ATT (AUDITING PROBLEMS)

1. Arellano Corporation uses leases as a method of selling its products . In early ea rly 2015, Arellano
Corporation completed construction of a passenger ferry for use between Quiapo and Guadalupe. On
April 1, 2015, the ferry was leased to Metro Ferry line on a contract specifying that the ownership of the
ferry will transfer to the lesse e at the end of the lease period. The ferry is expected to be economically
useful for 25 years. Annual lease lea se payments do not include executor costs. Other terms of the
agreement are as follows: Original cost of the ferry Annual lease payments Estimated residual value
Interest rate implicit in the lease Date of first lease payment Lease period

1,500,000 250,000 78,000 10% April 1, 2015 30 years

Which of the following statements are correct? A. Gross investment in the lease is P5, 00,000 and net
investment in the lease lea se is P2,871,600 B. Gross investment in the lease is P4,500,000 P4,500,000
and total finance income income to be earned over the lease term is P2,854,440 C. Gross investment in
the lease is P4,500,000 and total finance income income to be earned over over the lease term is
P2,392,897 D. Gross investment in the lease is P5, 00,000 and net investment in the lease is P2,658,775
Answer: D Gross investment in the lease (P250,000 x 20) Net investment in the lease (P250,000 x
9.3649) Total finance income to be earned over the lease term Reference: Asset Mockboard Examination

Php5,000,000.00 2,341,225 ANNUITY DUE Php2,658,775.00

2. Reid Company has been using the accrual basis of accounting. However, an examination of the
records reveals that some expenses and revenues have been handles on a cash basis by the
inexperienced bookkeeper of the company. The statements of comprehensive income prepared by the
bookkeeper reported by P133,333 profit for 2014 and P174,025 profit in 2015 . Further review of the
records reveals that the following items were handled improperly. a. Rent of P6,500 was received re
ceived from a lessee on December 23,2014. This amount represents rent for 2013.

b. Invoices for the supplies purchases were charged to expense accounts upon receipt. Inventories of
supplies on hand at the end of each year have been ignored and no adjusting entry has been made.
Office supplies inventories at the end of 2013, 2014, and 2015 were P7,666 , P4,735 and P7,100,
respectively. c. Salaries payable at the end of each year was consistently omitted from the records and
were recorded as expense when paid in the following year. Accrued salaries at the end of 2013,2014, and
2015 were P8,502 P9,999, and P10,003 respectively. Compute the corrected profit for the years 2014
and 2015 A. P 122, 405 and P176,386 B. P128,905 and P182,886 C. P122,405 and P182,886 D.
P128,905 and P176,386 Answer:  A Solution: 2013 133,333 -6,500 -7,666 4,735

Unadjusted profit a. b. c.

8,502 -9,999

Corrected profit

122,405

2014 174,025

-4,735 7,100 9,999 -10,003 176,386

Reference: Asset Mockboard Examination 3. On January 1,2014, Colombia Corp. purchased debt
securities for cash of P765,540 to be held as financial assets at amortized cost. The securities have a
face value of P600,000 and they mature in 15 years. The securities carry fixed interest of 10% that is
receivable semiannually, on June 30 and December 31. The prevailing market interest rate on these debt
securities is 7% compounded semiannually. The carrying value of debt securities on December 31, 2014,
at amortized cost using the effective interest rate method is A. P771,840 B. P759,016 C. P765,540 D.
P600,000

Answer: B. P759,016 Solution NI 1-Jan-14 30-Jun 30,000 31-Dec 30,000 Reference: REYES

EI

Premium Amortized

26,794 26,682

3,206 3,318

CA 765,540 762,334 759,016

4. LizQuen Company reported net assets totaling P8,750,000 at year-end which included the following:
Treasury shares of LizQuen Company at cost Idle machinery Trademark Allowance for inventory
writedown

250,000 100,000 150,000 200,000

What amount should be reported as net assets at year-end? A. 8,200,000 B. 8,300,000 C. 8,400,000 D.
8,500,000 Answer : D. 8,500,000 Reported net assets Less: Treasury shares of LizQuen Company at
cost Adjusted net assets Reference : PRACTICAL ACCOUNTING 1 (VALIX ET AL.)

