quotations for the investment.
c. At fair value with changes in fair value being recognized in the profit or loss, provided that the determination of the
investment’s fair value will not cause undue cost or effort.

FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 9: Investment in Associate)
A small entity shall account for all its investment in associate using one of the following:
a. At cost less impairment. Where the asset is impaired once its recoverable amount (higher between fair value less cost
to sell and value in use) becomes lower than cost.
b. Equity method (similar to equity method applied under PFRS for SMEs)

QUICK TEST:
Tomi Corp’s 20% investment in ordinary shares of ABC Corp. (with 100,000 shares outstanding) was acquired on
Page 9 of1,62
January 2021 at P50 per share which included
0915-2303213
P2 per share
 0908-6567516
transaction cost.
8288-6922
The book
 [email protected]
value of ABC Corp.’s Net
assets which approximated their fair value was at P6M. ABC Corp. declared a total comprehensive income of
P800,000 which included a P500,000 net income for the year, a P400,000 Revaluation Surplus on PPE and a
P100,000 Unrealized Holding Loss on FA at FMV. ABC Corp. also declared and distributed P250,000 cash
 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

QUICK TEST:
Tomi Corp’s 20% investment in ordinary shares of ABC Corp. (with 100,000 shares outstanding) was acquired on
January 1, 2021 at P50 per share which included P2 per share transaction cost. The book value of ABC Corp.’s Net
assets which approximated their fair value was at P6M. ABC Corp. declared a total comprehensive income of
P800,000 which included a P500,000 net income for the year, a P400,000 Revaluation Surplus on PPE and a
P100,000 Unrealized Holding Loss on FA at FMV. ABC Corp. also declared and distributed P250,000 cash
dividends in 2021. ABC Corp. shares had a fair market value of P59 per share as of December 31, 2021. Estimated
transaction cost to sell the shares remained P2 per share.
1. Assuming Tomi Corp. is applying Full PFRS, what is the CV of the investment as of Dec. 31, 2021?
a) P1,110,000 b) P1,090,000 c) P1,180,000 d) P1,140,000
2. Assuming Tomi Corp. is applying PFRS for SMEs as a medium entity, all of the following are allowed to be
the investments’ carrying value as of December 31, 2021, EXCEPT:
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000
3. Assuming Tomi Corp. is applying PFRS for Small Entities, all of the following are allowed to be the
investments’ carrying value as of December 31, 2021, EXCEPT (2 possible answers)
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000

Financial Asset at Fair Value (Through P/L or OCI/L) PFRS 9 WHERE RECYCLING IS NOT ALLOWED for equity
securities categorized as FA at FMV through OCI/L:
Investment at Fair Value through Profit Investment at Fair Value through other
or Losses (Trading security) Comprehensive income (Available for sale)
a) Initial recognition At Fair value (fair value of At Fair value (fair value of consideration
consideration given up), given up) plus any transaction costs
- Transactions costs shall be expensed incurred.
as incurred - Exclude accrued dividends (Note 1)
- Exclude accrued dividends(Note 1)
b) Balance sheet Fair Value Balance Sheet Date Fair Value Balance Sheet Date
valuation (temporary Less: Carrying Value Less: Original Cost
changes in value) Unrealized gain/loss – I/S Unrealized gain/loss – SHE of SFP

Fair Value Balance Sheet Date

Less: Carrying Value
Unrealized gain/loss – OCI in SCI
c) Disposal Proceeds, net of Trans. Cost Upon disposal:
Less: Carrying Value a) Difference between proceeds (gross of
Realized gain/loss – I/S transaction cost) against the CV of the
investment is UHG/L-OCI(SCI/SHE).
b) Transaction cost is recognized as
outright loss (expense)
c) Any Cumulative unrealized holding gain
or loss in the SHE may be transferred to RE
d) Impairment loss Decreases in FMV whether temporary Decreases in FMV whether temporary or
(permanent decline) or permanent are recognized in the permanent are recognized in the OCL/SHE
profit or loss
e) Reclassification At initial recognition, an entity may make an irrevocable election to present in other
comprehensive income. (PFRS 9, par 5.4.4) Thus, transfer into and out of
Investment at FMV through P&L (out of and into Investment at FMV through OCI) is
not allowed.
NOTES
1. If shares are acquired Div.-on (Between Declaration and Record date of Dividends), the purchase price shall be debited to dividend
receivable first before debiting the investment acct. for the bal. (Initial Cost = Purchase Price – Dividend Receivable)
2. Cash dividends shall be credited to dividend income upon declaration at face value.
3. Property dividends shall be credited to dividend income at fair value on declaration date.
4. Stock dividend shall be recorded only through memo (update carrying value per share)
5. Stock in lieu of Cash shall be recorded as div. income at the FV of shares received.
6. Cash in lieu of Stock shall be accounted for under the “as if” approach, that is, as if shares were received and sold at the cash
received. Gain or loss shall be recorded accordingly. (see disposal of FA at FMV)
7. Special dividends (preference shares received as dividend on ordinary shares held) shall be accounted for by allocating the carrying
value of the original shares held (if trading) or the original cost of the original shares held (if AFS) to the preference dividends
received and to the original investment based on aggregate fair values on a PRORATA basis.
8. Share assessment shall be debited to the investment account and credited to cash

FOR INVESTMENT IN DEBT SECURITIES (BONDS)

a) The business model of the company has an objective of holding debt security investments primarily to collect
contract cash flows; cash flows are in the form of principal and interest with fixed maturity date; does not
apply fair value option to eliminate accounting mismatch – Investment at Amortized Cost.
b) The business model of the company has an objective of holding the debt security investment primarily to
collect contractual cash flows but also has an objective of holding the debt security available for sale to take
advantage of business opportunities; does not apply fair value option to eliminate accounting mismatch – at
Fair Market Value through OCI/L
c) The business model has an objective of holding the securities for short-term profits or the entity uses fair
value option to eliminate accounting mismatch – at Fair Market Value through Profit or Loss.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
Financial Asset at Fair Value Through P/L and at Amortized Cost: PFRS 9 where recycling IS ALLOWED for
debt security investments categorized as FA@FMV through OCI/L:
At FMV Through Profit or Loss At FMV Through OCI/L Investment at Amortized Cost
(Trading security) (Available for sale security) (Held to maturity security)
a) Initial At Fair value (fair value of At Fair value (fair value of At fair value which is assumed
recognition consideration given up), consideration given up) plus any to be equal to the fair value of
- Transactions costs shall be transaction costs incurred, bonds plus any transaction cost,
expensed as incurred excluding any accrued interest. (a) excluding any accrued interest.
- Exclude accrued interest(a) (a)

b) Balance Fair Value Balance Sheet Date Fair Value @ Balance Sheet Date At Amortized Cost(b)
sheet Less: Carrying Value Less: Amortized Cost(b)
measurement Unrealized gain/loss – I/S Cum. Unrealized gain/loss – SHE
in SFP

Fair Value @ Balance Sheet Date

Less: Carrying Value
Unrealized gain/loss – OCI in SCI
c) Disposal Proceeds, net of transactions Proceeds, net of transactions Proceeds, net of transactions
costs, net of accrued interest (a) costs, net of accrued interest (a) costs, net of accrued interest(a)
Less: Carrying Value Less: Amortized Cost Less: Amortized Cost
Accrued Interest Realized gain/loss – IS* Gain/loss on sale
Realized gain/loss – I/S *including recycling of OCI/L
d) Impairment N/A (as any decline in the PV of New future cash flows at PV of New future cash flows at
Loss value of the investment is original effective rate original effective rate
recognized as UHL-P&L) Less: Amortized Cost Less: Amortized Cost
Impairment loss -IS* Impairment loss -IS*
*including recycling of OCI/L
e) Reclass. - Reclassification from one category to another is allowed when and only when the entity changes its
business model in holding debt security investment.
- The transfer shall be made at the beginning of the following reporting period from the date business
model has been changed (see following table)

RECLASSIFICATION DUE TO CHANGE IN BUSINESS MODEL

FROM/TO FMVP&L FMVOCI&L AMORTIZED COST
- No gain/loss on the reclass date - No gain/loss on the reclass date
FMVP&L - Amortization based on prevailing
- Future amortization based on
effective rate on reclass date
effective rate on reclass date
- No more future remeasurement
- Subsequent remeasurement
gain/loss to OCI/L
- Cumm OCI/L is recycled to - Cum. OCI/L is derecognized against
P&L on the reclass date the initial valuation of the investment,
FMVOCI&L - No more future amortization as a result the investment is transferred
- Subsequent remeasurement at amo. cost, as if it has been originally
gain/loss to profit or loss designated at amo. cost
- Subsequent amortization is based on
the original effective interest rate
-Gain/loss on reclassification -Gain/Loss on reclassification date
AMORTIZED date is recognized in the P&L is recognized in the OCI/L
COST - No more future amortization -Subsequent amortization shall be
- Subsequent remeasurement based on the original effective
gain/loss to profit or loss interest
- Subsequent remeasurement
gain/loss to OCI/L
Notes - (a) If bonds were acquired or sold in between interest payment dates, the acquisition price or the selling price includes
accrued interest not unless specifically expressed by the problem (e.g. at 105 plus accrued interest)
(b) If bonds were acquired at a premium (acquisition price > face value), the premium is a loss to be allocated over the
remaining term of the bonds by deducting the same to the related interest income. If bonds were acquired at a discount
(acquisition price < face value), the discount is a gain to be allocated over the remaining term of bonds by adding the same to
the related interest income. In summary:
Amortization of premium, decreases carrying value of investment and interest income.
Amortization of discount, increase carrying value of investment and interest income.
(c) Impairment loss on investment at amortized cost is the same with the computation of impairment of loans and receivables.

FOR MEDUIM ENTITIES (PFRS for SMEs, Sec. 11: Financial Instruments)
Financial instruments in bonds shall be categorized as:
(a) Debt instrument at amortized cost
(b) Debt instrument classified as current, measured at undiscounted value (Cost) (unless from a financing transaction)
(c) If financing transaction, current debt instrument shall be measured at the present value of future cash flows at
market rate of interest for similar debt instrument (at Fair Value)
Financial instrument in shares shall be measured at:
(a) Fair value (if publicly traded or if FMV can otherwise be measured reliably with changes in FMV recogn. in the P/L.
(b) All other investment shall be measured at cost less impairment.

FOR SMALL ENTITIES (PFRS for Small Entites, Sec. 6: Basic Financial Instruments)
Initial Measurement:
Financial instrument in bonds and in shares shall be initial recognized at transaction price (including transaction cost),
unless arrangement constitute financing in which case the debt security shall be initially measured at present value of
future cash flows at market rate.
Balance Sheet Measurement:
Financial Instruments in bonds – at amortized cost
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62 0915-2303213
Instrument in shares – at cost  0908-6567516
less impairment,  8288-6922
unless shares are  [email protected]
traded in an active market, which shall be
measured a lower of cost or fair value, with changes in fair value recognized in the profit or loss.

QUICK TEST:
 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

Balance Sheet Measurement:

Financial Instruments in bonds – at amortized cost
Financial Instrument in shares – at cost less impairment, unless shares are traded in an active market, which shall be
measured a lower of cost or fair value, with changes in fair value recognized in the profit or loss.

QUICK TEST:
An investment in 10,000 shares of ABC Corporation were acquired originally at P50 per share. At the balance sheet
date, the shares had a fair market value of P52 per share with cost to sell estimated at P4 per share.

5. Assuming the reporting entity is applying Full PFRS, what is the carrying value of the investment in equity
securities as at the balance sheet date?
a) P500,000 b) P520,000 c) P480,000 d) None of these
6. Assuming the reporting entity is applying PFRS for SMEs, being a medium entity, what is the carrying value
of the investment in equity securities as at the balance sheet date?
a) P500,000 b) P520,000 c) P480,000 d) None of these
7. Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the
investment in equity securities as of the balance sheet date, assuming further that the shares are not traded
in the active market?
a) P500,000 b) P520,000 c) P480,000 d) None of these
8. Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the
investment in equity securities as of the balance sheet date, assuming further that the shares are traded in
the active market?
a) P500,000 b) P520,000 c) P480,000 d) None of these

8. PROPERTY, PLANT AND EQUIPMENT

INITIAL MEASUREMENT at Cost. Cost of PPE shall include:
a. Cost of acquisition*
b. Incidental cost in bringing the asset to its present location and condition necessary for use.
c. Present value of the initial estimate of dismantling, removal or site restoration cost (credit goes to a provision
account – asset retirement obligation)

*Cost of acquisition depends on the mode of acquisition:

a. Cash purchase = Cash price + import duties + nonrefundable taxes (net of discount and rebates)
b. On account = at Cash price (net of discounts whether taken or not taken)
c. Installment/Deferred payment basis – at cash price equivalent or at present value of deferred payment
d. Share/Bond issue – at fair value of asset received, if not determinable, at fair value of shares issued
+ cash paid or – cash received
e. Exchange with commercial substance – at fair value of asset received (which is equal to the fair value
of asset given-up + cash paid or – cash received
f. Exchange without comm. substance – at book value of asset given-up, after impairment loss (where
appropriate) +cash paid or – cash received
g. Donation where the donor is a related party – at fair value (credit to APIC/Donated capital)
h. Donation where the donor is a non-related party (e.g. Government Grant) – at fair value (credit to
Income, if unconditional grant or Deferred Income, if conditional grant)
SUBSEQUENT MEASUREMENT
a. Cost method: At Cost, net of accumulated depreciation, and impairment loss
b. Appraisal/Revaluation method: At fair market value
Depreciation Methods
1. Uniform/Fixed Charge Method
Straight line = Depreciable cost / Useful life
2. Variable Charge Methods
Working hours = Depreciable cost / life in terms of working hours * actual hours used
Output method = Depreciable cost / life in terms of total output * actual output
3. Diminishing balance Methods
SYD = Depreciable cost * SYD rate
Declining balance = Cost*DB rate (consider salvage value only on the last year of depr.)
4. Others (useful for depreciating small tools and similar items)
Inventory method = Beg tools + Purchases – End tools – Proceeds from disposal of tools
Replacement method = Tools disposed * Cost of latest purchases – Proceeds from disposal
Retirement method = Tools disposed * Cost of earlier purchases – Proceeds from disposal
** For the computation of depreciation, where there are several transactions happening during the period
- List down all the items which became outstanding at one time or another during the period:
Disposed (Depreciate from Jan. 1 to date of disposal)
Newly Acquired (Depreciate from Date of acquisition to Dec. 31)
Outstanding during the entire year

IMPAIRMENT LOSS
An asset is impaired if only if the Carrying value is > that the Net recoverable value
* Net recoverable value is the higher between the Fair Value less Cost to Sell or the Value in use
Where: Fair Value less Cost to Sell = Estimated Selling Price – Estimated Cost to Sell
Value in use = PV of the future net cash flows from the continued use of the asset
and from its ultimate disposal using a pre-tax discount rate.

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REVALUATION/APPRAISAL
A. If asset have an active market, thus FMV is readily determinable:
Fair value of Asset – Carrying Value = Revaluation Surplus (OCI)

B. If asset have no active market, thus appraisal is determined through the current replacement cost:
Replacement Cost XX - XX Original Cost
Replacement AD (XX) - (XX) Accum. Depr. on Cost
Fair Value/Sound Value XX - XX Carrying Value
Fair Value/Sound Value = Replacement cost*Condition Percent
Condition Percent = (remaining life/total life, original estimate) or
(carrying value/depreciable cost, original estimate)

Transfer of Revaluation Surplus: (credit to retained earnings)

a. Piecemeal: RS/Remaining life of depreciation asset.
b. Lump sum: Realize upon disposal or retirement

Impairment with subsequent revaluation

a) Recognized impairment loss on the year of incurrence.
b) Continue Depreciation based on the impaired value.
c) Upon revaluation, recognize the gain on recovery =
CV had there been no impairment – CV based on impaired value
d) Recognize as revaluation surplus (under revaluation method) =
Fair Value – CV had there been no impairment

Revaluation with subsequent impairment

a) Recognize the revaluation surplus in the stockholders’ equity
b) Continue Depreciation based on the revalued amount (realize revaluation surplus on a piecemeal
basis if applicable)
c) Upon impairment, write off the remaining rev. surplus =
CV based on revalued amt. – CV had there been no revaltn.
d) Recognize as impairment loss in the income statement =
CV had there been no revaluation - Impaired value/Fair value

Compensation for Impairment Loss of PPE

a) Compensation for impairment loss of PPE shall be recognized as an asset in the BS and income in the IS, when and
only when it becomes virtually certain (when it becomes receivable).
b) The impairment loss shall be recognized separately at gross amount in the income statement.
c) The impairment loss and the compensation shall be separately recognized and are not to be offset.

FOR MEDUIM ENTITIES (PFRS for SMESs, Sec. 17: PPE)

Generally the same provisions with that of full PFRS except for the following:
- under Sec. 25: Borrowing Cost, all borrowing cost are to be expensed as incurred

FOR SMALL ENTITES (PFRS for Small Entities, Sec. 12: PPE)
Generally the same provisions with that of full PFRS except for the following:
- Balance sheet measurement - a small entity is allowed to choose between:
Cost Model – Cost less Accumulated Depreciation and Impairment (same as full PFRS)
Fair Market Value Mode – an entity shall measure the PPE at fair value at each reporting date with change in fair value
recognized in the profit or loss.
- under Sec. 19: Borrowing Cost, all borrowing cost are to be expensed as incurred

9. INTANGIBLES AND GOODWILL

INTIAL MEASUREMENT
a. Separate Acquisition: Cash purchase, installment basis, share/bond issue (see PPE)
b. Grants – At Fair Value or Zero/Nominal Amount
c. Business Combination – At Fair Value of Identifiable Intangibles acquired (regardless of intent to use)
d. Exchange – With Commercial Substance – At Fair Value
- W/out Commercial Substance – At Book Value of asset given + cash paid/ - cash received
e. Internally Developed Intangibles
e.1. For Patents, Brands, Mastheads, Publishing Titles, Recipes and Formulas, Customer Lists
- All research and development costs shall be recognized as outright expense. Only the cost directly associated
to acquiring the legal rights over the intangible forms part the initial cost of the asset.
e.2. For other internally developed intangibles (e.g. Computer Software)
- All research and development cost incurred prior to achieving the capitalization criteria under PAS 38 shall be
recognized as outright expense)
- Development costs that qualify for capitalization under PAS 38 (e.g. after establishment of tech. feasibility)

SUBSEQUENT MEASUREMENT
COST METHOD
- For Intangibles without definite useful life (including Goodwill): Cost net of Impairment Loss
- For Intangibles with definite useful life: Cost net of Amortization and Impairment Loss
REVALUATION METHOD (similar to PPE, except that intangibles shall only be revalued if it has an active market)

MATTERS ABOUT GOODWILL: Initial Measurement

Indirect: Acquisition Cost XX
Less: Fair Value of identifiable net assets, excluding goodwill (XX)
Goodwill XX
Direct: a) Purchase of excess earnings (Excess Earnings*#years)

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b) Present value (Excess Earnings*PV factor)
c) Capitalization of excess earnings (Excess Earnings/%)
d) Capitalization of normal/average earnings (Acq Price – (Norm Earnings/%))

Where: Excess Earnings is computed as:

1) If Average or Normal Earnings is given as a percentage:
Fair market value of net asset, excl goodwill * (Entity normal earnings % - Industry ave. earnings% )

2) If Normal Earnings is given in terms of actual historical earnings:

Historical accumulated earnings (usually 5 years) XX
Adj: Non-operating (gains)/losses X(X)
Historical earnings from operations XX
Divide by: number of year (usually 5 years) xyears
Average earnings XX
Add/Ded: Incremental/Decremental expense X(X)*
Entity Average earnings XX
Less: Industry normal earnings (XX)
Excess earnings XX
*eg. Bonuses to officers are no longer incurred after the business combination.
Depreciation and amortization shall either increase or decrease after the bus. com.

IMPAIRMENT LOSS ON GOODWILL:

Carrying value of the Cash Generating Unit (including Goodwill) XX
Recoverable Value of the cash generating unit* (XX)
Impairment loss XX
*Higher between the Value in use (present value of remaining future cash flows from continued use and eventual disposal of the
net assets comprising the CGU) and the fair value less cost to sell of the CGU.
a. Impairment loss shall be charged first against the goodwill attributed to the CGU,
b. if not enough any excess shall be charged to all other assets of the CGU in the ratio their carrying value before any
impairment. In allocating the remaining loss, the resulting CV of all other assets should not result to amounts lower than the
higher between and among: (a) the individual asset’s FMV less cost to sell; (b) the individual asset’s value in use; and, (c) zero

FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 19: Business Combination and Goodwill)
- require to measure goodwill at each balance sheet date at cost less accumulated amortization and impairment losses. If
an entity cannot determine the period which the economic benefits are expected, goodwill shall be amortized over a
period not to exceed 10 years.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 14, Business Combination and Goodwill)
- Essentially the same with PFRS for SMESs

FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 18: Intangibles)

- requires all research and development costs to be expensed as incurred unless it forms part of the cost of another asset
that meets the recognition criteria in terms of IFRS for SMEs
- internally generated intangibles are expensed: development costs may not be capitalized
- cost of intangible acquired through government grant is at fair value only: zero/nominal amount is not allowed valuation.
- requires intangibles be subsequently measured at each balance sheet date at cost less any accumulated amortization and
impairment loss (and does not allow the use of revaluation method)
- require to consider that all intangibles have finite(definite) useful life (if not reliably measurable, use management’s best
estimate but not more that 10 years)
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 13, Intangible Assets Other than Goodwill)
- Essentially the same with PFRS for SMESs

QUICK TEST:
A reporting entity incurred the following costs at the beginning of the reporting year: Research costs aimed at the
discovery of a new knowledge, P20,000; Development costs incurred before establishment of technical feasibility,
P30,000; Development cost incurred after technical feasibility, P40,000; Cost of separately acquiring an intangible
asset, P60,000; Goodwill recognized through a business combination, P50,000. Assuming the following useful lives:
Internally developed intangible – Indefinite; Separately acquired intangible – 15 years; Goodwill – Indefinite.
1. Assuming the reporting entity uses Full PFRS, what is the total carrying values of the intangibles and
goodwill as at the end of the reporting period?
a) P150,000 b) P146,000 c) P137,000 d) 135,000
2. Assuming the reporting entity uses PFRS for SMEs, being a medium entity, what is the total carrying values
of the intangibles and goodwill as at the end of the reporting period?
a) P110,000 b) P106,000 c) P137,000 d) 101,000
3. Assuming the reporting entity uses PFRS for Small Entities, what is the total carrying values of the
intangibles and goodwill as at the end of the reporting period?
a) P110,000 b) P106,000 c) P137,000 d) 101,000

10. LIABILITIES
REFINANCING AND BREACH OF CONTRACTS (PAS 1)
Refinancing: Generally, a currently maturing obligation must be presented as current liability. A currently maturing
obligation may be presented as a long term liability under refinancing agreement, only if:
1. The company (as of the BS date) has the option/right to refinance the liability on a long-term basis OR

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2. If there is no right but the long-term refinancing agreement was completed before or at the BS date.
Note: Long-term refinancing may be thru: a) extension of maturity date for another 12 months,
b) issuance of bonds the proceeds of which is used to settle the currently maturing obligation.

Breach of Contract: Generally, if the company breaches a covenant the long-term obligation becomes
due and demandable, thus is presented as short term liability.
The obligation may still be presented as long-term only under the following conditions:
1. If the creditor agreed to give the debtor a grace period for at least 12 months after the balance sheet date AND
2. The said grace period should have been provided on or before the balance sheet date.

