Which of the following controls most likely would help ensure that all credit sales transactions of

an entity are recorded?

The billing department supervisor sends copies of approved sales orders to the credit department
for comparison to authorized credit limits and current customer account balances.

The accounting department supervisor independently reconciles the accounts receivable

subsidiary ledger to the accounts receivable control account monthly.

The accounting department supervisor controls the mailing of monthly statements to customers
and investigates any differences reported by customers.

The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.
Ans.
The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales
at the balance sheet date

Compare shipping documents with sales records.

Apply gross profit rates to inventory disposed of during the period.
Trace payments received subsequent to the balance sheet date.
Send accounts receivable confirmation requests
Ans.
Compare shipping documents with sales records.

One of the major audit procedures for determining whether the allowance for doubtful
receivables is adequate is

The preparation of a list of aged accounts receivable.

Confirming any accounts receivable written off in prior periods.
Vouching the collection on any accounts receivable written off in prior periods.
Confirming any accounts receivable with a credit balance.
Ans.
The preparation of a list of aged accounts receivable.

In which of the following circumstances would the use of negative form of accounts receivable
confirmation most likely be justified?

A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.

A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances
A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to a few major customers. A small number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small balances.
Ans.
A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to many customers with small balances.

In connection with your examination of the financial statements of Tenacity Corporation

for the year ended December 31, 2013, you were able to obtain certain information during
your audit of the accounts receivable and related accounts.

The December 31, 2013 balance of the Accounts Receivable control account is
P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

· A credit of P2,592 on December 2, 2013 because Company A remitted in full
for the accounts charged off on October 31, 2013; and
· A debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance
January 1, 2013 P29,264
October 31, 2013
Accounts written-off:
Co. A – P2,592
Co. B – P6,560
Co. C – P4,512 P12,064 17,200
December 31, 2013 P78,800 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented

below:

Amount to which the allowance

is to be adjusted after adjustments
Age Net debit balance and corrections have been made
0 to 1 month P745,920 1 percent
1 to 3 months 614,560 2 percent
3 to 6 months 177,440 3 percent
Over 6 months 48,000 Definitely uncollectible, P8,000;
P16,000 is considered uncollectible;
The remainder is estimated to be
80% collectible
There is a credit balance in one account receivable (0 to 1 month) of P16,000; it
represents an advance on a sales contract. Also, there is a credit balance in one of the 1 to
3 months account receivable of P4,000 for which merchandise will be accepted by the
customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and you decided to adjust the control account to the sum of the
subsidiaries after corrections are made.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
How much is the adjusted balance of Accounts Receivable as of December 31, 2013?

P1,588,000
P1,605,920
P1,597,920
P1,586,400
Ans.
P1,597,920

When there is a large number of relatively small account balances, negative confirmation of
accounts receivable is feasible if internal accounting control is

Strong, and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration.

Weak, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.

Strong, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.

Weak, and the individuals receiving the confirmation requests are unlikely to give them adequate
consideration.
Ans.
Strong, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.

Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmation when the auditor did not receive replies to second requests?

Review the cash receipts journal for the month prior to the year-end.
Intensify the study of the internal control structure concerning the revenue cycle.
Increase the assessed level of detection risk for the existence assertion.
Inspect the shipping records documenting the merchandise sold to debtors.
Ans.
Inspect the shipping records documenting the merchandise sold to debtors.

It is sometimes impracticable or impossible for an auditor to use normal accounts receivable

confirmation procedures. In such situations, the best alternative procedure the auditor might
resort to would be

Examining subsequent receipts of year-end accounts receivable.

Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a
subsequent date.

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.

Performing an overall analytic review of accounts receivable and sales on a year-to-year basis.
Ans.
Examining subsequent receipts of year-end accounts receivable.

Negative confirmation of accounts receivable is less effective than positive confirmation of

accounts receivable because

A majority of recipients usually lack the willingness to respond objectively.

Some recipients may report incorrect balances that require extensive follow-up.
The auditor cannot infer that all nonrespondents have verified their account information
Negative confirmation do not produce evidential matter that is statistically quantifiable
Ans.
The auditor cannot infer that all nonrespondents have verified their account information

In connection with your examination of the financial statements of Tenacity Corporation

for the year ended December 31, 2013, you were able to obtain certain information during
your audit of the accounts receivable and related accounts.

The December 31, 2013 balance of the Accounts Receivable control account is
P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

· A credit of P2,592 on December 2, 2013 because Company A remitted in full
for the accounts charged off on October 31, 2013; and
· A debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance
January 1, 2013 P29,264
October 31, 2013
Accounts written-off:
 Co. A – P2,592
Co. B – P6,560
Co. C – P4,512 P12,064 17,200
December 31, 2013 P78,800 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented

below:

Amount to which the allowance

is to be adjusted after adjustments
Age Net debit balance and corrections have been made
0 to 1 month P745,920 1 percent
1 to 3 months 614,560 2 percent
3 to 6 months 177,440 3 percent
Over 6 months 48,000 Definitely uncollectible, P8,000;
P16,000 is considered uncollectible;
The remainder is estimated to be
80% collectible

There is a credit balance in one account receivable (0 to 1 month) of P16,000; it

represents an advance on a sales contract. Also, there is a credit balance in one of the 1 to
3 months account receivable of P4,000 for which merchandise will be accepted by the
customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and you decided to adjust the control account to the sum of the
subsidiaries after corrections are made.

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

How much is the adjusted balance of the Allowance for Doubtful Accounts as of
December 31, 2013?

P47,013
P38,113
P127,103
P37,873
Ans.
P38,113

Confirmation is the process of obtaining and evaluating a direct communication from a third
party in response to a request for information about a particular item affecting financial
statement assertions. Two assertions from which confirmation of accounts receivable balances
provides primary evidence are
Completeness and valuation.
Valuation and rights and obligation.
Rights and obligations and existence.
Existence and completeness.
Ans.
Rights and obligations and existence.

Which of the following statements is correct concerning the use of negative confirmation
requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Negative confirmation requests are effective when detection risk is low.

Unreturned negative confirmation requests indicate that alternative procedures are necessary.

Negative confirmation requests are effective when understatements of account balances are
suspected.
Ans.
Negative confirmation requests are effective when understatements of account balances are
suspected.

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 fallacy in the auditor’s
procedures is that

Checking of subsequent collections is not an accepted alternative auditing procedure for

confirmation of accounts receivable.

By looking only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance sheet date or a subsequent transaction.

The deposit slip would not be received directly by the auditor as a confirmation would be.

A customer may not have made a payment during the two-month period.
Ans.
By looking only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance sheet date or a subsequent transaction.

