PROBLEM NO.

The following are independent situations:

The Machinery account of Cardo COMPANY contains the following entries during the year:

Date Item Debit Credit

2015
Jan. 1 Balance P1,800,000
June 30 Purchased four new machines 1,080,000
Installation cost of new machines 48,000
Sept. 30 Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,000 P 66,000
Oct. 31 Repairs of machinery 75,000
Dec. 1 Cash paid for trade-in of old machines—cost,
P90,000; accumulated depreciation, P36,000.
Cash price of new machine, P270,000 225,000
Dec. 31 Balance 3,162,000
Total P3,228,000 P3,228,000

1. What is the correct balance of the Machinery account on December 31, 2015?
A. P3,162,000 B. P3,057,000 C. P3,048,000 D. P2,958,000

2. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the depreciation
charge for 2015?
A. P234,150 B. P300,000 C. P316,200 D. P227,400

On June 30, 2015, the DALISAY COPPER MINES, INC. purchased a copper mine for P14,580,000. The estimated
capacity of the mine was 1,620,000 tons. Dalisay Copper Mines expects to extract 15,000 tons of ore a
month with an estimated selling price of P50 per ton. Production started immediately after some new
machines costing P1,800,000 were bought on June 30, 2015. These new machines had an estimated useful
life of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted from the
property, at which time the machines will already be useless. Dalisay’s books show the following
expenses for 2015:

Depletion expense.................................P1,215,000
Depreciation—Machinery...............................120,000

3. Recorded depletion expense was

A. Overstated by P270,000.
B. Understated by P270,000.
C. Overstated by P405,000
D. Understated by P405,000.

4. Recorded depreciation expense was

A. Understated by P60,000.
B. Overstated by P60,000.
C. Understated by P30,000.
D. Overstated by P30,000.

BROTHERS COMPANY purchased a machine for P300,000 on January 1, 2012, with the following additional
items paid or incurred:

Separation pay for laborer laid off

upon acquisition of new machine P3,600
Loss on sale of machine replaced 3,900
Transportation in 3,000
Installation cost 12,000

The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
On January 1, 2015, new parts which cost P37,800 were added to the machine so as to reduce its fuel
consumption, but with no change in its estimated life or residual value.

5. The annual depreciation charge on the machine for 2015 was

A. P34,080 B. P35,494 C. P36,450 D. P35,700
PROBLEM 1 – CARDO COMPANY

16. D Balance, Jan. 1 P1,800,000

June 30 acquisition (P1,080,000 + P48,000) 1,128,000
Sept. 30 sale (150,000)
Dec. 1 trade in: old machine (90,000)
new machine 270,000
Balance, Dec. 31 P2,958,000

17. A Remainder of beginning balance (P1,800,000 – P150,000 – P90,000 =

P1,560,000 x 10%) P156,000
June 30 acquisition (P1,128,000 x 10% x 6/12) 56,400
Sept. 30 sale (P150,000 x 10% x 9/12) 11,250
Dec. 1 trade in: old machine (P90,000 x 10% x 11/12) 8,250
new machine (P270,000 x 10% x 1/12) 2,250
Depreciation expense for 2015 P234,150
DALISAY COPPERMINES, INC.

18. C Depletion rate per ton (P14,580,000 / 1,620,000) P9

Copper ore mined in 2015 (15,000 x 6 months) x 90,000
Depletion for 2015 P 810,000
Depletion per books 1,215,000
Overstatement of depletion expense P405,000
 19. D Depreciable cost of machinery (P1,800,000 x 90%) P1,620,000
Estimated copper ore reserve 1,620,000
Depreciation rate per ton P1
Copper ore mined in 2015 90,000
Depreciation expense for 2015 P 90,000
Depreciation per books 120,000
Overstatement of depreciation expense P 30,000

20. D January 1, 2012

Total cost of machine (P300,000 + P3,000 + P12,000) P315,000
Residual value (12,000)
Depreciable cost P303,000
Estimated useful life 10 years
Annual depreciation P30,300

Depreciable cost P303,000

Depreciation, 2012 – 2014 (P30,300 x 3 years) (90,000)
Remaining depreciable cost, Jan. 1, 2015 P212,100
Cost of new parts 37,800
Total P249,900
Remaining useful life (10 years – 3 years) 7 years
Revised annual depreciation P35,700

PROBLEM NO. 2

Presented below are unrelated situations.

