AUDITING PROBLEMS

EXPENDITURE CYCLE

1. It would be appropriate for the payroll accounting department to be responsible for which of
the following functions?
A. Approval of the employee time records
B. Maintenance of records of employment, discharges, and pay increases
C. Preparation of periodic government reports as to employees’ earning and withholding
taxes
D. Temporary retention of unclaimed employee paychecks

2. Which of the following is a question that the auditor would expect to find on the production
cycle section of an internal control questionnaire?
A. Are vendor’s invoices for raw materials approved for payment by an employee who is
independent of the cash disbursements function?
B. Are signed checks for the purchase of raw materials mailed directly after signing
without being returned to the person who authorized the invoice processing?
C. Are all releases by storekeepers of raw materials from storage based on approved
requisition documents?
D. Are details of individual disbursements for raw materials balanced with the total to be
posted to the appropriate general ledger account?
INVENTORY
3. Which of the following is the most appropriate audit test to evaluate the accuracy of the
inventory records for materials inventory in a production operation?
A. Trace selected inventory receipts to perpetual inventory records.
B. Vouch selected postings in the perpetual inventory records to source documents.
C. Perform turnover tests for materials inventory.
D. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing.
4. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off the items and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailers’ books for several items returned
to its suppliers.
D. An item purchased “FOB shipping point” had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
CASH
5. On receiving the bank cut-off statement, the auditor should trace:
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal
b. Checks dated prior to year end to the outstanding checks listed on the year-end
reconciliation
c. Deposits listed on the cut-off statement to deposits in the cash receipts journal
d. Checks dated subsequent to year end to the outstanding checks listed on the
year-end bank reconciliation
6. The cashier of Sherely Jewelries covered a shortage in the cash working fund with cash
obtained at December 31 from a bank by cashing but not recording a check drawn on the
company out of town bank. How would you as an auditor discover the manipulation?
 a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut-off statements of the succeeding
month.
d. By preparing independent bank reconciliations as of December 31

7. Which of the following cash transfers result in a misstatement of cash at December 31,
2011?
Disbursement Receipts
Recorded in Paid by bank Recorded in Received by
books books bank
A. 12/31/11 01/04/12 12/31/11 12/31/11
B. 01/04/12 01/05/12 12/31/11 12/31/11
C. 12/31/11 01/05/12 12/31/11 01/04/12
D. 01/04/12 01/11/12 01/04/12 01/04/12
REVENUE CYCLE

