AUDITING PROBLEMS

PROBLEM NO. 1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT (PPE)

The TGR Company commenced operations on January 1, 2014. The company’s

machinery account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2014 Purchase P157,200
120,000
132,000 P409,200
Sept. 30, 2014 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2014 Freight and installation 6,000 487,200
Dec. 31, 2014 Depreciation P97,440 389,760
2015 Installment payments for acquisition
on Sept. 30, 2014 144,000 533,760
June 30, 2015 Purchase 240,000 773,760
Dec. 31, 2015 Depreciation 154,752 619,008
June 30, 2016 Acquisition – trade in of old machine150,000 769,008
Dec. 31, 2016 Depreciation 153,802 615,206
Jan. 1, 2017 Sale 71,250 543,956
Dec. 31, 2017 Depreciation 108,791 435,165
Oct. 1, 2018 Sale 24,000 411,165
Dec. 31, 2018 Depreciation 82,233 328,932

The details of the transactions are as follows:

a) On September 30, 2014, a machine was purchased on an installment basis. The

list price was P180,000, but 12 payments of P18,000 each were made by the
company. Only the monthly payments were recorded in the machinery account
starting with September 30, 2014. Freight and installation charges of P6,000
were paid and charged to the machinery account on October 3, 2014.

b) On June 30, 2015, a machine was purchased for P240,000, 2/10, n/30, and
recorded at P240,000 when paid for on July 5, 2015.

c) On June 30, 2016, the machine acquired for P157,200 was traded for a larger
one having a list price of P279,000. Allowance of P129,000 was received on the
old machine, the balance of the list price being paid in cash and charged to the
machinery account.

d) On January 1, 2017, the machine acquired on January 1, 2014 with cost of

P132,000 was sold for P75,000. The cost of removal and crating totaled P3,750.

e) On October 1, 2018, the machine purchased on January 1, 2014 was sold for
P24,000 cash.

Assume a 5-year useful life for TGR Company’s machinery.

 Page 2

1. What is the total amount of gain on the sale/trade-in of the machinery acquired
on January 1, 2014?
A. P50,400
B. P40,200
C. P36,450
D. P86,850

2. What is the adjusted balance of the Machinery account on December 31, 2018?
A. P694,200
B. P705,000
C. P700,200
D. P703,950

3. What is the adjusted balance of the Accumulated depreciation account on

December 31, 2018?
A. P465,600
B. P457,140
C. P462,240
D. P397,740

4. What is the correct total depreciation provision for the years 2014-2018?
A. P737,400
B. P734,040
C. P728,940
D. P669,540

5. The entry to correct the depreciation provision for the years 2014-2018 should
include a debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249
 Page 3

PROBLEM NO. 2 – AUDIT OF CASH

The cash account of NUNAL COMPANY shows the following activities:

Date Debit Credit Balance
Nov. 30 Balance P345,000
Dec. 2 November bank charges P 150 344,850
4 November bank credit for notes
receivable collected P 30,000 374,850
15 NSF check 3,900 370,950
20 Loan proceeds 145,500 516,450
21 December bank charges 180 516,270
31 Cash receipts book 2,121,900 2,638,170
31 Cash disbursements book 1,224,000 1,414,170

CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000
 Page 4

BANK STATEMENT

Date Check Charges Credits

Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900

1. DMs 61 and 112 are for service charges.

2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810
 Page 5

Based on the preceding information, determine the following:

1. Outstanding checks at December 31

A. P459,000
B. P477,000
C. P441,000
D. P487,650

2. Deposit in transit at December 31

A. P114,000
B. P139,500
C. P132,000
D. P0

3. Adjusted bank receipts for the month of December

A. P2,297,400
B. P2,291,400
C. P2,303,400
D. P2,321,400

4. Adjusted book disbursements for the month of December

A. P1,228,440
B. P1,246,440
C. P1,210,440
D. P1,246,620

5. Adjusted bank balance at December 31

A. P1,449,810
B. P1,674,810
C. P1,431,810
D. P1,776,810

Page 6
PROBLEM NO. 3 – AUDIT OF ACCOUNTS RECEIVABLE (CONFIRMATION)

To substantiate the existence of the accounts receivable balances as at December

31, 2018 of LUKAS COMPANY, you have decided to send confrmation requests to
customers. Below is a summary of the confrmation replies together with the
exceptions and audit fndings. Gross proft on sales is 20%. The company is under
the perpetual inventory method.

Name of Balance Comments

Custome Per From Customers Audit Findings
r Books
Concordi P150,000 P90,000 was returned on December Returned goods were
a 30, 2018. Correct balance as is received December 31,
P60,000. 2018.
Falcon P30,000 Your CM representing price The CM was taken up by
adjustment dated December 28, 2018 Lukas Company in 2019.
cancels this.
Lazaro P144,000 You have overpriced us by P150. The complaint is valid.
Correct price should be P300.
Silang P112,500 We received the goods only on Term is shipping point.
January 6, 2019. Shipped in 2018.
Yakal P135,000 Balance was ofset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

1. If the necessary adjusting journal entry is made regarding the case of

Concordia, the net income will
A. Decrease by P18,000. .
B. Decrease by P90,000.
C. Increase by P18,000
D. Increase by P90,000.

