AUDITING PROBLEMS

CPA Review

PROBLEM NO. 1 TOY COMPANY

1. A Acquisition cost (P8,297,000 P297,000 = P8,000,000 x75%) P6,000,000
Reconditioning cost
342,000
Salvaged materials garage
(66,000)
Construction of warehouse
1,013,000
Total cost - Buildings
P7,289,000
2. B Land - acquisition cost (P8,000,000 x 25%)

P2,000,000

3. B Machinery (P310,000 + P610,000)

P920,000

4. C Share premium (P640,000 P40,000) + (P1,110,000 P1,000,000)P710,000

5. A Patent (P640,000 P310,000)
Franchise
Total intangibles

P330,000
500,000
P830,000

PROBLEM NO. 2 LAFAYETTE CORPORATION

Computation of Estimated Loss on Returns on Sales Warranties
Subsequent to June 30, 2012

Month
January
February
March
April
May
June

Percentage
of
Estimated
Returns

Sales
P4,200,000
4,700,000
3,900,000
3,250,000
2,400,000
1,900,000

7%
7
7
7
10
10

Total
Estimated
Returns

Percentage of
Estimated
Returns Subsequent to
6/30/12

P294,000
329,000
273,000
227,500
240,000
190,000
P1,553,500

Total estimated returns............... P648,850

Loss percentage on returns.........
65%*
Total estimated loss on returns. . . P421,753

Total
Estimated
Returns Subsequent to
6/30/12

10%
20
30
50
70
100

P29,400
65,800
81,900
113,750
168,000
190,000
P648,850

Required liability balance.......

Less balance, 6/30/12............
Required adjustment to
liability account

*Estimated loss on component replacement (in percentage of sales price):

Cost of unit replacement
Add freight charges on return and replacement
Deduct salvage value of components returned
Net loss on components returned

P421,753
120,400
P301,353

70%
5
75%
10
65%

Adjusting Entry
Warranty Expense
Estimated Liability for Product Warranty
1. D

2. B

3. A

301,353
301,353
4. B

Page 1 of 13 Pages

5. B

PROBLEM NO. 3 MALOX SPECIALTY COMPANY

Down tube shifters at NRV
Bar end shifters at cost
Head tube shifters at cost
Work-in-process at NRV
Derailleurs at NRV
Remaining items at NRV
Supplies at cost
Totals
1
2

FG
P266,000
182,000
195,000

WIP

P108,700

P643,000

P108,700

RM

FS

P110,0001
127,400

P64,8002
P64,800

P237,400

P264,000 x = P132,000; P132,000/1.2 = P110,000

P69,000 P4,200 = P64,800

1. B

2. C

3. D

4. A

5. C

PROBLEM NO. 4 GATAS COMPANY

1. C Cows (15,000 x P4,000)
Heifers (1,000 x P3,000)
Fair value, Nov. 1, 2010

P60,000,000
3,000,000
P63,000,000

2. A Cows (15,000 x P5,000)

Heifers (1,000 x P4,500)
Heifers (7,500 x P3,600)
Fair value, Oct. 31, 2011

P 75,000,000
4,500,000
27,000,000
P106,500,000

3. C Increase in fair value due to price change:

Cows 15,000 x P(4,500-4,000)
Heifers 1,000 x P(3,200-3,000)
Heifers 7,500 x P(3,200-3,000)
Total

P7,500,000
200,000
1,500,000
P9,200,000

4. B Increase in fair value due to physical change:

Cows 15,000 x P(5,000-4,500)
Heifers 1,000 x P(4,500-3,200)
Heifers 7,500 x P(3,600-3,200)
Total

P7,500,000
1,300,000
3,000,000
P11,800,000

5. A Fair value of cattle in Central Visayas:

Cows (6,000 x P5,000)
Heifers (2,000 x P4,500)
Total

P30,000,000
9,000,000
P39,000,000

PROBLEM NO. 5 MINA MINING CO.

