COMPREHENSIVE PROBLEM

You were assigned to audit the financial statements of LARES Company for the year
ended December 31, 2025. The fieldwork has been completed and you are now going
over your audit findings to summarize your potential adjustments. The client is willing to
accept all the necessary adjustments in order for the financial statements to be
presented fairly in conformity with generally accepted accounting principles.

The following data were taken from your current working papers.

Cash account consists of the following items:

Petty cash fund P 10,000

PBCom checking account (15,000)
PNB current account 137,700
Total per GL P 132,700

a. The count of the cashier’s accountability on January 2, 2026, revealed total

currency and coins of P3,600. Unreplenished vouchers for various expenses
totaled P6,400, of which P1,200 pertains to January 2026.

b. On December 29, 2025, a check for P35,000 was drawn against PBCom current
account resulting in bank overdraft of P15,000. The check was picked up by the
supplier on January 3, 2026.

c. Bank reconciliation statement prepared by the cashier for the PNB account
follows:

Bank balance P 124,200

Add: Deposit in transit P 24,500
Bank service charges 500 25,000
Total 149,200
Less: Outstanding checks
Check No. Amount
@
567 P 1,000
589 8,300
617 2,400
626 3,400 11,500
Book balance P 137,700
@
Check certified by the bank in December 2025.

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
P16,000. The check represents a collection from account customer for sales made in
the middle of October 2025.
Your review of the client’s internal control points out many weaknesses. Accordingly,
you did not perform tests of controls and you relied heavily on substantive procedures.
Confirmation replies received directly from customers disclosed the following
exceptions:

Confirmatio
n No. Customer’s Comments Audit Findings
5 The goods sold on December The client failed to record credit
(Mang Bert) 1 were returned on December memo no. 23 for P12,000. The
16, 2025. merchandise was included in
the ending inventory at cost.

15 We do not owe this amount * Investigation revealed that

(Mang Jess) %#@ (bad word). We did not goods sold for P16,000 were
receive any merchandise from shipped to Mang Jess on
your company. December 29, 2025, terms
FOB shipping point. The
goods were lost in transit and
the shipping company has
acknowledged its responsibility
for the lost of the merchandise.

21 I am entitled to a 10% Hercules is an employee of

(Hercules) employee discount. Your bill LARES. Starting November
should be reduced by P1,200. 2025, all company employees
were entitled to a special
discount.

23 We have not yet sold the Merchandise billed for P18,000

(Eric) goods. We will remit the were consigned to Eric on
proceeds as soon as the goods December 30, 2025. The
are sold. goods cost P13,000.

34 We do not owe you P20,000. The sale of merchandise on

(Mancio) We already paid our accounts December 18, 2025 was paid
as evidenced by OR # 1234. by Mancio on January 6, 2026.

67 Reduce your bill by P1,500 This amount represents freight

(Jimmy) paid by the customer for the
merchandise shipped on
December 17, 2025, terms,
FOB destination-collect.

From the schedule of accounts receivable as of December 31, 2025, you determined
that this account includes the following:
 Accounts with debit balances:
60 days old and below P 238,500
61 to 90 days 117,200
Over 90 days 85,400 P 441,100
Advances to officers 16,400
Accounts with credit balance (15,000)
Accounts receivable per GL P 442,500

The credit balance in customer’s account represents collection from a customer whose
account had been written-off as uncollectible in 2024.

Accounts receivable for more than a year totaling P21,000 should be written off.

Based on your discussion with Eddie, LARES’ Credit Manager, you both agreed that an
allowance for doubtful accounts should be maintained using the following rates:

60 days old and below 1%

61 to 90 days 2%
Over 90 days 5%

The client determines its ending inventory by conducting a physical count at December
31 of each year. Compilation of physical inventory disclosed that tag numbers 143,
144, and 145 were not included in the inventory list.