2. The efect on 2018 net income of Lukas Company of its failure to record the CM
involving transaction with Falcon:
A. P30,000 over.
B. P30,000 under.
C. P6,000 over.
D. P6,000 under.

3. The overstatement of receivable from Lazaro is

A. P96,000
B. P24,000
C. P72,000
D. P48,000

4. The accounts receivable from Silang is

A. Correctly stated.
B. P112,500 over.
C. P225,000 under.
D. P112,500 under

5. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
 Accounts receivable 135,000

Page 7
PROBLEM NO. 4 – AUDIT OF NOTES RECEIVABLE

The HVR Company included the following in its notes receivable as of December 31,
2018:
Note receivable from sale of land P2,640,000
Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2018 and other information relate to the
company’s notes receivable:

a) On January 1, 2018, HVR Company sold a tract of land to Triple X Company. The
land, purchased 10 years ago, was carried on HVR’s books at P1,500,000. HVR
received a noninterest-bearing note for P2,640,000 from Triple X. The note is
due on December 31, 2019. There was no established exchange price for the
land. The prevailing interest rate for this note on January 1, 2018 was 10%.

b) On January 1, 2018, HVR Company received a 5%, P3,600,000 promissory note

in exchange for the consultation services rendered. The note will mature on
December 31, 2020, with interest receivable every December 31. The fair value
of the services rendered is not readily determinable. The prevailing rate of
interest for a note of this type was 10% on January 1, 2018.

c) On January 1, 2018, HVR Company sold an old equipment with a carrying

amount of P4,800,000, receiving P7,200,000 note. The note bears an interest
rate of 4% and is to be repaid in 3 annual installments of P2,400,000 (plus
interest on the outstanding balance). HVR received the frst payment on
December 31, 2018. There is no established market value for the equipment.
The market interest rate for similar notes was 14% on January 1, 2018.

Note: Round of present value factors to four decimal places and fnal answers to
the nearest hundred.

1. What amount of consultation fee revenue should be recognized in 2018?

A. P3,600,000
B. P2,705,000
C. P4,047,500
D. P3,152,500

2. What amount should be reported as gain on sale of equipment?

A. P994,800
B. P2,400,000
C. P1,162,700
D. P1,237,300

3. The amount to be reported as noncurrent notes receivable on December 31,

2018 is
A. P7,482,200
B. P6,037,300
C. P5,477,500
D. P7,877,600

4. The amount to be reported as current notes receivable on December 31, 2018

is
A. P4,800,000
B. P2,400,200
C. P4,404,900
D. P7,440,000
 5. How much interest income should be recognized in 2018?
A. P974,200
B. P756,000
C. P1,378,700
D. P1,160,500

Page 8
PROBLEM NO. 5 – AUDIT OF SHAREHOLDERS’ EQUITY

iBELIEVE COMPANY began operations on January 1. Authorized were 120,000

shares of P10 par value ordinary shares and 240,000 shares of 10%, P100 par value
preference shares. The following transactions involving shareholders’ equity
occurred during the frst year of operations.

Jan. 1 Issued 30,000 ordinary shares to the corporation promoters in exchange for
land valued at P1,020,000 and services valued at P420,000. The property
had cost the promoters P540,000 3 years before and was carried on the
promoters’ books at P300,000.

Feb.23 Issued 60,000 preference shares with a par value of P100 per share. The
shares were issued at a price of P150 per share, and the company paid
P450,000 to an agent for selling the shares.

Mar.10 Sold 18,000 ordinary shares for P390 per share. Issue costs were P150,000.

Apr.10 24,000 ordinary shares were sold under share subscriptions at P450 per
share. No shares are issued until a subscription contract is paid in full. No
cash was received.

July 14 Exchanged 4,200 ordinary shares and 8,400 preference shares for a
building with a fair value of P3,060,000. The building was originally
purchased for P2,280,000 by the investors and has a book value of
P1,320,000. In addition, 3,600 ordinary shares were sold for P1,440,000 in
cash.

Aug. 3 Received payments in full for half of the share subscriptions and payments
on account on the rest of the subscriptions. Total cash received was
P8,400,000. Share certifcates were issued for the subscriptions paid in full.

Dec.31 Net income for the frst year of operations was P3,600,000.

Dec.31 Declared a cash dividend of P10 per share on preference shares and P20
per share on ordinary shares, payable on February 10 to shareholders of
record on January 15.