Depletable/Depreciable CostEstimated ReservesDepletion/Depreciation
Mineral propertyP 26,100,0001
120,000
P217.50
Building
1,080,000
120,000
9.00
Machinery (1/2)
900,000
120,000
7.50
Machinery (1/2)
900,000
120,000
15.00 2
1
2

P27,000,000 P900,000
P900,000/120,000) x 2

1. D
Mineral property (P217.50 x 6,000)
Building (P9 x 6,000)
Machinery (1/2) (P7.50 x 6,000)
Machinery (1/2) (P15 x 6,000)

Year 1
Depletion
Depreciation
P1,305,000
P 54,000
45,000
90,000
P1,305,000

P189,000
2. C

Year 5
Page 2 of 13 Pages

Mineral property (P217.50 x 12,000)

Building (P9 x 12,000)
Machinery (1/2) (P7.50 x 12,000)
Machinery (1/2) (P15 x 12,000)

Depletion
P2,610,000

Depreciation
P108,000
90,000
180,000
P2,610,000

P378,000
3. D
Mineral property (P217.50 x 12,000)
Building (P9 x 12,000)
Machinery (1/2) (P7.50 x 12,000)
Machinery (1/2) (P15 x 6,000)

Year 6
Depletion
Depreciation
P2,610,000
P108,000
90,000
90,000
P2,610,000

P288,000
4. A
Mineral property (P217.50 x 6,000)
Building (P9 x 6,000)
Machinery (1/2) (P7.50 x 6,000)
Machinery (1/2)

Year 11
Depletion
Depreciation
P1,305,000
P54,000
45,000
-P1,305,000

P99,000
5. A
Mineral property (P217.50 x 5,000)
Building (P9 x 5,000)
Machinery (1/2) (P7.50 x 5,000)
Machinery (1/2) (P15 x 5,000)

Year 1
Depletion
Depreciation
P1,087,500
P 45,000
37,500
75,000
P1,087,500

P157,500
PROBLEM NO. 6 DEBBY CORP.
1. B Land (appraised value)

P8,700,000

2. A Total purchase price

Less: Land appraisal
Balance of purchase price to be allocated
Building
Machinery

Appraisal Value
P3,150,000
1,350,000
P4,500,000

P12,000,000
8,700,000
P 3,300,000

Ratios
Allocated Values
315/450 = 0.70 x P3,300,000 P2,310,000
135/450 = 0.30 x P3,300,000
990,000
P3,300,000

Building (allocated value)

Renovations
3,000,000
Capitalized interest (P3,000,000 x 12%)
Total cost of building

P2,310,000
360,000
P5,670,000

3. D Machinery (allocated value)

P990,000

4. C 2012 Depreciation Building (P5,670,000 x 10%* x )

P283,500

* 150% x 1/15

5. B 2012 Depreciation Machinery (P990,000 x 40%* x )

P198,000

* 200% x 1/5

PROBLEM NO. 7 FISHING CORPORATION

1. C Sales price of Salmon ordinary shares (P70 x 1,200)
Page 3 of 13 Pages

P84,000

Acquisition cost (P660,000 x 1,200/13,200)

Gain on sale of Salmon ordinary shares

60,000
P24,000

2. D
3. C Investment in equity securities
Dividend income (P1.20 x 60,000 shares)

72,000
72,000

4. B Unrealized loss (P3,000,000 P2,808,000)

Investment
Quantity
Salmon Company 12,000 shares
Tamban, Inc.
60,000 shares
Totals
1
2

P74 x 12,000 shares

P32 x 60,000 shares

5. A
Aluminum siding
Cedar shake siding
Louvered glass doors
Thermal windows

Cost
P 210,000
258,000
336,000
420,000
P1,224,000

Cost
P 600,000
2,400,000
P3,000,000

P192,000
Fair Value
P 888,000 1
1,920,000 2
P2,808,000

Net Realizable Value

P 168,000
254,400
504,900
420,000
P1,347,300

Lower
P 168,000
254,400
336,000
420,000
P1,178,400

PROBLEM NO. 8 GARLA HOME IPROVEMENTS/MANGO BANGGO

1. B Allowance to reduce inventory to NRV, May 31, 2012
P45,600

(P1,224,000 P1,178,400)