In connection with your examination of the financial statements of Tenacity Corporation

for the year ended December 31, 2013, you were able to obtain certain information during
your audit of the accounts receivable and related accounts.
The December 31, 2013 balance of the Accounts Receivable control account is
P1,576,000.

The only entries in the Doubtful Accounts Expense account were:

· A credit of P2,592 on December 2, 2013 because Company A remitted in full
for the accounts charged off on October 31, 2013; and
· A debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance
January 1, 2013 P29,264
October 31, 2013
Accounts written-off:
Co. A – P2,592
Co. B – P6,560
Co. C – P4,512 P12,064 17,200
December 31, 2013 P78,800 P96,000

An aging schedule of the accounts receivable as of December 31, 2013 is presented

below:

Amount to which the allowance

is to be adjusted after adjustments
Age Net debit balance and corrections have been made
0 to 1 month P745,920 1 percent
1 to 3 months 614,560 2 percent
3 to 6 months 177,440 3 percent
Over 6 months 48,000 Definitely uncollectible, P8,000;
P16,000 is considered uncollectible;
The remainder is estimated to be
80% collectible

There is a credit balance in one account receivable (0 to 1 month) of P16,000; it

represents an advance on a sales contract. Also, there is a credit balance in one of the 1 to
3 months account receivable of P4,000 for which merchandise will be accepted by the
customer.

The ledger accounts have not been closed as of December 31, 2013. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and you decided to adjust the control account to the sum of the
subsidiaries after corrections are made.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
How much is the net adjustment to the Doubtful Accounts expense account?

P40,705 debit
P48,527 credit
P48,287 credit
P39,387 credit
Ans.
P48,287 credit

An aged trial balance of accounts receivable is usually used by the auditor to

Verify the validity of recorded receivables

Ensure that all accounts are promptly credited
Evaluate the results of compliance tests
Evaluate the provision for bad debts expense
Ans.
Evaluate the provision for bad debts expense

Which of the following policies is an internal control weakness related to the acquisition of
factory equipment?

Advance executive approvals are required for equipment acquisitions.

Variances between authorized equipment expenditures and actual costs are to be immediately
reported to management.

Depreciation policies are reviewed only once a year.

Acquisitions are to be made through and approved by the department in need of the equipment.
Ans.
Acquisitions are to be made through and approved by the department in need of the equipment.

It is an internal document sent by the department in need of the supplies to the purchasing
department.

Purchase requisition
Receiving report
Purchase invoice
Purchases order
Ans.
Purchase requisition

Proper authorization for acquisition is essential because it

Ensures that goods/services are used efficiently by company employees
Ensures that goods/services were purchased from approved vendors
Ensures that goods/services are for authorized company purposes
Ensures that goods/services are of good quality
Ans.
Ensures that goods/services are for authorized company purposes

In your audit of the December 31, 2012, financial statements of CHICKEN, INC., you
found the following inventory-related transactions.
A. Goods costing P50,000 are on consignment with a customer. These goods were
not included in the physical count on December 31, 2012.

B. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2013. The
invoice for these goods was received and recorded on January 10, 2013. The invoice
showed the shipment was made on December 29, 2012, FOB shipping point.

C. Goods costing P21,640 were shipped FOB shipping point on December 31,
2012, and were received by the customer on January 2, 2013.Although the sale was
recorded in 2012, these goods were included in 2012 ending inventory.

D. Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB
destination. These goods were delivered to the customer on January 5, 2013, and were
not included in the inventory. The sale was properly taken up in 2013.

E. Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2013, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2012, this shipment was
recorded as a purchase in 2012.

F. Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.

G. Chicken, Inc. recorded as a 2012 sale a P64,300 shipments of goods to a

customer on December 31, 2012, FOB destination. This shipment of goods costing
P37,500 was received by the customer on January 5, 2013, and was not included in the
ending inventory figure.
Prior to any adjustments, Chicken, Inc.’s ending inventory is valued at P445,000 and the
reported net income for the year is P1,648,000.

Purchase cut-off procedures test the cut-off and completeness assertions. A company
should include goods in its inventory if it

Has sold the goods.

Holds legal title to the goods.
Has physical possession of the goods.
Has paid for the goods.
Ans.
Has physical possession of the goods.

In your audit of the December 31, 2012, financial statements of CHICKEN, INC., you
found the following inventory-related transactions.
A. Goods costing P50,000 are on consignment with a customer. These goods were
not included in the physical count on December 31, 2012.

B. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2013. The
invoice for these goods was received and recorded on January 10, 2013. The invoice
showed the shipment was made on December 29, 2012, FOB shipping point.

C. Goods costing P21,640 were shipped FOB shipping point on December 31,
2012, and were received by the customer on January 2, 2013.Although the sale was
recorded in 2012, these goods were included in 2012 ending inventory.

D. Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB
destination. These goods were delivered to the customer on January 5, 2013, and were
not included in the inventory. The sale was properly taken up in 2013.

E. Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2013, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2012, this shipment was
recorded as a purchase in 2012.

F. Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.

G. Chicken, Inc. recorded as a 2012 sale a P64,300 shipments of goods to a

customer on December 31, 2012, FOB destination. This shipment of goods costing
P37,500 was received by the customer on January 5, 2013, and was not included in the
ending inventory figure.
Prior to any adjustments, Chicken, Inc.’s ending inventory is valued at P445,000 and the
reported net income for the year is P1,648,000.

Chicken’s December 31, 2012, inventory should be increased by

P8,000
P40,000
P66,00
P61,640
Ans.
P40,000

Bagtit Company has 35 employees who work 8-hour days and are paid hourly. On
January 1, 2012, the company began a program of granting its employees 10 days paid
vacation each year. Vacation days earned in 2012 may first be taken on January 1,
2013. Information relative to these employees is as follows:

Year Hourly Vacation Days Vacation Days

Wages Earned by Each Used by Each
Employee Employee
2012 P12.90 10 0
2013 13.50 10 8
2014 14.25 10 10

Bagtit has chosen to accrue the liability for compensated absences at the current rates
of pay in effect when the compensated time is earned.

What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2014?

P47,460
P45,360
P39,900
P47,880
Ans.
P47,460

Bagtit Company has 35 employees who work 8-hour days and are paid hourly. On
January 1, 2012, the company began a program of granting its employees 10 days paid
vacation each year. Vacation days earned in 2012 may first be taken on January 1,
2013. Information relative to these employees is as follows:

Year Hourly Vacation Days Vacation Days

Wages Earned by Each Used by Each
Employee Employee
2012 P12.90 10 0
2013 13.50 10 8
2014 14.25 10 10

Bagtit has chosen to accrue the liability for compensated absences at the current rates
of pay in effect when the compensated time is earned.

