COMPRE 3 – Auditing Problems

PROBLEM NO. 1

You requested a depreciation schedule for Semitrucks of Matador Manufacturing Company showing the
additions, retirements, depreciation and other data affecting the income of the Company in the 4-year period
2003 to 2006, inclusive. The Semitrucks account consists of the following as of January 1, 2003:

Truck No. 1 purchased Jan. 1, 2000, cost P 180,000

Truck No. 2 purchased July 1, 2000, cost 220,000
Truck No. 3 purchased Jan. 1, 2002, cost 300,000
Truck No. 4 purchased July 1, 2002, cost 240,000
P 940,000

The Semitrucks – Accumulated Depreciation account previously adjusted to January 1, 2003, and duly
entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective
date of purchase, based on five-year life, no salvage value). No charges have been made against the
account before January 1, 2003.

Transactions between January 1, 2003, and December 31, 2006, and their record in the ledger were as
follows:

July 1, 2003 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was
P340,000. Matador Mfg. Co. paid the automobile dealer P150,000 cash on the transaction.
The entry was debit to Semitrucks and a credit to cash, P150,000.

Jan. 1, 2004 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Semitrucks,
P35,000.

July 1, 2005 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to
Semitrucks account. (Assume truck No. 2 was not retired.)

July 1, 2005 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000
cash. Matador Mfg. Co. received P25,000 from the insurance company. The entry made
by the bookkeeper was a debit to cash, P32,000, and credits to Miscellaneous Income,
P7,000 and Semitrucks P 25,000.

Entries for depreciation had been made for the close of each year as follows: 2003, P203,000; 2004,
P211,000; 2005, P244,500; 2006, P278,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Disregard tax implications)
1. The 2006 depreciation expense is
a. P138,000 b. P184,000 c. P104,000 d. P140,000

2. The carrying amount of Semitrucks as of December 31, 2006 is

a. P885,400 b. P284,000 c. P504,000 d. P354,000

3. The 2003 net income is overstated by

a. P9,000 b. P20,000 c. P31,000 d. P0

4. The 2004 net income is understated by

a. P16,000 b. P50,000 c. P51,000 d. P0

5. The 2005 net income is understated by

a. P23,500 b. P94,500 c. P64,500 d. P0
PROBLEM NO. 2 SHAREHOLDER’S EQUITY (OCAMPO, Page 545)

PROBLEM NO. 3 CASH (Wa koy source jd)

PROBLEM NO. 4

You have been engaged to prepare audited financial statement figures for BOURNE, Inc. The records
are in agreement with the following balance sheet:
BOURNE, INC.
Balance Sheet
December 31, 2007
Assets Liabilities and Capital
Cash P10,000 Accounts Payable P10,000
Accounts 12,000 Notes Payable 3,000
receivable
Notes receivable 13,000 Common Stock 20,000
Inventory 25,000 Additional paid-in 40,000
capital
Equipment- net 40,000 Retained Earnings 27,000
P100,000 P100,000

A review of the records of the corporation indicates that the errors and omissions listed in the table
below had not been corrected during the applicable years:
Inventory Inventory Depreciation Prepaid Unearned Accrued
December Overstated Understated Expense Expense Income Expense
31
2004 --- P6,000 P250 P900 --- P200
2005 P7,000 --- 500 700 P400 75
2006 8,000 --- 150 500 --- 100
2007 --- 9,000 350 600 300 50

The net income according to the records is: 2005, P7,500; 2006, P6,500; and 2007, P5,500. No
dividends were declared during these years, and no adjustments were made to retained earnings.

Ignoring income tax effects, answer the following questions:

1. Adjusted net income/(net loss) for 2005:

a. P (6,475) b. P 225 c. P (6,225) d. P 775

2. Adjusted net income/(net loss) for 2006:

a. P 6,025 b. P (1,475) c. P 5,525 d. P (8,475)

3. Adjusted net income/(net loss) for 2007:

a. P 22,000 b. P 14,000 c. P 6,000 d. P 22,150

4. What is the effect of these errors on the net working capital at the end of 2007?
a. P 8,000 understated c. P 16,850 understated
b. P 8,900 understated d. P 9,250 understated

5. What is the adjusted balance of the stockholders’ equity at December 31, 2007?
a. P 95,000 b. P 95,900 c. P 103,850 d. P 96,250
PROBLEM NO. 5

The partnership of King, Queen and Prince engaged you to audit its accounting records. Some accounts
are on the accrual basis and others are on the cash basis. The partnership’s books were closed at
December 31, 2007 by the bookkeeper who prepared the general ledger trial balance that appears below.