8. Standard control procedures over customer remittances received through the mail include
the policy of having the mailroom personnel
A. Forwards the remittances, unopened, directly to the cashier
B. Forwards the remittances, unopened, directly to the accounts receivable
records
C. Opens the mail, restrictively endorse the checks, and then prelists each
remittance in triplicate copies
D. Opens the mail, restrictively endorses the checks, then, forward the
remittances directly to the account receivable clerk
9. Which of the following is not a common activity of the revenue/receipt cycle?
A. Order entry
B. Inventory control
C. Receiving
D. Cash collection
INVESTMENTS
10. Which of the following controls would an entity most likely use in safeguarding against the
loss of investment securities?
a. A designated member of the board of directors controls the securities in a bank safe
deposit box.
b. An independent trust company that has no direct contact with the employees who have
record-keeping responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entity’s safe each year on
the balance sheet date.
d. The independent auditor traces all purchases and sales of investment securities
through the subsidiary ledgers to the general ledger.
11. The auditee has just acquired another company by purchasing all its assets. As a result of
the purchase, "goodwill" has been recorded on the auditee's books. Which of the following
comparisons would be the most appropriate audit test for the amount of recorded goodwill?
A.The purchase price and the fair market value of assets purchased.
B. The purchase price and the book value of assets purchased.
C. The figure for goodwill specified in the contract for purchase.
D. Earnings in excess of 15% of net assets for the past five years.
PPE
12. The most significant audit step in substantiating additions to the office furniture account
balance is
A. Comparison to prior year's acquisitions.
 B. Examination of vendors' invoices and receiving reports for current year's acquisitions.
C. Review of transactions near the balance sheet date for proper period cutoff.
D. Calculation of ratio of depreciation expense to gross office equipment cost.
13. Property acquisitions that are misclassified as maintenance expense would most likely be
detected by internal control procedures that provide for
A. Review and approval of the monthly depreciation entry by the plant supervisor.
B. Investigation of variances within a formal budgeting system.
C. Examination by the internal auditor of vendor invoices and canceled checks for property
acquisitions.
D. Segregation of duties of employees in the accounts payable department.
14. An auditor analyzes repairs and maintenance accounts with the goal of obtaining
substantial evidence to support assertions regarding
A. To the proper classification of accounts- that expenditures for plant site have been recorded
to Property Plant and Equipment account
B. The recording of noncapitalizable expenditures for repairs and maintenance are in the
proper period
C. The assertion that expenditures for machinery have not been charged to expense
D. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense
LIABILITIES
15. In the audit of notes payable, it is common to include tests of principal and interest
payments as a part of the audit of the acquisition and payment cycle because the payments are
in the cash disbursement journal that is being sampled. It is also normal to test these
transactions as part of the capital acquisitions and repayment cycle due to the reason that:
A. Replication of the evidence will give the auditor a higher lever of assurance
B. It is not unusual for the auditor to duplicate a process. It is more of a safety measures to
scrutinize the details per account.
C. With the infrequency of these transactions, most cases would show that no transactions
involving notes payable are included in the sample tests of acquisitions and payments
D. The test performed in the acquisition and payments cycle will cover the cash credit side so
tha tests performed in the capital acquisition and repayment cycle will look at the debit side of
the transaction.
16. During the course of an audit, Harlet, CPA observes that the recorded interest expense
seems to be exorbitant in relation to the balance in the long-term debt account. Having this in
mind, it could be a red flag that :
A. Long term debt is overstated
B. Long term debt is understated
C. Premium on bonds payable in understated
D. Discount on bonds payable is overstated
17. The following controls over notes payable are significant. Which one is not?
A. Notes payable should not be issued if proper authorization was not fulfilled
B. At all costs, documentation and recording should be performed at all times
C. Repayment of interest and principal should always have an adequate control
D. Notes payable should be strategically issued. It entails a proper timing of issuance
that follows the business climate
18. Which of the following is a substantive test that an auditor is most likely to perform to verify
the existence and valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders
are used and accounted for.
b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to
search for unrecorded vendor’s invoices.
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports.
d. Confirming accounts payable balances with known suppliers who have zero balances.
SHAREHOLDER’S EQUITY

19. When the client-company does not maintain its own records, the auditor should seek for the
written confirmation from the agent responsible for the transfer and registration concerning:
A. Guarantees of preference shares liquidation value
B. Restriction on the payment of dividends
C. Quantity of shares issued and outstanding
D. The number of shares outstanding and subject to agreements to repurchase
20 . An auditor usually obtains evidence of stockholders equity transactions by reviewing the
entity’s
A. Cancelled stock certificates
B. Minutes of BOD meeting
C. Treasury share certificates
D. Transfer agent’s records
PROBLEMS

PROBLEM NO.1- AUDIT OF INVENTORY

You are engaged in an audit of CYDIAN CO. For the year ended Dec. 31, 2017. To reduce the
workload at year-end, the company took its annual physical inventory under your observation
on Nov. 30,2018.
The company’s inventory accounts, comprising of raw materials and work in process, is on a
perpetual basis and it employs the FIFO method of pricing. No finished goods are in the
inventory.
The company’s physical inventory revealed that the book inventory of P181,710 was
understated by P9,000. To evade distorting the interim financial statements, the company
decided not to adjust the book inventory until year-end except for obsolete inventory items.