PROVISIONS (PAS 37)

- A liability whose either amount or timing is uncertain. ACCRUED, under the following conditions:
1. Present obligation (legal or constructive) resulting form a past event or transaction (obligation event should have
happened on or before the balance sheet date)
2. It is probable that an outflow of economic benefits will be required to settle the obligation.
3. The amount of obligation should be capable of being reliable measured.
Common examples of provision are: Product warranties and guarantees, Premiums and coupon obligations,
Liability from litigations, Guarantee of liability of others, Provisions from onerous contracts, Unlawful
environmental damages

FOR PROVISIONS FOR WARRANTIES (assurance-type):

Total expense, per estimation policy XX
Less: Actual cost incurred to date (xx)
*Provision/Estimated Liability at year end XX
* Before accruing liability at year end, consider if all provision/estimated liability are still valid, that is, are still probable
to be settled in the next period (e.g. if warranty, consider warranty period, if GCP consider validity period, etc.)

- REIMBURSEMENTS OF PROBABLE LOSSES UNDER PAS 37 – these are amounts expected to be received as reimbursements
if entity settles the provision. Reimbursements shall be accounted for as follows:
1. If the entity has no obligation for the part of the expenditure to be reimbursed, the reimbursable amount shall be
deducted against the losses recognized in the income statement. The liability shall be presented in the balance sheet
net of the reimbursable amount.
2. If the obligation for the amount expected to be reimbursed remains with the entity and reimbursement is Virtually
Certain, the reimbursements shall be accrued as an asset (receivable) in the balance sheet any may be offset against
the losses recognized in the income statement. The amount recognized for the expected reimbursement should not
exceed the liability.
3. If the obligation for the amount expected to be reimbursed remains with the entity and the reimbursement is not
virtually certain, the expected reimbursement is not recognized as an asset. The expected reimbursement may be
disclosed.

CONTINGENT LIABILITIES
1. Possible obligation whose existence is to be determined in the future contingent upon the happening of a future
event; or
2. Present obligation, but is not accrued because it is either remotely possible that economic benefits will be required
to settle the obligation and/or the amount of the obligation is not capable of being reliably measured.

FOR BONDS PAYABLE PROBLEMS:

Bonds issued at a Discount (Proceeds < Face Value; Effective Interest > Nominal Interest)
- discount is a transaction loss (amount received/proceed is lower than the amount to be paid/face value) to be amortized
over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is added to the related expense – INTEREST EXPENSE
Dr: Interest Expense XX
Cr: Discount on Bonds Payable XX
- as a result of the amortization, the interest expense recognized in the income statement is higher than the interest paid
and/or accrued. The difference is the amount of amortization.
- Correct interest is computed as: (Carrying value of Bonds * Effective interest)
- Nominal interest is computed as: (Face value of Bonds * Nominal interest)

Bonds issued at a Premium (Proceeds > Face Value; Effective Interest < Nominal Interest)
- premium is a transaction gain (amount received/proceed is higher than the amount to be paid/face value) to be amortized
over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is deducted from the related expense – INTEREST EXPENSE
Dr: Premium on Bonds Payable XX
Cr: Interest Expense XX
- as a result of the amortization, the interest expense recognized in the income statement is lower than the interest
paid/accrued. The difference is the amount of amortization.

Bond Issue Costs – are deducted from net cash proceeds, thus in the process are deducted from premium or added to discount
on bonds payable (after which a new effective interest rate shall be computed)
Retirement of Bonds – if bonds are retired prior to their maturity dates, gain or loss shall be recognized in the profit or loss
(difference between the retirement price and updated amortized cost of the bonds plus accrued interest, where applicable)
Accrued Interest – in accounting for bond issuance and retirement, consider inclusion of accrued interest specifically if bonds
were issued or retired in between interest payment dates.

CONVERTIBLE BONDS
1. ISSUANCE – Proceeds from the issuance of Convertible Bonds should be allocated between the debt component (bonds
payable) and the equity component (Share Premium form Bond Conversion Privilege) using the RESIDUAL APPROACH.
To wit, the pro-forma entry to record issuance is:
Dr: Cash XX
Dr: Discount on Bonds Payable XX (or)

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Cr: Premium on Bonds Payable XX
Cr: Bonds Payable XX
Cr: Share Premium from Bonds Conv. Priv. XX

2. CONVERSION – If Convertible bonds are converted into ordinary shares, the carrying value of the bonds (updated
amortized bonds payable) shall be cancelled out. The difference between the carrying value of the bonds and the
aggregate par value of the converted shares shall be credited to share premium account. An allowed alternative is the
cancel out the equity component originally credited to share premium account upon issuance of the bonds. The same
shall be added to the amount credited to the share premium account upon conversion. To wit, the pro-forma entry to
record the conversion is:
Alternative 1 Alternative 2
Dr: Bonds Payable XX Dr: Bonds Payable XX
Dr: Premium on Bonds Payable XX (or) Dr: Sh Prem from Bond Conv. Priv. XX
Cr: Discount on Bonds Payable XX Dr: Premium on Bonds Payable XX (or)
Cr: Ordinary Shares XX Cr: Discount on Bonds Payable XX
Cr: Share Premium XX Cr: Ordinary Shares XX
Cr: Share Premium XX

3. EARLY RETIREMENT – If Convertible bonds are retired prior to maturity date, the retirement price shall
be allocated between the Bonds and the equity component, consistent with how the original issue price was
allocated (Residual Approach). The difference between the retirement price of the allocated to the debt component and
the carrying value of the bonds payable shall be recognized in the income statement, while the difference between the
retirement price allocated to the equity component and the original share premium from bond conversion privilege shall
be credited to share premium account.

LEASE
LEASE – a contract of part of a contract that conveys the RIGHT TO USE an underlying asset for period of time in exchange for a
consideration.
RIGHT TO USE – right to control the use of an IDENTIFIED ASSET
IDENTIFIED ASSET – by being explicitly identified in the contract or implicitly specified when made available to the customer
1. right to direct the use of an asset (how and for what purpose the asset is used throughout the period of use)
2. right to obtain substantially all the economic benefits from the use of the identified asset

*LEASES ARE FINANCE LEASE ON THE POINT OF VIEW OF THE LESSEE. PFRS 16 HOWEVER PERMITS THE LESSEE TO MAKE AN
ACCOUNTING POLICY ELECTION TO APPLY OPERATING LEASE UNDER THE FOLLOWING OPTIONAL EXCEPTIONS:
1. SHORT TERM LEASE – lease term is for a period of 12 months or less. Election to be made on a per class of
underlying asset basis (similar asset of nature and use)
2. LOW VALUE LEASE – low value asset based on professional judgment and based on the value of the asset when it
was brand new regardless of its age on the lease date. Typically low value underlying assets include computers,
office furniture and equipment. Election for low value lease is made on a lease by lease basis.
OPERATING LEASE
1. Periodic Payments – recognized as rent expense over the lease term on a straight-line uniform basis unless a more
systematic method is warranted.
2. Lease Inducements – effect of lease inducement is a reduction from the periodic rent expense on a straight-line uniform
basis, unless a more systematic method is warranted
3. Lease Bonus – recognized as additional rent expense over the lease term on a uniform or straight-line basis, unless a
more systematic method is warranted
4. Contingent Rentals – recognized as additional rent expense when incurred, that is when the condition or the contingent
event occurs.

FINANCE LEASE
1. INITIAL RECOGNITION/ACQUISITION OF RIGHT OF USE ASSET ON INSTALLMENT BASIS
ENTRY: Right of Use Asset (at COST) XX
Lease Liability (1) XX
Cash (2 and 3) XX
Asset Retirement Obligation (4) XX
Where the COST of the asset shall include:
1. Present value of the Minimum Lease Payments (MLP) – Credited to LEASE LIABILITY
1.1. Periodic Payments (Fixed and Variable)
1.2. Certain Purchase Option or Guaranteed Residual Value
1.3. Additional periodic payments upon extension (if with certain extension option)
1.4. Termination penalties (if with certain termination option)
*The PV of MLP shall be based on the IMPLICIT LEASE RATE if known to both parties, otherwise, the INCREMENTAL
BORROWING RATE
2. Lease payment before or at commencement date such as LEASE BONUS less any LEASE INCENTIVES (reimbursable
expenses incurred by the lessee in relation to the lease agreement) – Credited to Cash
3. Initial direct cost incurred by the lessee – Credited to Cash (when paid in Cash)
4. PV of Estimated Retirement Cost – Cr. to Prov. on Asset Retirement / Asset Retirement Obligation (PAS 37)
2. PERIODIC PAYMENTS
ENTRY: Interest expense (CV of Liab*%) XX
Lease Liability (balance) XX
Cash XX
3. Depreciation
Entry: Depreciation Expense XX
Accumulated Depreciation XX
Where: 1. If there is transfer of ownership (whether as directly agreed upon or as a result of a certain purchase option):
(Cost minus Estimated Residual Value / Useful Life)
2. If there is no transfer of ownership (whether as agreed upon or as a result of a certain termination option):
(Depreciable Cost / Term)
Where: Depreciable Cost is:
Cost Minus the Lower between the Guaranteed Residual Value or the Estimated Residual Value

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LEASE – LESSOR
Leases are generally OPERATING, unless FINANCE under specific criteria/requirements under PAS 17: (1) Transfer of ownership to
lessee; (2) Bargain Purchase Option; (3) Term at least 75% of life of asset; (4) PV of minimum lease payments (MLP) is at
least 90% of the FMV of the leased asset; (5) The asset is specialized in nature that only lessee can use with very minimal
alterations.
If the lessor is the manufacturer/dealer of the asset, the lessor shall be recognizing gross profit from the lease which shall be
accounted for as SALES TYPE LEASE.
Upon sale:
DR: FINANCE LEASE RECEIVABLE XX
CR: SALES XX
Or, if payments are made in advance (at the beginning of each lease period)
DR: CASH XX
DR: FINANCE LEASE RECEIVABLE (balance) XX
CR: SALES XX
To recognize the related cost of sales:
DR: COST OF SALES XX
CR: INVENTORY/ASSET XX
a. The amount of sale shall be the fair market value of the asset sold or the present value of the minimum lease payments
(MLP), whichever is lower.
b. The minimum lease payments (MLP) shall include a) Periodic Payments and b) Bargain Purchase Option or Guaranteed
Residual Value.
c. If the residual value is not guaranteed, the same shall still be added in the determination of the Finance lease receivable,
but instead of it being added to sale, it will now be deducted from the cost of sales. The rationale is that if the residual value
is not guaranteed, that portion of the asset is not deemed sold, while it will still accrue to the benefit of the lessor at the
expiration of the lease (no transfer of ownership).
d. As a result, the gross profit to be recognized shall be the same whether the residual value is guaranteed or unguaranteed.

If the lessor is a mere financing company (as in the case of a bank) instead of a manufacturer/dealer, the lease is under DIRECT
FINANCE LEASE. There will be no manufacturer’s profit to be recognized, instead income shall be derived merely through interest.
Upon sale:
DR: FINANCE LEASE RECEIVABLE XX
CR: ASSET XX
Or, if payments are made in advance (at the beginning of each lease period)
DR: CASH XX
DR: FINANCE LEASE RECEIVABLE (balance) XX
CR: ASSET XX
Regardless whether the lease is under sales-type or direct financing, upon periodic collection:
DR: CASH XX
CR: FINANCE LEASE REC. (Balancing fig.) XX
CR: INTEREST INCOME (CV of REC.*eff %) XX
a. The interest is computed based on the finance lease receivable balance.
b. The credit to the finance lease receivable is the balancing figure, that is the periodic collection less interest income
computed in a.
Direct lease costs incurred by the lessor shall be recognized as outright operating expense (alternatively added to cost of sales), under
Sales-type lease or are recognized as an addition to the initial investment on the lease by the lessor, under Direct finance lease (added
to the amount receivable by the lessor).

SALE AND LEASEBACK AGREEMENT (Sales Price = Fair Market Value)

1. Since lease agreements on the books of the lessee are by default, finance lease, the sale and lease back agreement
shall be considered simultaneously as sale of an asset and an acquisition of right of use asset:
DR: Cash XX
DR: Right of Use Asset(b) XX
DR/CR: Loss/Gain on Sale and Leaseback(c) XX/ XX
CR: Asset (at carrying value) XX
CR: Lease Liability(a) XX
(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a) XX
Divide by: FMV of the Asset /XX
Portion of the asset reacquired in % X%
Multiplied by: CV of the Asset XX
Portion of the asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset XX
Portion of the Asset Sold XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback XX
Less: PV of the MLP (CR to Lease Liability) (XX)
Proceeds from portion sold XX
CV of the portion sold (see b) (XX)
Loss/Gain on Sale and Lease back XX
SALE AND LEASEBACK AGREEMENT (Sales Price not equal to Fair Market Value)
1. If Sales price is higher than the Fair market value, the excess shall be treated as additional financing provided by the
buyer-lessor to the seller-lessee, thus is automatically included in the minimum lease payment credited to the Lease
Liability account.
DR: Cash XX
DR: Right of Use Asset(b) XX
DR/CR: Loss/Gain on Sale and Leaseback(c) XX/ XX
CR: Asset (at carrying value) XX
CR: Lease Liability(a) XX

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(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY (including payment of the
excess of sales price over the fair value of asset)
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a) XX
Less: Excess of Sales price over FMV of Asset (XX)
PV of MLP related to the lease liability or portion reacquired XX
Divide by: FMV of the Asset /XX
Portion of the asset reacquired in % X%
Multiplied by: CV of the Asset XX
Portion of the Asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset XX
Portion of the Asset Sold XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback XX
Less: PV of the MLP (CR to Lease Liability) (XX)
Proceeds from portion sold XX
CV of the portion sold (see b) (XX)
Loss/Gain on Sale and Lease back XX
2. If Sales price is lower than the Fair market value, the excess shall be treated as prepayment of the lease liability by the
seller-lessee to the buyer-lessor, thus is automatically deducted from the the minimum lease payment credited to the
Lease Liability account.
DR: Cash XX
DR: Right of Use Asset(b) XX
DR/CR: Loss/Gain on Sale and Leaseback(c) XX/ XX
CR: Asset (at carrying value) XX
CR: Lease Liability(a) XX
(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY (net of the excess of fair
market value of asset over the selling price)
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a) XX
Add: Excess of FMV of asset over Sales price (XX)
PV of MLP related to the lease liability or portion reacquired XX
Divide by: FMV of the Asset /XX
Portion of the asset reacquired in % X%
Multiplied by: CV of the Asset XX
Portion of the Asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset XX
Portion of the Asset Sold XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback XX
Less: PV of the MLP (CR to Lease Liability) (XX)
Proceeds from portion sold XX
CV of the portion sold (see b) (XX)
Loss/Gain on Sale and Lease back XX

INCOME TAXES (PAS 12)

The reconciliation between financial income and taxable income is shown below:
Financial Income before any differences (Net income before tax in the SCI) XX
Add: Permanent Difference, Non-deductible expenses XX
Less: Permanent Difference, Non-taxable income (XX)
Financial Income before Temporary Difference XX
Add: Future Deductible Amounts creating
Deferred Tax Asset and Deferred Tax Benefit (FDAAB) XX
Less: Future Taxable Amounts creating
Deferred Tax Liability and Deferred Tax Expense (FTALE) (XX)
Taxable Income XX
If there are no expected changes in tax rates in the future:
a. Total Tax Expense = Financial Income before temporary differences * Tax%
b. Current Tax Expense (Payable to BIR) = Taxable Income * Tax%
c. Deferred Tax Asset (in the Balance Sheet) and Deferred Tax Benefit (in the Income Statement) = FDAAB*Tax%
d. Deferred Tax Liability (in the Balance Sheet) and Deferred Tax Expense (in the Income Statement) = FTALE*Tax%
e. To Reconcile:
Current Tax Expense (Taxable Income*Tax%) XX
Add: Deferred tax expense (FTALE*Tax%) XX
Less: Deferred tax benefit (FDAAB*Tax% (XX)
Total Tax Expense (Fin. Inc. before Temp. Diff.*Tax%) XX
f. Entry to recognize the same shall be:
DR: INCOME TAX EXPENSE (TOTAL) XX
DR: DEFERRED TAX ASSET XX
CR: INCOME TAX PAYABLE (CURRENT TAX) XX
CR: DEFERRED TAX LIABILITY XX
If tax rates are expected to change in the future years:
Current Tax Expense (Taxable Income*Tax%) XX
Add: Deferred tax expense (FTALE*Future Tax%) XX
Less: Deferred tax benefit (FDAAB*Future Tax% (XX)
Total Tax Expense XX

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PERMANENT DIFFERENCES
a. Non-deductible expenses
o Fines, penalties, surcharges and compromise penalties for non-payment or late payment of taxes
o life insurance expense
o a portion of interest expense (33% of interest income gross of applicable final tax)
o a portion of charitable contributions expense (excess of 5% of taxable income)
o a portion of entertainment, amusement and representation expense (excess of 0.5% of net sales for
merchandising and manufacturing entities or excess of 1% of net revenue for service entities
o goodwill impairment

b. Non-taxable income
o dividend income by a domestic or resident foreign corporation from another domestic corporation
o life insurance policy settlement
o interest income subject to final tax
o royalty income subject to final tax
o gifts, bequests and devises
o gains from sale, exchange, or retirement of bonds
TEMPORARY DIFFERENCES
FUTURE DEDUCTIBLE AMOUNTS (FDAAB)
- Amounts that are deductible for tax purposes in the future. These items are not yet deductible from current income, thus
are being added back to financial income to determine taxable income.
- Future deductible amounts create deferred tax asset (in the balance sheet) and deferred tax benefit (deducted from
current tax expense in determining the total tax expense in the income statement)
- Generally includes the following:
o Accrued expenses – deducted only upon payment in the future.
o Unearned income – taxed upon collection, thus are taxable in the current period but are not yet recognized as
income for financial accounting purposes. (no longer taxable in the future, thus are deductible in the future)
o Excess financial depreciation over tax depreciation.
o Excess taxable income over financial income
o Bad debts (under allowance method) – deductible upon write-off in the future.
o Impairment losses (other than on goodwill)
FUTURE TAXABLE AMOUNTS (FTALE)
- Amounts that are taxable for tax purposes in the future. These items are not yet taxable in the current period, thus are
being deducted from financial income to determine taxable income.
- Future taxable amounts create deferred tax liabilities (in the balance sheet) and deferred tax expense (added to the
current tax expense in determining the total tax expense in the income statement)
- Generally includes the following:
o Accrued income – taxed only upon collection in the future.
o Prepaid expenses – deductible upon payment, thus are already deductible in the current period for tax purposes.
(no longer deductible in the future, thus are taxable in the future)
o Excess tax depreciation over financial depreciation
o Excess financial income over taxable income

POST RETIREMENT BENEFITS PROBLEMS (PAS 19)

TYPES OF POST RETIREMENT BENEFITS PLANS
A. DEFINED CONTRIBUTION – Under a defined contribution plan, what is defined, that is what has been agreed upon with
the employees, shall be the periodic contribution of the company to the employees retirement fund. The periodic pension
expense shall therefore be equal to the periodic agreed-upon contribution to the plan. As a result, any future income that
shall be earned by the employees’ retirement fund shall accrue to the benefit of the employees and shall not affect in any
way the computation of the company’s periodic pension expense.

B. DEFINED BENEFIT – under a defined benefit plan, what is defined, that is what has been agreed upon with the employees,
shall be the final amount the employee will be able to receive in the future upon their retirement. The amount is usually
based on a certain percentage of the final salary of the employee on their retirement date multiplied by the number of
years the employee has been in service. (%*Final Salary*#of years in service). The future amount to be settled upon
retirement, where funded, shall be paid through the employees retirement fund (plan asset) which the company funds
through the periodic contribution.

In a defined benefit plan, contribution to the employees retirement fund is separately accounted for in a
separate memorandum account, PLAN ASSET (PA), to account for any income that it may earn (reduction
from pension expense, since it will accrue to the benefit of the company). The accumulated benefit
obligation is also maintained in a separate memorandum account, ACCUMULATED BENEFIT OBLIGATION
(ABO), to monitor the balance of the benefits earned by the employees (incurred by the company). The
difference between these two memorandum accounts will actually be the year-end Accrued Pension
Expense (ABO>PA) or Prepaid Pension (PA>ABO).

DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN

Entry: Periodic Contribution to the Plan Entry: Periodic Contribution to the Plan
DR: Pension Expense XX DR: Pension Expense XX
CR: Cash XX CR: Cash XX

Year-end AJE: Year-end AJE:

If, Contribution = Required Expense* If, Contribution = Required Expense**
No AJE necessary No AJE necessary

If, Contribution < Required Expense* If, Contribution < Required Expense**
DR: Pension Expense XX DR: Pension Expense XX
CR: Accrued Pension Expense XX CR: Accrued Pension Expense XX

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If, Contribution > Required Expense* If, Contribution > Required Expense**
DR: Prepaid Pension Expense XX DR: Prepaid Pension Expense XX
CR: Pension Expense XX CR: Pension Expense XX
- the prepaid pension is subjected to an asset
Where *Required Expense = Defined contribution or ceiling test first (see discussion below) before the
the periodic contribution to the plan as per entry to set it up.
agreement with employees.
Where **Required Expense shall be computed as
follows:

Service Cost XX
Net Interest Expense/(Income) X(X)
Net Remeasurement Loss(Gain) X(X)
Total XX

Service Cost and Net Interest Expense(Income) shall

be recognized in the profit or loss while the Net
Remeasurement Loss(Gain) shall be recognized as
other comprehensive income or loss.

SERVICE COST
Service cost shall comprise the (1) current service cost, (2) past service cost, (3) settlement gain or loss. Service cost is a
component of pension expense recognized in the profit or loss.
CURRENT SERVICE COST - This is the increase in accumulated benefits obligation (ABO) for the current period due to the
services of employees for the current year.
PAST SERVICE COST - This is the increase in the accumulated benefits obligation (ABO) in the current period due to the
services of employees in the past years. This results from introduction of significant changes in the defined contribution plan during
the year. As for instance the, increase in the agreed percentage of final salary (e.g. from 10% to 20%) as a basis for the
computation of the defined benefit will result to substantial increase in the obligation for the current period, not only due to services
of the current year but also for the services in the previous years. Whether vested immediately or not vested immediately, past
service cost is immediately recognized as a component of service cost and pension expense for the current year.
SETTLEMENT GAIN OR LOSS - This result from the difference between an obligation’s settlement price (retirement benefits
actually paid to retiring employees) against the carrying value of the accumulated benefit obligation being settled. One possible
reason for such difference would be when the company offers early retirement plans to employees. To encourage employees to
take advantage of early retirement offers, the company usually offers to settle retirement plans at amounts which are significantly
higher that that earned by the employee (thus leading to a possible loss on the said settlement).
NET INTEREST EXPENSE (INCOME)
Net interest expense (income) is the difference between the Interest Expense on the accumulated benefit obligation (ABO,
beg*settlement or discount %) and the Interest Income on the plan asset (PA, beg*settlement or discount %).
Like any liabilities, the accumulated benefit obligation increases periodically due to interest incurred. Interest incurred on the ABO
shall be recognized as a component of pension expense in the profit or loss.
The expected return on the plan asset on the other hand, shall be the interest income on the plan asset. The interest income rate
shall be assumed to be equal to the settlement or discount rate used to determine the interest expense on the ABO. The interest
income on the plan asset shall be recognized as a reduction from pension expense in the profit or loss.
The net interest expense (income) is also effectively, the interest expense (income) on the beginning balance of the accrued
pension expense (ABO>PA) or the prepaid pension expense (PA>ABO).
NET REMEASUREMENT LOSS (GAIN)
The net remeasurement loss (gain) or the actuarial loss (gain) shall comprise: (1) Actuarial loss (gain) on the plan asset; (2)
Actuarial loss (gain) on accumulated benefit obligation, and; (3) Effect of the asset ceiling (impairment on the prepaid pension).
The net remeasurement loss (gain) shall be recognized as an element of pension expense as other comprehensive income or loss.
REMEASUREMENT LOSS (GAIN) ON PLAN ASSET - At year end, the employees retirement fund (plan asset) shall be
remeasured at fair market value. As a result any difference between the plan asset’s current fair market value and carrying value
shall be recognized as actuarial loss (gain).
PLAN ASSET
Beginning Balance XX
Contribution to the plan XX XX Settlement price to retirees
Interest income on the plan asset XX
Actuarial gain (squeeze) or XX XX Actuarial loss (squeeze)
Ending Balance (at Fair Value) XX
The actuarial gain/loss is actually the difference between the actual return on the plan asset and the expected
return on the plan asset (interest income on the plan asset).