2. A Allowance balance prior to adjustment

Required allowance balance
Gain to be recorded

P82,500
45,600
P36,900

3. B Gain from change in fair value of biological asset

P45,000

4. A Agricultural produce, at fair value

P90,000

5. A Gain from change in fair value biological asset

Gain from change in fair value agricultural produce
Gross profit on sold mangoes
Total effect on income

P 45,000
90,000
15,000
P150,000

PROBLEM NO. 9
1.
Cost of trademark
Less: Accumulated amortization, 20X4 20X6 (P300,000/10 x 3 yrs.)
Carrying value, December 31, 20X6
Remaining useful life, 20X7 20X9
Amortization for 20X7
Answer: B

P300,000
90,000
P210,000
3 years
P 70,000

2.
Cost
Less: Accumulated amortization, 20X4 20X7 (P90,000 + P70,000)
Carrying value, December 31, 20X7
Recoverable value
Impairment loss
Answer: A

P300,000
160,000
P140,000
50,000
P 90,000

3.
Probability-weighted expected cash flows:
P400,000 x 5%
P200,000 x 20%
Page 4 of 13 Pages

P 20,000
40,000

P80,000 x 50%
P20,000 x 25%

40,000
5,000
P105,000
6,300
P111,300
0.95238
P106,000

Total
Add: 6% risk adjustment
Total
Present value factor (at 5% for 6 months)
Present value of warranties, December 31, 20X2
Answer: D

4. It is probable that SME B will successfully defend the court case. Therefore, SME B has a
possible obligation and hence a contingent liability. No amounts are recognized for
contingent liabilities. However, disclosure is necessary.
Answer: D
5.
Cost of investment in entity DD (P28,000 x 101%)
Fair value less cost to sell (P15,000 x 95%)
Impairment loss
Answer: B

P28,280
14,250
P14,030

Impairment loss
Cash dividends (P2,000 + P250)
Net
Answer: A

P(14,030)
2,250
P(11,780)

6.

7.
Cost of investment in entity DD (P28,000 x 101%)
Less: Share of entity DDs loss (P20,000 x 25%)
Carrying value, December 31, 20X1
Fair value less cost to sell (P15,000 x 95%)
Impairment loss
Answer: C

P28,280
5,000
P23,280
14,250
P 9,030

Share of income, entities BB and CC (P1,250 + P4,500)

Share of loss, entity DD
Impairment loss
Net
Answer: A

P5,750
(5,000)
(9,030)
P(8,280)

8.

9.
Cost
P10,000
15,000
28,000
P53,000

BB
CC
DD

Fair Value
P13,000
29,000
15,000
P57,000

Increase in fair value (P57,000 P53,000)

Answer: A

P4,000

10.
Cost model:
Acquisition cost, including transaction cost (P53,000 + P530)
Less: Impairment loss
Carrying value, December 31, 20X1

P53,530
14,030
P39,500

Equity method:
Acquisition cost, including transaction cost
Cash dividends (P250 + P2,000)
Share of income, entities BB and CC (P1,250 + P4,500)
Share of loss, entity DD

P53,530
(2,250)
5,750
(5,000)

Page 5 of 13 Pages

Impairment loss
Carrying value, December 31, 20X1

(9,030)
P43,000

Fair value model:

BB
CC
DD
Carrying value, December 31, 20X1
Answer: C

P13,000
29,000
15,000
P57,000

PROBLEM NO. 10 HIATT TEXTILE CORPORATION

ADJUSTING JOURNAL ENTRIES
December 31, 2012
1.

2.

3.

4.