ALYANA COMPANY buys and sells securities expecting to earn profits on short-term differences in
price. During 2016, Alyana Company purchased the following trading securities:
Fair Value
Security Cost Dec. 31, 2016
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net income of
P2,700,000.

6. What is Alyana’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000

7. What would Alyana’s net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

MAJOR CO.’s portfolio of trading securities includes the following on December 31, 2015:

Cost Fair Value

15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069,000 P2,961,000

All of the above securities have been purchased in 2015. In 2016, Major Co. completed the following
securities transactions:

Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission of
P13,500.

April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other
transaction costs of P4,950.

The Major Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
1
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000
1,800 ordinary shares of Waston, Inc. 247,950 225,000 2
P1,885,950 P1,965,000
1
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

8. What amount of unrealized gain on these securities should be reported in the 2016 income
statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000

9. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016?
A. P144,000 B. P27,000 C. P130,500 D. P13,500

10. What amount should be reported as trading securities in Major’s statement of financial position on
December 31, 2016?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950

PROBLEM 2 – ALYANA COMPANY

21. A Net income before trading security adjustment P2,700,000

Unrealized loss (P3,465,000 cost – P3,195,000 market value) (270,000)
Net income, as adjusted P2,430,000
 22. B Net income before trading security adjustment P2,700,000
Unrealized gain (P3,465,000 cost – P3,564,000 market value) 99,000
Net income, as adjusted P2,799,000

MAJOR CO.

23. D Carrying Value Market Value

Ganda Co. P1,710,000 P1,759,500
Waston, Inc. (P135 x 1,800) 243,000 229,500
P1,953,000 P1,989,000

Unrealized gain (P1,989,000 – P1,953,000) P36,000

24. C Net proceeds (P93 x 15,000 = P1,395,000 – P13,500) P1,381,500

Carrying value (1,251,000)
Gain on sale P 130,500

25. B Trading securities at fair value

PROBLEM NO. 3

To substantiate the existence of the accounts receivable balances as at December 31, 2015 of ROMERO
COMPANY, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation replies together with the exceptions and audit findings. Gross profit on sales is 20%.
The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2015. Correct balance as is P60,000. received December 31, 2015.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2015 cancels this. Romero Company in 2016.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping point.
2016. Shipped in 2015.
Yakal P135,000 Balance was offset by our December Romero Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

11. If the necessary adjusting journal entry is made regarding the case of Concordia, the net income
will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

12. The effect on 2015 net income of Romero Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.

13. The overstatement of receivable from Lazaro is

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

14. The accounts receivable from Silang is

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

15. 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
PROBLEM 3 – LUKAS COMPANY

21. 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

22. A Sales 30,000

Accounts receivable 30,000

Income overstated by P30,000

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

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

25. D Accounts payable 135,000

Accounts receivable 135,000

PROBLEM NO. 4

A portion of the DOMENG COMPANY’s statement of financial position appears as follows:

December 31, 2015 December 31, 2014

Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Domeng Company pays for all operating expenses with cash and purchases all inventory on credit. During
2015, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2015 totaled
P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units per month
and valued by using periodic FIFO. The unit cost of inventory was P32.60 during January 2015 and
increased P0.10 per month during the year. Domeng sells only one product. All sales are made for P50
per unit. The ending inventory for 2014 was valued at P32.50 per unit.