REMEASUREMENT LOSS (GAIN) ON ACCUMULATED BENEFIT OBLIGATION - At year end, the accumulated benefit
obligation is determined by computing the present value of the projected benefits earned by employees using an appropriate
assumed settlement rate. The difference between the computed present vale of projected benefits and the accumulated benefit
obligations’ carrying value shall be the actuarial loss (gain).

ACCUMULATED BENEFIT OBLIGATION

XX Beginning balance
Settlement to retirees at CV XX XX Current service cost
XX Past service cost
XX Interest expense on ABO, Beg
Actuarial gain (squeeze) or XX XX Actuarial loss (squeeze)
XX Ending balance (Present Value of the
Projected Benefits)

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EFFECT OF THE ASSET CEILING - If the fair market value of the plan asset at year-end is higher than the present value
of the projected benefits (PA>ABO), the prepaid pension expense is tested for asset ceiling (tested for possible impairment), before
the same is set-up as prepayment at year end. The ASSET CEILING shall be the sum of the present value of any expected future
benefits from over-funding the benefit obligation (usually in the form of reduction in future contribution or future refunds). If the
asset ceiling is higher than the prepaid pension (PA – ABO) there is no loss. If the asset ceiling however is lower that the prepaid
pension (PA – ABO) the prepaid pension is written-down to the ceiling and additional loss shall be recognized as a component of
pension expense as other comprehensive income/loss.

FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 28, Employee Benefits)
Generally the same provisions with that full PFRS except:
- A medium entity may elect to report the remeasurement/actuarial gain or loss from plan asset and accumulated
benefit obligation either in the profit or loss or in other comprehensive income or losses.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 22, Employee Benefits)
- An entity should account for the post-employment benefit plan using the accrual approach by calculating the expected
liability as of reporting date using the current salary rate of the employees and the employee’s years of service, without
consideration of future changes in salary rates and service periods. The entity shall recognize the liability for such post-
employment benefit plan at the net total of (1) the accrued amount of the retirement benefits at the reporting date; less
(2) the fair value of plan asset (if any) at the reporting date out of which the obligations are to be settled directly.

QUICK TEST:
A reporting entity has 5 employees all employed 5 years ago as at the beginning of the current reporting period.
Each employee has an average current salary rate at P20,000 per month as of the current reporting period. The
agreement with the labor union (under a defined benefit obligation plan) included an agreement to pay each
employee 50% of their final monthly salary for each year of service upon retirement. The company estimates a 20%
annual increase in salaries. The employees are expected to retire in 4 years as at the end of the current reporting
period. The settlement rate is assumed at 10%. The fair market value of the Plan Asset as at the end of the year is
P250,000.
1. Assuming the entity uses the Full PFRS, what is the accrued pension as to be reported in the SFP as at the
end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000
2. Assuming the entity uses PFRS for SMEs, being a medium entity, what is the accrued pension to be
reported in the SFP as at the end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000
3. Assuming the entity uses PFRS for Small Entities, what is the accrued pension to be reported in the SFP as
at the end of the reporting period?
a) P372,080 b) P217,378 c) P174,889 d) P50,000

11. STOCKHOLDERS’ EQUITY

SHARE ISSUE
1. Issuance of Share Capital for Cash – Preference or ordinary shares are credited equal to par and the excess to additional
paid in capital.
Share Issuance Costs – include registration fees, underwriter commissions, legal fees, accounting fees,
share certificate cost, promotional costs and postage.
Generally, For subsequent issuances – charged to APIC relative to that particular issue.
For initial issuance – charged to Organization Expense
Issuance of Preference and Ordinary Shares for a Lump-sum Price – This is accounted as follows:
a. If preference are effectively equity securities, use pro-rata approach in reference to the aggregate market value of
preference and ordinary shares.
b. If preference are effective debt securities (e.g. redeemable), use residual approach assigning the fair value of the
preference shares first with the residual value assigned to the ordinary shares.
2. Issuance of Share Capital on a Subscription Basis – The agreed purchase price is debited to Subscriptions Receivable,
Share Capital Subscribed is credited at par and the difference is credited to APIC. Upon full payment, the Share
Capital Subscribed is closed to Issued Share Capital.
3. Issuance of Share Capital for Non-cash Consideration (PFRS 2)
Noncash consideration (Asset or Services) received shall be valued at their fair value, unless the
fair value of shares are more clearly determinable (as when the shares are traded in the market).
If the non-cash consideration received are in the form of employee services (e.g. Options), the fair value of services
received shall be based on the fair value of the equity security issued.
4. Issuance of Share Capital in settlement of a liability:
a. Under normal credit terms – accounted for as equity conversion and shall not result to gain or loss reported in
the profit or loss (e.g. conversion of a convertible bonds)
b. Under debt restructuring agreement (Equity Swap) – as if the shares are issued at prevailing fair market value,
and as if the assumed issue price (fair market value of shares) becomes the retirement price of the liability. As
a result: FMV of Shares – CV of Liability = Gain/Loss on debt restructuring (profit or loss)
TREASURY SHARES
- Acquisition of Treasury Shares, use cost model
Treasury Stock at cost XX
Cash XX
- Sale of Treasury Shares – When treasury shares are reissued, the journal entry is:
a. Sold at a price higher than the cost, resulting in a “capital gain”
Cash XX
Treasury shares (at cost) XX
APIC from TSTransactions XX

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b. At a price less than the cost, resulting in a “capital loss”
Cash XX
(1) APIC from TSTransactions XX
(2) Retained Earnings XX
Treasury shares (at cost) XX
* Note: When treasury shares are acquired at different costs, specific shares may be identified. Otherwise a FIFO or
average cost per share is used to determine the cost of the treasury shares sold.
- Retirement of Treasury Shares
Retire treasury shares at their carrying value, which is the original issue price:
If Original Issue Price (carrying value) > Cost of TS: “capital gain”
Ordinary share (at par) XX
Paid in Capital in Excess of Par (from orig. issue/pro-rata) XX
Treasury Shares (at cost) XX
APIC from Treasury Shares Transactions XX

If Original Issue Price (carrying value) < Cost of TS: “capital loss”
Ordinary shares (at par) XX
Paid in Capital in Excess of Par (from orig. issue/pro-rata) XX
(1) Paid in Capital from Treasury Shares Transactions XX
(2) Retained Earnings XX
Treasury Shares (at Cost) XX
- Restrictions of Retained Earnings for Treasury Shares – has to appropriate Retained Earnings equal to
the balance of its treasury shares. (Appropriation = cost of TS)
RIGHTS, WARRANTS AND OPTIONS
– These securities entitle holders to acquire shares at an exercise rate ordinarily lower than the prevailing market rate. The
following illustrate how to account for their issuance, exercise and expiration:
Issuance Exercise Expiration
RIGHTS – are issued to entitle No entry (memo entry only) Normal entry for issuance of No entry (memo entry only)
the general stockholders in shares:
relation to their pre-emptive 1 right for every 1 share
rights, to protect their outstanding, subscribed, share Cash (Ex. P) XX
proportional interest whenever dividends declared (pre- OS XX
corporations issue fresh new emptive right) Share Prem Xx
shares.
WARRANTS – normally issued PS with warrants:
attached to a principal security Cash XX Cash (Ex P) XX OSWO** XX
(Bond or Pref. Shares) as an PS XX OSWO** XX Share premium
inducement to buyers of the Share Prem XX OS XX from expired
principal securities. OSWO XX Share Premium XX warrants XX
*Use pro-rata or residual
approach **carrying value of the
warrants exercised.
Bonds with warrants:
Cash XX
Discount XX (or)
Premium XX
Bonds Pyable XX
OSWO XX
*Use residual approach.
OPTIONS – normally issued to Comp exp. XX Cash (Ex P) XX OSOO** XX
key executives and officers as OSOO XX OSOO** XX Share premium
additional compensation for At FMV of options or the OS XX from expired
either past or future services intrinsic value, whichever is Share Premium XX options XX
provided to the company. appropriate
**carrying value of the
(see note below) warrants exercised.
Notes on Accounting for Option Issuance (Equity-settled share based payment):
1. Determine if options VESTED IMMEDIATELY or NOT VESTED IMMEDIATELY.
a. If options vest immediately (charge compensation/salaries expense for the entire valuation of the options)
**The value of option should be at FAIR VALUE of option, otherwise at INTRINSIC VALUE
- If fair value method is used, value of the option shall be fixed at whatever is the fair value of the options on the
grant date.
- If intrinsic value (FMV of stocks – Exercise Price) is used, the intrinsic value is updated at each balance sheet date
before and after the vesting period, until the options are exercised. Any changes in intrinsic value shall be treated
as mere change in estimate (current and prospective), charged to profit or loss.
2. If options are not vested immediately, determine if option plan is FIXED or VARIABLE
a. If options are under FIXED OPTION PLAN (the only vesting condition is the vesting period), charge compensation expense
to the vesting period by allocating the valuation of the options to the said vesting period. (Options/VP)
b. In estimating the compensation expense for each period, always consider in the analysis the estimated number options
which will become exercisable based on number of employees who shall remain within the company’s employs until the
end of the vesting period. Any changes in the number of employees remaining with the company until the options vest
(thus number of options that will become exercisable) shall be accounted for as a mere change in estimate.
3. If options are under VARIABLE OPTION PLAN (if apart from the vesting period, there is an additional vesting condition),
determine what is the nature of the additional vesting condition (MARKET BASED OR NON-MARKET BASED)
a. If additional vesting condition is MARKET BASED (e.g. share price), account for the option as if it is FIXED. That is,
compensation expense shall be recognized over the vesting period regardless whether the additional market condition is
achieved or not. This is because the determination of the fair valuation of the options considers the probability that
market based condition will be achieved or not achieved. In addition, market based condition cannot be directly influenced
by key employees, that is, services of employees are not related to the achievability of the condition, thus whether the
market-based condition is achieved or not, in principle, the company received the services of the employees thus
compensation expense shall be recognized.

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4. If additional vesting condition is NONMARKET BASED (e.g. target sales, earnings, increase in sales etc.), consider whether the
additional nonmarket based condition is achieved or not in vesting the options. This means that compensation expense shall
only be recognized if the additional vesting condition (apart from the vesting period) is achievable/achieved. In addition,
ascertain which among the following items are variable/varies in response to the nonmarket based condition: (a) Number of
options; (b) Vesting period; (c) Fair value of options
*If non-market based vesting condition is not achieved, the option shall be reverted to equity.

STOCK APPRECIATION RIGHTS (Cash-settled share-based payments)

SARs are accounted for similar with options (follow the same steps above) with the following exceptions:
- SAR Payable is a financial liability to pay in cash.
- Measurement: the value of the SAR Payable (at fair value or intrinsic value) shall be updated at the end of each reporting
year during and after the vesting period until the liability is settled.
- The liability is settled at the prevailing fair/intrinsic of the SAR on the settlement date.
- Any changes in fair valuation at each balance sheet date and on the settlement date shall be treated as mere change in
estimate (current and prospective), charged to profit or loss.

RETAINED EARNINGS/ACCUMULATED PROFITS

RETAINED EARNINGS/ACCUMULATED PROFITS - UNAPPOPRIATED
RE, beginning
Prior period adjustments:
(a) PPErrors (a) PPErrors
(b) Change in Policies (b) Change in Policies
RE, beg as adjusted
(c) Dividends declared from earnings
(d) Possible losses from capital
transactions*
(e) Appropriations (legal, contractual, (f) Reversal of appropriations
voluntary)
(g) Net Loss (g) Net income
(h) Quasi-reorganization (h) Quasi-reorganization
RE, end
*Possible losses from capital transactions are first charged to the APIC from similar transactions, if not enough,
the balance is charged to the accumulated profits account

Cash Dividend
Number of shares outstanding and subscribed * (% of cash dividend*PAR per share)
Property Dividend (IFRIC 17)
• An entity should measure the dividend payable at Fair value of the assets to be distributed.
• At the end of each reporting period and at the date of settlement, the entity shall review and adjust the carrying amount
of the dividend payable (restate at fair value), with any changes in the amount of the dividend payable recognized in
equity (retained earnings) as adjustments to the amount of the distribution.
• Upon distribution, an entity should recognize the difference between the dividend payable and the carrying amount of the
asset distributed in the profit or loss.
Stock Dividends or Capitalization or Bonus Issue
An ordinary stock dividend is a stock dividend of the same class; i.e., ordinary shares to ordinary shareholders. A special
stock dividend is a stock dividend of a different class; i.e., preference shares to ordinary shareholders.
a) less than 20% of the shares previously outstanding and subscribed, the stock dividend is termed small, in which
case the amount to be charged to retained earnings is equal to its current market value.
b) at least 20% of the shares previously outstanding and subscribed, the stock dividend is termed large in which case
the amount charged against Retained Earnings is equal to par value.
Scrip Dividends
A corporation may declare a scrip dividend by issuing promissory notes called scrip. This arises when the corporation may
have adequate retained earnings to meet the legal dividend requirements but has insufficient funds to disburse. If the promissory
note bears interest, this is charged to Interest Expense.

Balance Sheet Classification

Dividends Payable, Property Dividends Payable and Scrip Dividends Payable are classified as liabilities whereas Stock Dividends
Distributable presented as contributed capital in the Stockholders’ Equity

PART 2: Audit Practice Cases/Problems

PROBLEM 1-A: CASH COUNT
You were assigned to render a cash count of Tindig Corporation’s petty cash fund with an imprest balance of P40,000.
The count was rendered on the morning of January 4 instead of exactly at the Balance sheet date December 31.

The custodian presented to you the following:

Currencies and coins 10,940
A disbursement check payable to the custodian 15,600
An officer’s personal check accommodated by the fund 4,000
Officer’s check marked NSF 2,000
Petty cash expense vouchers:
12/20 Transportation 1,500
12/24 Office repairs 900
12/27 Miscellaneous 2,100
1/3 Office supplies 1,600
Unused postage stamps 500
An enveloped marked “collections for charity” with list of
names and corresponding amounts contributed. There is
no money inside the envelope. 2,500

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1. What is the petty cash shortage, if there are any?

a. 3,860 c. 3,360
b. 1,360 d. 2,860
2. What is the adjusted petty cash fund balance as of December 31, 2021?
a. 30,860 c. 30,640
b. 29,640 d. 35,860
3. Assuming the collections for charity had been intact (the currencies are inside the envelope), what is the petty
cash shortage as of December 31, 2021?
a. 860 c. 8,940
b. 1,360 d. 1,860

PROBLEM 1-B: CASH COUNT

You were tasked to render a cash count of Maine Corporation’s undeposited collections appearing in the cash receipts
books was at P42,000. The count was rendered exactly on December 31.

The custodian presented to you the following:

Currencies and coins 12,540
Customer collection checks:
12/20 May Lee Co. 11,000
12/28 True Inc.(returned by the bank marked NSF) 9,000
12/29 Jordan Corp. 21,000
1/3 OTC Inc. 16,000
Postage stamps and other disbursement receipts paid out of collections 5,000
Employee IOUs supported by employee promissory notes 2,000

Further audit investigation revealed that customer collections on December 31 amounting to P12,500 (per official
receipts and customer remittance advices) were not yet recorded in the cash receipt books.

1. What is the cash shortage, if there are any?

a. 3,560 c. 2,960
b. 1,360 d. 9,540
2. What is the adjusted undeposited collections as of December 31, 2021?
a. 44,540 c. 49,540
b. 46,540 d. 51,540

PROBLEM 2: AUDIT OF CASH

You were assigned to audit the financial statement of Jade Corp. on January 15, 2019, for the year ended December 31,
2018. The general ledger shows cash account balance of P726,600 as at December 31, 2018.
The bank reconciliation prepared by the client’s cashier included the following items:
Cash per records, December 31, 2018 P726,600
Cash per bank statement, December 31, 2018 792,285
Note receivable collection by the bank in December, recorded in the books
in January 3 20,000
Bank service charge for December, recorded in books in January 3 5,000
Outstanding checks, including P11,900 disbursement check certified by 87,875
the bank
Check of Jude Corp., charged by the bank in error on December 28, 2018;
corrected by the bank on January 2, 2019 2,250
Deposit in transit, including P5,200 customer collection check marked NSF 15,700

From January 2, 2019, to January 15, 2019, the date of your cash count, total cash receipts appearing in the cash
records amounted to P180,500. During the same period, deposits clearing the bank amounted to P143,895. The following
cash and cash items were on hand at the close of business on January 15, 2019:
Currency P4,275
Customers’ checks 5,850
Expense vouchers 1,125

Audit notes:
a. Cash collections from accounts receivable were erroneously recorded by the company as follows:
Date
7/05/18 Allowance for bad debts 12,000
Accounts receivable 12,000
12/10/18 Inventory 9,000
Accounts receivable 9,000
12/15/18 Bad debt expense 10,500
Accounts receivable 10,500

b. Check deposit on January 5, 2019, amounting to P6,000 was not recorded in the books.

c. Undeposited collections on January 10, 2019 amounting to P13,500 was also not recorded in the books.

Requirements:
1. What is the correct cash in bank balance as of December 31, 2018?
a. 729,060 c. 778,110
b. 773,110 d. 726,810

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2. What is the net adjustment to cash as of December 31, 2018?
a. 46,500 c. 44,040
b. 2,460 d. 4,620
3. What is the cash shortage as of December 31, 2018?
a. 2,460 c. 44,040
b. 46,500 d. 4,620
4. What is the total cash shortage as of January 15, 2019?
a. 81,645 c. 44,040
b. 37,605 d. 4,620

PROBLEM 3: AUDIT OF CASH

You are auditing the cash account of Rosas Inc. for the fiscal year ended July 31, 2021. The client has not prepared the
July 31, bank reconciliation. The following information were made available:

General Ledger Bank Statement

Beginning balances P138,330 P207,990
Deposits 776,680
Cash receipts journal 793,680
Checks clearing the bank (743,850)
Cash disbursements journal (684,330)
July bank service charge (2,610)
Note paid by the bank (183,000)
NSF check (9,330)
Ending balances P247,680 P45,880

Audit notes:
a. Bank reconciliation in June included the following information: Bank statement balance, June, P207,990; Deposits
in transit, P18,000; Outstanding checks, P52,260, and; Balance per general ledger, June, P138,330. June bank
service charge, P4,600 and June Note Collection by the bank in behalf of Rosas Inc. (recorded in the books only in
July), P40,000.
b. A check for P31,800 cleared the bank, but had not been recorded in the cash disbursement journal. It was for a
payment of an accounts payable.
c. A check for P11,880 was erroneously charged by the bank to Rosas Inc.
d. Deposits included P18,000 from June and P758,680 from July. From the July deposits, reconciliation revealed that
P25,000 has not been recorded per books yet as these were direct deposits by the customer taking advantage of
the company’s bank lockbox services.
e. The bank charged Rosas Inc.’s account for a non-sufficient-fund check totaling to P9,330. The credit manager
concluded that the customer intentionally closed its account and the owner left the city. The check was turned over
to a collection agency.
f. A note for P174,000, plus interest, was paid directly by the bank under an agreement signed four months ago.
Required: Based on your audit procedures and appreciation of the above data, answer the following:
1. How much is the deposit in transit as of July 31?
a. 20,940 c. 18,000
b. 30,000 d. 20,000
2. How much is the total outstanding checks as of July 31?
a. 31,820 c. 29,940
b. 41,820 d. 10,020
3. What is the correct cash in bank balance as of July 31?
a. 32,820 c. 20,940
b. 45,940 d. 9,060

PROBLEM 4: AUDIT OF CASH; CASH/ACCRUAL

In line with your audit of Burberry Corporation for the period ended December 31, 2018, your audit staff provided you
the following audit notes:
Audit notes:
a. Accounts receivables from customers increased during the year by P4,200,000. Total discounts taken by
customers was at P1,580,000 while total sales returns which included the customer refunds was at P2,420,000.
b. The allowance for bad debts increase during the year by P840,000. During the year, the company wrote-off
P1,120,000 in bad debts. While recovery of previous write-off (included in the cash collections from customers)
was at P420,000.
c. Advances from customers decreased during the year by P1,900,000.
d. Accounts payable to suppliers increased during the year by P3,780,000. Total discounts taken by the company
for purchases was at P1,290,000 while total purchase returns which included the supplier refunds was at
P1,960,000.
e. Advances to suppliers increased during the year by P1,512,000.
f. Inventories increased during the year by P2,690,000.
g. The equipment account increased by P2,000,000 during the year while carrying value of the equipment sold
during the year was at P1,600,000.

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h. The accumulated depreciation account increased by P1,000,000 during the year.
i. the following information had been provided by the company’s accountant based on its cash records:
Cash collections from customers P45,780,000
Cash payments to suppliers 24,490,000
Cash payment of operating expenses 8,650,000
Cash payment for acquisition of an Equipment 5,000,000
Cash collection from disposal of an Equipment 1,040,000
Cash refunds received from purchase returns 640,000
Cash refunds paid for sales returns 830,000
Requirements:
1. What is the accrual basis gross sales?
a. 55,750,000 c. 56,170,000
b. 55,000,000 d. 56,580,000
2. What is the accrual basis gross purchases?
a. 31,520,000 c. 30,880,000
b. 30,008,000 d. 29,368,000
3. What is the accrual basis cost of sales?
a. 24,068,000 c. 23,428,000
b. 24,940,000 d. 25,580,000
4. What is the correct bad debt expense for the year?
a. 1,540,000 c. 1,960,000
b. 700,000 d. 140,000
5. What is the correct depreciation expense?
a. 2,400,000 c. 1,600,000
b. 2,000,000 d. 1,400,000

PROBLEM 5: AUDIT OF CASH/ CASH;ACCRUAL

Ford Corp. uses the direct method to prepare its statement of cash flows. Ford Corp.’s trial balances at December 31,
2018 and 2017 are as follows:
12/31/18 12/31/17
Debits
Cash P 35,000 P 32,000
Accounts receivable 33,000 30,000
Inventory 31,000 47,000
Property, plant & equipment 100,000 95,000
Unamortized bond discount 4,500 5,000
Cost of goods sold 250,000 380,000
Selling expenses 141,500 172,000
General and administrative
expenses 137,000 151,300
Interest expense 4,300 2,600
Income tax expense 20,400 61,200
P756,700 P976,100
Credits
Allowance for uncollectible
accounts P 1,300 P 1,100
Accumulated depreciation 16,500 15,000
Trade accounts payable 25,000 17,500
Income taxes payable 21,000 27,100
Deferred tax liability 5,300 4,600
8% callable bonds payable 45,000 20,000
Share capital 50,000 40,000
Share premium 9,100 7,500
Retained earnings 44,700 64,600
Sales 538,800 778,700
P756,700 P976,100

• Ford purchased P5,000 in equipment during 2018.