Your audit revealed these information about the Nov. 30 inventory:

 Footing and extension errors resulted in a P450 understatement in the physical inventory.
 Pricing tests showed that the physical inventory was overpriced by P6,600.
 The physical inventory included obsolete materials recorded at P750. During December,
these materials were removed from the inventory account by a charge to cost of sales.
Your audit also disclosed the following information about the December 31, 2017
inventory:
 Total debits to certain accounts during December are:
Purchases P74,100
Direct Labor 36,300
Manufacturing overhead expense 75,600
Cost of sales 205,800

 The cost of sales of P205,800 included direct labor of P41,400.

 Normal scrap loss on established product lines is negligible. However, a special order
started and completed during Dec. Had excessive scrap loss of P2,400, which was
charged to Manufacturing overhead expenses.
1. What is the correct amount of the physical inventory at Nov. 30, 2017?
A. P181,710 B. P172,710 C. P183,810 D. P190,710
2. What is the inventory per physical count on Nov. 30, 2017?
A. P181,170 B. P165,810 C.P190,710 D. P184,810
Without prejudice to your answer to question 1 and 2, assume that the correct amount of
inventory at Nov. 30,2017 was P173,100.

3. What is the amount of direct labor cost included in the Dec. 31,2017 inventory?
A. P24,900 B. P73,950 C. P30,000 D.P78,950
4. What is the materials inventory at Dec. 31, 2017?
A. P78,750 B.P74,700 C. P73,950 D. P776,350
5. What is the correct inventory at Dec. 31, 2017?
A. P198,150 B. P148,650 C. P149,400 D. P151,050

PROBLEM 2- AUDIT OF INVENTORY

The CRC-ACE Co. is on a calendar year basis. The following data were found during your
audit:

I. Goods in transit shipped FOB Destination by a supplier in the amount of P20,000 had
been excluded from the inventory, and further testing revealed that the purchase had
been recorded.

II. Goods costing P10,000 had been received, included in the inventory and recorded as a
purchase. However, upon inspection, the goods were found to be defective and
would be immediately returned.

III. Materials costing P50,000 and billed on December 30 at a selling price of P64,000 had
been segregated in the warehouse for shipment to a customer. The materials had
been excluded from inventory as a signed purchase order had been received from the
customer. Terms, FOB destination.

IV. Goods costing P14,000 was out on consignment with Libra, Inc. Since the monthly
statement from Libra listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P16,000.

V. The sale of P30,000 worth of materials and Costing P24,000 had been shipped FOB
point of shipment on December 31. However, this inventory was found to be included
in the final inventory.

VI. Goods costing P20,000 and selling for P28,000 had been segregated but not shipped
at December 31, and were not included in the inventory. A review of the customer’s
purchase order set forth terms as FOB destination. The sale had not been recorded.

VII. Your client has an invoice from a supplier, terms FOB shipping point but the goods had
not arrived as yet. However, these materials costing P34,000 had been included in
the inventory count, but no entry had been made for their purchase.

VIII. Merchandise costing P40,000 had been recorded as a purchase but not included in
inventory. Terms of shipment are FOB shipping point according to the supplier’s
invoice which was received on December 31.

Further inspection of the client’s records revealed the following December 31 balances.
Inventory, P220,000;
Accounts receivable, P116,000; Accounts payable, P138,000; Sales, P1,010,000; Purchases,
P640,000; Net
Income, P102,000.

Compute the adjusted balances of the following items:

1. Inventory
a. P310,000 b. P300,000 c. P334,000 d. none of these
2. Accounts receivable
a. P100,000 b. P52,000 c. P36,000 d. none of these

3. Accounts payable
a. P152,000 b. P108,000 c. P142,000 d. none of these

4. Sales
a. P946,000 b. P930,000 c. P994,000 d. none of these

5. Purchases
a. P644,000 b. P654,000 c. P610,000 d. none of these

6. Net income
a. P118,000 b. P108,000 c. P142,000 d. none of these
PROBLEM 3- AUDIT OF CASH AND CASH EQUIVALENTS
In connection with the audit of MONDAY Company’s financial statements, you obtained the
following information pertaining to its cash account.
Cash in bank
July 31 Book disbursements- August
136,429 111,423
Book receipts- August August 31 balance
141,230 166,236