What is the amount of expense relative to compensated absences that should be reported
on Bagtit’s income statement for 2012?
P 0
P34,440
P37,800
P36,120
Ans.
P36,120

In conducting your audit of V-Power Corporation, a company engaged in import and

wholesale business, for the fiscal year ended June 30, 2011, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2011 instead of at June 30, 2011.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011 1,536,000
Purchases for eleven months ended May 31, 2011
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2011 1,280,000
Inventory, July 1, 2010 140,000
Physical inventory, May 31, 2011 220,000

Your audit disclosed the following additional information.

· Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
· Deposit of P4,000 made with vendor and charged to purchases in April 2011.
Product was shipped in July 2011.
· A shipment in June was damaged through the careless of the receiving department.
This shipment was later sold in June at its cost of P16,000.

In audit engagements in which interim physical inventories are observed, a frequently

used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratio. Based on the above and the result of your audit, you are
to provide the answers to the following:

The June 30, 2011 inventory using the gross profit method is

P264,000
P340,000
P268,000
P260,000
Ans.
P260,000

In conducting your audit of V-Power Corporation, a company engaged in import and

wholesale business, for the fiscal year ended June 30, 2011, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2011 instead of at June 30, 2011.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011 1,536,000
Purchases for eleven months ended May 31, 2011
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2011 1,280,000
Inventory, July 1, 2010 140,000
Physical inventory, May 31, 2011 220,000

Your audit disclosed the following additional information.

· Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
· Deposit of P4,000 made with vendor and charged to purchases in April 2011.
Product was shipped in July 2011.
· A shipment in June was damaged through the careless of the receiving department.
This shipment was later sold in June at its cost of P16,000.

In audit engagements in which interim physical inventories are observed, a frequently

used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratio. Based on the above and the result of your audit, you are
to provide the answers to the following:

The gross profit ratio for eleven months ended May 31, 2011 is

20%
P35%
P30%
25%
Ans.
25%

In conducting your audit of V-Power Corporation, a company engaged in import and

wholesale business, for the fiscal year ended June 30, 2011, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2011 instead of at June 30, 2011.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2011 P1,344,000

Sales for the fiscal year ended June 30, 2011 1,536,000
Purchases for eleven months ended May 31, 2011
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2011 1,280,000
Inventory, July 1, 2010 140,000
Physical inventory, May 31, 2011 220,000

Your audit disclosed the following additional information.

· Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
· Deposit of P4,000 made with vendor and charged to purchases in April 2011.
Product was shipped in July 2011.
· A shipment in June was damaged through the careless of the receiving department.
This shipment was later sold in June at its cost of P16,000.

QUESTIONS:

In audit engagements in which interim physical inventories are observed, a frequently

used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratio. Based on the above and the result of your audit, you are
to provide the answers to the following:

The cost of goods sold during the month of June, 2011 using the gross profit ratio method
is

P132,000
P144,000
P148,000
P160,000
Ans.
P148,000
Beginning 2011, San Gin began marketing a new beer called “Blue Colt”. To help promote the
product, the management is offering a special beer mug to each customer for every 20 specially
marked bottle caps of Blue Colt. San Gin estimates that out of the 300,000 bottles of Blue Colt
sold during 2011, only 50% of the marked bottle caps will be redeemed. For the year 2011, 8,000
mugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs were
already distributed to customers. What is the amount of the liability that San Gin Company
should report on its December 31, 2011 statement of financial position?

P135,000
P202,500
P337,500
P360,000
Ans.
P135,000

A court case decided on 21 December 2011 awarded damages against San Gin. The judge has
announced that the amount of damages will be set at a future date, expected to be in March 2012.
San Gin has received advice from its lawyers that the amount of the damages could be anything
between P20,000 and P7,000,000. As of December 31, 2011, how much should be recognized in
the statement of financial position regarding this court case?

P 20,000
P3,510,000
P7,000,000
P 0
Ans.
P 0

During 2011, San Gin Company guaranteed a supplier’s P500,000 loan from a bank. On
October 1, 2011, San Gin was notified that the supplier had defaulted on the loan and
filed for bankruptcy protection. Counsel believes San Gin will probably have to pay
between P250,000 and P450,000 under its guarantee. As a result of the supplier’s
bankruptcy, San Gin entered into a contract in December 2011 to retool its machines so
that San Gin could accept parts from other suppliers. Retooling costs are estimated to be
P300,000. What amount should San Gin report as a liability in its December 31, 2011,
statement of financial position?

P250,000
P450,000
P350,000
P650,000
Ans.
P350,000

On January 2, 2009, San Gin Company introduced a new line of products that carry a
three-year warranty against factory defects. Estimated warranty costs related to peso sales
are as follows: 1% of sales in the year of sale, 2% in the year after sales and 3% in the
second year after sale.
Sales Actual Warranty
Expenditure
2009 P100,000 P 750
2010 250,000 3,750
2011 350,000 11,250
P700,000 P15,750

What amount should San Gin report as warranty expense in 2011?

P 3,500
P11,250
P11,500
P21,000
Ans.
P21,000

Which department cancels supporting documents after payment is mailed?

Vouchers payable
Accounting
Receiving
Treasury
Ans.
Treasury

Internal control over cash receipts is weakened when an employee who receives customer mail
receipts also

Prepares initial cash receipts records

Records credits to individual accounts receivable
Prepares bank deposit slips for all mail receipts
Maintains a petty cash fund
Ans.
Records credits to individual accounts receivable

The person who signs the checks

Reviews the monthly bank reconciliation

Returns the checks to accounts payableIs
denied access to the supporting documents
Is also responsible for mailing the checks
Ans.
Is also responsible for mailing the checks
Which of the following procedures would an auditor most likely perform in auditing the
statement of cash flows?

Compare the amounts included in the statement of cash flows to similar amounts in the prior
year’s statement of cash flows.

Reconcile the cut-off bank statements to verify the accuracy of the year-end bank balances.

Vouch all bank transfers for the last week of the year and first week of the subsequent year.

Reconcile the amounts included in the statement of cash flows to the other financial statements’
balances and amounts
Ans.
Reconcile the amounts included in the statement of cash flows to the other financial statements’
balances and amounts

Which one of the following would the auditor consider to be an incompatible operation?

The cashier prepares the daily deposit

The cashier makes the daily deposit at a local bank
The cashier posts the receipts to the accounts receivable subsidiary ledger cards
The cashier endorses the checks
Ans.
The cashier posts the receipts to the accounts receivable subsidiary ledger cards

To gather evidence regarding the balance per books in a bank reconciliation, an auditor would
most likely examine

Cut-off bank statements

Year-end bank statement
Bank confirmation
General ledger
Ans.
General ledger

An auditor ordinarily should send a standard confirmation request to all banks with which the
client has done business during the year under audit, regardless of the year-end balance because
this procedure

Provides for confirmation regarding compensating arrangements

Detect kiting activities that may otherwise not be discovered
Seek information about indebtedness to the bank
Verifies securities held by the bank in safekeeping
Ans.
Seek information about indebtedness to the bank
The following data were taken from your current working papers in connection with your
audit of the Resolve Company’s financial statements for the year ended December 31,
2013.