• Ford allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative
expenses.
Based on the foregoing, what amounts should Ford Corp.’s report in its statement of cash flows for the year ended
December 31, 2018 for:
1. Cash collected from customers?
a. 536,000 c. 535,800
b. 541,600 d. 541,800
2. Cash paid for goods to be sold?
a. 226,500 c. 242,500
b. 257,500 d. 258,500
3. Cash paid for interest?
a. 4,800 c. 3,800
b. 4,300 d. 1,700
4. Cash paid for income taxes?
a. 20,400 c. 19,700
b. 25,800 d. 15,000

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5. Cash paid for selling expenses?
a. 140,000 c. 142,000
b. 141,500 d. 141,000

PROBLEM 6: AUDIT OF CASH/ CASH;ACCRUAL

An analysis of incomplete records of Journey Corporation produced the following information applicable to 2018:
ACCOUNT INCREASES
Cash 4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000

ACCOUNT DECREASES
Inventory 1,000,000
Notes receivable 600,000
Summary of cash transactions were as follows:
RECEIPTS:
Cash sales 3,000,000
Collections on accounts receivable 30,000,000
Collections on notes receivable 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 500,000
DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Additional information:
a. Total purchase returns and allowances amounted to P800,000
b. Total sales returns and allowances amounted to P1,200,000.
What is the accrual basis Net Sales?
a. 37,000,000 c. 36,600,000
b. 36,200,000 d. 35,800,000

PROBLEM 7: AUDIT OF CASH/ CASH;ACCRUAL

You are auditing the financial statements of Clarke Co. for the year ended December 31, 2018. Clarke Co. maintains records
under cash basis and only keeps records of its cash receipt and cash disbursements. As part of your audit, you were
requested to convert the records to the accrual basis.
You were able to gather the following information:
Dec. 31, Dec. 31,
2017 2018
Outstanding sales invoices P536,000 P835,000
Advance collections from customers 0 125,000
Unpaid merchandise invoices 544,000 423,000
Advance payments to suppliers 98,000 0
The cash receipt and disbursement records revealed the following information:
• Amount collected from customers, P9,890,000
• Total payments to suppliers of merchandise, P5,615,000
What is the total sales for 2018 under accrual basis?
a. 10,013,000 c. 10,064,000
b. 9,716,000 d. 10,189,000

PROBLEM 8: AUDIT OF TRADE RECEIVABLES

You are auditing the Accounts Receivable of Generosity Inc. as of December 31, 2018. The general journal reported
Accounts receivable balance of P1,520,000 which was net of the unadjusted allowance for bad debts expense amounting
to P46,720.

The accounts receivable subsidiary ledger had the following details:

Customer Invoice date Amount Balance
Grace Inc. 9/12/2018 P139,200 P139,200
Truth Corp. 12/12/2018 153,600
12/02/2018 99,200 252,800
Gusto Co. 11/17/2018 185,120
10/08/2018 176,000 361,120
National Co. 12/08/2018 160,000
10/25/2018 144,800
8/20/2018 40,000 344,800
Nano Inc. 9/27/2018 96,000 96,000
Bruce Inc. 8/20/2018 71,360 71,360
Privacy Corp. 12/06/2018 112,000
11/29/2018 169,440 281,440
Total P1,546,720

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Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus your
suggested that the amount receivable from the same shall be written off.
b. Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice dated
10/25/2018 was erroneously invoiced at P144.80 per unit of the merchandise sold to the company, the correct
invoice price should have been P114.80 per unit.
c. You also discovered that the invoice dated 10/25/2018 has already been settled by Truth Corp. per OR number
34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger as a settlement
for an invoice dated 11/05/2018 for the same amount.
d. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of Collectibility
0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
1. What is the correct allowance for bad debt expense for the year ended December 31, 2018?
a. 117,344 c. 124,344
b. 130,320 d. 127,320
2. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt expense
for the year?
a. 80,600 c. 154,960
b. 151,960 d. 148,984
3. What it the carrying value of the company’s accounts receivable as of December 31, 2018?
a. 1,318,040 c. 1,321,016
b. 1,345,040 d. 1,315,040
4. What is the necessary adjusting entry to adjust any unlocated difference between the SL and GL?
a. Bad debt expense 20,000
Accounts receivable 20,000
b. Sales 20,000
Accounts receivable 20,000
c. Accounts receivable 20,000
Other income 20,000
d. No necessary entry

PROBLEM 9: AUDIT OF TRADE RECEIVABLES

You were assigned to audit the existence assertion of Colors Inc.’s receivables as of December 31, 2021. You have decided
to send confirmation letters to pre-selected customers. The following is a summary of the confirmation replies of client
customers where you noted audit exceptions. Gross profit on sales is at 30% and inventory records are kept under the
perpetual inventory method.
Customer Balance per Books Customer’s Comments Audit findings
Asul Inc. P30,000 Your Credit Memo No. 0978 The Credit Memo was taken up
representing price adjustment by Colors Inc. in January 2022.
dated December 29, 2021 cancels
this.
Bughao Corp. P300,000 P140,000 was for Sales Invoice No. Returned goods were received on
1190 were for goods returned on December 31, 2021. Credit
December 30, 2021. Correct Memo No. 1256 were issued and
balance is P160,000. recorded on January 5, 2022
Kulay Co. P288,000 This is for outstanding sales The customer complaint is valid.
invoice No. 1280 which should
have been priced at P122 per unit.
You erroneously billed us P144 per
unit.
Dilaw Inc. P265,000 Our records show a correct balance Colors Inc. recorded the
of P220,000. The difference is for transaction as a purchase by
Sales Invoice No. 1109 which were crediting accounts payable. The
for goods delivered to us but were related inventories were
subsequently returned to you appropriately taken in the
because the goods were with perpetual records.
wrong specifications.
Endigo Corp. P122,000 This is for Sales Invoice No. 1341. The goods were delivered on
We received the corresponding December 30, 2021 under term
goods only on January 5. FOB Shipping Point,
Requirements:
1. What is the effect to the net income, if there are any, as a result of the customer’s Asul Inc. reply?
a. Decrease by P30,000
b. Increase by P30,000
c. Decrease by P9,000
d. No effect.

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2. What is the effect to the net income, if there are any, as a result of the customer’s Bughao’s reply?
a. Decrease by P160,000
b. Decrease by P140,000
c. Decrease by P42,000
d. No effect.
3. The accounts receivable from Kulay Co. is:
a. Overstated by P244,000
b. Understated by P44,000
c. Overstated by P44,000
d. Correct.
4. What is the effect to the net income, if there are any, as a result of the customer’s Dilaw Inc. reply?
a. Decrease by P45,000
b. Increase by P45,000
c. Decrease by P13,500
d. No effect.
5. The accounts receivable from Endigo Corp. is:
a. Correct
b. Overstated by P122,000
c. Understated by P122,000
d. Overstated by P36,600.

PROBLEM 10: AUDIT OF TRADE RECEIVABLES

A reconciliation of accounts receivable General Ledger and Subsidiary ledger of your client Lucas Corporation was
provided by the client-accountant in relation to your audit.
Balance per SL P2,560,000
Invoice dated December 30 for goods delivered on the same date. Goods 500,000
still in transit as of December 31. Term: FOB Shipping point
Invoice dated December 29 for goods delivered on January 2 of the 250,000
following year. Term FOB Shipping point
Invoice dated December 30 for goods delivered on January 3 of the 300,000
following year under a bill and hold agreement terms executed in December
Invoice dated August 24 with corresponding credit memo for goods returned (90,000)
by the customer dated October 11.
Customer collection check dated December 28 in payment of an invoice (350,000)
dated October 20
Customer collection check dated January 2 in payment of an invoice dated (240,000)
November 5
Customer collection check dated December 3 in payment of an invoice dated
August 10, returned by the bank together with the December bank
statement marked NSF 190,000
Credit balance in one of the customer’s account resulting from a customer
advance for goods to be delivered in January (420,000)
Balance per GL P2,700,000
Audit notes:
a. The following aging schedule of receivables per SL was also made available by the client:
Age Amount % uncollectible
Current (1-60 days) 940,000 2%
61-120 days (1-60 days past due) 820,000 5%
121-180 days (61-120 days past due) 590,000 10%
More than 180 days (More than 120 days past due) 210,000 25%

b. The allowance for bad debt had a January 1, 2021 balance of P153,900. The company recorded recoveries of
previous write-off amounting to P21,000 during the year. Your audit investigation revealed that from the more
than 120 days past due accounts, P60,000 is proven to be worthless and therefore should be written-off. The
management agreed on the proposed write-off adjustment.

Required:
1. What is the correct accounts receivable balance as of December 31?
a. 3,110,000 c. 2,690,000
b. 3,200,000 d. 3,050,000
2. What is the correct allowance for bad debts as of December 31?
a. 164,800 c. 179,800
b. 151,300 d. 193,300
3. What is the correct bad debt expense for the year?
a. 49,900 c. 36,400
b. 64,900 d. 78,400
4. Assuming that the unadjusted December 31, 2021 balance of the allowance for bad debts is at P153,900, what
ist the correct bad debt expense for the year?
a. 70,900 c. 57,400
b. 85,900 d. 99.400

PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING)

ABC Co., a financing company, extended a loan to XYZ Corp. amounting to P10M on January 1, 2015 receivable 5 years
after. The loan bears 10% annual interest collectible at the end of each year starting December 31, 2015. The company
paid direct origination cost amounting to P300,000 and charged XYZ Corp. origination fees at P1,020,955. The yield on
the loan under this arrangement was at 12%.

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The 2015 to 2017 interests were collected as scheduled.

By the end of 2018, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual interest as scheduled
and ABC Co. is doubtful as to the collectibility of the remaining interests and the principal.
After due consideration and correspondence with XYZ company, ABC estimated that it will be able to recover the following
amounts at respective estimated dates:
Amount Expected recovery date
P1,000,000 December 31, 2019
2,000,000 December 31, 2020
2,500,000 December 31, 2021
2,500,000 December 31, 2022
Required:
1. What is the carrying value of the loans receivable as of December 31, 2018, before impairment?
a. 9,519,634 b. 9,392,530 c. 9,821,429 d. 9,661,990
2. How much is impairment loss on the receivables (including interest receivable) as of Dec. 31, 2018?
a. 4,806,499 b. 6,344,509 c. 4,965,938 d. 6,855,491
3. What is the correct net book value of the receivables as of December 31, 2018?
a. 6,855,491 b. 6,344,509 c. 5,855,491 d. 5,344,509
4. Assuming that in December 31, 2019, amounts were received as estimated, what is the balance of the receivables as
of December 31, 2019?
a. 4,225,128 b. 5,558,150 c. 2,232,143 d. 2,500,000
5. Assuming that in December 31, 2020, amounts were received as estimated, what is the correct interest income to be
recognized in 2020?
a. 267,857 b. 702,659 c. 507,015 d. 666,978

PROBLEM 12: AUDIT OF TRADE RECEIVABLES AND INVENTORIES

You were assigned to audit the receivables of Charleston Merchandising Company. As instructed by your audit manager,
you have performed a cut-off test of sales. The results of the cut-off test revealed the following:

Recorded as Sales in December 2018

Selling price Cost Terms Shipment Received by
Date customers
P18,000 P16,500 FOB shipping point 12/26/2018 12/29/2018
20,000 14,000 Shipped to consignee 12/26/2018 12/29/2018
8,680 7,240 FOB destination 12/28/2018 01/02/2019
9,000 7,500 FOB shipping point 12/30/2018 01/02/2019
10,000 7,750 FOB destination 12/31/2018 01/03/2019
7,800 6,100 FOB shipping point 12/31/2018 01/02/2019
14,000 12,000 Shipped to consignee 12/31/2018 01/02/2019

Recorded Sales in January 2019

Selling price Cost Terms Shipment Received by
Date customers
P21,000 P18,200 FOB shipping point 12/30/2018 01/03/2019
10,500 8,800 FOB shipping point 12/31/2018 01/03/2019
4,500 3,200 FOB destination 01/02/2019 01/03/2019
6,500 5,000 FOB shipping point 01/02/2019 01/05/2019

A count of all inventories within the premises was made on December 30, 2018. The total cost of the count was recorded
as inventories as of December 30, 2018. Half of the goods shipped to consignee on December 26 are still unsold at
December 31. The agreed commission on consignment sales is 20% of the sales price.
The unadjusted ledger balances show the following:
Accounts receivables P376,500
Inventories 525,000
Sales 1,520,000
Cost of sales 942,000

Determine the adjusted balances of the following:

A B C D
1. Accounts receivable 363,320 329,620 361,120 389,320
2. Inventories 506,800 524,340 547,440 549,500
3. Sales 1,522,320 1,504,620 1,508,820 1,551,500
4. Cost of sales 973,560 928,360 917,500 942,660

PROBLEM 13: AUDIT OF TRADE RECEIVABLES, TRADE PAYABLES AND INVENTORIES

The following information is as a result of your sales and purchases cut-off rendered in relation to your audit of the financial
statements of Baler Corporation as of the period ended December 31, 2021:
Sales Cutoff:

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SALE INVOICE SALES INVOICE COST OF MNSE. DATE SHIPPED
AMOUNT DATE SOLD
DECEMBER 2021
1) P 3,000 Dec. 21 P 2,000 Dec. 31
2) 7,000 Dec. 28 6,100 Dec. 28
3) 2,000 Dec. 31 800 Dec. 30
4) 6,900 Dec. 26 3,000 Jan. 4
5) 1,000 Dec. 29 600 Dec. 30
6) 4,500 Dec. 24 8,200 Dec. 27
7) 4,000 Dec. 31 2,400 Jan. 3
8) 10,000 Dec. 30 5,600 Dec. 28, (shipped
to consignee)
JANUARY 2022
9) 6,000 Dec. 31 4,000 Dec. 30
10) 3,300 Dec. 28 4,400 Jan. 1
11) 4,000 Jan. 2 2,300 Jan. 2
12) 8,000 Jan. 3 5,500 Dec. 31
Purchases Cutoff:
DECEMBER 2021
Dates Mdse.
F.O.B. Terms Shipped Received Invoice No. Amount
1) Destination Dec. 23 Dec. 26 1401 P 250
2) Shipping point Dec. 24 Dec. 30 9176 310
3) Shipping point Dec. 24 Dec. 31 0010 180
4) Destination Dec. 24 Dec. 29 1307 550
5) Destination Dec. 26 Jan. 2 6609 690
6) Destination Dec. 26 Dec. 31 6610 420
JANUARY 2022
7) Destination Dec. 26 Jan. 2 7611 680
8) Shipping point Dec. 27 Dec. 28 7711 460
9) Destination Dec. 27 Dec. 29 9001 770
10) Shipping point Dec. 28 Jan. 2 8345 205
11) Shipping point Jan. 1 Jan. 3 4678 315

Audit Notes:
a. Inventory Count date: December 28, 2021. (All goods delivered on or before count date are excluded from the
physical count. All goods received on or before the count date are included in the physical count)
b. All sales were made under FOB Shipping point terms.
Requirements:
1. What is the net adjustment to accounts receivable?
a. (6,900) c. (14,000)
b. 12,000 d. (16,900)
2. What is the net adjustment to accounts payable?
a. (690) c. 540
b. 745 d. 1,060
3. What is the net adjustment to inventories?
a. (2,900) c. (465)
b. 2,435 d. 565
4. What is the net adjustment to net income?
a. (9,800) c. 1,690
b. 4,500 d. (8,110)
PROBLEM 14: AUDIT OF INVENTORIES
A fire on October 31, damaged a considerable portion of Portent Corporation’s inventory. You were asked to assess the
extent of the damage on inventories. The following information were made available per the records.
Cost Retail Price
Inventory, January 1 1,698,735 2,516,130
Purchases (Jan. 1 to date of fire) 13,901,265 21,600,000
Freight-in 702,000
Purchase discount 1,684,800
Purchase returns and allowances 1,123,200 1,728,000
Departmental transfer in 2,808,000 4,320,000
Departmental transfer out 1,684,800 2,592,000
Mark-up 3,510,000
Mark-down 2,106,000
Mark-up cancellation 1,053,000
Mark-down cancellation 365,058
Sales (Jan. 1 to date of fire) 18,630,000
Sales discount to customers 1,490,400
Sales discounts to employees 745,200
Sales returns and allowances 2,235,600
Normal spoilages 1,117,800
Abnormal spoilages 493,812 894,240

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Audit notes:
a. Purchases included goods that were in-transit as of the date of fire invoiced at P590,000. These were
purchased under FOB Shipping Point term.
b. Sales included goods that were in-transit to a customer in Bicol as of the date of fire invoiced at P620,000.
These were delivered under an FOB Bicol term.
c. The inventory on hand damaged by the fire can be sold their scrap value P112,690.

Requirements:
1. Using the Average Retail Method, what is the estimated cost of inventory before the fire?
a. 3,717,323 c. 3,351,523
b. 3,682,232 d. 3,589,568
2. Using the Average Retail Method, what is the estimated loss on inventory due to the fire?
a. 3,014,633 c. 2,394,633
b. 2,648,833 d. 3,238,833
3. Using the FIFO Retail Method, what is the estimated cost of inventory before the fire?
a. 3,717,323 c. 3,351,523
b. 3,682,232 d. 3,654,318
4. Using the FIFO Retail Method, what is the estimated loss on inventory due to the fire?
a. 2,585,828 c. 2,592,028
b. 2,648,833 d. 3,238,833
5. Using the Conservative/Conventional/Lower of Cost or Average Retail Method, what is the estimated loss on
inventory due to the fire?
a. 3,717,323 c. 3,465,301
b. 3,682,232 d. 3,654,318

PROBLEM 15: AUDIT OF INVENTORIES

Gloria Corporation uses the lower of cost or net realizable value inventory. Data regarding the company’s inventories are
as follows:
The general ledgers showed the following balances:
Cost: Finished goods P1,520,000
Work-in-process 748,000
Raw materials 2,875,000
Allowance: Finished goods (10,000)
Raw materials (40,000)
The following information were further furnished to you by the client:
Finished Goods Item M Item P Item Q
Cost P550,000 P540,000 P430,000
Selling price 675,000 620,000 820,000
Estimated cost to sell, as % of sales 20% 15% 15%
Work-in-process
Cost of raw materials to date P120,000 P88,000 P200,000
Cost of direct labor to date 70,000 60,000 80,000
Cost of factory overhead to date 50,000 40,000 40,000
Selling price upon completion 360,000 289,000 735,000
Estimated cost to complete 48,000 97,650 74,000
Replacement cost 208,000 168,000 375,000
Normal profit margin as % of selling price 25% 35% 40%
Raw Materials – Item M A B C
Cost P250,000 P500,000 P400,000
Current purchase price 250,000 480,000 375,000
Raw Materials – Item P X Y Z
Cost P400,000 P300,000 P200,000
Current purchase price 450,000 275,000 180,000
Raw Materials – Item Q D E
Cost P375,000 P450,000
Current purchase price 395,000 420,000
Required:
1. What is the correct Finished goods inventory to be reported in the statement of financial position as of December
31?
a. 1,466,00 c. 1,497,000
b. 1,530,750 d. 1,520,000
2. What is the correct Work-in-process inventory to be reported in the statement of financial position as of December
31?
a. 748,000 c. 650,200
b. 746,420 d. 708,000
3. What is the correct total raw materials to be reported in the statement of financial position as of December 31?
a. 2,765,000 c. 2,785,000
b. 2,875,000 d. 2,775,000
4. What is the total loss on inventory write-down to be reported for the period?
a. 153,000 c. 143,000
b. 113,000 d. 103,000

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PROBLEM 16: AUDIT OF TRADE PAYABLES

Tomas Corporation, meat processing company, reported the following balances on the liability portion of its Statement of
Financial Position as of December 31, 2021:
Current Liabilities
Accounts payable – trade P1,250,000
Estimated Warranties Liability ?
Accrued Compensated Absences 360,000
Deferred Tax Liability 124,000
Additional information:
a. The result of your purchases cut-off revealed the following results:
December, 2021 Purchase Journal Entries
Receiving Report Invoice Receiving report Amount Remarks
Number date/Shipment date
date
100294 12/20 12/23 P20,000 FOB Destination
100295 12/22 12/26 50,000 FOB Destination
100296 12/27 12/30 70,000 On Consignment
100297 12/28 1/2 55,000 FOB Shipping Point
100298 12/29 1/3 60,000 FOB Destination
100299 12/30 1/4 80,000 FOB Shipping point
January, 2022 Purchase Journal Entries
Receiving Report Invoice Receiving report Amount Remarks
Number date/Shipment date
date
100300 12/29 1/4 P40,000 FOB Destination
100301 12/30 1/4 50,000 FOB Shipping point
100302 12/30 1/5 70,000 On Consignment
100303 1/2 1/6 75,000 FOB Shipping point
Note: Inventory has been correctly set-up based on an inventory count conducted on December 31,
2021 with appropriate reconciliation and adjustments.
b. The company started a “2-Year Assurance-type” Warranty Program at the beginning of 2020. The company sales
volume in 2020 and in 2021 were 150,000 and 180,000 respectively. The company estimates that only 30% of
the product sold will be returned as a result of the warranty program. The company further estimates that it will
incur P62 in labor and material cost per unit returned. Actual warranty-related labor and material costs paid were
at P1,980,000 and P2,220,000, in 2020 and 2021, respectively. The warranties liability per books, represented the
balance of the warranty’s liability at the end of 2020. Adjustments are yet to be made for the current year for the
said liability account.
c. Employees are entitled 15-day vacation leaves and 15-day sick leaves every year. At the beginning of 2021, the
liability for compensated absences (as presented per books) was for 1,200 days combined vacation and sick leaves
forwarded from the previous years, as employees are allowed to carry over unused sick leaves and vacation leaves
up to two years, upon which any unused leaves are forfeited. In 2021, additional 900 days unused leaves were
forwarded to the subsequent year. From the unused leaves prior to 2021, 450 were used in 2021 and 300 were
forfeited. There was a 10% increase in employees’ salaries during the current year. The unadjusted balance of
the accrued liability for compensated absences per books reflected the beginning balance of the account.
Adjustment for accrual at year-end is yet to be made.
d. The deferred tax liability balance is the net deferred tax consequence of the company’s warranties expense which
is tax deductible when actual warranty costs are paid and prepayments which are tax deductible upon payment.
Prepayments had adjusted balances of P1,120,000 and P970,000 at the end of 2020 and 2021 respectively.
e. The key officers of the company are given incentives in the form of 10% of net income after bonus and 40%
income tax. The unadjusted net income of the company as reported per books was at P5,450,000.