8,750,000 250,000 8,500,000

5. Selected records from the accounting records of Malakas Company are as follows: Net accounts
receivable at Dec. 31, 2005 1,900,000 Net accounts receivable at Dec. 31, 2006 1,000,000 Account
receivable turnover 5:1 Inventory at Dec. 31, 2005 1,100,000 Inventory at Dec.31, 2006 1,200,000
Inventory turnover 4:1 What is the amount of gross margin? A. 5,000,000

C.5,200,000

B.

5,150,000

D.5,300,000

Answer: B. 5,150,000 Solution:

(1900,000 +1,000,000) /2 =1,950,000 x 5 =9,750,000 (1,100,000 + 1,200,000)/2 =1,150,000 x 4

Reference : PRACTICAL ACCOUNTING 1 (VALIX ET AL.) 6. AlJames Company provided the following
information for the current year: Sales 5,000,000 Cost of goods sold 2,800,000 Foreign Translation
adjustment-credit 400,000 Selling expenses 700,000 Unusual and infrequent gain 400,000 Correction of
inventory error 200,000 General and administrative expenses 600,000 Income tax expense 150,000 Gain
on sale of investment 50,000 Proceeds from sale of land at cost 800,000 Dividends 300,000 What
amount should be reported as income from continuing operations? A. 1,200,000 B. 1,350,000 C.
1,600,000 D. 2,000,000 Answer: A. 1,200,000 Solution: Sales Cost of goods sold Gross income

5,000,000 2,800,000 2,200,000

Other income 450,000 Total income 2,650,000 Expenses: Selling expenses 700,000 Gen. and admin
600,000 1,300,000 Income before income tax 1,350,000 Income tax expenses (150,000) Income from
continuing operations 1,200,000 Foreign Translation adjustment-credit is a component of other
comprehensive income. 7. Mackerel, a company listed on a recognized stock exchange, reports operating
results from its North American activities to its chief operating decision maker. The segment information
for the year is: Revenue PHP 3,675,000 Profit PHP 970,000 Assets PHP 1,700,000 Number of
employees 2,500 Mackerel's results for all of its segments in total are: Revenue PHP39,250,000 Profit
PHP 9,600,000 Assets PHP17,500,000 Number of employees 18,500 According to IFRS8 Operating
segments, which piece of information determines for Mackerel that the North American activities are a
reportable segment? A Revenue B Profit C Assets D Number of employees Answer : B Profit The correct
answer is profit, because it is the only criterion out of profits, revenue and assets that exceeds 10% of the
total for all segments. The number of employees is not one of the criteria. See IFRS8 para 13. 8. Bonus
obligation: Sonic Company’s president gets an annual bonus of 10% of net income after bonus and
income tax. Assume the tax rate of 30% and the correct income before bonus and

tax is P9,600,000. (Ignore the effects of other given items on net income.) Determine the amount that
should be reported as current liability in Dec. 31,2005 bala nce sheet. A. P722,600 B. P395,000 C.
P2,240,000 D. P628,000 Answer: D. P628,000 B = 10% (P9,600,000 - B - T) T = 30% (P9,600,000 - B) T
= P2,880,000 - .3B B = 10% [P9,600,000 - B - (P2,880,000 - .3B)] B = 10% (P9,600,000 - B - P2,880,000
+ .3B) B = 10% (P6,720,000 - .7B) B = P672,000 - .07B 1.07B = P672,000 B = P628,000 (rounded off) 8.
The following information relates to Sonic Company’s obligations as of December 31, 2005. Determine
the amount ,if any, of accounts payable that should be reported as current liability in Sonic’s December
31, 2005 balance sheet. Accounts payable per general ledger control amounted to P5,440,000, net of
P240,000 debit balances in suppliers’ accounts. The unpaid voucher file included the following items that
not had been recorded as of December 31, 2005: a) A Company – P224,000 merchandise shipped on
December 31, 2005, FOB destination; received on January 10, 2006. b) B, Inc. – P192,000 merchandise
shipped on December 26, 2005, FOB shipping point; received on January 16, 2006. c) C Super Services
– P144,000 janitorial services for the three-month period ending January 31, 2006. d) MERALCO
– P67,200 electric bill covering the period December 16, 2005 to January 15, 2006. On December 28,
2005, a supplier authorized Sonic to return goods billed a t P160,000 and shipped on December 20,
2005. The goods were returned by Sonic on December 28, 2005, but the P160,000 credit memo was not
received until January 6, 2006. A. P5,923,200 B. P5,712,000 C. P5,601,600 D. P5,841,600 Answer: D.
P5,841,600 Solution Accounts payable per general ledger Debit balances in suppliers' accounts