Cash account consists of the following items:

Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
Total per GL P 331,750

a. The count of the cashier’s accountability on January 2, 2014, revealed total

bills and coins of P9,000. Unreplenished vouchers for various expenses totaled
P16,000, of which P3,000 pertains to January 2014.
b. On December 29, 2013, a check for P87,500 was drawn against Security
Bank current account resulting in bank overdraft of P37,500. The check was picked
up by the supplier on January 3, 2014.
c. Bank reconciliation statement prepared by the cashier for the Allied bank
account follows:
Bank balance P310, 500
Add: Deposit in transit P61,250
Bank service charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check no. Amount
214 P 2,500 *
219 20,750
225 6,000
228 8,500 28,750
Book balance P344,250
*Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customer’s post-dated check amounting to P40,000.
The check represents a collection from account customer for sales made in the middle of
October 2010.

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

How much is the cash shortage as of December 31, 2013?

P46,500
P9,000
P6,500
P0
Ans.
P6,500

The following data were taken from your current working papers in connection with your
audit of the Resolve Company’s financial statements for the year ended December 31,
2013.

Cash account consists of the following items:

Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
Total per GL P 331,750

a. The count of the cashier’s accountability on January 2, 2014, revealed total

bills and coins of P9,000. Unreplenished vouchers for various expenses totaled
P16,000, of which P3,000 pertains to January 2014.
b. On December 29, 2013, a check for P87,500 was drawn against Security
Bank current account resulting in bank overdraft of P37,500. The check was picked
up by the supplier on January 3, 2014.
c. Bank reconciliation statement prepared by the cashier for the Allied bank
account follows:
Bank balance P310, 500
Add: Deposit in transit P61,250
Bank service charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check no. Amount
214 P 2,500 *
219 20,750
225 6,000
228 8,500 28,750
Book balance P344,250
*Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customer’s post-dated check amounting to P40,000.
The check represents a collection from account customer for sales made in the middle of
October 2010.

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

How much is the adjusted balance of petty cash fund as of December 31, 2013?

P12,000
P9,000
P13,000
P16,000
Ans.
P12,000

Which of the following sets of information does an auditor usually confirm in one form?

Cash in bank and collateral for loans

Accounts payable and purchase commitments
Accounts receivable and accrued interest receivable
Accounts receivable and accrued interest receivable
Ans.
Cash in bank and collateral for loans

The following data were taken from your current working papers in connection with your
audit of the Resolve Company’s financial statements for the year ended December 31,
2013.

Cash account consists of the following items:

Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
Total per GL P 331,750

a. The count of the cashier’s accountability on January 2, 2014, revealed total

bills and coins of P9,000. Unreplenished vouchers for various expenses totaled
P16,000, of which P3,000 pertains to January 2014.
b. On December 29, 2013, a check for P87,500 was drawn against Security
Bank current account resulting in bank overdraft of P37,500. The check was picked
up by the supplier on January 3, 2014.
c. Bank reconciliation statement prepared by the cashier for the Allied bank
account follows:
Bank balance P310, 500
Add: Deposit in transit P61,250
Bank service charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check no. Amount
214 P 2,500 *
219 20,750
225 6,000
228 8,500 28,750
Book balance P344,250
*Check certified by the bank in December 2013.
All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customer’s post-dated check amounting to P40,000.
The check represents a collection from account customer for sales made in the middle of
October 2010.

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

How much is the adjusted cash as of December 31, 2013?

P355,500
P367,500
P398,500
P358,500
Ans.
P358,500

A proof of cash is normally used

for all audit engagements

to test the transaction process when controls over cash are weak
when control risk for cash is low
when lapping is suspected
Ans.
to test the transaction process when controls over cash are weak

The primary evidence regarding year-end bank balances is documented in the

Standard bank confirmations

Bank reconciliations
Interbank transfer schedule
Bank deposit lead schedule
Ans.
Standard bank confirmations

The following data were taken from your current working papers in connection with your
audit of the Resolve Company’s financial statements for the year ended December 31,
2013.

Cash account consists of the following items:

Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
 Total per GL P 331,750

a. The count of the cashier’s accountability on January 2, 2014, revealed total

bills and coins of P9,000. Unreplenished vouchers for various expenses totaled
P16,000, of which P3,000 pertains to January 2014.
b. On December 29, 2013, a check for P87,500 was drawn against Security
Bank current account resulting in bank overdraft of P37,500. The check was picked
up by the supplier on January 3, 2014.
c. Bank reconciliation statement prepared by the cashier for the Allied bank
account follows:
Bank balance P310, 500
Add: Deposit in transit P61,250
Bank service charges 1,250 62,500
Total 373,000
Less: Outstanding checks
Check no. Amount
214 P 2,500 *
219 20,750
225 6,000
228 8,500 28,750
Book balance P344,250
*Check certified by the bank in December 2013.

All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customer’s post-dated check amounting to P40,000.
The check represents a collection from account customer for sales made in the middle of
October 2010.

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

How much is the adjusted Allied Bank current account as of December 31, 2013?

P336,500
P296,500
P305,500
P330,250
Ans.
P296,500

The auditor gathers evidence regarding the validity of deposits in transit by examining the

bank confirmation
cut off bank statement
year-end bank statement
bank reconciliation
Ans.
cut off bank statement

Cash receipts should be deposited on the day of receipt or the following business day. Select the
most appropriate audit procedure to determine that cash is promptly deposited.

Review the functions of cash receiving and disbursing for proper separation of duties.

Review cash register tapes prepared for each sale.

Review the functions of cash handling and maintaining accounting records for proper segregation
of duties.

Compare the daily cash receipts totals with the bank deposits
Ans.
Compare the daily cash receipts totals with the bank deposits

A most likely procedure in obtaining an understanding of a manufacturing entity’s internal

control over inventory balances

Performing test counts when observing actual entity’s physical inventory count

Performing analytical procedures designed to identify significant cost variances

Analyzing the inventory turnover and liquidity ratios

Reviewing the entity’s description of inventory policies and procedures

Ans.
Reviewing the entity’s description of inventory policies and procedures

Which of the following is a question that the auditor would expect to find on the production
cycle section of an internal control questionnaire?

Are vendors’ invoices for raw materials approved for payment by an employee who is
independent of the cash disbursements function?

