ACT1204 – Auditing and Assurance: Concepts and Application 1

Final Examination Reviewer

Problem 1
The TOY COMPANY completed the following transactions during 2015:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000 representing property tax for
March 1 – June 30 which was prepaid by the vendor. Of the purchase price, 25% is deemed applicable
to land and the remaining 75% to buildings. The Toy Company assumed a mortgage of P4,600,000 on
the purchase and paid cash for the balance.

30 The building acquired necessitates current reconditioning at a cost of P342,000 because previous
owners had failed to take care of normal maintenance and repair requirements on it.

May 15 Garages in the rear of the building were demolished. The Toy Company recovered P66,000 on the
lumber salvage. It then proceeded to construct a warehouse at P1,013,000, which was almost exactly
the same as bids made by construction companies. Upon completion of construction, city inspectors
ordered extensive modifications to the warehouse as a result of failure on the part of the company to
comply with building safety code. Such modifications, which could have been avoided, cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market value of P640,000 (par, P40,000)
for a patent and new toy-making machine. The machine has a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the machinery, a new franchise was
acquired from the manufacturer of the machinery to produce toy robots. Payment was made by issuing
the company’s own ordinary shares (par, P1,000,000). The value of the franchise is set at P500,000,
while the machine’s fair value is P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of P420,000 and P89,000,
respectively. The work was completed and paid for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time, required
redecorating and repairs were completed at a cost of P64,000.

After considering the preceding transactions, compute the year-end balances of the following:

1.Buildings
A. P7,289,000 B. P7,511,750 C. P7,413,000 D. P7,635,750
2.Land
A. P2,074,250 B. P2,000,000 C. P2,583,250 D. P2,509,000
3.Machinery
A. P1,070,000 B. P920,000 C. P770,000 D. P931,000
4.Share premium
A. P10,000 B. P500,000 C. P710,000 D. P600,000
5.Intangibles
A. P830,000 B. P500,000 C. P330,000 D. P840,000

Problem 2
MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining estimates that the acquired
property will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It
further estimates that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between.
(Assume 11 years of mining operations.) The land will have a residual value of P900,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000. 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. Mina Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of P1,800,000. The machinery
cost the former owner P4,500,000 and was 50% depreciated when purchased. Mina 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.

6. What are the estimated depletion and depreciation charges for the first year?
Depletion Depreciation
A. P2,610,000 P189,000
B. P1,305,000 P378,000
C. P2,610,000 P234,000
 D. P1,305,000 P189,000
7. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P1,305,000 P378,000
B. P2,610,000 P234,000
C. P2,610,000 P378,000
D. P1,305,000 P234,000
8. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000
9. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000
10. What are the depletion and depreciation charges for the first year assuming actual production of 5,000 tons of
mineral ore? (Nothing occurred during the year to cause the company engineers to change their estimates of
either the mineral resources or the life of the structures and equipment.)
Depletion Depreciation
A. P1,087,500 P157,500
B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500

Problem 3
DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in the demand for its products over
the last several years. This prompted the company to obtain additional manufacturing facility. A real estate firm
located an available factory near Debby’s production facility, and Debby agreed to purchase the factory and used
machinery from Que Company on October 1, 2014. Renovations were necessary to convert the factory for Debby’s
manufacturing use.

The terms of the agreement required Debby to pay Que P1,500,000 when renovations started on January 1, 2015,
with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery
was P12,000,000. The building renovations were contracted to Malibay Construction Company at P3,000,000. The
payments made, as renovations progressed during 2015, are shown below. The factory was placed in service on
January 1, 2016.

Que Malibay

January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000
On January 1, 2015, Debby obtained a 2-year, P3 million loan with a 12% interest rate to finance the renovation of
the acquired factory. This is Debby’s only outstanding loan during 2015.

Debby’s policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and
prorate the balance of the purchase price over the remaining items. The building had originally cost Que P9,000,000
and had a net book value of P1,500,000, while the machinery originally cost P3,750,000 and had a net book value of
P1,200,000 on the date of sale. The land was recorded on Que’s books at P1,200,000.