Further investigation revealed the following:

Tag No.
143 200 units costing P8 per unit
144 800 units costing P15 per unit. Goods are held on consignment from
Lareng Co.
145 Cancelled tag

Your review of purchase transactions made a few days before and after December 31,
2025 revealed the following:

a. Merchandise costing P8,000 was received on January 3, 2026. The related

invoice was received and recorded on January 5, 2026. The invoice showed that
the shipment was made by the vendor on December 27, 2025; FOB destination.

b. Merchandise with a cost of P14,000 was received on December 31, 2025 and
the invoice was not recorded. The invoice was discovered at the Purchasing
Officer’s desk and was stamped “On Consignment” from Kolokoy Company.
 c. Merchandise received on January 3, 2026 costing P17,000 was entered in the
voucher register on the same day. Shipment was made by the vendor FOB
shipping point on December 31, 2025.

An analysis of 2025 transactions affecting the Available-for-Sale Securities and related

accounts follows:

Available-for-sale Securities
Jan. 01 Balance P 240,000
Jan. 02 Purchased 10,000 Super Co. common shares 250,000
July 01 Purchased P100,000,12% face value Mighty Co.
bonds 100,000
Sept. 08 Purchased 500 LARES Co.’s shares 6,000
Dec. 31 Balance P 596,000

a. The January 1 balance represents the cost of 10,000 shares of Super Co.’s
common stock acquired on January 2, 2024.

b. On January 2, 2025, LARES purchased 10,000 additional shares of Super Co.’s

common stock for P250,000 when the book value of Super’s stockholders’ equity
was P2,500,000.

c. From Super Company’s financial statements, you were able to obtain the
following information:
2024 2025
Net income 100,000 250,000
Dividends - 170,000

There are no other stockholders’ equity transactions that transpired in 2004 or

2005 for Super Company other than the above information.

At the end of 2005, the Super Co.’s common share was selling at P26 per share
while LARES Co.’s stock was selling at P15 per share.

d. Other income includes dividend of P34,000 received from Super Co. in 2025.

e. The client does not intend to hold Mighty bonds to maturity. The bonds pay
interest semi-annually on July 1 and January 1. Maturity date is 4 years from the
date of purchase. The Mighty bonds were selling at par at December 31, 2025.

Examination of the equipment and related accumulated depreciation account revealed

the following:

EQUIPMENT
01/01/2025 Balance P 640,000
 04/01/2025 Proceeds from sale of equipment (10,000)
07/01/2025 Cash paid to acquire new equipment 70,000
09/30/2025 Repair of equipment 5,000
12/31/2025 Balance P 705,000

Accumulated Depreciation
01/01/2025 Balance P 340,000
12/31/2025 Depreciation – 2025 141,000
12/31/2025 Balance P 481,000

a. On April 1, an equipment costing P50,000, with a carrying value of P20,000 on

the date of sale was sold for P10,000.

b. Old equipment was traded-in for new equipment with a market value of P75,000.
The old equipment was bought for P60,000. The carrying value of this
equipment on January 1, 2025 was P5,000.

c. Annual depreciation is computed at 20%. Salvage values of equipment are

immaterial.

Examination of subsequent disbursements revealed that expenses for telephone,

electricity, and water in 2025 totaling P32,000 were not recorded in the books.

On November 2, 2025, LARES Company issued P400,000 face value bonds. The
bonds, which will mature on January 1, 2010, pay interest of 12% every January 1. The
bonds were issued to give the bondholders a 14% yield.

From the minutes of the board of directors’ meetings, you gathered the following
information:

a. During the year 2025, the company issued 10,000 shares of its P10 par value
common stock for P12 each. The entire amount was credited to the common
stock account.

b. On December 31, 2025, the board of directors declared a 10% stock dividend to
stockholders on record as of January 16, 2026 distributable on January 31, 2026.