Prepaid insurance (P31,000 x 3/5)

Insurance expense (P31,000 x 1/5)
Retained earnings (P31,000 x 4/5)

18,600
6,200

Allowance for bad debts

Bad debt expense
(2% - 1 % = % x P5,000,000)

25,000

Retained earnings
Cost of goods sold (P99,000 P75,500)
Inventory

75,500
23,500

24,800
25,000

99,000

Equipment
Depreciation expense
(P125,000 x 1/10)
Retained earnings (P150,000 P12,500)
Accumulated depreciation Equipment
(P125,000 x 2/10)

150,000
12,500
137,500
25,000

2012
P1,100,000
(6,200)
25,000

Reported net income

Prepaid insurance charged to expense
Decrease in bad debt expense rate
Ending inventory overstated:
Cost of machine charged to expense
Unrecorded depreciation
Corrected net income
1. A

2. B

3. C

(12,500)
P1,082,800
4. D

2011
P975,000
24,800
150,000
(12,500)
P1,061,800

5. C

PROBLEM NO. 11 BENEFICIO CORPORATION

1.
Sales
Gain on sale of trading securities
Cost of goods sold
Selling and general expenses
Income taxes
Unrealized loss on trading securities
Loss on sale of equipment
Net income
Answer: D

Page 6 of 13 Pages

P 898,000
12,000
(539,000)
(287,000)
(35,000)
(4,000)
(1,000)
P 44,000

2.
Unappropriated retained earnings, Dec. 31, 2011
Net income (see no. 1)
Decrease in appropriation for treasury stock
Increase in appropriation for possible building expansion
Stock dividend declared (100,000 issued 1,000 treasury =
99,000 outstanding x 30% x P2)
Remaining unappropriated retained earnings
Unappropriated retained earnings, Dec. 31, 2012, including
net income for 2012*
Assumed cash dividends declared and paid during 2011

P112,000
44,000
5,000
(15,000)
(59,400)
86,600
78,600
P 8,000

Answer: A
3.
Increase in common stock (P359,400 P200,000)
Less: Stock dividend (P2 x 99,000 x 30%)
Par value of additional common stock issued in 2012

P159,400
59,400
P100,000

Increase in share premium (P116,000 P5,000)

Less: APIC from resale of treasury stock at more than cost
APIC from stock issued in 2012

P111,000
1,000
P110,000

Proceeds from issuance of ordinary shares in 2012

(P100,000 + P110,000)
Answer: C

P210,000

4.
Net decrease in investment in trading securities
Less: Unrealized loss on trading securities
Carrying value of trading securities sold
Add: Gain on sale of trading securities
Proceeds from sale of trading securities
Answer: B

P 30,000
4,000
26,000
12,000
P38,000

5.
Proceeds from sale of equipment (see information b)
Add: Loss on sale of equipment
Book value of equipment sold
Cost of equipment sold (see information b)
Accumulated depreciation of equipment sold
Answer: A

P 7,000
1,000
8,000
15,000
P 7,000

6.
Net increase in equipment (P305,000 P170,000)
Sale of equipment (see information b)
Purchase of equipment
Less:Note payable issued
Cash paid
Answer: D
*

P135,000
15,000
150,000*
50,000
P100,000

Equipment
Bal. 12/31/10 170,000
Purchase
(SQUEEZE)
150,000
Bal. 12/31/11 305,000

15,000

Sale

7.
Cost of treasury stock sold (P10,000 P5,000)
APIC from sale of treasury stock
Proceeds from sale of treasury stock
Page 7 of 13 Pages

P5,000
1,000
P6,000

Answer: A
8. CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Depreciation expense (P3,750 + P25,250)
Loss on sale of equipment
Unrealized loss on trading securities
Amortization of bond discount (P9,000 P8,500)
Gain on sale of trading securities
Proceeds from sale of trading securities (see no. 4)
Decrease in deferred tax liability
Increase in net accounts receivable
Decrease in inventories
Increase in prepaid insurance
Decrease in accounts payable
Increase in accrued expenses payable
Increase in income taxes payable
Decrease in unearned revenue
Net cash provided by operating activities