The following values were determined based on appraisal conducted by independent appraisers at the time of
acquisition.
Land P8,700,000
Building 3,150,000
Machinery 1,350,000

Gin G. Neer, Debby’s chief engineer estimated that the renovated plant would be used for 15 years, with an
estimated residual value of P900,000. Neer estimated that the productive machinery would have a remaining useful
life of 5 years and residual value of P90,000. Debby’s depreciation policy is to apply the 200% declining balance
method for machinery and the 150% declining balance method for the plant. One-half year’s depreciation is taken in
the year the plant is placed in service and one-half year is allowed when the property is disposed of or retired.

Determine the amounts to be recorded on the books of Debby Corp. as of December 31, 2015, for each of the
following properties.
11. Land
A. P7,909,000 B. P8,700,000 C. P9,060,000 D. P10,909,000
12. Building
A. P5,670,000 B. P6,223,600 C. P3,223,600 D. P5,310,000
13. Machinery
A. P1,227,300 B. P1,098,000 C. P1,335,300 D. P990,000

Calculate the 2016 depreciation expense for each of the following properties.
14. Building
A. P238,500 B. P311,180 C. P283,500 D. P265,500
15. Machinery
A. P180,000 B. P198,000 C. P219,600 D. P227,460

Problem 4
HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The bank has requested audited
financial statements. Hiatt’s financial statements have never been audited before. It has prepared the following
comparative financial statements for the years ended December 31, 2015 and 2014.

HIATT TEXTILE CORPORATION

COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2015 and 2014
2015 2014
Assets
Current assets:
Cash and cash equivalents P1,205,000 P 800,000
Accounts receivable 1,960,000 1,480,000
Allowance for bad debts (185,000) (90,000)
Inventory 1,035,000 1,010,000
Total current assets 4,015,000 3,200,000
Noncurrent assets:
Property, plant, and equipment 835,000 847,500
Accumulated depreciation (608,000) (532,000)
Total noncurrent assets 227,000 315,500
Total assets P4,242,000 P3,515,500

Liabilities and Shareholders’ Equity

Liabilities:
Accounts payable P 607,000 P 980,500
Shareholders’ equity:
Ordinary shares, P20 par value;
150,000 shares authorized;
65,000 shares issued and outstanding 1,300,000 1,300,000
Retained earnings 2,335,000 1,235,000
Total shareholders’ equity 3,635,000 2,535,000
Total liabilities and shareholders’ equity P4,242,000 P3,515,500

HIATT TEXTILE CORPORATION

COMPARATIVE INCOME STATEMENTS
For the Years Ended December 31, 2015 and 2014

2015 2014
Sales P5,000,000 P4,500,000
Cost of goods sold 2,150,000 1,975,000
Gross income 2,850,000 2,525,000
Operating expenses:
Selling expenses 1,150,000 1,025,000
 Administrative expenses 600,000 525,000
Total operating expenses 1,750,000 1,550,000
Net income P1,100,000 P 975,000

The 2015 audit revealed the following facts:

a. On January 5, 2014, Hiatt Textile Corporation had charged a 5-year insurance premium to expense. The
premium totaled P31,000.

b. The amount of loss due to bad debts has steadily decreased over the last 2 years. Hiatt Textile Corporation has
decided to reduce the amount of bad debt expense from 2% to 1½ % of sales, beginning with 2015. (A charge
of 2% has already been made for 2014.)

c. Hiatt Textile Corporation uses the periodic inventory system. The following are the inventory errors for the last 2
years.
2014 - Ending inventory overstated by P75,500
2015 - Ending inventory overstated by P99,000

d. An equipment costing P150,000 was acquired on January 3, 2014. The purchase was recorded by a charge to
operating expense. The equipment has a useful life of 10 years and a residual value of P25,000. Hiatt Textile
Corporation uses the straight-line method in depreciating its assets.

e. Assume that the books for 2015 have not yet been closed. Ignore tax implications.

Based on the above information, answer the following:

16. The December 31, 2015 adjusting entry to correct the expensing of insurance premium paid is
A. Prepaid insurance 18,600
Insurance expense 6,200
Retained earnings 24,800
B. Prepaid insurance 18,600
Retained earnings 18,600
C. Insurance expense 18,600
Retained earnings 18,600
D. Insurance expense 6,200
Retained earnings 6,200
17. The December 31, 2015 adjusting entry to correct the expensing of the equipment purchased on January 3,
2014 should include a credit to
A. Accumulated depreciation—P12,500.
B. Retained earnings—P137,500.
C. Equipment—P12,500.
D. Depreciation expense—P12,500.
18. The December 31, 2015 adjusting entry to correct the inventory errors should include a debit to
A. Cost of goods sold—P99,000.
B. Inventory—P23,500.
C. Retained earnings—P75,500.
D. Cost of goods sold—P75,500.