Further examination revealed the following:

 The cash receipts book in August was underfooted by P10,000.
 Included in the book receipts in August is a note collected by the bank in July for
P1,500.
 July NSF checks of P526 and bank service charges of P50 were recorded by the
Company in August.
 The bank statement in August showed total debits of P110,098, total credits of
P149,951, and an ending balance of P 180,413.
 Among the bank debits are:
NSF checks P 700
Bank error 900
Correction of July error 1,000
Service charges 65
 Among the bank credits are:
Correction of July error P 600
Note collected by bank 4,277
Bank error 3,000
 Deposits in transit: July 31, P5,200 ; Aug. 31, 8,330
 Outstanding checks as of July 31, P8,007.

Determine the following:

7. Cash Shortage
a. P 6,026 b. P 4,526 c. P 5,474 d. P 4,000
8. Outstanding checks, August 31
a. P 11,421 b. P 9,332 c. P 8,007 d. P 3,876
9. Adjusted cash Balance, August. 31
a. P 175,222 b. P 169,748 c. P 125,841 d. P 166,236
10. Adjusted cash balance, July 31
a. P 136,429 b. P 137,353 c. P 111,612 d. P 148,481
PROBLEM 4- AUDIT OF INVESTMENT

CITY FAIR Corporation purchased P100,000 8% bonds for P 92,418 on January 1, 2004.
CITY FAIR classified the bonds as available for sale. The bonds were purchased to yield 10%
interest. Interest is payable annually every January 1.

The market values of the bonds are as follows:

December 31, 2004 P 97,160
December 31, 2005 90,393
December 31, 2006 97,240
11. Interest income in 2004
a. P 9,242 b. P 8,000 c. P 10,000 d. P 9,124
12. Interest income in 2006
a. P 8,000 b. P 9,366 c. P 9,503 d. P 10,000
13. Unrealized gain or loss at the December 31, 2006.
a. gain P 711 b. loss P 711 c. gain P 3,267 d. loss P 3,267
14. Carrying value of held-to-maturity investment on December 31, 2006.
a. P 95,026 b. P 93,660 c. P 92,418 d. P 96,529

PROBLEM 5- AUDIT OF LIABILITIES

In your initial audit of Bulls Finance Co., you find the following ledger account balances.

12%, 25-year Bonds Payable, 2001 issue

01/01/2001 CR P 1,600,000

Treasury Bonds
10/01/2005 CD P 216,000

Bond Premium
01/01/2001 CR P 80,000

Bond Interest Expense

01/01/2005 CD P 96,000
07/01/2005 CD 96,000

The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus accrued
interest.

QUESTIONS:

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

1. The adjusted balance of bonds payable as of December 31, 2005 is

a. P1,400,000 b. P1,600,000 c. P1,000,000 d. P1,384,000
2. The unamortized bond premium on December 31, 2005 is
 a. P80,000 b. P64,000 c. P56,000 d. P58,800
3. The total bond interest expense for the year 2005 is
a. P189,100 b. P182,900 c. P188,800 d. P182,800
4. The gain or loss on partial bond redemption is
a. P1,900 loss b. P1,900 gain c. P18,100 loss d. P18,100 gain

SUGGESTED ANSWERS: A, C, B, A

PROBLEM 6 – Correction of Errors

You were first appointed auditor of the Pringles Corporation in 2007. You completed the audit
for 2007 and prepared audited financial statements directly from the audit working papers.
You have returned to make the 2008 audit and discovered that the client’s bookkeeper failed
to record the adjusting entries you made in 2007 audit working papers, which entailed
adjustments for the following items:
1. The December 31, 2007 inventory was understated by P5,000.
2. No entry was made for accrued utilities expense of P2,500 as of year end.
3. Ordinary motor repairs of P3,200 were charged to Accumulated Depreciation during
2007.
4. The Company failed to record the provision for uncollectible accounts in the amount
of P6,000.
Your examination of the 2008 entries in the accounts uncovered the following:
1. An expenditure of P10,000 for repairs of office equipment had been charged to
Furniture and Equipment. The Company records depreciation at 10% of the
December 31 balance of the Property and Equipment accounts.
2. A 2007 account receivable in the amount of P4,000 had been written off as
uncollectible by a charge to Retained Earnings.
3. Salesmen’s commission includes P2,400 paid on undelivered customers’ orders.
Additional data:
1. The audited statement of 2007 showed a net income of P250,000.
2. The unadjusted net income for 2008 is P320,000.