5,440,000 240,000

Goods in transit on 12/31/05, FOB shipping point 192,000 Unrecorded purchase return (160,000)
Adjusted accounts payable 5,712,000 Accrued janitorial expenses (P144,000 x 2/3) 96,000 Accrued
utilities (P67,200 x 15/30) 33,600 Total 5,841,600 D 9. Liton Company buys and sells securities expecting
to earn profits on short-term differences in price. During 2014, Liton Company purchased the following
trading securities: Security Cost A P195,000 P225,000 B 300,000 C 660,000

Fair Value Dec.31, 2014 162,000 678,000

Before any adjustments related to these trading securities, Liton Company had net income of P900,000.
What is Liton’s net income after making any necessary trading security adjustments? A. P900,000 B.
P810,000 C.P762,000 D.P948,000 Answer: B. P810, 000 Solution: Net income before trading security
adjustment Unrealized loss (P1,155,000 – P 1,065,000) Net income, as adjusted Security Cost A
P195,000 P225,000 B 300,000 C 660,000 1,155,000 1,065,000

900,000 (90,000) 810,000 Fair Value Dec.31, 2014

162,000 678,000

10. On January 1, 2014, Rambutan Corp. purchased debt securities for cash of P765, 540 to be held as
financial assets at amortized cost. The securities have a face value of P600, 000, and they mature in 15
years. The securities carry fixed interest of 10% that is receivable semiannually, on June 30 and
December 31. The prevailing market interest rate on these debt securities is 7% compounded
semiannually. The carrying value of the debt securities on December 31, 2014, at amortized cost using
the effective interest method is

A. P771,840

B. P759,016

C. P765,540

Answer : B. P759,016 Solution: Carrying value, Jan.1, 2014 Amortization of premium, Jan. 1- June 30
Nominal interest (600,000x10%x1/2) 30,000 Effective interest (765,540x7%x1/2) (26,794) Carrying value,
June 30,2014 Amortization of premium, July 1- December 31 Nominal interest (600,000x10%x1/2) 30,000
Effective interest (762,334x7%x1/2) (26,682) Carrying value at amortized cost, December 31,2014

D. P600,000

765,540

(3,206) 762,334

(3,318) 759,016

11. Andes Corporation expended P510,000 in research and development costs. These activities resulted
to a new product called the Oido Organ. It was patented at additional legal and other costs of P54,000.
The patent application was filed on October 1, 2010, and the patent was estimated to have useful life of
10 years. On June 1, 2012 , Andes spent P28,440 to successfully prosecute a patent infringement. In
addition, the patent’s est imated useful life was extended to 12 years from June 1, 2012. At the beginning
of 2014, Andes determined that a competitor’s product would make the Oido Organ obsolete and the
patent worthless by December 31,2015. Based on the preceding information, calculate the patent
amortization 2010? A. 14,100 B. 12,750 C. 5,400 D. 1,350 Answer: D. 1,350 Solution: Patent amortization
for 2010 October 1- December 31 (54,000/10 x 3/12)

1,350

12. Anabel corp. records its purchases at gross amounts but wishes to change to recording purchases net
of purchase discounts. Discounts on purchases recorded from January 1,2014 to December 31,2014,
totaled P80,000 . Of this amount, P8,000 is still available in the accounts payable balance. The balances
in Anabel’s accoutns as of and for the year ended December 31,2014 before conversion are : Purchases
Purchase discounts

4,000,000 32,000

Accounts payable

1,200,000

The amount of purchase discounts lost to be recognized is A. 8,000 B. 0 C.32,000 D. 40,000 Answer: D.
40,000 Discounts on 2014 purchases Less: Discounts taken Discounts still available in the accounts
payable balance Purchase discounts lost

80,000 32,000 8,000

40,000 40,000

13. On January 1, 2014, management of TUVALU Company decided to make a revision in the estimates
associated with its production equipment. The equipment was acquired on January 3, 2012, for P800, 000
and had been depreciated using straightline method. At the date of acquisition, it had an estimated useful
life of 10 years with an estimated salvage value of P50,000. Management has determined that the
equipment’s remaining useful life is 4 years and that it has an estimated residual value of P60,000. What
is the amount of depreciation expense that should be recognized in 2014 as a result of the changes in
estimates? A. 147,500 B. 75,000 C. 125,000 D. 150,000 Answer: A. 147,500 Solution: Cost of equipment
Less: AD (75,000X2) Book Value, Jan 1, 2014 Less: Revised Salvage Value Remaining depreciable cost
Divide by revised useful life Revised annual depreciation