Based on the preceding information, calculate the balances of each of the

following accounts:

1. Share premium – preference shares

A. P2,550,000
B. P540,000
C. P3,090,000
D. P3,270,000

3. Ordinary shares
A. P528,000
B. P678,000
C. P366,000
D. P372,000

3. Share premium – ordinary shares

A. P22,242,000
B. P18,660,000
C. P11,520,000
D. P21,432,000
 4. Retained earnings
A. P1,320,000
B. P3,600,000
C. P2,100,000
D. P1,740,000

5. Total shareholders’ equity

A. P32,160,000
B. P29,760,000
C. P33,900,000
D. P31,080,000

Page 9

PROBLEM NO. 6 – AUDIT OF INVESTMENT IN TRADING SECURITIES

Supporting records of MAYON CORPORATION’s trading securities portfolio show the

following debt and equity securities:

Security Cost Fair Value

400 ordinary shares Concave Co. P 254,500 P 243,000
P800,000 Tipo Co. 7% bonds 796,500 774,000
P1,200,000 Turkey Co. 7 ½% bonds 1,207,500 1,218,900
Totals P2,258,500 P2,235,900

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the
income approach to record the purchase of bonds with accrued interest. During
2018 and 2019, Mayon completed the following transactions related to trading
securities:

2018
Jan. 1 Received semiannual interest on bonds. Assume that the appropriate
adjusting entry was made on December 31, 2017.
April 1 Sold P600,000 of 7 ½% Turkey bonds at 102 plus accrued interest.
May21 Received dividend of P1.25 per share on the Concave ordinary share
capital. The dividend had not been recorded on the declaration date.
July 1 Received semiannual interest on bonds and then sold the 7% Tipo bonds at
97 ½.
Aug.15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per
share plus brokerage fees of P500.
Nov. 1 Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest.
Brokerage fees were P1,250. Interest dates are January 1 and July 1.
Dec.31 Market prices of securities were:
Concave ordinary shares P550
7 ½% Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75

2019
Jan. 2 Recorded the receipt of semiannual interest on bonds.
Feb. 1 Sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest.
 Page 10

1. What is the total interest and dividend income for 2018?

A. P125,166
B. P164,416
C. P91,417
D. P98,804

2. What amount should be reported as gain on sale of trading securities in 2018?

A. P2,550
B. P6,000
C. P8,550
D. P3,450

3. What amount of unrealized gain or loss should be reported in the income

statement for the year ended December 31, 2018?
A. P21,200 unrealized gain
B. P21,200 unrealized loss
C. P6,150 unrealized gain
D. P6,150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December

31, 2018?
A. P1,481,000
B. P1,450,450
C. P1,473,450
D. P1,452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2019?
A. P4,500
B. P10,500
C. P13,500
D. P750
 Page 11

PROBLEM NO. 7 – AUDIT OF INTANGIBLE ASSETS

BANAWE COMPANY began operations on January 2, 2010. Shown below is the

company’s trial balance prepared by its staf accountant for December 31, 2018.
Banawe Company
UNADJUSTED TRIAL BALANCE
December 31, 2018
(in thousands of pesos)
Debit Credit
Cash P 60
Accounts receivable 150
Inventory 360
Equipment 2,400
Accumulated depreciation – Equipment P 750
Buildings 3,600
Accumulated depreciation – Buildings 1,200
Patents 1,650
Franchise agreement 285
Organization costs 306
Goodwill 1,035
Accounts payable 36
Accrued wages payable 15
Accrued taxes payable 180
Bonds payable 1,500
Premium on bonds payable 105
Preference shares (P100 par value) 300
Ordinary shares (P25 par value) 3,300
Premium on share capital 660
Retained earnings (as of January 1) 1,200
Sales 2,700
Cost of goods sold 1,200
Selling and administrative expenses 900
P11,946 P11,946
As a member of the audit team for Banawe Company, you have been assigned the
audit of the company’s intangible assets. Your investigation reveals the following:

Patents
The patents, acquired January 2, 2011, are being amortized over an expected useful
life of 14 years. Improvements made to equipment covered by the patents costing
P225,000 were debited to the account in January 2015. Amortization in 2015-2017
included amortization on the P225,000 for the remaining life of the relevant patent.
It is determined that the P225,000 should have been expensed in 2015. It is further
determined on December 31, 2017, that one of the patents has a remaining life of
only 2 years. This patent was originally assigned a cost of P630,000.
Franchise Agreement
A franchise agreement was signed on January 1, 2018. A P150,000 fee was paid,
covering a 5-year period, at the end of which the company may renew the
agreement by paying P150,000. A decision on renewal has not been made as of
December 31, 2018. The agreement calls for an annual payment of 5% of revenue.
An entry debiting the account for P135,000 was made at the time of the cash
payment for 2018.

Organization Costs
Organization costs include the unamortized portion of amounts paid to promote for
services rendered at the inception of the corporation. These fees have been
amortized, since inception, over an estimated 40-year life. The decision is made, as
of December 31, 2018, to reduce the total period of amortization of organization
costs to 12 years.