1. The unadjusted net income for the year 2007 is:

a. P 253,500 b. P 256,700 c. P 263,700 d. P 261,700
2. By how much would the December 31, 2008 retained earnings be misstated if no
adjustments were made for the above errors?
a. Retained earnings overstated by P11,800. c. Retained earnings overstated by P15,800.
b. Retained earnings overstated by P12,800. d. Retained earnings overstated by P16,800.
3. The adjusted net income for the year 2008 is:
a. P 315,900 b. P 308,400 c. P 314,900 d. P 310,900

PROBLEM 7- AUDIT OF VARIOUS ACCOUNTS

The general ledger of the Mariposa Company includes the following balance sheet accounts at
December 31, 2009:

Cash 1,056,000
Account Receivable 1,220,000
Inventory 441,000
Trading Securities 200,000
Available for sale investments 500,000
Prepaid Insurance 50,000
 Deferred tax asset 150,000
Bank Overdraft 100,000

Additional information:

CASH

 The sales book was left open up to January 5, 2010 and cash sales totaling 150,000
were considered as sales in December.

 Checks of 93,000 in payment of liabilities were prepared before December 31, 2009,
recorded in the books, but not mailed or delivered to payees.

 Post dated checks totaling 78,000 are being held by the Cashier as part of CASH. The
company’s experience shows that post dated checks are eventually realized.

 Customer’s check for 15,000 deposited with but returned by bank, “NSF” on December
27, 2009. Return was recorded in the books.

 The CASH account includes 400,000 of compensating balance against a short term
bank loan. The compensating balance is legally restricted as to withdrawal.

ACCOUNTS RECEIVABLE

The account receivable consists of the following:

Trade accounts receivable 650,000

Allowance for uncollectible accounts (20,000)
Claims against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Mariposa
on consignment at 130% of cost
(included in Mariposa’s ending inventory at cost)260,000
Security deposit on lease of warehouse used for
storing some inventories 300,000
Total 1,220,000

INVENTORY

A physical count of inventory at December 31, 2009 revealed that Mariposa had inventory on
hand at that date with a cost of 441,000. The annual audit identified that the following items
were excluded from this amount and the related transactions were not recorded:

 Merchandise of 61,000 is held by Mariposa on consignment. The consignor is Lucresia

Company.

 Merchandise costing 38,000 was shipped by Mariposa FOB destination to a customer on

December 31, 2009. The customer was expected to receive the goods on January 6, 2010.

 Merchandise costing 46,000 was shipped by Mariposa FOB shipping to a customer on

December 29, 2009. The customer was scheduled to receive the goods on January 2,
2010.
 Merchandise costing 83,000 shipped by a vendor FOB destination on December 31, 2009
was received by Mariposa on January 4, 2010.

 Merchandise costing 51,000 purchased FOB shipping was shipped by the supplier on
December 31, 2009 and received by Mariposa on January 5, 2010.