Requirements:
1. What is the correct balance of the Accounts Payable trade as of December 31, 2021?
a. 1,170,000 b. 1,120,000 c. 1,100,000 d. 1,220,000
2. What is the balance of the Estimated Warranties Liabilities as of December 31, 2020?
a. 810,000 b. 1,350,000 c. 3,700,000 d. 2,790,000
3. What is the correct Warranties Expense to be reported in 2021?
a. 3,348,000 b. 2,160,000 c. 990,000 d. 1,800,000
4. What is the correct Accrued Liability for Compensated Absences as of December 31, 2021?
a. 360,000 b. 445,500 c. 405,000 d. 396,000
5. What is the correct deferred tax liability as of December 31, 2021?
a. 44,000 b. 362,000 c. 388,000 d. 358,400
6. What is the correct Accrued Bonus to key officers as of December 31, 2021?
a. 271,901 b. 256,569 c. 244,330 d. 266,773

PROBLEM 17: AUDIT OF INVESTMENTS

Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2018. All the financial asset were
acquired in 2018:

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Financial asset Acquisition Cost
Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
Dee Corp. Stocks, 50,000 shares 2,400,000
Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the share price’s
fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker’s fees and
commissions. The shares were acquired on February 20, 2018. A P2 per share cash dividends were received on
March 30. These dividends were declared by Aye Corp. on January 20, 2018 to stockholders as of record date
March 1, 2018.
b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of Bee Inc. on March
1, 2018. These shares were acquired for trading purposes. A P3 per share dividends were received from the said
shares on May 3, 2018. These dividends were declared on April 1 to stockholders as of record date April 20.
c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on October 1, 2018
at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%. The bonds shall
mature on December 31, 2020. The company has a business model of holding debt securities for short-term profits.
d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and commissions on June 30,
2018. Dee Corp. had a total of 200,000 shares outstanding on the same date. The company received P5 dividends
per share form Dee on December 20, 2018.
e. The following information were deemed relevant at year-end and no entries had been made yet by the company
to reflect any of the following information:
Aye Corp. Bee Inc. See Co. Dee Corp.
Net income in 2018 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh
Requirements:
1. What is the unrealized holding gain/loss to be reported in the 2018 statement of comprehensive income?
a. 51,948 c. 1,948
b. 121,948 d. 122,750
2. What is the correct carrying value of investments that should be presented as current asset?
a. 3,664,948 c. 3,665,750
b. 3,543,000 d. 3,765,250
3. What is the correct carrying value of investment in Dee Corp. shares that should be presented in the 2018 Statement
of Financial Position?
a. 2,430,000 c. 2,280,000
b. 2,150,000 d. 2,550,000
4. Assuming that the company’s business model regarding debt securities has an objective of collecting contractual cash
flows, what is the correct carrying value of investment in See Co. Bonds that should be presented in the 2018 Statement
of Financial Position?
a. 1,960,960 c. 1,965,750
b. 1,932,690 d. 1,930,690

PROBLEM 18: AUDIT OF INVESTMENTS

On January 1, 2018 Iffy Corp. acquired 30,000 shares of ABC Corp’s 100,000 shares outstanding for P5,000,000. The
book value of ABC’s identifiable net assets on this date was at P14M. All its assets carrying value approximated their fair
values except for a depreciable assets with a remaining life of 5 years, which was undervalued on this date by P1.6M.
ABC reported total comprehensive income in 2018 at P4,000,000 which was net of a foreign exchange loss reported in as
other comprehensive loss at P800,000. ABC also paid dividends at P1.5M at the end of the year, P500,000 of which is
from pre-acquisition Retained Earnings. The fair market value of shares on this date was at P210 per share.
Requirements:
1. What is the carrying value of Iffy’s investment in ABC shares as of December 31, 2018 using the appropriate
accounting standards?
a. 5,654,000 c. 5,990,000
b. 5,750,000 d. 5,894,000
2. Assuming that Iffy Corp. is a medium-sized entity and that the company uses the fair value method in accounting
for its investment in ABC, how much in total should be recognized in Iffy Corp.’s profit or loss for 2018?
a. 1,750,000 c. 1,300,000
b. 450,000 d. 300,000
3. Assuming that Iffy Corp. sold 18,000 shares of its ABC shares investment on December 31, 2018 at its prevailing
fair value, how much in total should be recognized in the profit or loss as a result of the transaction?
a. 387,600 c. 406,000
b. 646,000 d. 243,600
4. Using the information in the previous item, how much shall be the carrying value of any remaining investments as
of December 31, 2018?
a. 2,357,600 c. 2,300,000
b. 2,520,000 d. 2,261,600
5. Assuming that ABC issued 25,000 shares to other stockholders on December 31, 2018 at prevailing fair value without
Iffy Corp’s participation, how much should be recognized in the profit or loss as a result of the transaction/event?
a. 81,200 c. 129,200
b. 196,200 d. None

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PROBLEM 19: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
The draft balance sheet of Rural Corporation as of December 31, 2018 reported the net property, plant and equipment at
P6,270,000. Details of the amount follow:

Land at cost P1,000,000

Building at cost P4,000,000
Less accumulated depreciation
at 12/31/17 ( 800,000) 3,200,000
Plant at cost 5,200,000
Less accumulated depreciation
at 12/31/17 (3,130,000) 2,070,000
P6,270,000
Audit notes:
(a) The company policy for all depreciation is that a full year’s charge is made in the year of acquisition or completion and
none in the year of disposal.
(b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30, 2018.
The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2017. Other than
recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have been made.
All plant is depreciated at 25% per annum on the reducing balance basis.
(c) On September 30, 2018, the company completed the construction of a new warehouse. The construction was achieved
using the company’s own resources as follows:
Purchased materials P150,000
Direct labor 800,000
Supervision 65,000
Design and planning costs 20,000

Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due to
the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The
building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-line
depreciation).
(d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding the
newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors wish
these values to be incorporated into the financial statements. The properties had an estimated remaining life of 20
years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to retained
earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2018 has not yet been accounted for the in the draft financial statements.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the new warehouse as of December 31, 2018 is
a. 987,500 c. 1,000,000
b. 869,250 d. 950,000
2. The carrying amount of plant as of December 31, 2018 is
a. 1,710,000 c. 1,282,500
b. 1,375,310 d. 1,350,000
3. The total depreciation for the year ended December 31, 2018 is
a. 740,000 c. 380,000
b. 735,750 d. 736,250
4. The revaluation surplus as of December 31, 2018 is
a. 1,720,000 c. 1,800,000
b. 1,710,000 d. 960,000

PROBLEM 20: AUDIT OF PROPERTY, PLANT AND EQUIPMENT

You were assigned to audit the Property, Plant and Equipment of Kindness Corporation in line with your firm’s continuing
engagement to audit its financial statements as of and for the period ended December 31, 2016. Your prior year working
papers included the following - analysis of the clients’ property, plant and equipment:
Accumulated Depreciation Method/
Balances as of 12/31/2015 Cost Depreciation Useful life
Land 2,100,000
Double declining balance, 20
Building 8,100,000 2,785,590 years
Machinery and Equipment 5,400,000 2,160,000 Straight-line, 10 years
Automotive Equipment 4,600,000 3,322,222 SYD, 8 years
Audit notes:
a. A four-year old automotive equipment with an original cost of P2,100,000 was traded in for a new automotive
equipment having a cash price of P1,600,000 at the beginning of 2016. The company paid additional cash of
P850,000. The new automotive equipment was recorded by the company at the cash payment made.
b. A machinery which was acquired on January of 2012 was totally destroyed by a fire on June 30, 2016. The
machinery was originally acquired at a cost of P1,800,000.
c. A replacement machinery was acquired on September 1, 2016 on installment basis. The total installment price is
P3,837,054 and is payable five equal annual installments beginning September 1, 2016. The company issued a
non-interest bearing note in lieu of the machinery. There is no established price for the machinery. The prevailing
market rate of interest for similar securities on the transaction date was at 10%.

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d. Major improvements on the building’s electrical wiring system was incurred at the beginning of the year. The total
cost amounting to P1,250,000 was recognized as outright repairs and maintenance expense.
e. The beginning balance of the automotive equipment would have been depreciated at total of P511,111 for the
year.
f. Salvage value of the assets are considered immaterial.

Requirements:
1. What is the gain or loss from the trade in transaction in item a?
a. 266,667 c. 125,000
b. 166,667 d. 1,016,667
2. What is the correct depreciation expense on the building for 2016?
a. 698,108 c. 687,691
b. 656,441 d. 531,441
3. What is the correct depreciation expense on machinery and equipment for 2016?
a. 572,550 c. 546,970
b. 577,902 d. 556,667
4. What is the correct depreciation expense on automotive equipment for 2016?
a. 455,555 c. 575,000
b. 633,333 d. 466,667

PROBLEM 21: AUDIT OF PROPERTY, PLANT AND EQUIPMENT

On January 1, 2014, MONICA CORP. acquired a factory equipment at a cost of P450,000. The equipment is being
depreciated using the straight-line method over its projected useful life of 10 years with P50,000 salvage value.
On December 31, 2015, a determination was made that the future net cash flows expected from the continued use of the
asset shall be P40,000 per year. Estimated salvage value remains to be P50,000. The asset also had a fair value less cost
to sell at P220,000 on the same date. You ascertained that this was properly computed and that recognition of the
impairment was warranted. (the prevailing interest rate is 10%)
On December 31, 2017, the asset’s replacement cost was determined to be P555,000 with a total life of 12 years from
date of acquisition. Salvage value is still estimated to be at P50,000. You also ascertained that this valuation is reasonable
in the circumstance.
You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of
assets.
Required:
1. What is the recoverable value of the asset on December 31, 2015?
a. 213,397 b. 236,722 c. 220,000 d. 320,000
2. How much impairment loss should be recognized on December 31, 2015?
a. 133,278 b. 156,603 c. 150,000 d. 0
3. What is the asset’s carrying amount on December 31, 2017, before revaluation?
a. 160,050 b. 177,525 c. 190,042 d. 172,548
4. How much impairment recovery should be reported in the 2017 income statement?
a. 155,475 b. 99,958 c. 142,975 d. 117,450
5. What is the depreciation expense in 2019, under the cost method?
a. 41,625 b. 36,250 c. 37,875 d. 30,000
6. What is the depreciation expense in 2019, under the revaluation method?
a. 41,625 b. 36,250 c. 37,875 d. 30,000
7. What is the balance of any revaluation surplus at the end of 2019, under the piecemeal realization?
a. 47,250 b. 55,125 c. 52,500 d. 63,000

PROBLEM 22: AUDIT OF INTANGIBLES

The Cruz Company acquired several small companies at the end of 2017 and, based on the acquisitions, reported the
following intangibles in its December 31, 2017 statement of financial position:
Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000
The company's accountant determines the patent has an expected life of 10 years and no expected residual value, and
that it will generate approximately equal benefits each year. The company expects to use the copyright and tradename
for the foreseeable future. The accountant knows that the computer software is used in the company's 120 sales offices.
The company has replaced the software in 60 offices in 2018, and expects to replace the software in 40 more offices in
2019 and the remainder in 2020.
On December 31, 2018, there are no indications of impairment of patent and computer software. The following information
relate to the other intangible assets:
a) Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
b) The tradename is expected to generate cash flows of P15,000 per year.
c) The goodwill is associated with Cruz Company’s Jade Production reporting unit. The cash flows expected to be
generated by the Jade Production reporting unit is P200,000 per year for the next 25 years. The reporting unit has a
carrying amount of P2,100,000 excluding goodwill.

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Requirements:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for
all items is 5%)
1. Total amortization of intangible assets in 2018
a. 107,500 c. 88,750
b. 70,000 d. 20,000
2. Total loss on impairment in 2018
a. 452,470 c. 471,211
b. 530,280 d. 433,720
3. Carrying amount of goodwill on December 31, 2018
a. 659,720 c. 855,000
b. 900,000 d. 718,789
4. Carrying amount of other intangible assets on December 31, 2018
a. 640,000 c. 980,000
b. 690,000 d. 706,667

PROBLEM 23: AUDIT OF INTANGIBLES

Doha Corporation was organized in 2017. Its accounting records include only one account for all intangible assets. The
following is a summary of the entries that have been recorded and posted during the years 2017 and 2018:
Intangibles
7/1/17 Franchise expiring on June 30, 2025 P252,000
10/1 Advance payment on lease expiring on October 1, 2019 168,000
12/31 Net loss for 2017 including incorporation fee, P6,000, and
related legal fees of organizing the business, P30,000 (all
incurred in 2017) 96,000
1/2/18 Acquired patent with a useful life of 10 years 444,000
3/1 Cost of developing a secret formula 450,000
4/1 Goodwill purchased 1,670,400
7/1 Legal fees for successful defense of patent purchased on 1/2 75,900
10/1 Research and development costs on a new project 960,000

Required: Ignoring income tax effects, determine the following:

1. The unamortized patent cost at December 31, 2018:
a. 399,600 c. 444,000
b. 470,880 d. 394,980
2. The unamortized franchise cost at December 31, 2018:
a. 204,750 c. 189,000
b. 220,500 d. 236,250
3. The adjusting entries on December 31, 2018, should include a retroactive adjustement to the beginning retained
earnings account at:
a. 120,750 c. 132,750
b. 84,000 d. 1,778,550
4. As a result of the adjustments at December 31, 2018, the total charges against income of 2018 should be:
a. 1,195,800 c. 1,645,800
b. 1,681,800 d. 1,682,550

PROBLEM 24: AUDIT OF INTANGIBLES

Sabrina Manufacturing Corporation was incorporated on January 3, 2017. The corporation’s financial statements for its
first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for the year
ended December 31, 2018, and your work is substantially completed. A partial trial balance of the company’s accounts
follows:
Account Title Debit Credit
Cash P11,000
Accounts receivable 42,500
Allowance for doubtful accounts P 500
Inventories 38,500
Machinery 75,000
Equipment 29,000
Accumulated depreciation 10,000
Patents (Item 1) 85,000
Leasehold improvements (Item 6) 26,000
Prepaid expenses 10,500
Organization expenses (Item 7) 29,000
Goodwill (Item 5) 24,000
Licensing Agreement – A*
(Item 2 & 3) 50,000
Licensing Agreement – B*
(Item 2 & 4) 49,000
The following information relate to accounts that may yet require adjustment:
Item 1:
Patents for Sabrina’s manufacturing process were purchased January 2, 2018, at a cost of P68,000. An additional P17,000
was spent in December 2018 to improve machinery covered by the patents and charged to the Patents account. The
patents had a remaining legal term of 17 years.

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Item 2:
On January 3, 2017, Sabrina purchased two licensing agreements; at that time they were believed to have unlimited useful
lives. The balance in the Licensing Agreement – A account included its purchase price of P48,000 and P2,000 in acquisition
expenses. Licensing agreement – B also was purchased on January 3, 2017, for P50,000 but it has been reduced by credit
of P1,000 for the advance collection of revenue from the agreement.
Item 3:
In December 2017, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value of
Licensing Agreement – A, and in January 2019, a flood caused additional damage, which rendered the agreement worthless.
Item 4:
A study of Licensing Agreement – B made by Sabrina in January 2018 revealed that its estimated remaining life expectancy
was only 10 years as of January 1, 2018.
Items 5:
The balance in the Goodwill account includes P24,000 paid December 30, 2017, for an advertising program, which it is
estimated will assist in increasing Sabrina’s sales over a period of four years following the disbursement.
Item 6:
The Leasehold Improvement account includes (a) the P15,000 cost of improvements with a total estimated useful life of
12 years, which Sabrina, as tenant made to leased premises in January 2017; (b) movable assembly-line equipment with
a 5-year useful life and with a cost of P8,500, which was installed in the leased premises in December 2018; and (c) real
estate taxes of P2,500 paid by Sabrina, which under the terms of the lease, should have been paid by the landlord. Sabrina
paid its rent in full during 2018. A 10-year nonrenewable lease was signed January 3, 2017, for the leased building that
Sabrina used in manufacturing operations.
Item 7:
The balance in the Organization Expenses account includes pre-operating costs incurred during the organizational period.

Questions:
1. Patents will have an audited balance as of December 31, 2018 of
a. 85,000 c. 66,000
b. 64,000 d. 46,000
2. The adjusted balance of Licensing Agreement – A as of December 31, 2018 is
a. 20,000 c. 10,000
b. 0 d. 50,000
3. The adjusted balance of Licensing Agreement – B as of December 31, 2018 is
a. 66,000 c. 45,000
b. 85,000 d. 64,000
4. Leasehold improvements, net of amortization, audited balance as of December 31, 2018 is
a. 12,000 c. 13,500
b. 15,000 d. 26,000

PROBLEM 25: AUDIT OF NON-TRADE PAYABLES

YZ Corporation, reported the following balances on the liability portion of its Statement of Financial Position as of
December 31, 2018:
Noncurrent Liabilities
Note Payable, Bank 10% 4,500,000
Bonds Payable, 12% 3,231,652
Finance Lease Liability 2,200,000
Additional information:
a. The note payable to the bank was originated on September 1, 2017 and is due annually at the rate of P1.5M
every August 31 starting 2018. Interest which is based on the outstanding balance of the loan is also payable
every August 31. Interest is yet to be accrued on the note by the balance sheet date. Payments on the note and
interest during the current year had been recorded appropriately.
b. The 5 year, 12% bonds payable (with a face value of P3M) were issued on January 1, 2018 at the prevailing
market rate of interest which is 10%. Interest on the bonds are payable semi-annually every June 30 and
December 31. The entry made by the client to record the issuance was to debit cash and credit bonds payable
for the total cash consideration received.
c. The Lease Liability is in relation to XYZ’s purchase of a machine on December 31, 2017. The machine was
delivered the same day to the company. The lease stipulates that annual payments will be made for 5 years
starting December 31, 2017. At the end of the 5-year term, the company may purchase the machine. The
estimated economic life of the machine is 12 years. Your further investigation revealed the following terms of
the transaction:
Annual lease payments P550,000
Purchase option price 250,000
Estimated fair value after 5 years 750,000
Implicit rate 10%
Borrowing rate 12%
Entry made:
Equipment P2,750,000
Cash 550,000
Finance Lease Liability 2,200,000
Payment on December 31, 2018 is yet to be recorded.

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Requirements:
1. What is the amount to be capitalized as an asset for the lease of the machinery?
a. 2,759,130 b. 2,240,170 c. 2,293,450 d. 2,448,656
2. What is the carrying value of the leased asset as of December 31, 2018?
a. 2,040,547 b. 1,958,925 c. 2,448,656 d. 2,244,601
3. What is the correct total noncurrent liabilities to be presented in the 2018 Statement of Financial Position?
a. 5,842,069 b. 6,193,897 c. 7,336,271 d. 6,049,341
4. What is the correct total current portion of long-term debts to be presented in the 2018 Statement of Financial
Position?
a. 1,500,000 b. 1,896,148 c. 1,860,134 d. 2,005,457
5. What is the total interest expense to be reported in the 2018 income statement?
a. 1,026,097 b. 1,009,211 c. 1,062,111 d. 662,111

PROBLEM 26: AUDIT OF EQUITY ACCOUNTS

Nevada Square Company has the following selected accounts in its shareholders’ equity section as of December 31, 2017:

Preference shares, P100 par, 10 percent cumulative,

100,000 shares issued and outstanding P10,000,000
Ordinary shares, P20 par, 1,000,000 shares authorized,
700,000 shares issued and outstanding 14,000,000
Share premium 8,000,000
Accumulated profits 30,000,000
There are no dividends in arrears on the preference shares. During 2018, the following transactions occurred:
a. The board of directors declared a cash dividend totaling to P2,800,000 to be paid to preference and ordinary
shareholders. Later, a share dividend of 100,000 ordinary shares were declared on ordinary shares. The market
value of ordinary shares is P68 per share on the date the share dividends were declared.
b. Sometime after the above dividends were declared and settled, the board of directors declared as property
dividends one shares of its investment in Bingo Corp. stocks being held by the company as financial asset at fair
market value through profit or losses for every two ordinary share outstanding. Bingo Corp. stocks were originally
purchased by the company at P12 per share and have a carrying value based on their fair value as per the last
balance sheet date, at P20 per share. Bingo Corp. shares were selling at P24 when the property dividends were
declared and were selling at P25 when the property dividends were settled. The company had a total of 600,000
shares of Bingo Corp. shares.
c. At the end of 2018, the board declares a four-for-one share split. With the split, the number of ordinary shares
authorized to be issued increased to 4,000,000. At the date of the share split, the market value of ordinary share
is P75 per share.
d. Net earnings during 2018 total P6,000,000.
Required:
1. What is the correct debit to the accumulated profits as a result of the stock dividends declared in item a?
a. 6,800,000 c. 4,800,000
b. 1,000,000 d. 2,000,000
2. What is the total debit to the accumulated profits account as a result of the declaration and distribution of the
property dividends in item b?
a. 10,000,000 c. 8,000,000
b. 12,500,000 d. 12,000,000
3. What is the adjusted balance of the company’s Accumulated profit account at the end of year?
a. 21,600,000 c. 16,400,000
b. 18,400,000 d. 26,400,000
4. What is the balance of the ordinary shares account as of December 31, 2018?
a. 20,800,000 c. 18,000,000
b. 14,000,000 d. 16,000,000

PROBLEM 27: AUDIT OF EQUITY ACCOUNTS

In your audit of Spurs Inc. for the calendar year ended December 31, 2018, you discovered the following charges to the
company’s Retained Earnings account:

Balance, January 1 P7,800,000

Unrealized holding loss on financial assets at fair value through other
comprehensive income or loss (400,000)
Inventory fire loss (150,000)
Impairment loss on Property Plant and Equipment (750,000)
15% Stock dividends declared (100,000 shares outstanding at P100 par) (1,500,000)
Loss on sale of equipment (200,000)
Correction of a prior period error (1,500,000)
Loss on retirement of ordinary shares as treasury (1,050,000)
Gain on sale of ordinary shares as excess over par 1,000,000
Gain on premature retirement of bonds 300,000
Unrealized holding gain on financial asset held at fair value through
profit/loss 800,000
Proceeds from sale of donated shares 800,000
Net income for the year 9,000,000
Reserve for plant expansion (3,000,000)

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Audit Notes
a. The 15% stock dividends were declared on November 1, 2018 distributable to stockholders as of December 1,
2018 distributable on January 15, 2019. Spur’s stocks were selling at P110 on November 1

b. The company’s Share premium from treasury stock transaction account amounted to P850,000.

c. The company’s management decided to change its inventory costing method from the weighted average to the
FIFO approach during the current year. The inventory balances under the two methods are as follows:
AVERAGE FIFO
Beginning 2,500,000 2,600,000
Ending 1,900,000 2,200,000
The company, however, is yet to effect the said change in its current financial statements.

Using the information above, answer the following:

1. What is the net adjustment to the retained earnings account for the declaration of the stock dividends?
a. 100,000 c. 150,000
b. 50,000 d. no adjustement
2. What is the correct net income for the year 2018?
a. 9,100,000 c. 9,200,000
b. 9,000,000 d. 9,300,000
3. What is the retroactive adjustment to the retained earnings beginning in 2018 as a result of the change in the inventory
cost formula from the weighted average to the FIFO approach?
a. 100,000 debit c. 300,000 credit
b. 200,000 credit d. 100,000 credit
4. What is the correct retained earnings at the end of 2018?
a. 11,200,000 c. 10,900,000
b. 10,6s50,000 d. 10,750,000

PROBLEM 28: AUDIT OF EQUITY ACCOUNTS

Ekkans Corporation was incorporated in 2017. During 2017, the company issued 100,000 shares of P1 par value ordinary
shares for P27 per share. During 2017, Ekkans Corporation had a profit of P250,000 and paid dividends of P28,000.

During 2018, the company had the following transactions.

1/2 Issued 10,000 shares of P100 par value cumulative preference shares at par. The preference
shares are convertible into five ordinary shares and had a dividend rate of 6%.

3/1 Issued 3,000 ordinary shares for legal service performed. The value of the legal services was
P100,000. The shares are actively traded on a stock exchange and valued on 3/1 at P32 per
share.

7/1 Issued 40,000 ordinary shares for P42 per share.

10/1 Repurchased 16,000 treasury shares for P34 per share.

12/1 Sold 3,000 treasury shares for P29 per share.