Are signed checks for the purchase of raw materials mailed directly after signing without being
returned to the person who authorized the invoice processing?

Are all releases by storekeepers of raw materials from storage based on approved requisition
documents?

Are details of individual disbursements for raw materials balanced with the total to be posted to
the appropriate general ledger account?
Ans.
Are all releases by storekeepers of raw materials from storage based on approved requisition
documents?
Which of these is implemented to maintain accurate inventory records?

Periodic counts are conducted to adjust the perpetual records

A JIT system to keep inventory levels to optimum balance

Periodic comparison of records and net realizable value of inventories

Supporting documents are matched before payment is approved

Ans.
Periodic counts are conducted to adjust the perpetual records

When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to
obtain evidence that:

All goods purchased before year-end are received before the physical inventory count.
No goods held on consignment for customers are included in the inventory balance.
No goods observed during the physical count are pledged or sold.
All goods owned at year-end are included in the inventory balance.
Ans.
All goods owned at year-end are included in the inventory balance.

For several years a client’s physical inventory count has been lower than what was shown on the
books at the time of the count so that downward adjustments to the inventory account were
required. Contributing to the inventory problem could be weaknesses in internal control that led
to the failure to record some

Purchases returned to vendors.

Sales returns received.
Sales discounts allowed.
Cash purchases.
Ans.
Purchases returned to vendors.

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels.
60% of the production are “class A” which sell for ₱500 per dozen and 40% are “class B”
which sell for ₱250 per dozen. During 2012, 6,000 dozens were produced at an average
cost of ₱360 per dozen. The inventory at the end of the year was as follows:
220 dozens “Class A”@ ₱360 ₱79,200
300 dozens “Class B”@ ₱360 108,000
P187,200

The management considers the relative sales value method as a more equitable basis of
cost distribution.
Required:

How much is the cost of sales for the year 2012?

₱1,972,800
₱1,993,500
₱2,061,000
₱2,092,500
Ans.
₱1,993,500

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels.
60% of the production are “class A” which sell for ₱500 per dozen and 40% are “class B”
which sell for ₱250 per dozen. During 2012, 6,000 dozens were produced at an average
cost of ₱360 per dozen. The inventory at the end of the year was as follows:
220 dozens “Class A”@ ₱360 ₱79,200
300 dozens “Class B”@ ₱360 108,000
P187,200

The management considers the relative sales value method as a more equitable basis of
cost distribution.

Required:

How much is the value of inventory as of December 31,2012?

₱67,500
₱99,000
₱166,500
₱187,200
Ans.
₱166,500

Cherry Lou Factory started operations in 2012. Cherry Lou manufactures bath towels.
60% of the production are “class A” which sell for ₱500 per dozen and 40% are “class B”
which sell for ₱250 per dozen. During 2012, 6,000 dozens were produced at an average
cost of ₱360 per dozen. The inventory at the end of the year was as follows:
220 dozens “Class A”@ ₱360 ₱79,200
300 dozens “Class B”@ ₱360 108,000
P187,200

The management considers the relative sales value method as a more equitable basis of
cost distribution.
Required:

How much of the total cost should be allocated to “Class A”?

₱600,000
₱1,620,000
₱1,800,000
₱2,400,000
Ans.
₱1,620,000

An auditor’s program to examine long-term debt most likely would include steps that
require

Comparing the carrying amount of the debt to its year-end market value
Correlating interest expense recorded for the period with outstanding debt
Verifying the existence of the holders of the debt by direct confirmation
Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt
Ans.
Correlating interest expense recorded for the period with outstanding debt

Two months before the year end, the bookkeeper erroneously recorded the receipt of a long-term
bank loan by a debit to cash and a credit to sales. Which of the following is the most effective
procedure for detecting this type of error?

Analyze the notes payable journal

Prepare a year-end bank reconciliation
Analyze bank confirmation information
Prepare a year-end bank transfer schedule
Ans.
Analyze bank confirmation information

During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long-term debt. This observation could lead the auditor to
suspect that

Long-term debt is understated.

Long-term debt is overstated.
Discount on bonds payable is overstated.
Premium on bonds payable is understated.
Ans.
Long-term debt is understated.
In performing an audit, which one of the following procedures would be considered a
"substantive" test"?

Comparing last year's interest expense with this year's interest expense.
Comparing signatures on checks with the signatures of authorized check signers.
Reviewing initials on received documents.
Reviewing procedures followed in receiving, depositing, and disbursing cash.
Ans.
Comparing last year's interest expense with this year's interest expense.

Bowles Corporation is in the business of leasing new sophisticated computer systems. As

a lessor of computers , Bowles purchased a new system on December 31, 2011. The
system was delivered the same day (by prior arrangement) to General Investment
Company, a lessee. The corporation accountant revealed the following information
relating to the lease transaction:
Cost of system to Bowles P550,000
Estimated useful life and lease term 8 years
Expected residual value P40,000
(unguaranteed)
Bowle’s implicit rate of interest 12%
General’s incremental borrowing 14%
rate
Date of first lease payment Dec. 31, 2011

Additional information is as follows:

(a) At the end of the lease, the system will revert to Bowles.
(b) General is aware of Bowle’s rate of implicit interest.
(c) The lease rental consists of equal annual payments.

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

The amount to be reported under current liabilities as liability under finance lease as of
December 31, 2012 is

P60,239
P48,611
P35,715
P64,963
Ans.
P48,611

Bowles Corporation is in the business of leasing new sophisticated computer systems. As

a lessor of computers , Bowles purchased a new system on December 31, 2011. The
system was delivered the same day (by prior arrangement) to General Investment
Company, a lessee. The corporation accountant revealed the following information
relating to the lease transaction:
Cost of system to Bowles P550,000
Estimated useful life and lease term 8 years
Expected residual value P40,000
(unguaranteed)
Bowle’s implicit rate of interest 12%
General’s incremental borrowing 14%
rate
Date of first lease payment Dec. 31, 2011

Additional information is as follows:

(a) At the end of the lease, the system will revert to Bowles.
(b) General is aware of Bowle’s rate of implicit interest.
(c) The lease rental consists of equal annual payments.

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

The annual lease payment under the lease is

P110,717
P95,950
P102,665
P91,664
Ans.
P95,950

The equity section of Urbiztondo Corporation’s statement of financial position as of

December 31, 2011 is as follows:
Shareholders’ Equity
Share capital, P5 par value; authorized,
2,000,000 shares; issued, 400,000 P2,000,000
shares
Share premium 850,000
Retained earnings 3,000,000
P5,850,000

The following events occurred during 2012:

Jan. 5 10,000 shares were sold for P9 per share.