P 44,000
29,000
1,000
4,000
500
(12,000)
38,000*
(6,300)
(45,000)
9,000
(500)
(5,000)
9,300
25,000
(8,000)
P 83,000

Answer: C

9. CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of equipment (see no. 6)
Overhaul of equipment (see information h)
Sale of equipment (see information b)
Net cash used in investing activities

P(100,000)
(6,000)
7,000
P(99,000)

Answer: B
10. CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends (see no. 2)
Retirement of notes payable (P60,000 P40,000)
Sale of treasury stock (see no. 7)
Issuance of common stock (see no. 3)
Net cash provided by financing activities

P (8,000)
(20,000)
6,000
210,000
P188,000

Answer: A
PROBLEM NO. 12 CORNETTE MANUFACTURING COMPANY
1.
Cash price
Freight charges
Installation cost
Total cost of machine 3

P171,000
1,326
5,274
P177,600

Answer: B
2.
Cash price
Repainting cost
New tires
Total cost of second-hand vehicle acquired

P45,600
1,965
1,035
P48,600

Answer: D
3. Fair value of the machine given up
Answer: A

P34,500

Page 8 of 13 Pages

4.
Cost of machine 1
Accumulated depreciation, Oct. 7, 2008 Aug. 28, 2012
(P129,000 P7,500 = P121,500/5 x 3 11/12)

P129,000
(95,175)

Carrying value
Fair value
Gain on exchange
Answer: D

33,825
34,500
P 675

5.
Depreciation expense for 2012:
Buildings ([P557,160 P15,000]/20 years)
Machinery:
1 ([P129,000 P7,500]/5 X 8/12)
2 ([P144,000 P9,000]/6)
3 ([P177,600 P12,000]/5)
Vehicles:
Old ([P140,400 P58,968] x 40%)
New (P48,600 x 40% x 6/12)
Office furniture
([P34,500 P1,620]/8 x 4/12)
Total
Answer: D
6.
Proceeds from sale
Carrying value, Jan. 1 ([P81,432 P32,573] x )
Depreciation, Jan. 1 May 25 (P24,430 x 40% x 5/12)
Loss on sale
Answer: A

P 27,108
P16,200
22,500
33,120

71,820

P32,573
9,720

42,293
1,370
P142,591

P19,800
P24,430
(4,072)

(20,358)
P (558)

7.
Depreciation expense for 2013:
Buildings
Machinery:
2
3
Vehicles:
Old sold on May 25, 2013
Old still on hand on 12/31/13 (P24,430 x 40%) 9,772
New ([P48,600 P9,720] x 40%)
Office furniture (P32,880/8)
Land improvements (P16,500/10 x 6/12)
Total

P 27,108
P22,500
33,120
P4,072
9,772
15,552

55,620

29,396
4,110
825
P117,059

Answer: B
8.
Total cost of machine 2 (P144,000 + P36,000 cost of overhaul)
Accumulated depreciation, Feb. 4, 2008 Jan. 5, 2014:
([P144,000 P9,000]/6 x 4 11/12)
Carrying value
Revised residual value
Remaining depreciable cost

P180,000

Revised remaining life (6-4 11/12 +1)

Revised annual depreciation (P54,375/25 x 12)

25 months
P26,100

Answer: C

9.
Page 9 of 13 Pages

110,625
69,375
(15,000)
P 54,375

Cash paid
Trade in value of old vehicle
Total cost of new vehicle

P69,900
11,100
P81,000

Answer: A
10.
Depreciation expense for 2014:
Buildings
Machinery:
2
3
Vehicles:
Old traded-in on June 20
([P24,430 P9,772] x 40% X 6/12)
Acquired June 20 through trade-in
(P81,000 x 40% X 6/12)
Acquired June 22, 2011, scrapped
Oct. 4, 2013 ([P38,880 P15,552] x 40% X 9/12)
Office furniture
Land improvements (P16,500/10)
Total