Based on the preceding information, compute the following:

16. Number of units sold during 2015

A. 7,066 B. 18,400 C. 4,268 D. 13,400

17. Accounts payable balance at December 31, 2015

A. P190,100 B. P50,000 C. P199,100 D. P200,000

18. Inventory quantity on December 31, 2015

A. 5,750 B. 2,750 C. 17,084 D. 10,750

19. Cost of inventory on December 31, 2015

A. P187,450 B. P186,875 C. P192,950 D. P189,660

20. Cost of goods sold for the year ended December 31, 2015
A. P609,125 B. P609,700 C. P606,915 D. P603,625
PROBLEM 4 – SPARK COMPANY

31. B Cash balance, Dec. 31, 2014 P100,000

Sales (SQUEEZE) 920,000
Cash paid for operating expenses (220,000)
Cash paid on accounts payable (471,700)
Collections on notes receivable 25,000
Cash balance, Dec. 31, 2015 P353,300
Units sold (P920,000/P50) 18,400
32. D Accounts payable:
Balance, Dec. 31, 2014 P75,000
Purchases 596,700*
Cash payments on accounts payable (471,700)
Balance, Dec. 31, 2015 P200,000
*Purchases:
Month Unit Cost Units Total Cost
January P32.60 1,500 P48,900
February 32.70 1,500 49,050
March 32.80 1,500 49,200
April 32.90 1,500 49,350
May 33.00 1,500 49,500
June 33.10 1,500 49,650
July 33.20 1,500 49,800
August 33.30 1,500 49,950
September 33.40 1,500 50,100
October 33.50 1,500 50,250
November 33.60 1,500 50,400
December 33.70 1,500 50,550
Total purchases 18,000 P596,700
Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700

33. A Inventory, Dec. 31, 2014 (P199,875/P32.50) 6,150

Purchases 18,000
Units sold (18,400)
Inventory, Dec. 31, 2015 5,750
34. C FIFO cost of inventory, Dec. 31, 2015:
December purchases 1,500 x P33.70 P 50,550
November purchase 1,500 x P33.60 50,400
October purchase 1,500 x P33.50 50,250
September purchase 1,250 x P33.40 41,750
5,750 P192,950
35. D Inventory, Jan. 1, 2015 P199,875
Purchases 596,700
 Goods available for sale 796,575
Inventory, Dec. 31, 2015 (192,950)
Cost of goods sold P603,625

PROBLEM NO. 5

Kolokoy, CPA, is a new-hire in a very popular Auditing Firm in the Philippines and he is very excited in
his first engagement in the firm. His first audit client was Super 8 Grocery stores. Since he was just
neophyte in the firm, he was the one instructed to observe the annual physical inventory count of the
client to be held on December 31, 2019. So while his family is preparing for their Media Noche, he was
in a warehouse somewhere in Sucat observing the client’s personnel counting their goods.

Come January 2020, after taking very little rest, Kolokoy’s very competitive and aiming to be promoted
at the end of the fiscal year senior associate, Neneng Bibo, has reviewed his documentation and deemed
that the procedures he had performed were not sufficient to obtain the desired level of comfort they
were aiming for to please the Partner of the firm. Hence, being a toxic senior as her usual nature, she
instructed Kolokoy to conduct Analytical Procedures on the cost of the ending inventory of the client.
Therefore, you were able to request the following information from your client, Super 8:

@Cost @Retail
Sales 5,000,000
Sales returns 300,000
Sales Discount 150,000
Employee Discount 400,000
Abnormal loss due to theft 200,000 350,000
Normal loss 100,000 200,000
Inventory, January 2019 300,000 650,000
Purchases 4,000,000 6,000,000
Purchase Discount 400,000
Freight-in 200,000
Mark up 400,000
Mark-up cancellation 100,000
Mark-down 500,000
Mark-down cancellation 50,000

21. What is the cost ratio to be used assuming your senior, Neneng Bibo, instructed you to use the
Conservative Approach?
A. 59.09%
B. 58.82%
C. 59.38%
D. 58.74%

22. What is the cost ratio to be used assuming your senior, Neneng Bibo, instructed you to use the
Average cost Approach?
A. 63.87%
B. 63.41%
C. 62.69%
D. 62.99%

23. What is the cost of ending inventory you are expecting assuming that you used the Conservative
Approach in estimaton?
A. 502,265
B. 617,610
C. 623,490
D. 616,770

24. What is the cost of ending inventory you are expecting assuming that you used the Average Cost
Approach in estimaton?