Jan. Declared a cash dividend of P0.40 per share, payable February 15 to
16 shareholders of record on February 5.
Feb. 40,000 shares were sold for P11 per share.
10
 Mar. 1 A 40% share dividend was declared and issued. Market value per share is
currently P15.
April 1 A two-for-one split was carried out. The par vale of the share was to be
reduced to P2.50 per share. Market value on March 31 was P18 per share.
July 1 A 10% share dividend was declared and issued. Market value is currently P10
per share.
Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Dec. Profit for 2012 was P1,880,000.
31

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

The balance of retained earnings as of December 31, 2012 is

P381,600
P3,362,400
P1,094,400
P2,001,600
Ans.
P2,001,600

The equity section of Urbiztondo Corporation’s statement of financial position as of

December 31, 2011 is as follows:
Shareholders’ Equity
Share capital, P5 par value; authorized,
2,000,000 shares; issued, 400,000 P2,000,000
shares
Share premium 850,000
Retained earnings 3,000,000
P5,850,000

The following events occurred during 2012:

Jan. 5 10,000 shares were sold for P9 per share.

Jan. Declared a cash dividend of P0.40 per share, payable February 15 to
16 shareholders of record on February 5.
Feb. 40,000 shares were sold for P11 per share.
10
Mar. 1 A 40% share dividend was declared and issued. Market value per share is
currently P15.
April 1 A two-for-one split was carried out. The par vale of the share was to be
reduced to P2.50 per share. Market value on March 31 was P18 per share.
July 1 A 10% share dividend was declared and issued. Market value is currently P10
 per share.
Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Dec. Profit for 2012 was P1,880,000.
31

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

The balance of share capital as of December 31, 2012 is

P3,465,000
P3,780,000
P3,228,750
P3,622,500
Ans.
P3,465,000

The equity section of Urbiztondo Corporation’s statement of financial position as of

December 31, 2011 is as follows:
Shareholders’ Equity
Share capital, P5 par value; authorized,
2,000,000 shares; issued, 400,000 P2,000,000
shares
Share premium 850,000
Retained earnings 3,000,000
P5,850,000

The following events occurred during 2012:

Jan. 5 10,000 shares were sold for P9 per share.

Jan. Declared a cash dividend of P0.40 per share, payable February 15 to
16 shareholders of record on February 5.
Feb. 40,000 shares were sold for P11 per share.
10
Mar. 1 A 40% share dividend was declared and issued. Market value per share is
currently P15.
April 1 A two-for-one split was carried out. The par vale of the share was to be
reduced to P2.50 per share. Market value on March 31 was P18 per share.
July 1 A 10% share dividend was declared and issued. Market value is currently P10
per share.
Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Dec. Profit for 2012 was P1,880,000.
31
Questions:
Based on the above and the result of your audit, answer the following:

The balance of share premium as of December 31, 2012 is

P2,075,000
P2,547,500
P1,760,000
P3,695,000
Ans.
P2,075,000

The equity section of Urbiztondo Corporation’s statement of financial position as of

December 31, 2011 is as follows:
Shareholders’ Equity
Share capital, P5 par value; authorized,
2,000,000 shares; issued, 400,000 P2,000,000
shares
Share premium 850,000
Retained earnings 3,000,000
P5,850,000

The following events occurred during 2012:

Jan. 5 10,000 shares were sold for P9 per share.

Jan. Declared a cash dividend of P0.40 per share, payable February 15 to
16 shareholders of record on February 5.
Feb. 40,000 shares were sold for P11 per share.
10
Mar. 1 A 40% share dividend was declared and issued. Market value per share is
currently P15.
April 1 A two-for-one split was carried out. The par vale of the share was to be
reduced to P2.50 per share. Market value on March 31 was P18 per share.
July 1 A 10% share dividend was declared and issued. Market value is currently P10
per share.
Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Dec. Profit for 2012 was P1,880,000.
31

Questions:
Based on the above and the result of your audit, answer the following:
The number of shares issued and outstanding as of December 31, 2012 is

P2,079,000
P1,386,000
P1,188,000
P346,500
Ans.
P1,386,000

Which of the following controls would a company most likely use to safeguard marketable
securities when an independent trust agent is not employed?

The investment committee of the board of directors periodically reviews the investment decisions
delegated to the treasurer.

Two company officials have joint control of marketable securities, which are kept in a bank safe-
deposit box.

The internal auditor and the controller independently trace all purchases and sales of marketable
securities from the subsidiary ledgers to the general ledger.

The chairman of the board verifies the marketable securities, which are kept in a bank safe-
deposit box, each year on the balance sheet date.
Ans.
Two company officials have joint control of marketable securities, which are kept in a bank safe-
deposit box.

Which of the following controls would be most effective in assuring that the proper custody of
assets in the investing cycle is maintained?

Direct access to securities in the safe-deposit box is limited to only one corporate officer.

Personnel who post investment transactions to the general ledger are not permitted to update the
investment subsidiary ledger.

The purchase and sale of investments are executed on the specific authorization of the board of
directors.

The recorded balances in the investment subsidiary ledger are periodically compared with the
contents of the safe-deposit box by independent personnel.
Ans.
The recorded balances in the investment subsidiary ledger are periodically compared with the
contents of the safe-deposit box by independent personnel.

A weakness in internal control over recording retirements of equipment may cause an auditor to

Inspect certain items of equipment in the plant and trace those items to the accounting records.
Review the subsidiary ledger to ascertain whether depreciation was taken on each item of
equipment during the year.

Trace additions to the “other assets” account to search for equipment that is still on hand but no
longer being used.

Select certain items of equipment from the accounting records and locate them in the plant.
Ans.
Select certain items of equipment from the accounting records and locate them in the plant.

Which of the following is not a control that is designed to protect investment securities?

Custody over securities should be limited to individuals who have recordkeeping responsibility
over the securities.

Securities should be properly controlled physically in order to prevent unauthorized usage.

Access to securities should be vested in more than one individual.

Securities should be registered in the name of the owner.

Ans.
Custody over securities should be limited to individuals who have recordkeeping responsibility
over the securities.