Questions:

6. The adjusted balance of Cash:

a. 921,000 b. 521,000 c. 584,000 d. 506,000
7. Net accounts receivable:
a. 630,000 b. 782,800 c. 767,800 d. 754,000
8. Trade and other receivables, net:
a. 797,800 b. 812,800 c. 660,000 d. 784,000
9. Inventory
a. 730,000 b. 340,000 c. 451,000 d. 530,000
10. Current assets
a. 2,361,000 b. 2,498,800 c. 2,485,000 d. 2,513,800

PROBLEM 8
{Correction of Errors – Counterbalancing and Non counterbalancing Errors and Preparation of
Correcting/Adjusting Journal Entries assuming books are still open or books are already
closed.}

Dee Corporation reports net income for a two year period as follows:

2007 1,600,000
2008 1,500,000

In reviewing the accounts for 2008, you find the following errors have been made in
summarizing activities:

2007 2008
Understatement of inventory 130,000 110,000
Overstatement of accrued advertising 60,000 30,000
Overstatement of accrued interest income 40,000 60,000
Omission of depreciation 80,000 100,000
Questions:

30. How much is the adjusted net income for 2007

a. 1,670,000 b. 1,570,000 c. 1,270,000 d. 1,490,000
31. How much is the adjusted net income for 2008
a. 1,590,000 b. 1,570,000 c. 1,370,000 d. 1,330,000
32. If the books are still open, the net adjustment to retained earnings would be
a. 230,000 reduction b. 230,000 addition c. 70,000 addition d. 70,000 reduction
33. If the books are already closed, the net adjustment to retained earnings would be
a. 260,000 reduction b. 100,000 reduction c. 260,000 addition d. 100,000
addition
PROBLEM 9- AUDIT OF INTANGIBLE ASSETS
Grace Corporation has provided information on intangible assets as follows:
  A patent was purchased from Normie Company for P6,000,000 on January 1, 2006.
On the acquisition date, the patent was estimated to have a useful life of 10 years.
The patent had a net book value of P6,000,000 when Normie sold it to Grace.

 On February 1, 2007, a franchise was purchased from the Eddie Company for
P1,440,000. The contract which runs for 20 years provides that 5% of revenue from
the franchise must be paid to Eddie. Revenue from the franchise for 2007 was
P7,500.000

 The following research and development costs were incurred by Grace in 2007:

Materials and equipment 426,000

Personnel 567,000
Indirect cost 206,000
Total 1,299,000

Because of recent events, Grace, on January 1, 2007, estimates that the remaining life of the
patent purchased on January 1, 2006, is only 5 years from January 1, 2007.

Question:

1. On December 31, 2007, the carrying value of the patent should be

a. P 6,000,000 b. P 4,320,000 c. P 1,680,000 d. P0
2. The unamortized cost of the franchise at December 31, 2007, should be
a. P 1,440,000 b. P 1,374,000 c. P 1,356,250 d. P 999,000
3. How much should be charged against Grace’s comprehensive income for the year ended
December 31, 2007?
a. P 2,826,000 b. P 2,820,000 c. P 2.280,000 d. P 1,725,000

PROBLEM 10- AUDIT OF PPE

You are engaged in the examination of the financial statements of PATIENCE CORPORATION
for the year ended December 31, 2005. The chief accountant of the client has prepared the
accompanying analyses of the Property, Plant, and Equipment and related accumulated
depreciation accounts. You have traced the beginning balances to your prior year’s audit
working papers.

All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all other
items, 10 years. The company’s policy is to take one-half year’s depreciation on all assets
additions and disposals during the year.

PATIENCE CORPORATION
Analysis of Property, Plant, and Equipment, and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2005

Description Final Assets Assets Per ledger

12/31/04 Additions Retirements 12/31/05
Land P 4,225,000 P 500,000 P 0 P 4,725,000
Buildings 1,200,000 475,000 0 1,675,000
Machinery & Equipment 3,850,000 404,000 260,000 3,994,000
 P 9,275,000 P 1,379,000 P 260,000 P 10,394,000

Description Final Assets Assets Per ledger

12/31/04 Additions Retirements 12/31/05
Buildings P 600,000 P 51,500 P 651,500
Machinery & Equipment 1,732,500 392,200 2,124,700
P 2,332,500 P 443,700 P 2,776,200

Your examination revealed the following information:

1. On April 1, the company entered into a 10-year lease contract for a die-casting machine,
with annual rentals of P50,000 payable in advance every April 1. The lease is cancelable
by either party (60 day’s written notice is required), and there is no option to renew the
lease or buy the equipment at the end of the lease. The estimated service life of the
machine is 10-years with no residual value. The company recorded the die casting
machine in the Machinery and Equipment account at P404,000, the present value at the
date of the lease, and P20,200 applicable to the machine has been included in depreciation
expense for the year.