19. What is Hiatt’s corrected net income for the year ended December 31, 2014?
A. P1,012,200 B. P1,212,800 C. P786,800 D. P1,061,800
20. What is Hiatt’s corrected net income for the year ended December 31, 2015?
A. P1,095,200 B. P1,129,800 C. P1,082,800 D. P1,107,800

Problem 5
The Terran Company acquired several small companies at the end of 2015 and, based on the acquisitions, reported
the following intangibles in its December 31, 2015 statement of financial position:
Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000

The company's accountant determines the patent has an expected life of 10 years and no expected residual value,
and that it will generate approximately equal benefits each year. The company expects to use the copyright and
tradename for the foreseeable future. The accountant knows that the computer software is used in the company's
120 sales offices. The company has replaced the software in 60 offices in 2016, and expects to replace the software
in 40 more offices in 2017 and the remainder in 2018.

On December 31, 2016, there are no indications of impairment of patent and computer software. The following
information relate to the other intangible assets:
a) Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
b) The tradename is expected to generate cash flows of P15,000 per year.
c) The goodwill is associated with Terran’s SCV Manufacturing reporting unit. The cash flows expected to be
generated by the SCV Manufacturing reporting unit is P200,000 per year for the next 25 years. The reporting
unit has a carrying amount of P2,100,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate
for all items is 5%)
21. Total amortization of intangible assets in 2016
a. P 70,000 c. P88,750
b. P107,500 d. P20,000
22. Total loss on impairment in 2016
a. P452,470 c. P471,220
b. P530,280 d. P433,720
23. Carrying amount of goodwill on December 31, 2016
a. P900,000 c. P855,000
b. P718,780 d. P659,720
24. Carrying amount of other intangible assets on December 31, 2016
a. P690,000 c. P980,000
b. P640,000 d. P706,667

Problem 6
During the current year, PJ Company reported sales of Php15,000,000, sales discount of Php1,000,000, purchases
of Php9,300,000 and purchase discount of Php400,000

Units Unit Cost Total Cost

Beginning inventory 20,000 60 1,200,000
Purchases – first quarter 30,000 65 1,950,000
Purchases – second quarter 40,000 70 2,800,000
Purchases – third quarter 50,000 75 3,750,000
Purchases – fourth quarter 10,000 80 800,000

The accounting policy is to report inventory at LCNRV. Cost is determined under FIFO. At year-end, the replacement
cost of inventory was Php70 and the net realizable value was Php72 per unit. The actual sale price is Php150 and
the normal profit margin is Php10 per unit.

Dian Company purchased milk for sale to local and national ice cream producers. Dian Company began operations
at the beginning of current year by purchasing 650 milk cows for Php8,000,000. The entity provided the following
information for the current year:
Acquisition cost, January 1 Php 8,000,000
Change in fair value due to growth and price change 2,500,000
Decrease in fair value due to harvest 250,000
Milk harvested during the year but not yet sold 400,000

At year-end, Poblete Company reported that a flood caused severe damage to the entire inventory. Based on recent
history, Poblete Company had a gross profit of 25% sales. The entity provided the following information for the
current year:
Inventory, January 1 500,000
Purchases 4,000,000
Purchase returns 200,000
Sales 5,600,000
Sales returns 400,000
Sales allowances 100,000

Alex Company used the average cost retail method to account for inventory. The entity provided the following
information for the current year:
Cost Retail
Beginning inventory and purchases 6,000,000 9,200,000
 Net mark-up 400,000
Net mark-down 600,000
Sales 7,800,000

25. What amount should PJ report as Cost of Goods sold?

26. What amount should Dian Company report as gain from biological asset and gain from agricultural produce,
respectively?
27. What amount should Poblete Company report as cost of ending inventory damaged by flood?
28. What amount should Alex company report as cost of goods sold?

Problem 7
On January 1, 2022, Ms. Aya purchased a plating machine for Php8,000,000. Aya received a government grant of
Php2,000,000 toward this capital cost. The machine had a useful life of 5 years with residual value of Php500,000.
Aya used the double declining balance method of depreciation. The accounting policy is to treat the government
grant as a deferred income.