12/30 Declared and paid a dividend of P0.20 per share on ordinary shares and a 6% dividend on the
preference shares.

During 2018 Ekkans Corporation had a profit of P380,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following:
1. Total share premium as of December 31, 2018
a. 4,333,000 c. 4,337,000
b. 1,733,000 d. 4,348,000
2. Total retained earnings as of December 31, 2018
a. 501,000 c. 602,000
b. 516,000 d. 279,000
3. Total equity as of December 31, 2018
a. 5,535,000 c. 5,621,000
b. 5,539,000 d. 5,550,000
4. Basic earnings per share for the year 2018
a. 3.20 c. 2.69
b. 1.60 d. 2.11
5. Diluted earnings per share for the year 2018
a. 2.11 c. 2.25
b. 1.48 d. 1.90

PROBLEM 29: AUDIT OF EQUITY ACCOUNTS

Presented below is the statement of financial position of Diesel Corporation prepared by the chief accountant for the current
year, 2018.

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Diesel Corporation
Statement of Financial Position
December 31, 2018
Current assets P 435,000
Investments 640,000
Property plant, and equipment 1,720,000
Intangible assets 305,000
P3,100,000

Current liabilities P 330,000

Long-term liabilities 1,000,000
Shareholders’ equity 1,770,000
P3,100,000

Consider the following information:

1. The current assets section includes: cash P100,000, accounts receivable P170,000 less P10,000 for allowance for
doubtful accounts, inventories P180,000, and unearned revenue P5,000. The cash balance is composed of P114,000,
less a bank overdraft of P14,000. Inventories are stated on the lower of FIFO cost or market.
2. The investments section includes: the cash surrender value of a life insurance contract P40,000; investment in ordinary
shares, short-term (trading) P80,000 and long-term (available-for-sale) P270,000; and bond sinking fund P250,000.
The cost and fair value of investments in ordinary shares are the same.
3. Property, plant, and equipment includes: buildings P1,040,000 less accumulated depreciation P360,000; equipment
P450,000 less accumulated depreciation P180,000; land P500,000; and land held for future use P270,000.
4. Intangible assets include: a franchise P165,000: goodwill P100,000; and discount on bonds payable P40,000.
5. Current liabilities include: accounts payable P90,000; notes payable - short term P80,000 and long - term P120,000:
and taxes payable P40,000.
6. Long - term liabilities are compose solely of 10% bonds payable due 2025.
7. Shareholders' equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares for
P450,000; and ordinary shares, P1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average
price of P10. In addition, the corporation has retained earnings of P320,000.
8. The company's management does not elect to use the fair value option for any of its financial assets or liabilities.

QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following to be reported on the
company’s statement of financial position as of December 31, 2018:

1. Current assets
a. 588,000 c. 534,000
b. 574,000 d. 548,000
2. Noncurrent investments
a. 560,000 c. 830,000
b. 520,000 d. 790,000
3. Property, plant and equipment
a. 1,615,000 c. 1,450,000
b. 1,885,000 d. 1,720,000
4. Total assets
a. 3,079,000 c. 2,814,000
b. 2,979,000 d. 3,093,000
5. Current liabilities
a. 229,000 c. 210,000
b. 224,000 d. 215,000

PART 3: RAP, TOC and ST THEORIES

Risk Assessment Procedures (RAP)
1. If the internal control structure is deemed to be effective during the obtaining an understanding phase, the test of
transactions will usually be planned to be performed:
a. At the balance sheet date
b. At an interim date
c. At the beginning of the client’s fiscal period
d. After the tests of balances are completed
2. If the controls necessary to satisfy one of the objectives are inadequate, the likelihood of errors related to that objective
a. Is increased, regardless of the controls for the other objectives
b. May be increased if the controls for other objectives don’t mitigate it
c. May be decreased if management is aware of the poor controls
d. Is indeterminate
3. Which one of the following statements is true? In deciding on substantive tests of transactions,
a. Some procedures are commonly employed on every audit regardless of the circumstances
b. All procedures are dependent on the adequacy of the controls and the results of the test of controls
c. Results obtained in the prior year’s audit will not affect the procedures used this year
d. The materiality of the item will not influence the choice of procedures used.

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4. Which of the following statements is true?
a. If control risk is assessed at maximum, the nature of related substantive tests should be changed from more to
less effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should be changed from less to
more effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should be changed from year-end
to an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should be changed from a larger
to a smaller sample.
5. After the audit planning procedures, your audit team decided to place the preliminary audit risk at a high level. Which of
the following is correct?
a. The risk the planned further audit procedures will not be able to detect misstatement should be increased.
b. The audit materiality levels should be decreased.
c. The auditors should plan extensive substantive testing through analytical procedures.
d. The auditors should plan set the timing of its extensive compliance testing at year-end.
6. In rendering a preliminary financial ratio analysis on Atom Inc.’s financials, you have observed that the clients’ accounts
receivable turn-over ratio decreased from 10 times last year (based on audited financial statement) to 6 times this year
(based on unaudited figures). Which of the following is correct regarding the implication of this information in your audit
plan?
a. Accounts receivables may be materially misstated thus the auditor should issue a qualified opinion due to
departure from PFRS.
b. Accounts receivables are materially misstated thus the auditor should issue an adverse opinion due to material
and pervasive departure from PFRS.
c. The auditor increases his assessment of inherent risk in the financial statement thus shall plan to do extensive
substantive analytical procedures.
d. The auditor increases his assessment of risk of misstatement in the financial statement thus shall plan to render
test of details at year-end.
7. To obtain an understanding of the client’s internal control over its revenue/receipt transactions, an audit staff was assigned
to do inquiries with the department’s involved (Sales Department, for order processing; Credit Department, for credit
authorization; Warehouse, for determining the availability of goods; Shipping, for the preparation and actual shipment of
goods, and; Billing Department, for the invoice preparation). Which of the following shall be rendered next?
a. Assessment of control risk at below the maximum level if the staff is satisfied that the design, operation and
effectiveness of internal control can reasonably detect/prevent potential misstatements in the financial
statements.
b. Assessment of the control risk at the maximum level if the design and operations of the internal controls are
inappropriate to detect or prevent potential misstatement in the financial statements.
c. Confirm his understanding of the internal control through inspection of documents and/or observation of the
performance of policies and procedures.
d. Test the effectiveness of the controls as to consistency of their application.
8. After obtaining and understanding of the Atom Inc.’s internal control policies and procedures over its purchasing and
disbursements transactions, the auditor was satisfied regarding’s the internal control’s potential reliability. Which of the
following shall be rendered next?
a. Test the effectiveness of the internal control in terms of their consistent application by extending the analytical
procedures done during the audit planning.
b. Sending confirmation letters to suppliers to confirm their agreements with Atom Inc.’s reported balances.
c. Examine the consistency of the application of the control by inspecting documents where control performance
are documented.
d. Render purchases cut-off to ascertain whether purchases were recorded in the correct period.

Test of Controls (TOC) and Substantive Testing (ST): Order to Cash; Purchase to Pay Process (Audit of Cash)
1. To gather evidence regarding the balance per bank in a bank reconciliation, the auditor would examine any of the following
except:
a. Cutoff bank statement
b. Year-end bank statement
c. Bank confirmation
d. General ledger
2. Which of the following errors would not be discovered during the test of the bank reconciliation?
a. Cash received by the client subsequent to the balance sheet date but recorded as cash receipt in the current
year.
b. Deposits recorded in the cash book near the end of the year, deposited in the bank, and included in the bank
reconciliation as a deposit in transit
c. The existence of payments on notes payable that were debited directly to the bank balance by the bank but were
not entered in the client’s records
d. Payment to an employee for more hours than he worked.
3. Which of the following procedures would the auditors most likely perform to test controls relating to management’s
assertion about the completeness of cash receipts for cash sales in a grocery store which inevitably operates on a cash
basis?
a. Observe the consistency of employees’ use of cash registers and tapes
b. Inquire about employees’ access to recorded but undeposited cash
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger
d. Compare the cash balance in the general ledger with the bank confirmation request.
4. Reconciliation of the bank account should not be performed by individual who also:
a. Process cash disbursements
b. Has custody of securities
c. Prepares the cash budget
d. Reviews inventory reports

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5. The auditors suspects that a clients’ cashier is misappropriating cash receipts for personal use by lapping customer checks
received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:
a. Details of deposit slips with details of credits to customer accounts
b. Daily cash summaries with the sums of the cash receipts journal entries
c. Individual bank deposit slips with the details of the monthly bank statements
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are recorded.
6. The cashier diverted cash received over the counter from a customer to his own use and wrote off the receivable as bad
debt. Select the control that should have prevented the error.
a. Aging schedules of accounts receivable are prepared
b. Journal entries are approved by a responsible official
c. Receipts are given directly to the cashier by the person who opens the mail
d. Remittance advises, letters, or envelopes that accompany receipts are separated and given directly to the
accounting department
7. The audit procedure referred to as proof of cash receipts is useful to test
a. Whether all recorded cash receipts have been deposited in the bank
b. Time lags in making deposits
c. Whether there are cash receipts that have not been recorded int eh journals
d. All of the these.

Items 8 and 10 are based on the following:

Miles Company
Bank Transfer Schedule
December 31, 2020
Check Bank Accounts Date disbursed per Date deposited per
Number From To Amount Books Bank Books Bank
2020 FEBTC PNB P32,000 12/31 1/5* 12/31 1/3^
2021 FEBTC PNB 21,000 12/31 1/4* 12/31 1/3^
3217 PCIB FEBTC 6,700 1/3 1/5 1/3 1/6
0659 PCIB FEBTC 5,500 12/30 1/5 12/30 1/3^
8. The tick mark * most likely indicates that the amount was traced to the
a. December cash disbursements journal.
b. Outstanding check list of the applicable bank reconciliation.
c. January cash disbursements journal.
d. Year-end bank confirmations.
9. The tick mark^ most likely indicates that the amount was traced to the
a. Deposits in transit of the applicable bank reconciliation.
b. December cash receipts journal.
c. January cash receipts journal.
d. Year-end bank confirmations.
10. A cash shortage may be concealed by transporting funds one location to another or by converting negotiable assets to
cash. Because of this, which of the following is vital?
a. Simultaneous confirmations.
b. Simultaneous bank reconciliations.
c. Simultaneous verification.
d. Simultaneous surprise cash count.

TOC & ST: Order to Cash Process (Audit of Trade Receivables)

1. The overall objective in the audit of the sales and collection cycle is to evaluate whether:
a. The sales account and the accounts receivable account are free of errors
b. The sales account and the accounts receivable account are free of materials errors
c. The sales account and the accounts receivable account are presented fairly in accordance with financial reporting
standards
d. The accounts balances affected by the cycle are fairly presented in accordance with financial reporting standards.
2. For the most part, the audit of the sales and collection cycle
a. Cannot be performed until the audit of cash is completed
b. Can be performed independently of the audit of the other cycles
c. Must be performed simultaneously with the audit of the purchases and disbursement cycle
d. Must be performed first so that the audit of the other cycles can rely on the data
3. For the most part, the evidence gathered during the audit of the sales and collection cycle can be subjectively combined
with the other parts of the audit
a. As the evidence accumulation process proceeds
b. Only when all fieldwork processes of the engagement are completed
c. Only after the audit of the sales and collections cycle is concluded
d. After the conclusion of both the cash cycle and the sales and collection cycle.
4. Which of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances
b. Bad debt expense
c. Allowance for uncollectible accounts
d. Cash credits from the cash disbursement journal
5. The customer’s request for merchandise, the customer order, would be in the form of
a. An oral request
b. A written request on customer’s letterhead
c. A written request on pre-printed form
d. Any of the above three formats

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6. A document for recording the description, quantity and related information for goods ordered by a customer is the
a. Customer order
b. Sales order
c. Shipping document
d. Remittance advice
7. The document used to indicate to the customer the amount of a sale and due date of the payment is the
a. Sales order
b. Shipping document
c. Bill of lading
d. Sales invoice
8. The document used as the basis for recording sales transactions and updating the accounts receivable master file is the
a. Sales order
b. Bill of lading
c. Sales journal
d. Sales invoice
9. A document prepared to initiate shipment of goods sold is the
a. Sales order
b. Bill of lading
c. Sales invoice
d. Customer order
10. When posting the Sales Journal, details of the journal are posted to ____________; and journal totals are posted to
____________.
a. The sales account; the general ledger
b. The accounts receivable master file; the general ledger
c. The sales account; the accounts receivable subsidiary ledger
d. The accounts receivable subsidiary account in the general ledger; the sales account in the general ledger.
11. The report which typically includes information analyzed by key components as sales person, product and territory is the:
a. Remittance advice
b. Summary sales report
c. Accounts receivable master file
d. Monthly statement
12. The document which supports reductions in accounts receivable is
a. Remittance advice
b. Credit memo
c. Sales invoice
d. Monthly statement
13. The document which accompanies the customer’s payment and is used to permit the immediate deposit of cash to improve
the control over the custody of asset is the:
a. Credit memo
b. Remittance advice
c. Sales invoice
d. Monthly statement
14. The daily entry in the cash receipt journal are supported by the
a. Sales invoice
b. Shipping document
c. Remittance advice
d. Credit memo
15. A file for recording individual sales, cash receipt and sales returns and allowances for each customer is the:
a. Sales journal
b. Cash receipt journal
c. General ledger
d. Accounts receivable subsidiary ledger
16. A document sent to each customer showing their beginning accounts receivable balance and the amount and date of each
sale, cash payment received, credit memo issued, and the ending accounts receivable balance is the:
a. Accounts receivable subsidiary ledger
b. Monthly statement
c. Remittance advice
d. Sales invoice
17. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice
b. Approve the journal entry
c. Approve credit
d. Verify the unit price is accurate
18. For the most firms, the function of indicating credit approval is recorded on the
a. Customer order
b. Sales order
c. Remittance advice
d. Sale invoice
19. Most companies recognize sales when
a. A customer order is received
b. The merchandise is shipped
c. The merchandise is received by the customer
d. Cash is received on account

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20. Which of the following would an auditor be concerned with when examining the billing function of client?
a. All shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All three are of concern
21. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible
b. Customer files for bankruptcy
c. A collection agency cannot inspire customer to pay the debt
d. The account is at least six month old.
22. In many audits of sales transactions, no substantive tests of transactions are made for the completeness objective on the
ground that
a. Overstatements of assets and income are greater concern than understatement
b. Understatements of assets and income are greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the reduced revenue and
net income is correct
d. The reduced sales causes a reduction of the accounts receivable therefore the ratios of the two financial
statements will not be misleading.
23. Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
a. Restrictions placed on sales by laws and regulations
b. Decline in sales due to economic declines
c. Decline in sales due to product obsolescence
d. Over-recorded sales due to a lack of control over the sales entry function
24. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping document
b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
25. Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?
a. Inaccurate billing due to a lack of controls
b. Lapping of accounts receivable
c. Misbilling a client due to a data input error
d. Recording sales when the customer is likely to return the goods
26. Which of the following is an example of misappropriation of assets relating to sales?
a. Accidentally recording cash that represents a liability as revenue
b. Holding the sales journal open to recorded next year’s sales as having occurred in the current year
c. Intentionally recording cash received from a new debt agreement as revenue
d. Theft of cash register sales
27. There is a presumption that auditors will confirm accounts receivable unless the auditor’s assessment of the risk of
material misstatement is low
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective
b. And accounts receivable are composed of large accounts
c. And the effectiveness of confirmations is absolutely determined
d. Or accounts receivable are from extremely reputable customers.
28. To determine that all valid sales have been recorded, the auditors would select sample of transactions from the
__________; This is necessary to support the __________ assertion over sales.
a. Shipping documents file; Completeness
b. Sales journal; Existence
c. Accounts receivable subsidiary ledger; Existence
d. Remittance advices; Completeness
29. Which of the following would most likely be detected by an auditor’s review of the client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
30. To test existence assertion of recorded receivables, the auditors would select sample from the:
a. Sales order file
b. Customer purchase orders
c. Accounts receivable subsidiary ledger
d. Shipping documents (bill of lading) file.
31. Which of the following relating to sales is most directly addressed when the auditors compare a sample of shipping
documents to related sales invoices?
a. Existence or occurrence
b. Completeness
c. Rights and obligation
d. Presentation and disclosure
32. Park, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents’
delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts
receivable balances at the balance sheet date. Park, CPA most likely would:
a. Send negative confirmation letter
b. Examine evidence of subsequent cash receipt
c. Inspect the internal records, such as copies of tax invoices that were mailed to the residents
d. Sent positive confirmation request

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33. Fork, CPA is engaged in audit of a cable TV firm which services a rural community. All recieable balances are small,
customers are billed monthly an internal control is effective. To determine the validity of accounts receivable balances at
the balance sheet date, Fork would most likely:
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation request.
34. Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-
off of a trade accounts receivable:
a. Write-offs must be approved by a responsible official after review of credit department recommendations and
supporting evidence
b. Write-offs must be approved by accounts receivable department
c. Write-offs must be authorized by shipping department
d. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months
have been written-off.
35. An effective procedure to test for unbilled shipments is to trace from the _________. This is to support the financial
statement assertion of __________ over sales and receivables.
a. Sales journal to shipping documents; existence/occurrence.
b. Shipping documents to the sales journal; completeness.
c. Sales journal to the accounts receivable subsidiary ledger; existence/occurrence.
d. Sales journal to the general ledger sales account; completeness.
36. Bok No Manufacturing received a substantial sales return on December 31, 2020, but credit memorandum for the returns
were not prepared and recorded until March 4, 2021. The returned merchandise was included in the year-end physical
inventory taken on December 31, 2021. The most effective procedure for preventing this type of error and its implication
on the net income are:
a. Prepare an aged schedule of accounts receivable monthly; Net income is overstated by the gross profit on sales.
b. Prenumber and account for all credit memorandums; Net income is overstated by the amount of gross sales.
c. Reconcile the subsidiary accounts receivable ledger with the general ledger control account monthly; Net income
is overstated by the cost of inventory.
d. Prepare and numerically control receiving reports for all materials received; Net income is overstated by the
amount of gross sales.
37. An auditor should perform alternative audit procedures to substantiate the existence of accounts receivable when:
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectibility of the receivable is in doubt.
d. Pledging of receivables is probable.
38. It is sometimes necessary for an auditor to use alternative audit procedure specially in instances where reply on positive
confirmation requests is not received even for a second set of confirmation requests. In such a situation, the best
alternative procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable gaining schedule prepared at the balance sheet date and at a subsequent date.
c. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some
percentage of the balance in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year basis.
39. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the auditor
decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed the customer
name next to each check listed on the deposit slip; hence, he decided that for each customer for which a confirmation
was not received that he would add all amounts shown for that customer on each validated deposit slip for the two months
following the balance sheet date. The major fault in the auditor’s procedure is that”:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for confirmation of accounts
receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the receivable at the
balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.
40. When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts
receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good
c. Negative confirmations are to be used
d. There is a simultaneous examination of cash and accounts receivable.

TOC & ST: Purchase to Pay, Hire to Retire and Plan to Inventory Processes (Audit of Inventories, Trade Liabilities and
Accrued Expenses
1. Which of the following is least likely to be among the auditors’ objective in the audit of inventories and cost of goods sold?
a. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods
b. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold
c. Establish that the client includes only inventory on hand at year-end in inventory totals
d. Establish completeness of inventories
2. The receiving department is least likely to be responsible for the:
a. Determination of quantities of goods received
b. Detection of damaged or defective merchandise
c. Preparation of a shipping document
d. Transmittal of goods received to the store’s department

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3. The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the
transportation agreement is the:
a. Bill of lading
b. Job time shipping
c. Production order
d. Production schedule
4. An auditor usually examines receiving reports to support entries in the
a. voucher register and sales returns journal.
b. sales journal and sales returns journal.
c. voucher register and sales journal.
d. check register and sales journal.
5. When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:
a. Existence and Valuation
b. Existence and Completeness
c. Completeness and Valuation
d. Presentation and Valuation
6. Instead of taking a physical inventory count on the balance sheet date, the client may take physical count prior to the
year-end if internal control is adequate and:
a. Well kept records of perpetual inventory are maintained
b. Inventory is slow-moving
c. Computer error reports are generated for missing prenumbered inventory tickets
d. Obsolete inventory items are segregated and excluded.
7. The auditor’s analytical procedures will be facilitated if the client:
a. Uses a standard cost system that produces variance reports
b. Segregates obsolete inventory before the physical inventory count
c. Corrects material weaknesses in internal control before the beginning of the audit
d. Reduces inventory balances to the lower of cost or net realizable value.
8. Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities in the prior-year
b. Observe merchandise and raw materials during the client’s physical inventory taking
c. Review the management’s inventory representation letter for accuracy
d. Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.
9. Henry Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on
the basis of statistical plan. During the year, Doris Alcaide, CPA, observes such counts as she deems necessary and is
able to satisfy herself to the reliability of the client’s procedures. In reporting on the results of her examination, Alcaide:
a. Can issue an unqualified opinion without disclosing that she did not observe year-end inventories
b. Must comment in an emphasis-of-a-matter paragraph the auditor’s responsibility section of the audit report as
to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion.
c. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole.
d. Must, if the inventories are material, qualify her opinion.
10. The primary objective of a CPA’s observation of a client’s physical inventory count is to:
a. Discover whether a client has counted a particular inventory item or group of items
b. Obtain direct knowledge that the inventory exists and has been properly counted
c. Provide an appraisal of the quality of the merchandise on hand on the day of the physical count
d. Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are
reasonably accurate.
11. An auditor most likely would analyse inventory turnover rates to obtain evidence concerning management’s assertions
about
a. existence or occurrence.
b. rights and obligations.
c. presentation and disclosure.
d. valuation or allocation.
12. Which of the following audit procedures probably would provide the most reliable evidence concerning the entity’s
assertion of rights and obligations related to inventories?
a. Trace test counts noted during the entity’s physical count to the entity’s summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
c. Select the last few shipping advices used before the physical count and determine whether the shipments
were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be considered for disclosure.
13. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to
obtain evidence that all items __________. This is necessary in relation to the auditor’s objective of validating
____________ assertion over inventories.
a. included in the listing have been counted; completeness
b. represented by inventory tags are included in the listing; completeness
c. included in the listing are represented by inventory tags; existence
d. represented by inventory tags are bona fide; existence
14. Which of the following is correct?
a. The overhead charged to inventory at the balance sheet date can be understated if the salaries of the
administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to
incorrect jobs.
c. Payroll is significant portion of inventory for retail and service industry companies.
d. The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the
wrong job or process.