Page 12

Goodwill
The goodwill account includes the following:
P135,000 -- Legal expenses relative to incorporation. These were assigned to the
account in January 2010.
P600,000 -- Excess of cost over assigned net asset values of an enterprise
acquired in early 2016 expected to be of value for an indefnite
period.
P300,000 -- Paid to an advertising consulting frm in early 2017 for a major
advertising efort expected to be benefcial for an indefnite period.

No amortization has been taken on any amount in the Goodwill account.

1. What is the carrying value of the Patents on December 31, 2018?

A. P1,211,786
B. P1,009,286
C. P1,166,786
D. P1,256,786

2. What is the carrying value of the Franchise Agreement on December 31, 2018?
A. P120,000
B. P228,000
C. P123,000
D. P112,500

3. What is the carrying value of the Organization Costs on December 31, 2018?
A. P171,000
B. P0
C. C.P417,375
D. P194,625

4. What is the carrying value of Goodwill on December 31, 2018?

A. P1,035,000
B. P585,000
C. P1,009,125
D. P600,000

5. What is the total Patent amortization for 2018?

A. P370,714
B. P168,214
 C. P315,000
D. P325,714

Page 13

PROBLEM NO. 8 – COMPUTATION OF CASH SHORTAGE

You have been asked by the proprietor of the SANDOVAL CO. to verify the
accountability of the cashier-bookkeeper, who was allowed to take a vacation leave
a few days ago.

A. The bank reconciliation statements prepared by the cashier-bookkeeper are

presented below:
November 30, 2018
Balance per bank statement P21,500
Cash on hand 500
Total 22,000
Outstanding checks:
No. 2520 P 2,000
2521 1,400
2522 1,900 (3,300)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P20,200

December 31, 2018

Balance per bank statement P 135,000
Cash on hand 6,300
Total 141,300
Outstanding checks:
No. 2674P31,000
2675 10,300
2676 5,000 (41,300)
Erroneous bank charge 3,000
Erroneous bank credit (600)
Book balance P102,400

B. The Cash in Bank account in the general ledger shows the following debits and
credits during December:

Cash in Bank
Dec. Dec.
1 Balance P20,200 1 Checks issuedP2,000
2 Received from customers4,500 5 Checks issued5,200
7 Received from customers5,000 14 Checks issued31,000
12 Received from customers20,000 24 Checks issued 46,000
17 Received from customers30,000 28 Checks issued 7,600
 23 Received from customers9,000
27 Received from customers70,000
31 Received from customers 48,500 31 Balance 102,400
Total P198,200 Total P198,200

Page 14

C. The following summarized transactions were taken from the bank statement for
the month of December 2018:

Balance, December 1, 2018 P16,500

Total deposits P173,700
The total deposits per bank statement include:
a. Collection of notes receivable P5,000
b. Correction of November erroneous bank charge 2,000
c. December 10 deposit of Lava, Inc. credited in error
to SANDOVAL 600
Total P7,600
Total checks P65,200
The total checks per bank statement include:
a. Correction of November erroneous bank credit P 500
b. December check of Nile Co. charged in error
to SANDOVAL 3,000
Total P3,500

D. Cash on hand per count in the morning of January 2, 2019, amounted to P6,300.

E. Before leaving his company for a one-week vacation, the proprietor had left
several signed blank checks that the cashier-bookkeeper had cashed for his
personal use.

1. What is the adjusted cash balance on November 30, 2018?

A. P16,500
B. P13,200
C. P20,200
D. P14,500

2. The amount of unaccounted receipts in December is

A. P11,000
B. P13,200
C. P9,000
D. P15,100
 3. The amount of unrecorded/unsupported disbursements in December is
A. P15,100
B. P10,900
C. P7,000
D. P5,000

4. What is the total cash shortage as of December 31, 2018?

A. P26,000
B. P15,100
C. P33,000
D. P7,000

5. What is the adjusted cash balance on December 31, 2018?

A. P102,400
B. P125,000
C. P87,400
D. P111,400

Page 15

PROBLEM NO. 9 – AUDIT OF INVENTORIES

The cost of goods sold section of the income statement prepared by your client for
the year ended December 31 appears as follows:

Inventory, January 1 P 240,000

Purchases 4,800,000
Cost of goods available for sale P5,040,000
Inventory, December 31 300,000
Cost of goods sold P4,740,000

Although the books have been closed, your working paper trial balance is prepared
showing all accounts with activity during the year. This is the frst time your frm
has made an examination.

The January 1 and December 31 inventories appearing above were determined by

physical count of the goods on hand on those dates and no reconciling items were
considered. All purchases are FOB shipping point.

In the course of your examination of the inventory cutof, both at the beginning and
end of the year, you discovered the following facts:

Beginning of the Year

1. Invoices totaling P75,000 were entered in the voucher register in January, but
the goods were received during December.