P 27,108
P26,100
33,120

59,220

P 2,932
16,200
6,998

26,130
4,110
1,650
P118,218

Answer: C
PROBLEM NO. 13 CHELSEE COMPANY
1.
Outstanding checks, December 31 (P49,400 P1,400 P8,000)

P40,000

Answer: D

Per bank statement

Outstanding checks:
Nov. 30
Dec. 31
Deposits in transit:
Nov. 30
Dec. 31
Interest on note discounted
(P90,000 x 6% 60/360)
NSF checks
Bank service charge
Cancellation of check no. 1434
Error in recording check no. 1562
(P7,500 P750)
Cancellation of check no. 1584
Counter check drawn by president
Check of Chelsea charge in
error
Postdated check presented for
payment
Per book balances
2. A

3. D

Balance
Nov. 30
P194,000

December
Receipts
Disb.
P1,487,000
P1,325,000

(23,000)
11,000

(23,000)
40,000
(11,000)
24,000
900
(4,000)

P182,000

P1,496,900

Balance
Dec. 31
P356,000
(40,000)
24,000
900

(4,000)
(300)
1,400

300
(1,400)

6,750
8,000
(2,000)

(6,750)
(8,000)
2,000

(3,000)

3,000

(100,000)
P1,248,850

100,000
P430,050

4. C

5.
Book
P430,050

Unadjusted balances
Outstanding checks
Deposits in transit
Page 10 of 13 Pages

Bank
P356,000
(40,000)
24,000

Interest on note discounted

Bank service charge
Cancellation of check no. 1434
Error in recording check no. 1562
Cancellation of check no. 1584
Counter check
Check of Chelsea charged in error
Postdated check presented for payment
Adjusted balance

(900)
(300)
1,400
6,750
8,000
(2,000)
3,000
(100,000)
P343,000

P343,000

Answer: A
PROBLEM NO. 14 SABILA COMPANY
1.
Accounts receivable, Dec. 31, 2012
Add: Collections, 2010 2012
Total
Less:Accounts receivable, Jan. 1, 2010
Total credit sales
Add: Cash sales, 2010 2012
Total sales, 2010 2012

P 33,000
567,600
600,600
16,600
584,000
74,200
P658,200

Answer: A

2.
Sales revenue for 2011 (see no. 5)

P206,400

Answer: A
3.
Accounts payable, Dec. 31, 2012
Add: Payments to suppliers
Total
Less:Accounts payable, Jan. 1, 2012
Total purchases, 2010 2012

P 11,000
440,000
451,000
5,000
P446,000

Answer: D
4.
Sales (see no. 1)
Less: Cost of sales
Inventory, Jan. 1, 2010
Add: Purchases (see no. 3)
Goods available for sale
Less:Inventory, Dec. 31, 2012
Gross profit
Gross profit ratio (P219,400 / P658,200)

P658,200
P 11,600
446,000
457,600
18,800

438,800
P219,400
33 1/3%

Answer: A
5.
Cash sales
Collections in:
2010
2011
2012
A/R, Dec. 31
Total sales
Multiply by gross profit ratio
Gross profit

2010
P 17,000

2011
P 26,000

2012
P 31,200

Total
P 74,200

148,800
15,000
2,000
800
183,600
33 1/3%
P 61,200

161,800
16,800
1,800
206,400
33 1/3%
P 68,800

208,800
28,200
268,200
33 1/3%
P 89,400

148,800
176,800
227,600
30,800
658,200
33 1/3%
P219,400

Answer: D

Page 11 of 13 Pages

PROBLEM NO. 15 MABUHAY COMPANY

1.
Sales proceeds (P69 x 4,000)
Carrying value (P528,250 x 4/8)
Gain on sale of Toronto shares

P276,000
264,125
P 11,875

Answer: C
2.
Sales proceeds (P62 x 4,000)
Unrealized gain on share sold (P40,000 x 4/10)
Total
Carrying value (P630,000 x 4/10)
Gain on sale of Bulacan shares