King, Queen and Prince

GENERAL LEDGER TRIAL BALANCE
December 31, 2007
Debit Credit
Cash P 100,000
Accounts receivable 400,000
Inventory 260,000
Land 90,000
Buildings 500,000
Accumulated depreciation- buildings P 20,000
Equipment 560,000
Accumulated depreciation- equipment 60,000
Goodwill 50,000
Accounts payable 550,000
Allowance for future inventory losses 30,000
King, capital 600,000
Queen, capital 400,000
Prince, capital . 300,000
Totals P1,960,000 P1,960,000

Your inquiries disclosed the following:

1. The partnership was organized on January 1, 2006 with the partners making equal amount of
contributions. The initial partnership agreement calls for an equal distribution of profit or loss
among the partners. The partnership agreement was amended effective January 1, 2007 to
provide for the following profit and loss ratio: King, 50%; Queen, 30%; and Prince, 20%. The
amended partnership agreement also stated that the accounting records were to be maintained
on the accrual basis and that any adjustments necessary for 2006 should be allocated
according to the 2006 distribution of profits.

2. The following amounts were not recorded:

December 31 2007 December 31
2006
Prepaid insurance P7,000 P 6,500
Advances from customers 2,000 11,000
Accrued interest expense 4,500
The advances from customers were recorded as sales in the year the cash was received.

3. In 2007 the Partnership recorded a provision of P30,000 for anticipated declines in inventory
prices. You convinced the partners that the provision was unnecessary and should be removed
from the books.

4. The partnership charged equipment purchased for P44,000 on January 3, 2007 to expense.
This equipment has an estimated life of ten years and an estimated salvage value of P4,000.
The partnership depreciates its capitalized equipment under the straight-line depreciation
method.

5. The partners agreed to establish an allowance for doubtful accounts at two percent of current
accounts receivable and five percent of past due accounts. At December 31, 2006 the
partnership had P540,000 of accounts receivable, of which only P40,000 was past due. At
 December 31, 2007 fifteen percent of accounts receivable was past due, of which P40,000
represented sales made in 2006, and was generally considered collectible. The partnership
had written off uncollectible accounts in the year the accounts became worthless as follows:
Accounts Written Off in
2007 2006
2007 accounts P 8,000
2006 accounts 10,000 2,500

6. Goodwill was recorded on the books in 2007 and credited to the partners’ capital accounts in
the profit and loss ratio in recognition of an increase in the value of the business resulting from
improved sales volume.

7. No other capital transactions took place in 2006 and 2007.

8. Ignore tax implications.

Based on the above information, answer the following:

6. The net income of the partnership in 2007, before adjustment is:
a. P1,000,000 b. P980,000 c. P950,000 d. P920,000

7. The capital balance of King on January 1, 2007 before adjustment is:

a. P100,000 b. P125,000 c. P300,000 d. P600,000

8. The capital balance of Queen on December 31, 2007 before adjustment is:
a. P410,860 b. P374,140 c. P385,000 d. P400,000

9. What is the effect on 2007 net income of the omission of prepaid insurance, advances from
customers, and accrued interest expenses in 2006 and 2007?
a. P9,000 b. P9,000 overstated c. P5,000 d.P14,000
understated understated understated

10. What is the carrying value of equipment on December 31, 2007?

a. P600,000 b. P540,000 c. P544,000 d. P604,000

11. What should be the balance of the allowance for uncollectible accounts at December 31, 2007?
a. P9,800 b. P12,000 c. P15,800 d. P14,500

12. How much is the uncollectible account expense that should have been recognized in 2006?
a. P24,500 b. P14,500 c. P12,000 d. P9,500

13. The adjusted net income in 2007 is:

a. P1,086,200 b. P1,027,200 c. P1,008,200 d. P1,036,200

14. What should be the capital balance of Prince at December 31, 2007?
a. P310,240 b. P300,240 c. P317,240 d. P307,240

15. What is the adjusted capital balance of Queen on January 1, 2007?

a. P107,000 b. P89,667 c. P93,000 d. P79,000

16. By how much would the 2006 net income be misstated, if no adjustments were made for the above
errors?
a. P31,000 b.P31,000 c. P21,000 d.P21,000
overstated understated overstated understated

17. The adjusted partners’ equity on December 31, 2007 is:

a. P1,315,200 b. P1,336,200 c. P1,306,200 d. P1,365,200
PROBLEM NO. 6 Constructive Accounting (Wa sd koy source)

PROBLEM NO. 7

Lady Choi Corporation manufactures television components and sells them with 6-month warranty under
which defective components will be replaced without charge. On December 31, 2005, Estimated Liability
for Product Warranty had a balance of P765,000. By June 30, 2006, this balance had been reduced to
P120,375 by debits for estimated net cost of components returned that had been sold in 2005.