2. December invoices totaling P39,600 were entered in the voucher register in

December, but the goods were not received until January.

End of the Year

3. Sales of P129,000 (cost of P38,700) were made on account on December 31 and
the goods delivered at that time, but all entries relating to the sales were made
on January 2.

4. Invoices totaling P45,000 were entered in the voucher register in January, but
the goods were received in December.

5. December invoices totaling P54,000 were entered in the voucher register in

December, but the goods were not received until January.

6. Invoices totaling P36,000 were entered in the voucher register in January, and
the goods were received in January, but the invoices were dated December.

Page 16

1. What working paper adjustment should be made at the end of the current year
for item no. 1?
A. Purchases 75,000
Retained earnings 75,000
B. Retained earnings 75,000
Purchases 75,000
C. Inventory, beginning 75,000
Purchases 75,000
D. No adjusting entry is necessary.

2. The working paper adjustment to correct the error described in item no. 3 should
include a debit to
A. Accounts receivable of P129,000
B. Sales of P129,000
C. Inventory of P38,700
D. Retained earnings of P90,300

3. The company’s statement of fnancial position as of the end of the current year
should show inventory of
A. P390,000
B. P300,000
C. P279,600
D. P351,300

4. What is the net adjustment to purchases of the current year?

A. P81,000 increase
B. P75,000 decrease
C. P6,000 increase
D. P6,000 decrease
5. The cost of goods sold for the current year is
A. P4,683,600
B. P4,659,600
C. P4,740,000
D. P4,695,600

Page 17

PROBLEM NO. 10 – AUDIT OF VARIOUS WORKING CAPITAL ACCOUNTS

The following accounts were included in the unadjusted trial balance of BUNCHING
COMPANY as of December 31, 2018:

Cash.............................................................................. P 963,200
Accounts receivable.......................................................2,254,000
Inventory.......................................................................6,050,000
Accounts payable..........................................................4,201,000
Accrued expenses.............................................................431,000

During your audit, you noted that Bunching Company held its cash books open after
year-end. In addition, your audit revealed the following:

1. Receipts for January 2019 of P654,600 were recorded in the December 2018
cash receipts book. The receipts of P360,100 represent cash sales and P294,500
represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2019. The payments, on

which discounts of P12,400 were taken, were included in the December 2018
check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The

following information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a
purchase on December 31, 2018. The related goods, shipped FOB
destination, were received on January 4, 2019, and thus were not included in
the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2018, terms

FOB destination, are not included in the year-end inventory. The goods cost
P130,000 and were delivered to the customer on January 3, 2019. The sale
was properly recorded in 2019.

c. Goods costing P637,500 were shipped on December 31, 2018, and were
delivered to the customer on January 3, 2019. The terms of the invoice were
 FOB shipping point. The goods were included in the 2018 ending inventory
even though the sale was recorded in 2018.

d. Goods costing P217,500 were received from a vendor on January 4, 2019.

The related invoice was received and recorded on January 6, 2019. The
goods were shipped on December 31, 2018, terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These goods

are not included in the inventory fgure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods

are not included in the physical inventory.

Page 18

Based on the above and the result of your audit, determine the adjusted balances of
the following as of December 31, 2018:

1. Cash
A. P963,200
B. P681,000
C. P668,600
D. P693,400

2. Accounts receivable
A. P2,908,600
B. P2,564,000
C. P2,254,000
D. P2,548,500

3. Inventory
A. P6,035,000
B. P6,080,000
C. P5,860,000
D. P5,010,000

4. Accounts payable
A. P4,790,900
B. P4,615,900
C. P4,573,000
D. P4,603,500

5. Current ratio
A. 2.00
B. 1.83
C. 1.84
D. 2.01

---END---
 SOLUTION

AUDITING PROBLEMS
PROBLEM 1 – TGR Company – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT (PPE)

1. D Trade-in – June 30, 2016

Cost P157,200
Accum. depreciation, 1/1/14 – 6/30/16 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50,400
Sale – Jan. 1, 2017
Cost P132,000
Accum. depreciation, 1/1/14 – 1/1/17 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2018
Cost P120,000
Accum. depreciation, 1/1/14 – 10/1/18 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

2. C Machine acquired on Sept. 30, 2014 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2015 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2016 (list price) 279,000
Total P700,200

3. C Machine acquired on:

Sept. 30, 2014 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2015 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2016 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2018 P462,240

4. B
Date of
Acquisition Cost 2014 2015 2016 2017 2018 Total
1/1/14 P157,200 P31,440 P31,440 P15,720 P0 P0 P 78,600
120,000 24,000 24,000 24,000 24,000 18,000 114,000
132,000 26,400 26,400 26,400 0 0 79,200
9/30/14 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/15 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/16 279,000 0 0 27,900 55,800 55,800
139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040
P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233
597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807)(P
137,022)