2. The company completed the construction of a wing on the plant building on June 30. The
service life of the building was not extended by this addition. The lowest constructions bid
received was P475,000, the amount recorded in the Building account. Company
personnel constructed the addition at a cost of P460,000 (materials, P175,000; labor,
P155,000; and overhead, P130,000).

3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the
company and used as a packing lot for employees. The expenditure was charged to the
Land account.

4. The amount shown in the Machinery and Equipment asset retirement column represents
cash received on September 5 upon disposal of a machine purchased in July, 1998 for
P480,000. The chief accountant recorded depreciation expense of P35,000 on this
machine in 2005.

5. Davao City government donated land and building appraised at P1,000,000 and
P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1,
the company began operating the plant. Since no costs were involved, the chief
accountant made no entry for the above transaction.

Questions
1. PATIENCE CORPORATION’s Land balance at December 31, 2005 is:
a. P 5,725,000 b. P 5,225,000 c. P 4,725,000 d. P 4,225,000

2. PATIENCE CORPORATION’s Building balance at December 31, 2005 is:

a. P 5,690,000 b. P 5,675,000 c. P 5,660,000 d. P 5,645,000

3. PATIENCE CORPORAITON’s Machinery and Equipment balance at December 31, 2005

is:
a. P 4,090,000 b. P 3,590,000 c. P 3,370,000 d. P 3,110,000

4. PATIENCE CORPORATION’s Accumulated Depreciation – Building at December 31, 2005

is:
 a. P 766,000 b. P 747,000 c. P 737,500 d. P 651,500

5. PATIENCE CORPORATION’s Accumulated Depreciation – Machinery and Equipment at

December 31, 2005 is:
a. P 1,819,900 b. P 1,788,700 c. P 1,757,500 d. P 1,752,700

6. PATIENCE CORPORATION’s Depreciation Expense – Building at December 31, 2005 is:

a. P 227,000 b. P 211,500 c. P 147,000 d. P 137,500

7. PATIENCE CORPORATION’s Depreciation Expense – Machinery and Equipment at

December 31, 2005 is:
a. P 372,000 b. P 361,000 c. P 337,000 d. P 276,000

8. PATIENCE CORPORATION’s Depreciation Expense – Land Improvements at December

31, 2005 is:
a. P 50,000 b. P 25,000 c. P 18,750 d. P 0

9. PATIENCE CORPORATION’s Net Book Value of Building at December 31, 2005 is:
a. P 5,023,500 b. P 4,924,000 c. P 4,913,000 d. P 4,907,500

10. PATIENCE CORPORATION’s Net Book Value of Machinery and Equipment at December
31, 2005 is:
a. P 2,332,500 b. P 1,770,100 c. P 1,612,500 d. P 1,357,300

Solution

Adjusting Journal Entries as of December 31, 2005

(1) Equipment Rental Expense (P50,000 x 9/12) 37,500
Prepaid Equipment Rental 12,500
Obligations under Capital Lease 354,000
Machinery and Equipment 404,000

(2) Profit on Construction 15,000

Buildings ( 475,000 - 460,000) 15,000

(3) Land Improvements 500,000

Land 500,000

(4) Accumulated Depreciation - Mach. & Eqpt. 336,000

Machinery & Equipment 220,000
Gain on sale of machinery 116,000
P260,000 - (480,000 x 3/10) = P116,000 gain

(5) Land 1,000,000

Building 4,000,000
Gain from Donation 5,000,000

(6) Depreciation Expense 95,667

Accumulated Depreciation - Buildings 95,667
Depreciation Expense for 2005
1,200,000 x 4% P48,000
 460,000 / 12 years x ½ 19,167
4,000,000 x 4% x ½ 80,000 P147,167
Amount recorded 51,500
Adjustment to be made P95,667