The company started out in 2006 expecting 8% of the peso volume of sales to be returned. However, due
to the introduction of new models during the year, this estimated percentage of returns was increased to
10% on May 1. It is assumed that no components sold during a given month are returned in that month.
Each component is stamped with a date at time of sale so that the warranty may be properly administered.
The following table of percentages indicates the like pattern of sales return during the 6-month period of
the warranty, starting with the month following the sale of components.

Percentage of Total Returns

Expected
Month Following Sale

First 20%

Second 30

Third 20

Fourth through sixth – 10% each month 30

100%

Gross sales of components were as follows for the first 6 months of 2006:

Month Amount

January P5,400,000

February 4,950,000

March 6,150,000

April 4,275,000

May 3,000,000

June 2,700,000

The company’s warranty also covers the payment of freight cost on defective components returned and on
the new components sent out as replacements. This freight cost runs approximately 10% of the sales price
of the components returned. The manufacturing cost of the components is roughly 80% of the sales price,
and the salvage value of returned components averages 15% of their sales price. Returned components
on hand at December 31, 2005, were thus valued in inventory at 15% of their original sales price.
QUESTIONS:

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

1. The total estimated returns for the six-month period ended June 30, 2006 is
a. P2,232,000 b. P2,118,000 c. P2,647,500 d. P2,382,750

2. The warranty expense for the six-month period ended June 30, 2006 is
a. P1,985,625 b. P2,057,400 c. P1,674,000 d. P1,588,500

3. The Estimated Liability for Product Warranty as of June 30, 2006 should have a balance of
a. P956,400 b. P713,250 c. P795,938 d. P636,750

4. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of
a. P592,875 b. P675,563 c. P740,385 d. P516,375

5. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether

the estimates are
a. Not subject to bias.
b. Based on objective assumptions.
c. Consistent with industry guidelines.
d. Reasonable in the circumstances.

PROBLEM NO. 8

Your client, UK Company, showed the following details of its Investment in Stock account for the year
2005:

Investment in Stock
Date Particulars Debit Credit
Jan. 01 Audited balance, 40,000 shares P800,000
Feb. 14 Cash dividend P20,000
Mar. 31 Shares purchased 90,000
Apr. 01 Sale of rights 60,000
Jun. 30 Sale of shares 110,000
Dec. 31 Balance 700,000
P890,000 P890,000

The following transactions occurred:

1. A cash dividend of P0.50 per share was received on Feb. 14. The adjusting entry is:

Debit Credit
a. Investment in Stock 20,000 Dividend income 20,000
b. Retained earnings 20,000 Dividend income 20,000
c. Dividend income 20,000 Investment in Stock 20,000
d. None

2. On March 15, stock rights were received entitling shareholders to purchase one share for every five
held at P15 per share. Market values on this date were: shares, P20; rights, P5. The adjusting entry
to recognize the cost allocated to the right is:

Debit Credit
a. Stock rights 160,000 Investment in Stock 160,000
b. Stock rights 200,000 Investment in Stock 200,000
 c. Stock rights 38,000 Investment in Stock 38,000
d. None

3. On March 31, 6,000 shares were purchased with the partial exercise of the rights. The adjusting
entry, after the adjustment in No. 2 above has been effected, is:

Debit Credit
a. Investment in Stock 120,000 Stock rights 120,000
b. Investment in Stock 150,000 Stock rights 150,000
c. Investment in Stock 28,500 Stock rights 28,500
d. None

4. On April 1, the remaining rights were sold for P60,000. The adjusting entry, considering the
adjustment in No. 2 above has been effected, is:

Debit Credit
a. Investment in Stock 60,000 Gain on sale of rights 60,000
b. Investment in Stock 20,000 Gain on sale of rights 20,000
c. Investment in Stock 60,000 Stock rights 40,000
Gain on sale of rights 20,000
d. None

5. On June 30, 4,600 shares were sold for P110,000. The adjusting entry is:

Debit Credit
a. Cash 110,000 Investment in Stock 85,000
Gain on sale of stock 25,000
b. Investment in Stock 36,400 Gain on sale of stock 36,400
c. Investment in stock 25,000 Gain on sale of stock 25,000
d. None

PROBLEM NO. 9 CONSTRUCTION CONTRACTS (Wa sd koy source)