800,000 150,000 650,000 60,000 590,000 4 147,500

14. The audited income statement of Uruguay Co. shows a net income of P175,000 for the year ended
December 31, 2014. Adjustments were made for the following errors: a. December 31,2013, inventory
overstated by 22,500 b. December 31, 2014, inventory understated by 37,500 c. A P10, 000 customer’s
deposit received in December 2014, was credited to sales in 2014. The goods were actually shipped in
January 2015. What is the unadjusted net income of Uruguay Co. for the year ended December 31,
2014? A. 234,000 B. 125,000 C. 170,000 D. 200,000 Answer: B. 125,000 Solution: Unadjusted Net
Income (SQUEEZE) December 31, 2013, Inventory- understated December 31, 2014, Inventory-
understated Customer’s deposit recognized as sales revenue  Adjusted Net Income

125,000 22,500 37,500 (10,000) 175,000

15. The following amounts are included in the general ledger of LESTER NEIL CORPORATION at
December 31, 2014: Organization costs Trademarks Patents Discounts on bonds payable Deposits with
advertising agency for ads to promote goodwill of company Costs of equipment acquired for various
Research and development projects Costs of developing a secret formula for A product that is expected
to be marketed For at least 20 years

72,000 45,000 225,000 105,000 30,000 320,000

240,000

On the basis of the information above, what is the total amount of intangible assets to be reported by
LESTER NEIL in its statement of financial position at December 31,2014? A. 342,000 B. 270,000 C.
510,000 D. 830,000

16. Alex Company started operations at the beginning of current year. The entity failed to recognize
accruals and prepayments at the end of the reporting period. The income before tax, accrual and
prepayments at the end of the current year are: Income before tax 1,400,000 Prepaid insurance 20,000
Accrued wages 25,000 Rent received in advance 30,000 Interest receivable 50,000 What is the corrected
income before tax? A. 1,385,000 B. 1,415,000

C. 1,400,000

D. 1,375,000

Answer: B. 1,415,000 Solution: Income before tax 1,400,000 Prepaid insurance 20,000 Accrued wages
(25,000) Rent received in advance (30,000) Interest receivable 50,000 Corrected income 1,415,000 17.
Victoria Company revealed the following:

2014 2015

Ending inventory Depreciation 200,000 understated 50,000 understated 300,000 overstated 90,000
overstated

At what amount should retained earnings be retroactively adjusted on Ja nuary 1,2016? A. 260,000
increase C. 410,000 decrease B. 260,000 decrease D. 210,000 decrease Answer: B. 260,000 decrease
Solution: 2014 inventory understated 2015 depreciation understated 2015 inventory overstated 2015
depreciation overstated Net correction to income Net correction to 2014 income Net correction to 2015
income

2014 200,000 (50,000)

150,000

2015 (200,000) (300,000) 90,000 (410,000) 150,000 (410,000)

Net correction to retained earnings

(260,000)

18. Kent Company, a division of National Realty Corporation maintains an escrow account and pays real
estate taxes for the mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest,
less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow
payments. Escrow account liability- January 1 Escrow payments received during the year Real estate
taxes paid during the year Interest on escrow funds

700,000 1,580,000 1,720,000 50,000

What is the escrow account liability on December 31? A. 510,000 B. 515,000 C. 605,000 D. 610,000
Answer: C. 605,000 Solution: Escrow accounts liability- January 1 700.000 Add: Escrow payments
received 1,580,000 Interest on escrow funds 50,000 1,630,000 Total 2,330,000 Less: Real estate taxes
paid 1,720,000 Service fee (50,000x10%) 5,000 1,725,000 Escrow accounts liability- December 31
605,000 19. Herson Company had determined the 2014 and 2015 net income to be P4,000,000 and
P5,000,000, respectively. In a first time audit of the financial statements, the following errors are
discovered: Merchandise inventory was incorrectly determined – P50,000 overstatement for 2014 and
P150,000 overstatement for 2015. Revenue received in advance in 2014 of P300,000 was credited to a
revenue account when received. Of the total, P50,000 was earned in 2014, P200,000 was earned in 2015
and the remainder will be earned in 2016. P400,000 gain on sale of plant asset in 2015 was erroneously
credited to retained earnings. What is the corrected net income for 2015? A. 5,500,000 B. 5,450,000