The following were made available to you as part of your audit of ABC Corp.’s
investment accounts as of and for the period ended December 31, 2012:
Acquisition FMV FMV
Cost (12/31/2011 (12/31/2012)
Aye Inc, Ordinary
Shares P1,200,000 P1,300,000 P750,000
Bee Inc., Preference
Shares 2,100,000 1,900,000 2,240,000
See Corp., 10%
3,000, P1,000
Bonds 3,100,000 3,200,000 3,180,000
Dee Corp., Ordinary
Shares 4,250,000 4,100,000 3,270,000

Audit notes:
a) All the investments were acquired at the beginning of 2011. Broker’s fees and
commission charged to expense in 2011 related to share acquisition amounted to 10% of
their acquisition cost while the company incurred brokers’ fees and commission related to
the bond acquisition amounted to P98,000.
b) ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc.
which reported net income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc.
also paid dividends in 2011 at P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock
investment in Aye at P150 per share.

c) ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which
reported net income in 2011 and 2012 at P2M and P3m, respectively. The company also
paid P500,000 dividends to preference shares and P500,000 dividends to preference
shares to ordinary shares in 2011 and P750,000 dividends to preference shares and
P750,000 dividends to ordinary shares in 2012.

d) The See Corp. bonds will mature on December 31, 2014. The yield rate on the
acquisition date as a result of the incurrence of the transaction cost was at 8%. Interests
are receivable from bonds every December 31.

e) ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee
Corp. which reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee
Corp. also paid dividends in 2011 and 2012 at P800,000 and P1M, respectively. On
December 28, 2012 after receiving the dividends declared for 2012, ABC Corp. sold
5,000 Dee Corp. shares at p160 per share.

Required:

Assuming that all the investments are accounted for as available-for-sale securities under
PAS 39, what is the unrealized holding gain/loss o be reported in the stockholders’ equity
portion of the 2012 statement of financial position?

2,110,000.
1,917,147.
508,147.
96,147.
Ans.
508,147.

The following were made available to you as part of your audit of ABC Corp.’s
investment accounts as of and for the period ended December 31, 2012:
Acquisition FMV FMV
Cost (12/31/2011 (12/31/2012)
Aye Inc, Ordinary
Shares P1,200,000 P1,300,000 P750,000
Bee Inc., Preference
Shares 2,100,000 1,900,000 2,240,000
See Corp., 10% 3,100,000 3,200,000 3,180,000
3,000, P1,000
 Bonds
Dee Corp., Ordinary
Shares 4,250,000 4,100,000 3,270,000

Audit notes:
a) All the investments were acquired at the beginning of 2011. Broker’s fees and
commission charged to expense in 2011 related to share acquisition amounted to 10% of
their acquisition cost while the company incurred brokers’ fees and commission related to
the bond acquisition amounted to P98,000.

b) ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc.
which reported net income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc.
also paid dividends in 2011 at P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock
investment in Aye at P150 per share.

c) ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which
reported net income in 2011 and 2012 at P2M and P3m, respectively. The company also
paid P500,000 dividends to preference shares and P500,000 dividends to preference
shares to ordinary shares in 2011 and P750,000 dividends to preference shares and
P750,000 dividends to ordinary shares in 2012.

d) The See Corp. bonds will mature on December 31, 2014. The yield rate on the
acquisition date as a result of the incurrence of the transaction cost was at 8%. Interests
are receivable from bonds every December 31.

e) ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee
Corp. which reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee
Corp. also paid dividends in 2011 and 2012 at P800,000 and P1M, respectively. On
December 28, 2012 after receiving the dividends declared for 2012, ABC Corp. sold
5,000 Dee Corp. shares at p160 per share.

Required:

Assuming that all the investments are accounted for at fair market value through profit or
losses under PAS 39, what is the realized gain/loss on sale of investments in 2012?

60,000.
63,000.
70,000.
222,500
Ans.
60,000.
The following were made available to you as part of your audit of ABC Corp.’s
investment accounts as of and for the period ended December 31, 2012:
Acquisition FMV FMV
Cost (12/31/2011 (12/31/2012)
Aye Inc, Ordinary
Shares P1,200,000 P1,300,000 P750,000
Bee Inc., Preference
Shares 2,100,000 1,900,000 2,240,000
See Corp., 10%
3,000, P1,000
Bonds 3,100,000 3,200,000 3,180,000
Dee Corp., Ordinary
Shares 4,250,000 4,100,000 3,270,000

Audit notes:
a) All the investments were acquired at the beginning of 2011. Broker’s fees and
commission charged to expense in 2011 related to share acquisition amounted to 10% of
their acquisition cost while the company incurred brokers’ fees and commission related to
the bond acquisition amounted to P98,000.

b) ABC Corp. owns 10,000 out of 100,000 ordinary shares outstanding of Aye Inc.
which reported net income in 2011 and in 2012 at P5m and P6M, respectively. Aye Inc.
also paid dividends in 2011 at P1.2M. On March 2012, ABC Corp. sold 4,000 of its stock
investment in Aye at P150 per share.

c) ABC Corp. owns 50% of the preference shares outstanding of Bee Inc. which
reported net income in 2011 and 2012 at P2M and P3m, respectively. The company also
paid P500,000 dividends to preference shares and P500,000 dividends to preference
shares to ordinary shares in 2011 and P750,000 dividends to preference shares and
P750,000 dividends to ordinary shares in 2012.

d) The See Corp. bonds will mature on December 31, 2014. The yield rate on the
acquisition date as a result of the incurrence of the transaction cost was at 8%. Interests
are receivable from bonds every December 31.

e) ABC Corp. owns 25,000 out of the 200,000 ordinary shares outstanding of Dee
Corp. which reported net income in 2011 and 2012 at P2M and P5M, respectively. Dee
Corp. also paid dividends in 2011 and 2012 at P800,000 and P1M, respectively. On
December 28, 2012 after receiving the dividends declared for 2012, ABC Corp. sold
5,000 Dee Corp. shares at p160 per share.

Required:

Assuming that all the investments are accounted for at fair market value through profit or
losses under PFRS 9, what is the unrealized holding gain/loss to be reported in the 2013
 statement of comprehensive income?

1,210,000.
1,060,000.
674,000.
280,000.
Ans.
280,000.

Belgium Company acquired the following assets and constructed a building as well. All
this was done during the current year.

Asset 1 and 2
These assets were purchased as a lump sum for P104,000 cash. The following
information was gathered.
Depreciation to
Initial Cost on Date on Seller’s Book Value
Description Seller’s Books Books on Seller’s Appraised
Books Value
Machinery P100,000 P50,000 P50,000 P90,000
Office 60,000 10,000 50,000 30,000
Equipment

Asset 3
This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-
year, zero-interest-bearing note. The note is to be paid off in two P15,000 installments
made at the end of the first and second years. It was estimated that the asset could have
been purchased outright for P35,900.

Asset 4
This machinery was acquired by trading in used machinery. (The exchange lacks
commercial substance.)
Cost of machinery traded P100,000
Accumulated depreciation to date of sale 36,000
Fair value of machinery traded 80,000
Cash received 10,000
Fair value of machinery acquired 70,000

Asset 5
Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.
The shares have a market value of P11 per share.