A. 670,365
B. 538,985
C. 658,245
D. 661,395

25. What is the cost ratio to be used assuming your Manager, Ching Chang, entered into the picture and
instructed you to use the FIFO Retail Approach?
A. 64.46%
B. 66.04%
C. 65.45%
D. 64.91%

PROBLEM 5 – Super 8

21. A 22. B 23. A 24. B 25. C

PROBLEM NO. 6

EG Mining CO. has acquired a tract of mineral land for P50,000,000. EG Mining estimates that the
acquired property will yield 150,000 tons of ore with sufficient mineral content to make mining and
processing profitable. It further estimates that 7,500 tons of ore will be mined the first and last
year and 15,000 tons every year in between. (Assume 11 years of mining operations.) The land will have
a residual value of P1,550,000.

EG Mining builds necessary structures and sheds on the site at a total cost of P12,000,000. The company
estimates that these structures can be used for 15 years but, because they must be dismantled if they
are to be moved, they have no residual value. EG Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000. The
machinery cost the former owner P9,000,000 and was 50% depreciated when purchased. EG Mining estimates
that about half of this machinery will still be useful when the present mineral resources have been
exhausted but that dismantling and removal costs will just about offset its value at that time. The
company does not intend to use the machinery elsewhere. The remaining machinery will last until about
one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be
allocated equally between these two classes of machinery.

26. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000

27. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

28. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

29. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

30. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000

PROBLEM 6 – MINA MINING CO.

Depletable/Depreciable Cost Estimated Reserves Depletion/Depreciation

Mineral property P48,450,000 1
150,000 P323
Building 12,000,000 150,000 80
Machinery (1/2) 1,800,000 150,000 12
Machinery (1/2) 1,800,000 150,000 24 2
1
P50,000,000 – P1,550,000
2
(P1,800,000/150,000) x 2

51. C Year 1
Depletion Depreciation
Mineral property (P323 x 7,500) P2,422,500
Building (P80 x 7,500) P600,000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) (P24 x 7,500) 180,000
P2,422,500 P870,000
52. D Year 5
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 15,000) 360,000
P4,845,000 P1,740,000
53. C Year 6
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 7,500) 180,000
P4,845,000 P1,560,000
54. C Year 7
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) --
P4,845,000 P1,380,000
55. D Year 11
Depletion Depreciation
Mineral property (P323 x 7,500) P2,422,500
Building (P80 x 7,500) P600,000
 Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) ---
P2,422,500 P690,000
PROBLEM NO. 7

OG Company, a manufacturer of small tools, provided the following information from its accounting
records for the year ended December 31, 2006:
Inventory at December 31, 2006 (based on physical count on
December 31, 2006) P1,520,000
Accounts payable at December 31, 2006 1,200,000
Net sales (sales less sales returns) 8,150,000

Additional information follows:

a) a.Included in the physical count were tools billed to a customer FOB shipping point on
December 31, 2006. These tools had a cost of P31,000 and were billed at P40,000. The shipment
was on OG’ loading dock waiting to be picked up by the common carrier.

b) Goods were in transit from a vendor to OG on December 31, 2006. The invoice cost was P71,000,
and the goods were shipped FOB shipping point on December 29, 2006.

c) Work in process inventory costing P30,000 was sent to an outside processor for plating on
December 30, 2006.

d) Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2006, were not included in the physical count. On January 8, 2007, the tools
costing P32,000 were inspected and returned to inventory. Credit memos totaling P47,000 were
issued to the customers on the same date.

e) Tools shipped to a customer FOB destination on December 26, 2006, were in transit at December
31, 2006, and had a cost of P21,000. Upon notification of receipt by the customer on January
2, 2007, OG issued a sales invoice for P42,000.

f) Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31,
2006, were recorded on a receiving report dated January 2, 2007. The goods were not included
in the physical count, but the invoice was included in accounts payable at December 31,
2006.

g) Goods received from a vendor on December 26, 2006, were included in the physical count.
However, the related P56,000 vendor invoice was not included in accounts payable at December
31, 2006, because the accounts payable copy of the receiving report was lost.

h) On January 3, 2007, a monthly freight bill in the amount of P6,000 was received. The bill
specifically related to merchandise purchased in December 2006, one-half of which was still
in the inventory at December 31, 2006. The freight charges were not included in either the
inventory or accounts payable at December 31, 2006.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
31. The adjusted balance of Inventory as of December 31, 2006 is
a. P1,673,000 b. P1,704,000 c. P1,672,000 d. P1,670,000

32. The adjusted balance of Accounts Payable as of December 31, 2006 is

a. P1,333,000 b. P1,262,000 c. P1,327,000 d. P1,330,000

33. The adjusted Net Sales fro the year ended December 31, 2006 is
a. P8,103,000 b. P8,110,000 c. P8,150,000 d. P8,063,000

34. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to
obtain evidence that
a. All goods purchased before year end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. All goods owned at year end are included in the inventory balance.
d. No goods observed during the physical count are pledged or sold.
35. Which of the following audit procedures would provide the least reliable evidence that the
client has legal title to inventories?
a. Analytical review of inventory balances compared to purchasing and sales activities.
b. Confirmation of inventories at locations outside the client's facilities.
c. Observation of physical inventory counts.
d. Examination of paid vendors' invoices.

PROB 7
31)B 32) A 33) D 34) C 35) A

PROBLEM NO. 8

Both BSA Inc. and CPA Corp. have 1,000,000 shares of no-par common stock outstanding. Bucks Inc.
acquired 100,000 shares of BSA stock for P5 per share and 250,000 shares of CPA stock for P10 per
share on January 2, 2005. Both securities are being held as long term investments. Changes in
retained earnings for BSA and CPA for 2005 and 2006 are as follows:

BSA, Inc. CPA Corp.

Retained earnings (deficit), 1/1/05
P2,000,000 (P350,000)
Cash dividends, 2005 (250,000) -
Net income, 2005 400,000 650,000
 Retained earnings, December 31, 2005 2,150,000 300,000
Cash dividends, 2006 (300,000) (100,000)
Net income, 2006 600,000 250,000
Retained earnings, December 31, 2006 P2,450,000 P 450,000

Market value of stock: 12/31/05 P7.00 P12.00

12/31/06 6.50 15.00

QUESTIONS:
Based on the above and the result of your audit, answer the following:
36. The income from investment in BSA, Inc. in 2006 is
a. P30,000 b. P25,000 c. P2,000 d. P0
37. The income from investment in CPA, Inc. in 2005 is
a. P62,500 b. P5,000 c. P162,500 d. P0
38. The carrying value of Investment in BSA, Inc. as of December 31, 2006 is
a. P500,000 b. P650,000 c. P700,000 d. P505,000
39. The carrying value of Investment in CPA, Inc. as of December 31, 2006 is
a. P2,500,000 b. P3,750,000 c. P2,537,500 d. P2,700,000
40. How much is the unrealized gain or loss that will be included as component of equity as of
December 31, 2006?
a. P150,000 gain b. P50,000 gain c. P50,000 loss d. P0

PROBLEM 8.
36) A 37)C 38) B 39)D 40) A

PROBLEM NO. 9
You obtained the following information on the current account of Liquid Company during your
examination of its financial statements for the year ended December 31, 2006.

The bank statement on November 30, 2006 showed a balance of P306,000. Among the bank
credits in November was customer’s note for P100,000 collected for the account of the
company which the company recognized in December among its receipts. Included in the bank
debits were cost of checkbooks amounting to P1,200 and a P40,000 check which was charged
by the bank in error against Liquid Co. account. Also in November you ascertained that
there were deposits in transit amounting to P80,000 and outstanding checks totaling
P170,000.