5. A Depreciation expense (2018) 75,807

Retained earnings (2014 – 2017) 61,215
Accumulated depreciation 137,022
 Page 2

PROBLEM 2 – NUNAL COMPANY – AUDIT OF CASH

1. A Outstanding checks, December 31:

Check no. 806 P 57,000
807 78,000
810 21,000
812 48,000
817 33,000
819
21,000
822 36,000
823 39,000
824 87,000
825 6,000
826 33,000
Total P459,000

2. A Deposit in transit, November 30 P 25,500

Collections 2,121,900
Total 2,147,400
Deposits 2,033,400
Deposit in transit, December 31 P 114,000

Nov. 30 Receipts Disbursements Dec. 31

Unadjusted book balances P345,000 P2,297,400 P1,228,230
P1,414,170
Bank service charges:
November 30 (150) (150)
December 31 360 (360)
Notes collected by bank:
November 30 30,000 (30,000)
December 31 36,000 36,000
Unrecorded disbursement (815) 18,000
(18,000)
Adjusted book balances P374,850 P2,303,400 P1,246,400
P1,431,810

Nov. 30 Receipts Disbursements Dec. 31

Unadjusted bank balances P342,000 P2,493,900 P1,059,090
P1,776,810
Outstanding checks:
November 30 (28,650) (28,650)
December 31 459,000 (459,000)
Deposits in transit:
November 30 25,500 (25,500)
December 31 114,000 114,000
Error corrected (243,000) (243,000)
Erroneous bank charge 36,000 (36,000)

Adjusted bank balances P374,850 P2,303,400 P1,246,440

P1,431,810

Outstanding checks, November 30:

Check no. 792 P 7,500
799 21,150
Total P28,650

3. C

4. B

5. C
 Page 3

PROBLEM 3 – LUKAS COMPANY – AUDIT OF ACCOUNTS RECEIVABLE

(CONFIRMATION)

1. A Sales returns and allowance 90,000

Accounts receivable 90,000

Inventory 72,000
Cost of sales 72,000
(P90,000 x 80%)

Net decrease in income (P90,000 – P72,000) P18,000

2. A Sales 30,000
Accounts receivable 30,000

Income overstated by P30,000

3. D Overstatement of receivable Lazaro (P150 x 320 units) P48,000

4. A Correctly stated because the goods are considered sold in 2015.

5. D Accounts payable 135,000

Accounts receivable 135,000
 Page 4

PROBLEM 4 – HVR Company – AUDIT OF NOTES RECEIVABLE

1. D Present value of principal (P3,600,000 x 0.7514) P2,705,040

Present value of interest (P3,600,000 x 5% x 2.4860) 447,480
Consultation service fee revenue P3,152,520

2. D Interest Principal Total PVF Present Value

12/31/18 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/19 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/20 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 1,684,800
Present value of note P6,037,258
Carrying amount of equipment 4,800,000
Gain on sale of equipment P1,237,258

Note receivable from sale of land:

Date Interest Income Carrying Amount
1/1/18 --- P2,181,960*
12/31/18 P218,196 2,400,156
12/31/19 239,844** 2,640,000
* P2,640,000 principal x 0.8265 PVF at 10% for 2 periods.
** P2,640,000 - P2,400,156

Note receivable from consultation:

Effective Nominal Discount Carrying
Date Interest Interest Amortization Amount
1/1/18 --- --- --- P3,152,520
12/31/18 P315,252 P180,000 P135,252 3,287,772
12/31/19 328,777 180,000 148,777 3,436,549
12/31/20 343,451** 180,000 163,451* 3,600,000

* P3,600,000 – P3,436,549 = P163,451

** P163,451 + P180,000 = P343,451

Note receivable from sale of equipment:

Effective Nominal Principal Carrying
Date Interest Interest Amortization Collection Amount
1/1/18 --- --- --- ---- P6,037,258
12/31/18 P845,216 P288,000 P557,216 P2,400,000
4,194,474
12/31/19 587,226 192,000 395,226 2,400,000
2,189,700
12/31/20 306,300* 96,000 210,300 2,400,000

* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300

3. C Note receivable from consultation P3,287,772

Note receivable from sale of equipment 2,189,700
Noncurrent notes receivable, Dec. 31, 2018 P5,477,472

4. C Note receivable from sale of land P2,400,156

Note receivable from sale of equipment (P4,194,474 – P2,189,700) 2,004,774
Total current notes receivable, Dec. 31, 2018 P4,404,930

5. C Note receivable from sale of land P218,196

Note receivable from consultation 315,252
Note receivable from sale of equipment 845,216
Total interest income on notes receivable for 2018 P1,378,664
 Page 5

PROBLEM NO. 5 – iBELIEVE, INC. – AUDIT OF SHAREHOLDERS’ EQUITY

JOURNAL ENTRIES

Jan. 1 Land 1,020,000

Organization expense 420,000
Ordinary shares (P10 x 3,000) 300,000
Share premium – ordinary 1,140,000