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15. Which of the following circumstances would not cause an auditor to extend payroll procedures considerably?
a. Payroll significantly affects inventory valuation for manufacturing concern
b. There is a possibility of material fraudulent payroll transaction
c. There is a weak internal control structure
d. There is a lack of independent third-party evidence, such as confirmations.
16. Which of the following is not a type of error that gives the auditor concern in auditing payroll transactions?
a. Classification errors in charging labor to inventory and job cost accounts
b. Computational errors in formulas when a computerized system is used
c. Weaknesses in control system which allows underpayment of employees
d. Any error which indicates possible fraud.
17. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be clear under the control of the personnel department
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud
c. The duties of hiring, payroll computation, and payment to employees should be segregated
d. The payment of cash to employees should be replaced by payment through checks.
18. No individual with access to time cards, payroll records or checks should also be permitted access to
a. Personnel records
b. The computer
c. The canceled check file
d. Job time tickets
19. Controls should prevent those responsible for the preparation of payroll checks from all but which one of the following
activities?
a. Signing paychecks
b. Distributing paychecks
c. Access to time cards
d. Access to the payroll journal
20. Which of the following is an effective internal control used to prove that production department employees are property
validating payroll time cards at a time-recording station?
a. Time cards should be carefully inspected by those persons who distribute pay envelopes to employees
b. One person should be responsible for maintaining records of employee time for which salary payment is not to
be made
c. Daily reports showing tie charged to jobs should be approved by the supervisor and compared to the total hours
worked on the employee time cards
d. Internal auditors should make observations of distribution of paychecks on a surprise basis.
21. The signing and distribution of the checks must be properly handled to prevent their theft. Which of the following is not
an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the preparation of the payroll
b. A check signing machine should not be used to replace a manual signature
c. Distribution of paychecks should be performed by someone who is not involved in the other payroll function
d. Unclaimed paychecks should be immediately returned for redeposit
22. To minimize the opportunity for fraud, unclaimed salary checks should be:
a. Deposited in a special bank account
b. Kept in the payroll department
c. Left with the employee supervisor
d. Held for the employee in the personnel department
23. Effective internal accounting control over unclaimed payroll checks that are kept by the treasury department would include
accounting department procedures that require
a. Effective cancellation and stop payment orders for checks representing unclaimed wages
b. Preparation of a list of unclaimed wages on a periodic basis
c. Accounting for all unclaimed wages in a current liability account
d. Periodic accounting for the actual checks representing unclaimed wages
24. The most important means of verifying account balances in the payroll and personnel cycle are:
a. Analytical procedures
b. Test of controls
c. Test of details transaction
d. Test of details of balances
25. Which of the following would not be a justification for an auditor spending very little time performing tests of transactions
in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background that the former one
b. Employees will detect any underpayments
c. Payroll transactions are uniform and uncomplicated
d. Payroll transactions are extensively audited by government agencies.
26. Because of the lack of available evidence, it is usually difficult for an auditor to discover if an employee records more time
on his or her time card than actually worked. One procedure is
a. To reconcile the total hours paid this period with a previous period
b. To reconcile the total hours paid according to the payroll records with an independent record of the total hours
worked, such as those maintained by production control
c. To reconcile the total hours worked this period with a previous period
d. To reconcile the total hours worked according to the summary payroll report with the total hours worked as
recorded on the time card for the period.
27. Control Objective 1: Recorded payroll payments are for work actually performed by non-fictitious employees.
Control Objective 2: Existing payroll transactions are recorded.
Control Objective 3: Recorded payroll transaction are for the amount of time actually worked and at the proper
pay rate; withholdings are properly calculated.

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a. Completeness, Existence, Valuation
b. Existence, Valuation, Completeness
c. Existence, Completeness, Valuation
d. Valuation, Completeness, Existence
28. Which of the following is test of controls in auditing payroll cycle?
a. Review the payroll journal, general ledger, an payroll earnings record for large or unusual amounts
b. Examine time cards for indication of supervisor approval
c. Compare canceled check with payroll journal for name, amount and date
d. Examine canceled checks for proper endorsement.
29. Which of the following is substantive test of transaction in auditing payroll cycle?
a. Review personnel policies
b. Account for a sequence of payroll checks
c. Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement
d. Examine printouts of the transactions rejected by the computer as having invalid employee numbers.
30. Tracing selected items from payroll register to employee time cards that have been approved by supervisory personnel
provides evidence that
a. Internal controls relating to payroll disbursements were operating effectively
b. Payroll checks were signed by an appropriate officer independent of the payroll preparation process
c. Only bona fide employee worked and their pay was properly computed
d. Employees worked the number of hours for which their pay was computed.
31. The primary concern in testing payroll-related liabilities is to make sure that
a. Accruals are properly valued
b. Transactions were recorded in the prior period
c. There are no understated or omitted accruals
d. The accruals are not overstated
32. Client’s liability for payroll taxes withheld but not yet disbursed can be tested by comparing the balances with
a. The payroll journal
b. The payroll tax form prepared in the subsequent period
c. The cash disbursement in the subsequent period
d. All of these
33. The correct cut-off and valuation of accrued salaries and wages
a. Is to calculate the exact hours of pay that were earned in the current period and paid in the subsequent period
b. Is to compute an approximate proportion of the wages that were earned in the current period and use that
amount as the accrual
c. Allows the client to choose between a and b above each year
d. Depends on company policy, consistently followed.
34. Which of the following would not be a test used when auditing accrued sales commission?
a. Confirm the amount of commissions directly with the employees
b. Test the calculations based on the agreement between client and employees
c. Compare the method of accruing commissions with the previous years
d. Test the mechanical accuracy in the Commissions Expense account at interim dates.
35. Verification of the legitimacy or propriety of year-end unpaid bonuses to officers and employees can be accomplished by
comparing the recorded accrued to the amount _________. This is necessary to gather evidence regarding _________
assertion on the year-end accrued bonuses.
a. In the expense account; Completeness
b. Use in the prior period; Existence
c. Authorized in the minutes of board meetings; Existence
d. Paid in the subsequent period; Completeness
36. The most important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay and other
benefits is
a. The consistent accrual of these liabilities relative to those of the preceding year
b. The actual expense incurred for the prior period
c. The amount expended to date in the current period
d. The profitability of the client which will enable these liabilities to be met.
37. Ordinarily, the most significant assertion relating to accounts payable, in the perspective of a financial statements auditor is:
a. Completeness
b. Existence
c. Rights and obligation
d. Valuation
38. Which of the following procedures is least likely to be completed before the balance sheet date?
a. Confirmation of receivables
b. Search for unrecorded liabilities
c. Observation of inventory
d. Review of internal accounting control over cash disbursements.
39. An audit of the balance in the accounts payable account ordinarily is not designed to:
a. Detect accounts payable that are substantially past due
b. Verify that accounts payable were properly authorized
c. Ascertain the reasonableness of recorded liabilities
d. Determine that all existing liabilities at the balance sheet date have been recorded.
40. Which of the following is the best audit procedure for determining existence of unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of
accounts payable.
b. Examine unusual relationships between monthly accounts payable balances and recorded purchases
c. Examine sample of invoices a few days prior to and subsequent to year-end to ascertain whether they been
properly recorded
d. Examine selected cash disbursement sin the period subsequent to year-end.

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41. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
b. Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the
balance sheet date.
c. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the
related payables apply to the prior period.
d. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine
whether they are supported by receiving reports.
42. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
a. This is a duplication of cutoff test
b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed
c. Correspondence with the audit client’s attorney will reveal all legal action by vendors for non-payment
d. There is likely to be other reliable external evidence available to support the balances.
43. When confirming accounts payable, the approach is most likely to be on of
a. Selecting the accounts with the larges balances at year-end, plus a sample of other accounts
b. Selecting accounts of companies with whom the client has previously done the most business, plus a sample of
other accounts
c. Selecting a random sample of accounts payable at year-end
d. Confirming all accounts.
44. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most
likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal
b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts
c. Tracing totals from the purchases journal to the ledger accounts
d. Sending written quarterly confirmation to all vendors.
45. The least likely approach in auditing management’s estimate relating to accrued liability is to:
a. Independently develop an estimate of the amount to compare to management’s estimate
b. Review and test management’s process of developing the estimate
c. Review subsequent events or transactions bearing on the estimate
d. Send confirmation relating to the estimate
46. In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting
documents. Which assertion would this test of controls most likely test?
a. Completeness
b. Existence
c. Valuation
d. Rights

ST: Acquire to Retire Process (Audit of Investments, PPE, Intangibles and Other Non-current Assets)
1. In order to guard against the misappropriation of company-owned marketable securities, which of the following is the
best course of action that can be taken by a company with a large portfolio of securities?
a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping are where
securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in a log the exact reason
for their access
c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities
on a current basis
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a
custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase
securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The
best person or persons to make periodic reviews of the investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representative be present in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank where the securities are held in a safe deposit box should be asked to
a. verify differences between the contents of the box and the balances in the client’s subsidiary ledger.
b. provide a list of securities added and removed from the box between the balance-sheet date and the
security count date.
c. confirm that there has been no access to the box between the balance sheet date and the security-
count date.
d. count the securities in the box so the auditor will have an independent direct verification.

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6. Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed
asset additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirmation ownership and corroborating transactions through inquiries client personnel.
7. An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that
all
a. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
b. Capitalizable costs for property and equipment have not been charged to expense.
c. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
d. Expenditures for property and equipment have been recorded in the proper period.
8. Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related
mortgage acquisition costs would be least likely to include an examination of the related.
a. deed.
b. cancelled checks.
c. closing statement.
d. interest expense.
9. When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not
available for inspection. The policy’s absence most likely indicates the possibility of a (an)
a. insurance premium due but not recorded.
b. deficiency in the coinsurance provision.
c. lien on the plant equipment.
d. understatement of insurance expense.
10. To assure accountability for fixed asset retirements, management should implement an internal control that includes:
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds form sale of the plant assets
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired
c. Utilization of serially numbered retirement work orders
d. Periodic observation of plant assets by the internal auditors.
11. Which of the following is an internal control weakness related to factory equipment
a. Checks issued in payment of purchases of equipment are not signed by the controller
b. All purchases of factory equipment are required to be made by the department in need of the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation
schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
12. To strengthen internal control over custody of heavy mobile equipment, the client would most likely institute a policy
requiring a periodic:
a. Increase in insurance coverage
b. Inspection of equipment and reconciliation with accounting records
c. Verification of liens, pledges and collateralizations
d. Accounting for work orders.
13. The auditors may conclude that depreciation charges are insufficient (understated) by noting:
a. Insured values greatly in excess of book values
b. Large amounts of fully depreciated assets
c. Continuous trade-ins of relatively new assets
d. Excessive recurring losses on assets retirements.
14. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to
property, plant and equipment are not understated?
a. Depreciation
b. Accounts payable
c. Cash
d. Repairs and maintenance
15. The auditors are most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts
b. Appropriateness of physical inventory observation
c. Existence of obsolete machinery
d. Deferral of procurement of certain necessary insurance coverage.
16. Which of the following statements is not typical of property, plant and equipment as compared to most current asset
accounts?
a. A property, plant and equipment cutoff near year-end has more significant effect on net income
b. Relatively few transactions occur in property, plant and equipment during the year
c. Auditors normally elect direct substantive testing rather than test of controls in auditing property, plant and
equipment accounts.
d. Property, plant and equipment accounts typically has higher peso value.
17. For the audit of a continuing non-public client, the emphasis for testing for property accounts is on:
a. All transactions resulting in the ending balance
b. Test of controls over disposal
c. Transactions that occurred during the year
d. Performing analytical procedures on beginning balances of the accounts.
18. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment?
a. Accumulated depreciation
b. Cost of goods sold
c. Purchase returns and allowances
d. Purchase discounts.

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19. An effective procedure for identifying unrecorded retirements of equipment is to ________. This is consistent with the
audit objective of gathering evidence to support __________ assertion on PPE.
a. Foot related property; Existence
b. Recalculate depreciation on related equipment; Valuation
c. Select items of equipment in the accounting records and then locate then in the plant; Existence
d. Select items of equipment while conducting ocular inspections on plants and then locate them in the
accounting records; Completeness
20. If the auditor believes that there is a high likelihood of significant missing permanent assets that are still recorded on the
accounting records, an appropriate procedure is to select a sample from the assets master file and examine
a. The documents verifying the acquisition
b. The assets
c. All the related journal entries
d. The accumulated depreciation calculations
21. Because failure to record disposal of manufacturing equipment can significantly affect the financial statements, the search
for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review the plant modifications and changes in product line, taxes or insurance coverage.
22. When an asset is sold or disposed of without having been traded in for a replacement asset, the valuation of the transaction
can be verified by examining the related
a. Purchase order and property master file
b. Sales invoice and property master file
c. Sales invoice and merchandise inventory listing
d. Purchase order and merchandise inventory listing
23. Which of the following is not an overall test of the annual provision for depreciation expense?
a. Compare rates used in the current year with those used in the prior years.
b. Test computation of depreciation provisions for a representative number of units
c. Test deductions from accumulated depreciation for assets purchased during the year
d. Perform analytical procedures
24. Which of the following is the least audit objective when auditing manufacturing equipment and the related depreciation
and accumulated depreciation?
a. To determine whether costs and related depreciation for all significant retirements, abandonments, and
disposals of property have been properly recorded
b. To determine whether the balances in the property accounts, including the amounts carried forward from the
preceding year, are properly stated
c. To determine whether additions represent properties that are installed, constructed or rented
d. To determine whether the balances in accumulated depreciation accounts are reasonable, considering expected
useful lives of property units and possible net salvage values
25. The emphasis in auditing manufacturing equipment for a continuing audit is on the verification of
a. The balance carried forward in the account form previous period (beginning balance)
b. Current period acquisitions and retirements
c. The balance in the account after the current year’s activities are considered (ending balance)
d. All of these.
26. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior periods because
a. It will not affect the current valuation
b. They were verified in previous audits
c. The related depreciation calculations for the current period are more important
d. The emphasis of the audit is on the income statement items not he balance sheet items.
27. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects the
balance sheet
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
28. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects the
income statement
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
29. The test of details of balances procedure which “physically examine assets” is done to satisfy the audit objective of:
a. Classification
b. Completeness
c. Cutoff
d. Validity
30. The test of details of balances procedures to “examine vendors’ invoices of closely related accounts such as repairs and
maintenance to uncover items that should be manufacturing equipment” is done to satisfy the audit objective of:
a. Classification
b. Valuation
c. Cutoff
d. Validity

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
31. The most common audit test to verify additions to manufacturing equipment is examination of vendor’s invoices and
receiving reports. The appropriate procedure is:
a. Verifying
b. Tracing
c. Dual referencing
d. Vouching
32. It should ordinarily be unnecessary to examine supporting documentation for each addition to manufacturing equipment,
but it is normal to verify:
a. All large transactions
b. All unusual transactions
c. A representative sample of typical additions
d. All of these
33. The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs expense,
lease expense or supplies is a common client error. The auditor should evaluate the likelihood of these type of
error/misclassifications in conjunction with:
a. The test of details of balances
b. The test of details of transactions
c. Test of controls
d. Obtaining an understanding of the internal control structure during the audit planning phase
34. If client fails to record disposals of manufacturing equipment both the original cost of the asset account the net book
value will be incorrect.
a. Both will be overstated indefinitely
b. The original cost will be overstated indefinitely and the net book value will be overstated until the asset is fully
depreciated
c. The original cost will be overstated indefinitely and the net book value will be understated indefinitely
d. The original cost will be overstated indefinitely and the net book value will be understated until the asset is fully
depreciated
35. The audit of intangible assets typically involves:
a. Vouching the cost of asset and testing allocation methods.
b. Vouching the cost of assets only.
c. Testing the allocation methods only.
d. Neither is involved in audit of intangibles.
36. A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances.
Tests to identify possible legal encumbrances would satisfy the audit objective for
a. validity.
b. classification.
c. disclosure.
d. mechanical accuracy.
37. Depreciation expense is one of the few expense accounts that is not verified as apart of
a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. analytical procedures.
38. The most important objective for depreciation expense is proper
a. valuation.
b. classification.
c. cutoff.
d. disclosure.
39. Occasionally, changing circumstances may necessitate a revaluation of the useful life of an asset. When this occurs, it
involves a change in
a. accounting estimate rather than a change in accounting principle.
b. accounting principle rather than a change in accounting estimate.
c. both accounting principle and accounting estimate.
d. neither accounting principle nor accounting estimate.
40. In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of
depreciation expense, whereas the debits are normally tested as a part of the audit of
a. asset acquisitions.
b. capital acquisitions.
c. disposal of assets.
d. accumulated depreciation.

ST: Financing Cycle (Audit of Non-trade Liabilities and Stockholders’ Equity)

1. Which of the following is least likely to be an audit objective for debt?
a. Determine the existence of recorded debt.
b. Establish the completeness of recorded debt.
c. Determine that the client has rights to receive proceeds relating to the redemption of debt.
d. Determine that the valuation of debt is in accordance with financial reporting standards.
2. The auditors would be most likely to find unrecorded long-term liabilities by analyzing:
a. Interest payments.
b. Discounts on long-term liabilities.
c. Premiums on long-term liabilities.
d. Recorded long-term liability accounts.
3. A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of
such debt provisions may affect the total recorded.
a. Number of debt restrictions.
b. Current liabilities.
c. Long-term assets.
d. Share capital.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
4. An auditor’s program to examine long-term debt most likely would include steps that require
a. comparing the carrying amount of the debt to its year-end market value.
b. correlating interest expense recorded for the period with outstanding debt.
c. verifying the existence of the holders of the debt by direct confirmation.
d. inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
5. The auditors can best verify a client’s bond sinking fund transactions and year-end balance by:
a. Recomputation of interest expense, interest payable, and amortization of bond discount or premium.
b. Confirmation with individual holders of retired bonds.
c. Confirmation with the bond trustee.
d. Examination and count of the bonds retired during the year.
6. The auditor’s program for the examination of long-term debt should include steps that require the:
a. Verification of the existence of the bondholders.
b. Examination of copies of debt agreements.
c. Inspection of the accounts payable subsidiary ledger.
d. Investigation of credits to the bond interest income account.
7. In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to
require the least amount of audit time?
a. Owner’s equity.
b. Revenue.
c. Assets.
d. Liabilities.
8. Which of the following is most likely to be an audit objective in the audit of owner’s equity?
a. Establish that recorded owner’s equity incudes all long-term debt and equity balances.
b. Determine that ordinary share is valued at current market value.
c. Determine that the presentation and disclosure of owner’s equity is appropriate.
d. Determine that the existence of recorded owner’s equity is in conformity with equity accounting
rule valuations.
9. The audit procedure of confirmation is least appropriate with respect to:
a. The trustee of an issue of bonds payable.
b. Holders of ordinary shares.
c. Holders of notes receivable.
d. Holders of notes payable.
10. An auditor is most likely to trace treasury stock purchase transactions to the:
a. Numbered stock certificates on hand.
b. Articles of incorporation.
c. Year’s interest expense.
d. Minutes of the audit committee
11. All corporate share capital transactions should ultimately be traced to the:
a. Minutes of the board of directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.
12. An audit program for the examination of the retained earnings should include a step that requires verification of the
a. market value used to charge retained earnings to account for a two-for-one stock split.
b. approval of the adjustment to the beginning balance as a result of a write down of an account
receivable.
c. authorization for both cash and stock dividends.
d. gain or loss resulting from disposition of treasury shares.

PART 4: SUGGESTED SOLUTIONS AND ANSWERS

PROBLEM 1-A: TINDIG CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 1-B: MAINE CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 2: AUDIT OF CASH: JADE CORPORATION
Bank Reconciliation
BANK BOOK
Unadjusted balance 792,285 726,600 Unadjusted balance
Deposit in transit, excluding NSF 10,500 20,000 Unrecorded credit
Outstanding check, excluding certified check (75,975) (5,000) Unrecorded debit
Bank error 2,250 31,500 Book errors (note a.)
Correct cash balance (1. Ans. A) 729,060 773,100
(44,040) Shortage 3. Ans. C
729,060 Adjusted balance
Unadjusted balance per books 726,600
Correct cash balance 729,060
Net adjustment to cash (12/31) (2,460) 2. Ans. B

Accountability as of January 15 180,500

Unrecorded credit as of 12/31 (20,000)
Book errors in January (audit note b & c) 19,500
Adjusted accountability 180,000
January deposits from January collections
January bank credits 143,895
Correction of Dec. bank charge error (2,250)
Dec. deposit in transit (10,500) 131,145
Cash on hand 10,125
Expense vouchers 1,125
Cash shortage from Jan. 2 - Jan. 15 37,605
Add: Cash shortage as of Dec. 31 44,040
Total cash short as of Jan. 15, 2019 81,645 4. Ans. A

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

PROBLEM 3: ROSAS INC (DISCUSSED DURING PREWEEK LECTURES)

PROBLEM 4: AUDIT OF CASH; CASH/ACCRUAL: BURBERRY CORPORATION
1. Ans. A.
Cash collection from customers 45,780,000
Add: Sales discounts 1,580,000
Sales returns, excluding refunds 1,590,000
Write-off of receivables 1,120,000
Decrease in advances from customers 1,900,000
Increase in accounts receivables 4,200,000
Total 56,170,000
Less: Recoveries of previous write-off (420,000)
Accrual basis gross sales 55,750,000
2. Ans. D.
Cash payments to suppliers of inventory 24,490,000
Add: Purchase discounts 1,290,000
Purchase returns, excluding refunds 1,320,000
Increase in accounts payable 3,780,000
Total 30,880,000
Less: Increase in advances to suppliers (1,512,000)
Accrual basis gross purchases 29,368,000
3. Ans. C.
Accrual basis gross purchases 29,368,000
Less: Purchase discount (1,290,000)
Purchase returns (total) (1,960,000)
Net Purchases 26,118,000
Less: Increase in Inventories (2,690,000)
Cost of Sales 23,428,000
4. Ans. A.
Increase in allowance for bad debt 840,000
Add: Write-off of AR 1,120,000
Less: Recovery of previous write-off (420,000)
Bad debt expense 1,540,000
5. Ans. A.
Increase in accumulated depreciation 1,000,000
Decrease in accum depr from equpment sold* 1,400,000
Depreciation expense for the year 2,400,000
Increase in Equipment account 2,000,000
Purchase of Equipment during the year 5,000,000
Cost of Equipment sold during the year 3,000,000
Carrying value of equipment sold 1,600,000
Accum Depr. of equipment sold during the year 1,400,000

PROBLEM 5: AUDIT OF CASH; CASH/ACCRUAL: FORD CORP.