The bank statement for the month of December showed total credits of P416,000 and total
charges of P204,000. The company’s books for December showed total debits of P735,600,
total credits of P407,200 and a balance of P485,600. Bank debit memos for December were:
No. 121 for service charges, P1,600 and No. 122 on a customer’s returned check marked
“Refer to Drawer” for P24,000.

On December 31, 2006 the company placed with the bank a customer’s promissory note with a
face value of P120,000 for collection. The company treated this note as part of its
receipts although the bank was able to collect on the note only in January, 2007.

A check for P3,960 was recorded in the company cash payments books in December as P39,600.

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above
data, you are to provide the answers to the following:
41. How much is the undeposited collections as of December 31,
2006?
a. P339,600 c. P219,600
b. P179,600 d. P139,600
42. How much is the outstanding checks as of December 31, 2006?
a. P191,960 c. P361,960
b. P397,600 d. P363,160
43. How much is the adjusted cash balance as of November 30,
2006?
a. P216,000 c. P176,000
b. P256,000 d. P157,200
44. How much is the adjusted bank receipts for December?
a. P635,600 c. P475,600
b. P515,600 d. P435,600
45. How much is the adjusted book disbursements for December?
a. P395,960 c. P225,960
b. P431,600 d. P397,160
46. How much is the adjusted cash balance as of December 31,
2006?
a. P625,640 c. P220,000
 b. P195,640 d. P375,640
41) C 42) C 43) B 44) B 45) A 46) D

PROBLEM NO. 10

On January 1, 2014, GOLIATH MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2015.

Expenditures on the project were as follows:

January 3, 2014 P2,500,000

March 31, 2014 3,000,000
June 30, 2014 4,000,000
October 31, 2014 3,000,000
January 31, 2015 1,500,000
March 31, 2015 2,500,000
May 31, 2015 3,000,000

On January 3, 2014, the company obtained a P5 million construction loan with a 10% interest rate. The
loan was outstanding all of 2014 and 2015. The company’s other interest-bearing debts included a long-
term note of P25 million with an 8% interest rate, and a mortgage of P15 million on another building
with an interest rate of 6%. Both debts were outstanding during all of 2014 and 2015. The company’s
fiscal year-end is December 31.

47. What is the amount of capitalizable interest in 2014?

A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000

48. What is the amount of capitalizable interest in 2015?

A. P630,625 B. P654,663 C. P361,707 D. P799,663

49. What amount of interest should be expensed in 2014?

A. P2,736,875 B. P2,356,250 C. P2,900,000 D. P 0

50. What amount of interest should be expensed in 2015?

A. P2,769,375 B. P3,038,293 C. P2,600,337 D. P2,745,337

51. What is the total cost of the building (including the interest capitalized in 2014 and 2015)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625

PROBLEM 5 – GOLIATH MFG. CO.

26. C Actual borrowing cost:

Specific borrowing (P5 million x 10%) P500,000
General borrowings:
P25 million x 8% P2,000,000
P15 million x 6% 900,000 2,900,000
Total P3,400,000
Capitalization rate (P2,900,000/P40 million) 7.25%
Average expenditures – 2014 P7,250,000
Capitalizable interest – 2014:
Specific borrowing (P5 million x 10%) P500,000
General borrowings (P7,250,000 – P5,000,000 = P2,250,000 x 7.25%) 163,125
Total P663,125

27. B Average expenditures – 2015 P16,163,125

Capitalizable interest – 2015:
Specific borrowing (P5 million 10% x 6/12) P250,000
General borrowings (P16,163,125 – P5,000,000 = P11,163,125 x 7.25% x 6/12) 404,663
Total P654,663

28. A 2014 interest expense (P3,400,000 – P663,125) P2,736,875

29. D 2015 interest expense (P3,400,000 – P654,663) P2,745,337

30. B Accumulated expenditures before interest P19,500,000

Interest capitalized in 2014 and 2015 (P663,125 + P654,663) 1,317,788
Total cost of building P20,817,788