Feb. 23 Cash (P150 x 60,000) 9,000,000

Preference shares (P100 x 60,000) 6,000,000
Share premium – preference shares 3,000,000

Share premium – preference 450,000

Cash 450,000

Mar. 10 Cash (P390 x 18,000) 7,020,000

Ordinary shares (P10 x 18,000) 180,000
Share premium – ordinary 6,840,000

Share premium – ordinary shares 150,000

Cash 150,000

April 10 Subscriptions receivable (P450 x 24,000) 10,800,000

Subscribed ordinary shares (P10 x 24,000) 240,000
Share premium – ordinary 10,560,000

July 14 Cash 1,440,000

Ordinary shares (P10 x 3,600) 36,000
Share premium – ordinary 1,404,000

14 Building 3,060,000
Ordinary shares (P10 x 4,200) 42,000
Share premium – ordinary (P400 – P10 = P390 x 4,200) 1,638,000
Preference shares (P100 x 8,400) 840,000
Share premium – preference (P1,380,000 – P840,000) 540,000

Fair value of building P3,060,000

MV of ordinary shares (P1,440,000/3,600 =
P400 x 4,200) 1,680,000
Assumed MV of preference shares P1,380,000

Aug. 3 Cash 8,400,000

Subscriptions receivable 8,400,000

3 Subscribed ordinary shares 120,000

Ordinary shares (P10 x 12,000) 120,000

Dec. 31 Income summary 3,600,000

Retained earnings 3,600,000
 31 Retained earnings 2,280,000
Dividends payable 2,280,000

Preference (60,000 + 8,400 = 68,400 x P10) P 684,000

Ordinary (30,000 + 18,000 + 3,600 + 4,200 +
12,000 + 12,000 subscribed = 79,800 x P20) 1,596,000
P2,280,000

Page 6

Preference Share premium - Ordinary Share premium - Retained

shares preference shares shares ordinary shares Earnings
Jan 1 P 300,000 P1,140,000
Feb 23 P6,000,000 3,000,000
23 (450,000)
Mar 10 180,000 6,840,000
(150,000)
Apr 10 10,560,000
July 14 840,000 540,000 36,000 1,404,000
42,000 1,638,000
Aug. 3 120,000
Dec. 31 (2,280,000)
Net income 3,600,000
P6,840,000 P3,090,000 P678,000 P21,432,000 P1,320,000
(1-C) (2-B) (3-D) (4-A)

5. Preference shares P6,840,000

Share premium – preference shares 3,090,000
Ordinary shares 678,000
Share premium – ordinary shares 21,432,000
Subscribed ordinary shares (P240,000 – P120,000) 120,000
Subscriptions receivable (P10,800,000 – P8,400,000) (2,400,000)
Retained earnings 1,320,000
Total shareholders’ equity (D) P31,080,000
 Page 7

PROBLEM 6 – MAYON CORPORATION – AUDIT OF TRADING SECURITIES

1. Interest income:
Tipo Co. bonds, Jan. 1 – July 1
(P800,000 x 7% x 6/12) P28,000
Turkey Co. bonds:
Jan. 1 – April 1 (P1,200,000 x 7 ½% x 3/12)22,500
April 1 – Dec. 31 (P600,000 x 7 ½% x 9/12)33,750
Toll Co. bonds (P500,000 x 8% x 2/12) 6,667
Dividend income 500
Total P91,417
Answer: C

2. Gain on sale of Turkey bonds:

Sales price (P600,000 x 102%) P612,000
Carrying amount (P1,218,900 x ½)609,450 P 2,550
Gain on sale of Tipo bonds:
Sales price (P800,000 x 97 ½%) P780,000
Carrying amount 774,000 6,000
Total P8,550
Answer: C

3. Carrying Fair Increase

Security Amount Value (Decrease)
Concave Co. ordinary P243,000 P220,000 P(23,000)
Turkey bonds 609,450 610,500 1,050
Newman, Inc. ordinary 116,000 116,750 750
Toll Co. bonds 505,000 505,000 --
Totals P1,473,450 P1,452,250P(21,200)

Unrealized loss on trading securities P21,200

Answer: B

4. Trading securities, at fair value P1,452,250

Answer: D

5. Sales price (P600,000 x 101%) P606,000

Carrying amount 610,500
Loss on sale of Turkey Bonds P 4,500
Answer: A
 Page 8

PROBLEM 7 – BANAWE COMPANY – AUDIT OF INTANGIBLE ASSETS

1. C PATENTS
Balance per books, Dec. 31, 2018 P1,650,000
Unamortized balance of P225,000 erroneously charged to account
in January 2015 (P225,000 x 7/10) (157,500
Corrected balance before 2018 amortization 1,492,500
2018 amortization:
Patent with 2 years remaining life (P630,000 x 7/14 = P315,000/2 years)
(157,500)
Remaining patent (P1,492,500 – P315,000 = P1,177,500/7 years) (168,214
Carrying value, December 31, 2018 P1,166,786