During 2022, Marjorie Company constructed asset costing Php4,215,000. The weighted average expenditures during
the year amounted to Php3,900,000. The entity borrowed Php2,000,000 at 7.5% on January 1, 2022. Funds not
needed for construction were temporarily invested in short-term securities and earned Php59,000 in interest revenue.
In addition to the construction loan, Marjorie had two other notes outstanding during the year, a Php1,500,000, 10-
year, 10% note payable dated October 1, 2021 and a Php1,000,000. 8% 5-year note payable dated November 1,
2021.

During 2022, Harry Company had outstanding specific construction loan 12% Php5,000,000 and general loan 10%
Php15,000,000. The entity began the self-construction of a building on January 1, 2022 which was completed on
December 31, 2022. During the year, the expenditures were Php4,000,000 on January 1; Php7,000,000 on July 1;
and Php3,000,000 on November 1.

On January 1, 2022, Ocampo Company purchased a machinery for Php7,200,000. The machinery had a useful life of
10 years with no residual value and was depreciated using straight line. In 2025, a decision was made to change the
depreciation method from straight line to sum of years digits. The useful life and residual value did not change.

On January 1, 2022, Giron Company purchased a mineral mine for Php26,400,000 with removable ore estimated at
1,200,000 tons. After it has extracted all the ore, Giron will be required by law to restore the land to the original
condition at an estimated cost of Php2,100,000. The present value of the estimated restoration cost is Php1,800,000.
The property can be sold afterwards for Php3,000,000. During 2022, Giron incurred Php2,000,000 exploration cost
and Php1,600,000 development cost preparing the mine for production. Giron removed 100,000 tons of ore and sold
90,000 tons of ore in the current year.

During the course of your audit examination, answer the following questions:
29. What amount should Ms. Aya Company report as deferred grant income on December 31, 2022?
30. What amount should Marjorie Company capitalize as interest for 2022?
31. What amount should Harry Company report the building on December 31, 2022?
32. What amount should Ocampo Company record as depreciation for 2025?
33. What amount of depletion should Giron Company include in cost of goods sold?

Problem 8
Flores Company cans two food commodities which it stores at various warehouses. The company uses a perpetual
inventory system under which the finished goods inventory is charged with production and credited for sales at
standard cost. The detail of the finished goods inventory is maintained on punched cards by the tabulating
department in units and pesos for the various warehouses.

The accounting department receives copies of daily production reports and sales invoices. Units are then extended at
standard cost and a summary of the day’s activity is posted to the Finished Goods Inventory general ledger control
account. Next the sales invoices and production reports are sent to the tabulating department for processing. Every
month the control account and detailed tab records are reconciled and adjustments recorded.

The last reconciliation and adjustments were made at November 30, 2020.

Your CPA firm observed the taking of the physical inventory at all locations in December 31, 2020. The inventory
count began at 4:00 p.m. and was completed at 8:00 p.m. The company’s figure for the physical inventory is
P342,400. The general ledger control account balance at December 31 was P384,900, and the final “tab run” of the
inventory punched cards showed a total of P403,300.

Unit cost data for the company’s two products are as follows:
Product Standard Cost
 A P2
B 3

A review of December transactions disclosed the following:

1. Sales invoice no. 1310, December 2, was priced at standard cost for P11,700 but was listed on the accounting
department’s daily summary at P11,200.

2. A production report for P23,900, December 15, was processed twice in error by the tabulating department.

3. Sales invoice no. 1423, December 9, for 1,200 units of product A, was priced at a standard cost of P1.50 per unit
by the accounting department. The tabulating department corrected the error but did not notify the accounting
department of the error.

4. A shipment of 3,400 units of Product A was invoiced by the billing department as 3,000 units on sales invoice no.
1504, December 27. the error was discovered by your review of transactions.

5. On December 27 the Pampanga warehouse notified the tabulating department to remove 2,200 unsalable units of
Product A from the finished goods inventory, which it did without receiving a special invoice from the accounting
department. The accounting department received a copy of the Pampanga warehouse notification on December 29
and prepared a special invoice which was processed in the normal manner. The units were not included in the
physical inventory.

6. A report for the production on January 3 of P2,500 units of Product B was processed for the Bulacan plant as of
December 31.