Presented on the next page are the unadjusted balances taken from the working trial
balance.
 LARES Company
December 31, 2025

Debit Credit

Cash P132,700
Accounts receivable 442,500
Allowance for doubtful accounts P15,000
Interest receivable -
Advances to officers and employees -
Inventory 367,200
Available-for-sale securities 596,000
Investment in Associate -
Equipment 705,000
Accumulated depreciation 481,000
Accounts payable 168,175
Accrued expenses 28,600
Bank overdraft -
Customers’ credit balance -
Interest payable -
Bonds payable 416,000
Discount on bonds payable -
Common stock, P10 par 670,000
Stock dividends distributable -
Additional paid-in capital 80,000
Retained earnings 90,975
Treasury stocks -
Net sales 1,053,500
Cost of sales 525,400
Other income 42,450
Investment income -
Operating expenses 276,900
Other expenses -
Finance cost - .
P3,045,700 P3,045,700
INSTRUCTIONS: Select the best answer from choices: A, B, C, and D that corresponds
to the audited balance of the account or account classification. Disregard tax
implications.

A B C D
147,40
1 Cash 146,000 144,400 0 143,400
2 Accounts receivable 424,400 387,400 418,400 403,400
3 Allowance for doubtful accounts 12,952 8,958 9,000 7,942
4 Interest receivable 12,000 5,975 11,975 6,000
5 Advances to officers and employees 20,000 16,400 2,600 19,000
371,80
6 Inventory 367,800 353,200 0 384,800
7 Available-for-sale securities - 106,000 590,000 100,000
8 Investment in associate - 490,000 506,000 516,000
705,00
9 Equipment 700,000 600,000 0 605,000
1 431,00
0 Accumulated depreciation 451,000 401,000 0 371,000
1 1,793,65
1 Total assets 1,785,658 1,779,658 8 1,798,658
1
2 Accounts payable 168,175 212,175 185,175 220,175
1 26,80
3 Accrued expenses 32,000 28,600 0 60,600
1
4 Bank overdraft 35,000 15,000 20,000 -
1
5 Customers' credit balance 15,000 16,400 10,000 -
1 48,77
6 Interest payable 48,960 48,800 3 48,000
1 376,96
7 Bonds payable 376,000 416,000 0 400,000
1 23,04
8 Discount on bonds payable - 24,000 0 23,227
1
9 Total liabilities 670,548 697,548 657,548 705,548
2 550,00
0 Common stock, P10 par 670,000 645,000 0 650,000
2 96,75
1 Stock dividends distributable 65,000 97,500 0 64,500
2 122,25
2 Additional paid-in capital 100,000 80,000 0 132,250
2 90,97
3 Retained earnings, 1/1/2005 111,975 112,975 5 100,975
2 Retained earnings, 12/31/2005 242,360 239,360 233,36 252,360
 4 0
2 5,00
5 Treasury stock - 4,500 0 6,000
2 1,074,11
6 Total stockholders’ equity 1,088,110 1,080,110 0 1,093,110
2 1,040,30
7 Net sales 1,023,500 1,034,300 0 1,022,300
2 510,60
8 Cost of sales 523,800 537,800 0 524,800
2
9 Other income 69,450 13,450 8,450 19,450
3
0 Investment income - 49,000 48,000 50,000
3
1 Operating expenses 318,815 321,100 298,542 300,042
3
2 Other expenses - 18,773 40,000 10,000
3 48,00
3 Finance cost 8,000 48,773 0 8,773
3
4 Net income 235,135 229,135 243,135 248,135
3
5 Cash shortage 1,200 3,600 - 2,600
3 5,20
6 Petty cash fund 6,400 3,600 0 4,800
3 123,50
7 Depreciation expense 122,000 141,000 0 121,000
3 96
8 Bond discount amortization - 800 0 773
3 20,00
9 Implied goodwill 40,000 10,000 0 -

40. Based on the above and the result your audit, you will most likely issue
a. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
c. Qualified or adverse opinion
d. Unqualified opinion.