Asset 6
Belgium Company purchased office equipment for P20,000, terms 2/10, n/30. Because
the company intended to take the discount, it made no entry until it paid for the
acquisition. The entry was:
 Office Equipment 20,000
Cash 19,600
Purchase Discounts 400

Asset 7
Belgium recently received a land from the Municipality of San Manuel as an inducement
to locate its business in the municipality. The appraised value of the land is P270,000 but
this was acquired San Manuel 20 years ago at a cost of P20,000. The company made no
entry to record the land because it had no cost basis.

Asset 8
Belgium Company constructed a building for P600,000. It could have purchased the
building for P740,000. The controller made the following entry.

Building 740,000
Cash 600,000
Profit on Construction 140,000
What is the total cost of the office equipment?

P50,700
P47,100
P46,700
P51,100
Ans.
P46,700

Belgium Company acquired the following assets and constructed a building as well. All
this was done during the current year.

Asset 1 and 2
These assets were purchased as a lump sum for P104,000 cash. The following
information was gathered.
Depreciation to
Initial Cost on Date on Seller’s Book Value
Description Seller’s Books Books on Seller’s Appraised
Books Value
Machinery P100,000 P50,000 P50,000 P90,000
Office 60,000 10,000 50,000 30,000
Equipment

Asset 3
This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-
year, zero-interest-bearing note. The note is to be paid off in two P15,000 installments
made at the end of the first and second years. It was estimated that the asset could have
been purchased outright for P35,900.
Asset 4
This machinery was acquired by trading in used machinery. (The exchange lacks
commercial substance.)
Cost of machinery traded P100,000
Accumulated depreciation to date of sale 36,000
Fair value of machinery traded 80,000
Cash received 10,000
Fair value of machinery acquired 70,000

Asset 5
Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.
The shares have a market value of P11 per share.

Asset 6
Belgium Company purchased office equipment for P20,000, terms 2/10, n/30. Because
the company intended to take the discount, it made no entry until it paid for the
acquisition. The entry was:

Office Equipment 20,000

Cash 19,600
Purchase Discounts 400

Asset 7
Belgium recently received a land from the Municipality of San Manuel as an inducement
to locate its business in the municipality. The appraised value of the land is P270,000 but
this was acquired San Manuel 20 years ago at a cost of P20,000. The company made no
entry to record the land because it had no cost basis.

Asset 8
Belgium Company constructed a building for P600,000. It could have purchased the
building for P740,000. The controller made the following entry.

Building 740,000
Cash 600,000
Profit on Construction 140,000

What is the cost of the building?

P600,000
P670,000
P700,000
P740,000
Ans.
P600,000
 Problem 15
Belgium Company acquired the following assets and constructed a building as well. All
this was done during the current year.

Asset 1 and 2
These assets were purchased as a lump sum for P104,000 cash. The following
information was gathered.
Depreciation to
Initial Cost on Date on Seller’s Book Value
Description Seller’s Books Books on Seller’s Appraised
Books Value
Machinery P100,000 P50,000 P50,000 P90,000
Office 60,000 10,000 50,000 30,000
Equipment

Asset 3
This machine was acquired by making a P10,000 down payment and issuing a P30,000, 2-
year, zero-interest-bearing note. The note is to be paid off in two P15,000 installments
made at the end of the first and second years. It was estimated that the asset could have
been purchased outright for P35,900.

Asset 4
This machinery was acquired by trading in used machinery. (The exchange lacks
commercial substance.)
Cost of machinery traded P100,000
Accumulated depreciation to date of sale 36,000
Fair value of machinery traded 80,000
Cash received 10,000
Fair value of machinery acquired 70,000

Asset 5
Office equipment was acquired by issuing 100 shares of P8 par value ordinary shares.
The shares have a market value of P11 per share.

Asset 6
Belgium Company purchased office equipment for P20,000, terms 2/10, n/30. Because
the company intended to take the discount, it made no entry until it paid for the
acquisition. The entry was:

Office Equipment 20,000

Cash 19,600
Purchase Discounts 400

Asset 7
Belgium recently received a land from the Municipality of San Manuel as an inducement
to locate its business in the municipality. The appraised value of the land is P270,000 but
this was acquired San Manuel 20 years ago at a cost of P20,000. The company made no
entry to record the land because it had no cost basis.

Asset 8
Belgium Company constructed a building for P600,000. It could have purchased the
building for P740,000. The controller made the following entry.

Building 740,000
Cash 600,000
Profit on Construction 140,000

What is the total cost of the machinery?

P167,900
P183,900
P195,900
P179,900
Ans.
P167,900

SCAR, Inc. reported other noncurrent asset account balances on December 31, 2010, as
follows;
Patent P192,000
Accumulated amortization (24,000)
Net patent P168,000

Transactions during 2011 and other information relating to SCAR’s other noncurrent
assets included the following:
a. The patent was purchased from Ruby Company on January 2, 20 09, when the
remaining legal life was 16 years. On January 2, 2011, SCAR determined that the
remaining useful life of the patent was only eight years from the date of its acquisition.

b. On January 3, 2011, in connection with the purchase of a trademark from the

Golden Corp., the parties entered into a noncompetition agreement. SCAR paid Golden
P800,000, of which three-quarters related to the trademark and one-quarter reflected
Golden’s agreement not to compete for a period of five years in the line of business
covered by the trademark. SCAR considers the life of the trademark to be indefinite.

c. On January 3, 2011. SCAR acquired all the noncash assets and assumed all
liabilities of White Company at a cash purchase price of P1,200,000. SCAR determined
that the fair value of the net assets acquired in the transaction is P800,000.
What is the carrying amount of intangibles at December 31, 2011?

1,300,000
1,340,000
1,140,000
900,00
Ans.
1,300,000

SCAR, Inc. reported other noncurrent asset account balances on December 31, 2010, as
follows;
Patent P192,000
Accumulated amortization (24,000)
Net patent P168,000

Transactions during 2011 and other information relating to SCAR’s other noncurrent
assets included the following:
a. The patent was purchased from Ruby Company on January 2, 20 09, when the
remaining legal life was 16 years. On January 2, 2011, SCAR determined that the
remaining useful life of the patent was only eight years from the date of its acquisition.

b. On January 3, 2011, in connection with the purchase of a trademark from the

Golden Corp., the parties entered into a noncompetition agreement. SCAR paid Golden
P800,000, of which three-quarters related to the trademark and one-quarter reflected
Golden’s agreement not to compete for a period of five years in the line of business
covered by the trademark. SCAR considers the life of the trademark to be indefinite.

c. On January 3, 2011. SCAR acquired all the noncash assets and assumed all
liabilities of White Company at a cash purchase price of P1,200,000. SCAR determined
that the fair value of the net assets acquired in the transaction is P800,000.

What is the total amortization expense of intangible assets in 2011?

61,000
64,000
68,000
28,000
Ans.
68,000