C. 5,400,000 D. 5,550,000 Solution: A. 5,500,000

Net income per book Overstatement of inventory 2014 2015 Revenue received in advance Gain on sale
of plant asset Corrected net income

2014 4,000,000

2015 5,000,000

(50,000)

50,000 (150,000) 200,000 400,000 5,500,000

(250,000) 3,700,000

20. On January 1, 2015, Gumamela Company had monetary assets of P5,000,000 and monetary
liabilities of P3,000,000. During 2015, the entity’s monetary inflows and outflows were relatively constant
and equal so that it ended the year with the same net monetary assets of P2,000,000. The index number
of January 1, 2015 was 125 and the index number on December 31,2015 was 280. What is the gain or
loss on purchasing power during the year? A. 2,480,000 gain B. 2,480,000 loss C. 3,720,000 gain D.
3,720,000 loss Answer: B. 2,480,000 loss Solution Monetary assets Monetary liabilities Net monetary
assets - December 31 at cost Net monetary assets - December 31 as restated (2,000,000 x 280/125)
Loss on purchasing power

5,000,000 3,000,000 2,000,000 (4,480,000) (2,480,000)

21. Elysee Company leases a machine with a fair value of P1,650,000 for a period of 5 years under a
finance lease. The initial direct costs included in negotiating the lease

amounted to P12,500 . The present value of the minimum lease payments discounted at the rate implicit
in the lease is 1,584,000. At what amount should the machine be recognized initially in the financial
statement? A. 1,650,000 B. 1,596,500 C. 1,662,500 D. 1,584,000 Answer: B. 1,596,500 Solution: Present
value of minimum lease payments Initial direct costs Total initial cost of machine

1,584,000 12,500 1,596,500

22. On January 1, 2015 , Aly Corp. reported the fair value of plan assets at P6,700,000 and projected
benefit obligation at P7,600,000. The entity revealed the following for the current year. Current service
cost Past service cost Discount rate Actual return on plan assets Contribution to the plan Benefits paid to
retirees

1,450,000 300,000 10% 500,000 1,500,000 800,000

What is the fair value of plan assets on December 31? A. 8,070,000 B. 7,400,000 C. 7,900,000 D.
8,200,000 Answer: C. 7,900,000 Solution FVPA-Jan 1 Actual return on plan assets Contribution to the
plan Benefits paid to retirees FVPA-Dec. 31

6,700,000 500,000 1,500,000 (800,000) 7,900,000

23. Stabilizer Company reported taxable income of P8,000,000 in the income tax return for the first year
of operations. Temporary differences between financial income and taxable income for the year as
follows: Tax depreciation in excess of book depreciation Accrual for product liability claim in excess of
Actual claim Reported installment sales income in excess of Taxable installment sales income Income tax
rate

800,000 1,200,000 2,600,000 30%

What is the deferred tax asset at year-end? A. 240,000 B. 360,000 C. 780,000 D. 0 Answer: B. 360,000
Deferred tax asset (1,200,000 x 30%)

360,000

24. Adel company reported the following shareholder’s equity on January 1,2015: Share capital, P10 par,
outstanding 225,000 shares 2,250,000 Share premium 900,000 Retained Earnings 2,190,000 During the
current year, the entity had the following share transactions: Acquired 6,000 treasury shares for P270,000
Sold 3,600 treasury shares at P50 a share Sold the remaining treasury shares at P41 per share What is
the total amount of share premium on December 31,2015? A. 891,600 B. 870,000 C. 908,400 D. 927,600
Answer: C. 908,400 Solution Share premium- issuance January 1 900,000 Share premium- treasury
(18,000-9,600) 8,400 Total share premium 908,400
25. Dunn Company had 200,000 ordinary shares of P20 par value a nd 20,000 shares of P100 par, 6%
cumulative, convertible preference share capital outstanding for the entire year ended December 31,
2015. Each preference share is convertible into 5 ordinary shares. The net income for the current year
was P840,000. What amount should be reported as diluted earnings per share? A. 2.40 B. 2.80 C. 3.60
D. 4.20 Answer: B. 2.80 Solution Ordinary shares outstanding Potential ordinary shares to be issued for
Conversion of preference shares (20,000 x 5) Total ordinary shares Diluted earnings per share
(840,000/300,000)

200,000 100,000 300,000 2.80