1. Ans. C.
4. Ans. B.
Accounts receivable, beginning balance 30,000
Income tax expense, accrual basis 20,400
Add: Sales, accrual basis 538,800
Add: Income tax payable, beg. bal. 27,100
Less: Accounts receivable, ending bal. (33,000)
Deferred tax liability, beg. bal. 4,600
Collections from customers 535,800
Less: Income tax payable, end. bal. (21,000)
2. Ans. A. Deferred tax liability, end bal. (5,300)
Inventory, ending balance 31,000
Income tax expense paid 25,800
Add: Cost of goods sold for the year 250,000
Less: Inventory, beginning balance (47,000) 5. Ans. D.
Purchases, accrual basis 234,000 Selling expenses, accrual basis 141,500
Add: Trade accounts payable, beg. bal. 17,500 Depr. expense - selling (1,500 * 1/3) (500)
Less: Trade accounts payable, end bal. (25,000) Selling expenses paid 141,000
Cash payments made to suppliers 226,500
3. Ans. C.
Interest expense, accrual basis 4,300
Amortization of discount on bonds (500)
Interest expense paid 3,800

PROBLEM 6: AUDIT OF CASH; CASH/ACCRUAL: JOURNEY CORPORATION (ANS. D)

Cash sales 3,000,000
Collections from accounts receivable 30,000,000
Collections from trade notes receivable 2,400,000 35,400,000
Add: Sales returns and allowances (no refund) 800,000
Increase in Accounts receivable 1,400,000
Total 37,600,000
Less: Decrease in Notes receivable (600,000)
Gross Sales P37,000,000
Less: Sales returns (total) (1,200,000)
Net sales, per audit P35,800,000
PROBLEM 7: AUDIT OF CASH; CASH/ACCRUAL: CLARKE CORPORATION (ANS. C)
Cash collected from customers 9,890,000
Add: AR, ending 835,000
Deduct: AR, beginning (536,000)
Advances from customers, ending (125,000)
Sales Accrual basis 10,064,000

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
PROBLEM 8: AUDIT OF RECEIVABLES: GENEROSITY INC.
Aug. and
Dec. Nov. Oct. Sept. prior
Invoice 0-30 31-60 61-90 91-120
Customer Amount
date days days days days >120 days
Grace Inc. 9/12/18 139,200 139,200
Truth Corp. 12/12/18 153,600 153,600
12/2/18 99,200 99,200
Gusto Co. 11/17/18 185,120 185,120
10/8/18 176,000 176,000
National Co. 12/8/18 160,000 160,000
10/25/18 144,800 144,800
8/20/18 40,000 40,000
Nano Inc. 9/27/18 96,000 96,000
Bruce Inc. 8/20/18 71,360 71,360
Privacy Corp. 12/6/18 112,000 112,000
11/29/18 169,440 169,440
Total 1,546,720 524,800 354,560 320,800 235,200 111,360

Reconciliation between GL and SL with Aging of AR analysis

0-30 31-60 61-90 91-120 >120
Per GL Per SL days days days days days
Unadjusted balances 1,566,720 1,546,720 524,800 354,560 320,800 235,200 111,360
(a) Write-off of AR-Bruce (71,360) (71,360) (71,360)
(b) Pricing error (30,000) (30,000) (30,000)
(c) Posting error - - (99,200) 99,200
Adjusted balances 1,465,360 1,445,360 425,600 453,760 290,800 235,200 40,000
Unreconciled difference (20,000)
Adjusted balance 1,445,360
Required allowance for BD in
% 2% 5% 10% 20% 50%
Required allowance for
Bad Debt 127,320 8,512 22,688 29,080 47,040 20,000
1.Ans. D.
2. Ans. B.
Allowance for BD, ending 127,320
Less: Allowance for BD, unadjusted (46,720)
Add: Write off of AR-Bruce 71,360
Bad Debt Expense 151,960
3. Ans. A.
Gross Accounts Receivable 1,445,360
Allowance for Bad Debts (127,320)
Amortized cost/Carrying value 1,318,040
4. Ans. B.
AJE to record unreconciled difference:
Sales 20,000
Accounts receivable 20,000
PROBLEM 9: COLORS INC (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 10: LUCAS CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC CO.

Amortization table:
Correct Interest Nominal Interest Amortization Balance
(CV*12%) (Princ*10%)
1/2015 (Initial amount recognized) P9,279,045
12/2015 1,113,485 1,000,000 113,485 9,392,530
12/2016 1,127,104 1,000,000 127,104 9,519,634
12/2017 1,142,356 1,000,000 142,356 9,661,990
12/2018 1,159,439 1,000,000 159,439 9,821,429 1. Ans. C.

Loans and receivable, including interest (9,821,429+1,000,000) 10,821,429

PV of future cash flows using the original effective rate %: 12%
(1,000,000*0.8929) = P892,857
(2,000,000*0.7972) = 1,594,388
(2,500,000*0.7118) = 1,779,451
(2,500,000*0.6355) = 1,588,795 (5,855,491) 3. Ans. C.
Impairment loss P4,965,938 2. Ans. C.

Date Amortization/ Principal

(CV*12%) Collection Balance
12/2018 P5,855,491
12/2019 702,659 (1,000,000) 5,558,150 4. Ans. B.
12/2020 666,978 (2,000,000) 4,225,128 5. Ans. D.
12/2021 507,015 (2,500,000) 2,232,143
12/2022 267,857 (2,500,000) -

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

PROBLEM 12: AUDIT OF TRADE RECEIVABLES AND INVENTORIES:

AR Inventories Sales COS
376,500 525,000 1,520,000 942,000
December recorded sales:
Shipment to consignee
(Half has been sold) (10,000) 7,000 (10,000) (7,000)
Commission of consignee (2,000)
In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240)
In-tansit FOB, Dest. (10,000) (10,000)
In-transit FOB, SP (6,100) 6,100
Sipment to consignee (14,000) (14,000)
January recorded sales:
In-transit FOB, SP 21,000 21,000
In-transit FOB, SP 10,500 (8,800) 10,500 8,800
Adjusted balance 363,320 524,340 1,508,820 942,660
1. Ans A. 2. Ans. B. 3. Ans. C. 4. Ans. D.
PROBLEM 13: BALER CORP. (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 14: PORTENT CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 15: GLORIA CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 16: TOMAS CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 17: AUDIT OF INVESTMENTS: BENSHOPPE INC.
1. Ans. B.
2. Ans. A.
FMV 12/18 CV/Cost
Aye Corp. Shares 700,000 540,000 (29.50-2-0.50)*20,000sh
Bee Inc. Shares 1,000,000 1,080,000 (27.50-.50)*40,000sh
See Co. 10%, 2M Bonds** 1,964,948 1,923,000 (1,973,000-50,000)
3,664,948 3,543,000
Unrealized holding gain - IS 121,948
Financial assets at FMVPL 3,664,948
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual effective rate)
Principal (2M*0.8072) 1,614,433 1
Interest (100,000*3.5052) 350,515
** 1,964,948
3. Ans. A.
Investment in Dee Shares (Associate)
Intial cost (6/30/18) 2,400,000
Share from dividends (250,000)
Share from net income 280,000 (2,240,000*6/12)*25%
Investment in Assoc Balance 2,430,000
4. Ans. D.
Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Nominal
Int. Int. Amortization Balance
October 1, 2018: 1,923,000 *excluding accrued interest
December 31, 2018: 57,690 50,000 7,690 1,930,690
PROBLEM 18: AUDIT OF INVESTMENTS: IFFY CORP.
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
Carrying Value, 12/31/18 5,654,000 1. A.
If SME using the FMV Method:
Acquisition price 5,000,000
Fair market value, 12/31/18 (30,000*210) 6,300,000
Unrealized holding gain - IS 1,300,000
Dividend Income (1.5M*30%) 450,000
Total Investment Income 1,750,000 2. A.
CESSATION:
Proceeds from sale (18,000*210) 3,780,000
Fair Value of remaining share to be reclassified to FA
at FMV (12,000*210) 2,520,000 4. B.
Total 6,300,000
Less: Carrying Value of Investment in Assoc. before
cessation 5,654,000
Gain before recycling of OCLoss 646,000
Recycling of OCloss (240,000)
Total cessation loss - IS 406,000 3. C.
DILUTION: Before After
# shares held 30,000 30,000
# shares outstanding 100,000 125,000
% of interest 30% 24%
Share from increase in Assoc.'s net assets
(25,000*210)*24% 1,260,000
Carrying value of Investment as if given up
(5,654,000*6/30) (1,130,800)
Gain on dilution before recycling of OCLoss 129,200
Recycling of Ocloss (240,000*6/30) (48,000)
Total cessation loss - IS 81,200 5. A.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
PROBLEM 19: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: RURAL CORPORATION
1. Ans. D.
Initial cost of Warehouse:
Materials (P150,000 - 10,000) 140,000
Direct Labor (P800,000 - 25,000) 775,000
Supervision 65,000
Design and planning costs 20,000 1,000,000
Depreciation for the year: (1,000,000 / 20 years) (50,000)
Carrying value as of December 31, 2018 950,000
2. Ans. D.
Plant, Carrying Value as of December 31, 2017 2,070,000
CV as of 12/31/17 of the plant sold in 2018 (270,000)
CV as of 12/31/17 of the remaining plant 1,800,000
Less: Depreciation for the year (P1.8M*25%) (450,000)
Plant, Carrying Value as of December 31, 2018 1,350,000
3. Ans. A
Depreciation
Remaing Plant 450,000
New Warehouse 50,000
Building at revalued amount (P4.8M/20yrs) 240,000
Total depreciation for the year 740,000
4. Ans. A.
Fair market value of the building 1/1/18 4,800,000
Carrying value of the building 1/1/18 3,200,000
Revaluation surplus on building, 1/1/18 1,600,000
Piecemeal transfer of RS as of 12/31 (1.6M/20yrs) (80,000)
Revaluation surplus on building as of 12/31/18 1,520,000
Revaluation surplus on land (1.2M - 1M) 200,000
Total Revaluation Surplus as of December 31, 2018 1,720,000
PROBLEM 20: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: KINDNESS CORPORATION
1. Ans. B.
Cash price of new automotive equipment 1,600,000
Less: Cash payment made (850,000)
Trade in allowance/Fair value of old eqpt. 750,000
Carrying value of old equipment
P2,100,000 - (2,100,000*26/36) 583,333
Gain on trade-in 166,667
2. Ans. C.
Depreciation - Building
Beginning Balance, CV 5,314,410
Multiply by: Double declining rate: 10% 531,441
Building Improvement
Cost 1,250,000
Multiply by: Double declining rate based
on Bldg's remaining life (16yrs*) 12.50% 156,250
Total depreciation expense 687,691
*Note: Through trial and error, one can figure out based on the Accum Depr.-Bldg balance that the
building has already been depreciated for 4 year as of December 31, 2015. Thus the building's
remaining life as of January 1, 2016 is 16 years.
3. Ans. D.
Depreciation - Machinery and equipment
Beginning Balance (5.4M - 1.8M) 3,600,000
Divide by: useful life 10 360,000
Machinery destroyed by fire 1,800,000
Divide by: useful life 10
Multiply by: 6mos/12mos 6/12 90,000
Replacement machinery 3,200,000 *
Divide by: useful life 10
Multiply by: 4mos/12mos 4/12 106,667
Total depreciation expense 556,667

* PV of installment payments:
Installment price 3,837,054
Divide by: 5 years 5
Installment payment, in advance 767,411
Multiply by: PV of 1 at 10% for 5 periods in advance 4.169865 0.68301
Cash price equivalent/Initial cost of the new machine 3,200,000
4. Ans. B.
Depreciation - Automotive equipment
Beginning Balance 511,111
Less: Depreciation on old equipment traded out
P2,100,000*4/36 (233,333)
Add: Depreciation on new equipment traded in
P1,600,000*8/36 355,556
Total depreciation expense 633,333

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

PROBLEM 21: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: MONICA CORP.

Value in use: P40,000*5.33493 P213,397
50,000*0.46651 23,325 P236,722 1. Ans. B.
(higher than fair value less cost to sell, P220,000)

Carrying value (12/31/15) (400,000*8/10)+50,000 P370,000

Recoverable value (236,722)
Impairment loss P133,278 2.
Ans. A.

Carrying value (12/31/17) ((236,722-50,000)*6/8)+50,000 P190,042 3. Ans. C.

Carrying value had there been no impairment: (400,000*6/10)+50,000 P290,000

Carrying value (with impairment): 190,042
Gain on impairment recovery P99,958 4.
Ans. B.

FMV = (555,000-50,000)*60% = 303,000 + 50,000 = P353,000

Depreciation 2019: (P290,000-50,000)/8 (revised remaining life) P30,000 5. Ans. D.

Depreciation 2019: (P353,000-50,000)/8 (revised remaining life) P37,875 6. Ans. C.

Revaluation surplus 12/31/2019 (353,000-290,000) P63,000

Multiply by: 6/8 P47,250 7.
Ans. A.
PROBLEM 22: AUDIT OF INTANGIBLES: CRUZ COMPANY
1. Ans. B.
Amortization:
Patent (P200,000 / 10 years) 20,000
Computer software (P100,000 * 60/120) 50,000
Total Amortization 70,000
2. Ans. C.
Impairment loss:
Copyright:
Carrying value 400,000
Recoverable value/Value in use (P8,000 / 5%) 160,000 240,000

Tradename
Carrying value 350,000
Recoverable value/Value in use (P15,000 / 5%) 300,000 50,000

Goodwill
Carrying value of the CGU including Goodwill 3,000,000
Recoverable value/Value in use (P200,000 * 14.09394) 2,818,789 181,211
(present value at 5% for 25 periods with annuity)
Total Impairment Loss 471,211
3. Ans. D.
Goodwill before impairment loss 900,000
Impairment of the CGU entirely attributed to Goodwill (181,211)
Carrying value of Goodwill after impairment loss 718,789
4. Ans. B.
Patent, 12/31/18 (P200,000 - P20,000) 180,000
Computer software (P100,000 - P50,000) 50,000
Copyright 160,000
Tradename 300,000
Carrying Value of Intangibles as of 12/31/18 690,000

PROBLEM 23: AUDIT OF INTANGIBLES: DOHA CORPORATION

1. Ans. A.
CV, Patent, 12/31/15: P444,000*9yrs/10yrs 399,600
2. Ans. A.
CV, Franchise, 12/31/15: P252,000*6.5yrs/8yrs 204,750

3. Ans. C.
Amortization of franchise, 2017 (P252,000/8yrs)*6/12 15,750
Rent expense, 2017 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2017 96,000
Retroactive adjustment to RE,beg. 2018 132,750
4. Ans. C.
Amortization of franchise, 2018 (P252,000/8yrs) 31,500
Rent expense, 2018 (P168,000/2yrs) 84,000
Amortization of patent, 2018 (P444,000/10yrs) 44,400
Cost to develop a secret formula 450,000
Legal fees - successful defense 75,900
Research and development expense, 2018 960,000
Total expense in 2018 1,645,800

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
PROBLEM 24: AUDIT OF INTANGIBLES: SABRINA MANUFACTURING CORPORATION
1. Ans. B.
Patent per books 85,000
Cost to improve the machinery charged to the patent (17,000)
Correct cost of the Patent 68,000
Amortization for the year: (68,000 / 17 years) (4,000)
Correct Carrying Value of the Patent as of 12/31/18 64,000
2. Ans. A.
Correct Initial Cost of Lic. Agreement A 50,000
Impairment loss in 2017 (P50,000*60%) (30,000)
Carrying Value of Lic. Agreement A as of 12/31/18 20,000
*Note that the flood happening on January 2019 is a Type 2 (Non-adjusting subsequent event)
3. Ans. C.
Correct Iniital Cost of Lic. Agreement B 50,000
Amortization for 2018 (P50,000/10yrs) (5,000)
Carrying Value of Lic. Agreement B as of 12/31/18 45,000

4. Ans. A.
Correct cost of Leasehold Improvement 1/1/17 15,000 *
Accumulated Depreciation: (15,000/10yrs)*2yrs (3,000) **
Carrying Value as of December 31, 2018 12,000
*The initial cost excluded the movable equipment which shall be recognized separately and the
real property taxes paid by Sabrina which shall be recognized as an advances to the lessor.
**Depreciation is over the lease term since it is shorter that the life

PROBLEM 25: AUDIT OF NON-TRADE PAYABLES: YZ CORPORATION

1. Ans. D.
Present value of periodic payments: (550,000*4.1699) 2,293,426
Present value of BPO: (250,000*0.6209) 155,230
Total 2,448,656

2. Ans. D.
Capitalized cost of the asset: 12/31/17 2,488,656
Accumulated depreciation (2018) (2,488,656/12) (over useful life) (408,109)
Carrying value (12/31/2018) 2,244,601

Long Term Short Term Interest

Expense
a. Note Payable P3,000,000 P1,500,000
Interest: (6M*10%*8/12) P400,000
(4.5M*10%*4/12) 150,000
b. Bonds Payable** 3,193,897 322,245
c. Lease Liability*** 1,142,374 396,148 189,866
Total 7,336,271 1,896,148 1,062,111
3. Ans. C 4. Ans. B 5. Ans. C.
**(Amortization Table – 12% Bonds Payable)
Date Nom. Eff. Int Amort. Balance
Int.
1/1/18 3,231,652
6/30 180,000 161,583 (18,417) 3,213,235
12/31 180,000 160,662 (19,338) 3,193,897
Total 322,245

***(Amortization Table -10% Lease Liability

Date Periodic Effective Interest Principal Balance
payments
12/31/17 2,488,656
12/31/17 550,000 0 550,000 1,898,656
12/31/18 550,000 189,866 360,134 1,538,522
12/31/19 550,000 153,852 396,148 1,142,374

PROBLEM 26: AUDIT OF EQUITY ACCOUNTS: NEVADA SQUARE COMPANY

1. Ans. A.; 2. Ans. A.; 3. Ans. C.
Retained earnings, Jan. 1, 2015 P30,000,000
Cash dividends (2,800,000)
Stock dividends (100,000*P68) (a) (6,800,000)
Property dividends (800,000/2)*P25 (b) (10,000,000)
Net income for the year 60,000,000
Retained earnings, Dec. 31, 2015 P16,400,000
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.
4. Ans. D.
Ordinary shares, January 1, 2014 P14,000,000
Stock dividends issuance (100,000*20) 2,000,000
Ordinary shares, December 31, 2014 P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.
PROBLEM 27: AUDIT OF EQUITY ACCOUNTS: SPURS INC.
1. Ans. C.
Debit to RE, per books 1,500,000
Debit to RE, per audit (15%*100,000sh)*P110 1,650,000
Adjustment to RE (additional debit) (150,000)

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination
2. Ans. C.
Unadjusted Net Income, per books 9,000,000
Inventory fire loss (150,000)
Impairment loss on PPE (750,000)
Loss on sale of Equipment (200,000)
Gain on retirement of bonds 300,000
Unrealized holding gain on FA 800,000
Increase in beg. Inventory under FIFO (100,000)
Increase in end. Inventory under FIFO 300,000
Adjusted Net Income, per audit 9,200,000
3. Ans. D.
Inventory beg, under FIFO 2,600,000
Inventory beg, under weighted average 2,500,000
Adjustment to RE, beg (credit) 100,000
4. Ans. D.
Retained earnings, beginning 7,800,000
Correction of prior period error (1,500,000)
Change in policy (Ave to FIFO) 100,000
Retained earnings, beg. as restated 6,400,000
15% stock dividend declaration (1,650,000)
Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)
Reserve for plant expansion (3,000,000)
Adjusted Net Income 9,200,000
Retained earnings, ending balance 10,750,000

PROBLEM 28: AUDIT OF EQUITY ACCOUNTS: EKKANS CORPORATION

Ordinary Preference Sh. Accum. Treasury
Sh. Sh. Premium Profits Sh.
Captial blances as of December 31, 2017 100,000 2,600,000 222,000
1/2 Issue of Preference shares 1,000,000
3/1 Ordinary shares issue for services 3,000 93,000
7/1 Ordinary shares issue for cash 40,000 1,640,000

10/1 Reacquisition of Treasury (544,000)

12/1 Reissue of Treasury shares for cash (15,000) 102,000
12/30 Cash dividends declaration
Ordinary shares: (P0.20*130,000) (26,000)
Preference shares:
(6%*P100*10,000sh) (60,000)
12/31 Net income for 2018 380,000

Capital balances as of December 31, 2018 143,000 1,000,000 4,333,000 501,000 (442,000)

1. Ans. A.
2. Ans. A.
3. Ans. A.
Paid-in Capital
Ordinary shares 143,000
Preference shares 1,000,000 1,143,000
Additional paid-in capital/Share premium 4,333,000
Contributed Capital 5,476,000
Accumulated profits - appropriated for treasury 442,000
Accumulated profits - unappropriated 59,000 501,000
Treasury shares (442,000)
Total Stockholders' Equity 5,535,000

4. Ans. C.
Net income 380,000
Less: PS Dividends (60,000)
Net income to ordinary shares 320,000
Divide by: Weighted average ordinary shares outstanding* 118,750
Basic Earnings Per Share 2.69
1/1 Beginning balance (100,000*12/12) 100,000
3/1 OS issue for services (3,000 * 10/12) 2,500
7/1 OS Share issue for cash (40,000 * 6/12) 20,000
10/1 Reacquisition of TS (16,000 * 3/12) (4,000)
12/1 Reissue of Treasury shares (3,000 * 1/12) 250
Weighted average ordinary shares oustanding 118,750 *
5. Ans. C.
Net income 380,000
Divide by: Weighted average ordinary shares outstanding** 168,750
Diluted Earnings per Share 2.25
Weighted average ordinary shares oustanding 118,750
Additional OS from assumed PS conversion on 1/2 50,000
Weighted average ordinary shares oustanding 168,750 **

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP Preweek
Batch 44 – October 2022 CPA Licensure Examination

PROBLEM 29: AUDIT OF EQUITY ACCOUNTS: DIESEL CORPORATION

1. Ans. C.
Cash 114,000 4. Ans. A.
Trading securities 80,000 Total Current Assets 534,000
Receivables, net 160,000 Total Noncurrent Assets 2,545,000
Inventories 180,000 Total Assets 3,079,000
Total Current Assets 534,000
5. Ans. A.
2. Ans. C. Unearned revenues 5,000
3. Ans. C. Bank Overdraft 14,000
Property, Plant and Equipment Accounts payable 90,000
Land 500,000 Notes payable - short term 80,000
Building, net 680,000 Taxes payable 40,000
Equipment, net 270,000 1,450,000 Total current liabilities 229,000
Investments
Available for sale securities 270,000
Land held for future use* 270,000
Cash Surrender Value 40,000
Bond Sinking Fund 250,000 830,000
Franchise 165,000
Goodwill 100,000
Total Non Current Assets 2,545,000

*note that the land held for future use was classified as LT investment instead of PPE. Had it been a land held as a future plant site, it
would have been appropriately included in PPE instead.

ANSWERS TO PART 3: RAP, TOC AND ST THEORIES

RISK ASSESSMENT PROCEDURES
1. B. 4. B. 7. C.
2. A. 5. B. 8. C.
3. A. 6. D.

TOC and ST: Order to Cash; Purchase to Pay (Audit of Cash)

1. D. 4. A. 7. D. 10. C.
2. D. 5. A. 8. B.
3. A. 6. B. 9. A.

TOC and ST: Order to Cash (Audit of Trade Receivables )

1. D. 6. B. 11. B. 16. B. 21. A. 26. D. 31. B. 36. D.
2. B. 7. D. 12. B. 17. C. 22. A. 27. A. 32. D. 37. A.
3. A. 8. D. 13. B. 18. B. 23. D. 28. A. 33. B. 38. A.
4. D. 9. B. 14. C. 19. B. 24. D. 29. D. 34. A. 39. B.
5. D. 10. B. 15. D. 20. D. 25. D. 30. C. 35. B. 40. B.

TOC and ST: Purchase to Pay; Hire to Retire; Plan to Inventory (Audit of Inventories, Trade Payables and Accrued
Expenses)
1. C. 6. A. 11. D. 16. C. 21. B. 26. B. 31. C. 36. A. 41. C. 46. B.
2. C. 7. A. 12. B. 17. C. 22. A. 27. C. 32. D. 37. A. 42. D.
3. A. 8. B. 13. B. 18. A. 23. D. 28. B. 33. D. 38. B. 43. B.
4. A. 9. A. 14. D. 19. D. 24. C. 29. C. 34. D. 39. A. 44. B.
5. A. 10. B. 15. D. 20. C. 25. A. 30. D. 35. C. 40. D. 45. D.

ST: Acquire to Retire (Audit of PPE, Intangibles, Investments and Other Noncurrent Assets)
1. D. 6. A. 11. B. 16. A. 21. C. 26. B. 31. D. 36. C.
2. A. 7. B. 12. B. 17. C. 22. B. 27. C. 32. D. 37. B.
3. C. 8. A. 13. D. 18. A. 23. C. 28. B. 33. D. 38. A.
4. B. 9. C. 14. D. 19. C. 24. C. 29. D. 34. B. 39. A.
5. C. 10. C. 15. C. 20. B. 25. B. 30. A. 35. A. 40. C.

ST: Financing Cycle (Audit of Non-trade Liabilities and SHE)

1. C. 4. B. 7. A. 10. A.
2. A. 5. C. 8. C. 11. A.
3. B. 6. B. 9. B. 12. C.

- END -

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