P248,000
16,000
P264,000
252,000
P 12,000

Or
Sales proceeds
Cost of Bulacan shares sold (P590,000 x 4/10)
Gain on sale of Bulacan shares

P248,000
236,000
P 12,000

Answer: A
3.
Yemen Corp. stock (P76.60 x 13,000)
Toronto, Inc. stock (P68.50 x 4,000)
Manila Water bonds
Pasay Co. stock (P55.25 x 15,000)
Carrying value (Fair value), December 31, 2012

P 995,800
274,000
205,550
828,750
P2,304,100

Answer: C
4.
Bulacan, Inc. stock (P61 x 6,000)
Jumbo Unlimited, Inc. stock (P27 x 20,000)
Carrying value (Fair value), December 31, 2012

P366,000
540,000
P906,000

Answer: C
5.
Balance of trading securities, December 31, 2011
Cost of 3,000 Yemen shares purchased on March 1
Carrying value of Toronto stock sold on April 15
Cost of Pasay shares purchased on October 30
Balance before market adjustment
Market value, December 31, 2012
Unrealized gain Trading Securities

P1,477,500
229,500
(264,125)
832,500
P2,275,375
2,304,100
P 28,725

Balance of AFS securities, December 31, 2011

Carrying value of Bulacan stock sold on May 4
Balance before market adjustment
Market value, December 31, 2012
Decrease in unrealized gain AFS
Balance of unrealized gain AFS, 12/31/12 (P100,000 P16,000)
Unrealized gain to be reported in equity

P1,180,000
(252,000)
P 928,000
906,000
P (22,000)
84,000
P 62,000

Or
Cost of Bulacan stock (P590,000 x 6/10)
Cost of Jumbo Unlimited, Inc. stock
Total cost
Market value, December 31, 2012
Unrealized gain AFS, December 31, 2012
Answer: A
Page 12 of 13 Pages

P354,000
490,000
P844,000
906,000
P 62,000

PROBLEM NO. 16 BABOLS COMPANY

2010
1. Net income as reported
2. Elimination of profit on
consignments:
Billed at 130% of cost
Cost (/130%)
Profit error
3. To correct COD sale
4. Adjustment of warranty expense:
Sales per books
Corrections for Consignments
Correction for COD sale
Corrected sales
1,867,000
Normal warranty expense
(1/2 of 1%)
Costs charged to expense
Additional expense
5. Bad debt adjustments:
Normal bad debt expense,
of 1% of sales
Previous write-offs
Additional expenses
6. Adjustment for commissions

13,000
10,000
3,000

COMPUTATIONS
2011
2012

3,000

11,180
8,600
2,580

2,020,000
13,000
12,200
2,045,200

3,590,000
(11,180)
(12,200)
3,566,620

9,335
(1,520)
7,815

10,226
(3,340)
6,886

17,833
(7,700)
10,133

4,668
(1,500)
3,168

5,113
(2,640)
2,473

8,917
(7,700)
1,217

1,880,000
(13,000)
1,867,000

7. Adjustment for bonus, of 1% of income before

taxes & bonus
INCOME BEFORE INCOME TAXES
1. A

2. D

3. B

4. A

5. A

6. D

7. A

--- END ---

Page 13 of 13 Pages

SUMMARY INCREASES
(DECREASES) IN INCOME
2010
2011
2012
P143,200
P222,800
P207,160

(3,000)

3,000
12,200

(2,580)
(12,200)

(7,815)

(6,886)

(10,133)

(3,168)
(2,800)
126,417

(2,473)
1,200
229,841

(1,217)
(640)
180,390

(632)
P125,785

(1,149)
P228,692

(902)
P179,488

8. C

9. A

10. A