(7) Accumulated Depreciation - Mach. & Equipment 31,200

Depreciation Expense 31,200
Depreciation expense for 2005
(3,850,000 - 480,000) x 10% P337,000
480,000 x 10% x ½ 24,000 P361,000
Amount recorded 392,200
Adjustment to be made (P31,200)

(8) Depreciation Expense 25,000

Accumulated Depreciation - Land Improvements 25,000
(P500,000 x 10% x 6/12)
Answer:
1. B 2. C 3. C 4. B 5. C
6. C 7. B 8. B 9. C 10. C

PROBLEM 11- AUDIT OF RECEIVABLES

In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

ALLOWANCE FOR BAD DEBTS

Jan. – Dec. Write-off of Jan. 1, 2002 P 95,000
last year’s receivables P 85,000 Dec. 31 provisions 315,000

Write-off of this year’s

Receivables
15,000

In your examination, you find that the balance of Accounts Receivable represents sales of the
current audit year only; that credit balances in the subsidiary ledger for accounts receivable
totaled P80,000; and that the current year’s provision for bad debts expense was 5% of sales
(as compared with 4½% last year, 4% of the year before, and 3½% the next previous year).
Sequential to aging the accounts receivable, you and the company’s treasurer agree on an
additional write-off of P50,000, and P300,000 as the probable loss to be sustained on collection
of the accounts receivable balance.

Questions

1. The adjusted Accounts Receivable balance is:

a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000

2. The adjusted Allowance for Bad Debts is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000
3. The adjusted Bad Debts account is:
a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

4. The provision per record at December 31 is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000

* Beg. balance 95,000

+ Provisions 355,000 squeezed figure
- Write-off per book 100,000
- Additional write-off 50,000
Ending balance 300,000
Answer:
1. C 2. B 3. D 4. C

PROBLEM 12- AUDIT OF SHE

Pilantik Corporation was authorized at the beginning of 2004 with 300,000 authorized shares
of P100, par value common stock. At December 31, 2004, the stockholders’ equity section of
Pilantik was as follows:

Common stock, par value P100 per share; authorized 300,000 shares;
issued 30,000 shares P3,000,000
Additional paid-in capital 300,000
Retained earnings 450,000
Total stockholders’ equity P3,750,000

On June 15, 2005, Pilantik issued 50,000 shares of its common stock for P6,000,000. A 5%
stock dividend was declared on September 30, 2005 and issued on November 10, 2005 to
stockholders of record on October 31, 2005. Market value of common stock was P110 per
share on declaration date. The net income of Pilantik for the year ended December 31, 2005
was P475,000.

During 2006, Pilantik had the following transactions;

March 1 Pilantik reacquired 3,000 shares of its common stock for P95 per share.

May 31 Pilantik sold 1,500 shares of its treasury stock for P120 per share.

August 10 Issued to stockholders one stock right for each share held to purchase two additional
shares of common stock for P125 per share. The rights expire on December 31, 2006.

September 15 25,000 stock rights were exercised when the market value of common stock was P130 per
 share.

October 31 40,000 stock rights were exercised when the market value of the common stock was P140
per share.

December 10 Pilantik declared a cash dividend of P2 per share payable on January 5, 2007 to
stockholders of record on December 31, 2006.

December 20 Pilantik retired 1,000 shares of its treasury stock and reverted them to an unused basis.
On this date, the market value of the common stock was P150 per share.

December 31 Net income for 2006 was P500,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31,
2006:

1. Common stock
a. P21,400,000 b. P21,300,000 c. P14,800,000 d. P21,250,000
2. Additional paid-in capital
a. P4,627,500 b. P3,007,500 c. P4,632,500 d. P4,592,500
3. Retained earnings
a. P600,000 b. P565,000 c. P557,000 d. P560,000
4. Treasury stock
a. P10,000 b. P47,500 c. P50,000 d. P0