2. A FRANCHISE AGREEMENT
Balance per books, December 31, 2018 P285,000
Annual payment charged to account (135,000
Corrected balance before 2018 amortization 150,000
2018 amortization (P150,000/5 years) (30,000
Carrying value, December 31, 2018 P120,000

3. B Organization costs, December 31, 2018 P0

4. D Goodwill, December 31, 2018 P600,000

5. D Patent amortization for 2018 (P157,500 + P168,214) P325,714

 Page 9

PROBLEM NO. 8 – SANDOVAL COMPANY – COMPUTATION OF CASH SHORTAGE

Nov. 30 Receipts Disb. Dec. 31

Bank balances P 16,500 P173,700 P 65,200 P125,000
Undeposited collections:
Nov. 30 500 (500)
Dec. 31 6,300 6,300
Outstanding checks:
Nov. 30 (5,300) (5,300)
Dec. 31 46,300 (46,300)
Erroneous bank charges:
Nov. 30 2,000 (2,000)
Dec. 31 (3,000) 3,000
Erroneous bank credits
Nov. 30 (500) (500)
Dec. 31 (600) (600)
Adjusted bank balances P 13,200 P176,900 P102,700 P 87,400

Nov. 30 Receipts Disb. Dec. 31

Book balances P 20,200 P178,000 P 95,800 P102,400
Underfooting of receipts 9,000 9,000
Overfooting of disbursements (4,000) 4,000
Bank collection 5,000 5,000
Corrected book balances P 20,200 P192,000 P 91,800 P120,400
Adjusted bank balances 13,200 176,900 102,700 87,400
Shortage as of Nov. 30 P 7,000
Unaccounted receipts P 15,100
Unsupported/unrecorded disbursements P 10,900
Shortage as of December 31 P 33,000

1. B

2. D

3. B

4. C

5. C
 Page 10

PROBLEM 9 – AUDIT OF INVENTORIES

SUMMARY OF WORKING PAPER ADJUSTMENTS

Debi t ( Credit )
Retained Beginning Accounts Accounts Ending
No. Earnings Purchases Inventory Receivable Sales Payable Inventory

1 P75,000 (P75,000) - - - - -
2 (39,600) - P39,600 - - - -
3 - - - P129,000 (P129,000) - -
4 - 45,000 - - - (P45,000) -
5 - - - - - - P54,000
6 - 36,000
- - - (36,000) 36,000
P35,400 P 6,000 P39,600 P129,000 (P129,000) (P81,000) P90,000

1. Retained earnings 75,000

Purchases 75,000
Answer: B

2. Accounts receivable 129,000

Sales 129,000
Answer: A

3. Inventory per client-prepared income statement P300,000

Add: Item no. 5 P54,000
Item no. 6 36,000 90,000
Adjusted inventory, December 31 P390,000
Answer: A

4. Net adjustment to purchases – increase P6,000

Answer: C

5. Inventory, Jan. 1 (P240,000 + P39,600) P 279,600

Add: Purchases (P4,800,000 + P6,000) 4,806,000
Cost of goods available for sale P5,085,600
Less: Inventory, Dec. 31 (P300,000 + P90,000) 390,000
Cost of goods sold P4,695,600
Answer: D
 Page 11

PROBLEM 10 – BUNCHING COMPANY – AUDIT OF VARIOUS WORKING CAPITAL

ACCOUNTS

Accounts Accounts
Cash Receivable Inventory Payable
Per books P963,200 P2,254,000 P6,050,000 P4,201,000
AJE 1 (654,600) 310,000 --- ---
2 360,000 --- --- 372,400
3 a --- --- --- (175,000)
b --- --- 130,000 ---
c --- --- (637,500) ---
d --- --- 217,500 217,500
e --- --- 275,000 ---
Per audit P668,600 P2,564,000 P6,035,000 P4,615,900

(1 – C) (2 – B) (3 – A) (4 – B)

AJES
1. Sales 360,100
Accounts receivable (P294,500 / 95%) 310,000
Sales discounts (P310,000 x 5%) 15,500
Cash 654,600
2. Cash (P372,400 – P12,400) 360,000
Purchase discounts 12,400
Accounts payable 372,400

3. a Accounts payable 175,000

Purchases 175,000
b Inventory 130,000
Cost of sales 130,000
c Cost of sales 637,500
Inventory 637,500
d Purchases 217,500
Accounts payable 217,500
Inventory 217,500
Cost of sales 217,500
e Inventory 275,000
Cost of sales 275,000
f No adjusting entry

5. C Current ratio:
Current assets:
Cash P 668,600
Accounts receivable 2,564,000
 Inventory 6,035,000
P9,267,600
Current liabilities:
Accounts payable P4,615,900
Accrued expenses 431,000 5,046,900
1.84

---END---