7. A shipment of 300 units of Product B was made from Tarlac warehouse to Ken’s Markets, Inc., at 8:30 p.m. on
December 31 as an emergency service. The sales invoice was processed as of December 31. Flores Company
prefers to treat the transaction as a sale in 2020.

8. The working papers of the auditor observing the physical count at the Bataan warehouse revealed that 700 units of
Product B were omitted from Flores’s physical count. Flores concurred that the units were omitted in error.

9. A sales invoice for 600 units of Product A shipped from the Zambales warehouse was mislaid and was not
processed until January 5. The units were shipped on December 30.

10. The physical inventory of the Angeles warehouse excluded 350 units of Product A marked “reserved”.
Investigation revealed that this merchandise was being stored as a convenience for Steve’s Markets, Inc., a
customer. This merchandise, which has not been recorded as a sale, is billed as it is shipped.

11. A shipment of 10,000 units of Product B was made on December 27 from the Zambales warehouse to the Bataan
warehouse. The shipment arrived on January 6 but had been excluded from the physical inventories.

Requirements:
34. What is the correct inventory balance to be presented in the balance sheet as of December 31, 2020?
35. What is the inventory shortage/overage?

Problem 9
Macalma Corp. has a current account in PNB. Your audit of the company’s cash account reveals the following:

a. Balances taken from the company’s general ledger:

Cash balance, November 30, 2020 Php 637,860
Cash balance, December 31, 2020 576,420
Receipts, December 1 – 31, 2020 306,220

b. Balances taken from the December bank statement:

Bank balance, November 30, 2020 Php 685,180
Bank balance, December 31, 2020 637,220
Disbursements (debit) 356,080

c. Outstanding checks, November 30, 2020 (P26,140 was paid by the bank in December), P64,140.

d. Checks written and recorded in December; not included in the checks returned with the December bank statement,
P36,080.

e. Deposit in transit, November 30, 2020, P15,260.

f. Deposit in transit, December 31, 2020, P16,140.

g. A bank credit memo was issued in December to correct an erroneous charge made in November, P1,500.

h. Note collected by bank in December (company was not informed of the collection), P2,060.
i. A check for P2,020 (payable to a supplier) was recorded in the Check Register in December as P3,000.

j. A check for P2,240 was charged by the bank as P2,420 in December.

k. Halal Co. issued a stop payment order to bank in December. This pertains to a check written in December which
was not received by the payee. A new check was written and recorded in the Check Register in December. The old
check was written off by a journal entry also in December, P780.

l. Bank service charge, November 30, 2020, P60.

36. What is the total book disbursements in December?

37. What is the total bank receipts in December?
38. What is the total outstanding check on December 31?
39. What is the adjusted bank balance on November 30?
40. What is the adjusted book receipts in December?
41. What is the adjusted bank disbursements in December?
42. What is the adjusted book balance on December 31?

Problem 10
Use the information to answer the following questions:
The accountant for Pampanga Company assembled the following data:
June 30 July 31
Cash account balance Php 15,822 Php 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer’s check deposited July 10, returned by
bank on July 16 marked NSF, and redeposited
immediately; no entry made on books for return or
redeposit 8,250
Collection by bank of company’s notes receivable 71,815 80,900

The bank statements and the company’s cash records show these totals:
Disbursements in July per bank statement Php 218,373
Cash receipts in July per Pampanga’s books 236,452

43. How much is the adjusted cash balance as of June 30?

44. How much is the adjusted bank receipts for July?
45. How much is the adjusted book disbursements for July?
46. How much is the adjusted cash balance as of July 31?
47. How much is the cash shortage as of July 31?

Problem 11
The next four items are based on the following information.
Siargao Company incurred the following costs in relation to property, plant and equipment:
Cash paid for purchase of land 2,500,000
Mortgage assumed on the land purchased, including
interest accrued P100,000 1,000,000
Realtor commission 300,000
Legal fees, realty taxes and documentation expenses 50,000
Amount paid to relocate persons squatting on the property 100,000
Cost of tearing down an old building on the land to make room for construction
of new building 200,000
Salvage value of old building demolished 50,000
Cost of fencing the property 250,000
Amount paid to contractor for the building constructed 5,000,000
Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
Interest that would have been earned had the money used during the period
of construction been invested 150,000

Surigao Company acquired a new machinery.

Invoice price of the machinery 1,400,000
Cash discount available but not taken on purchase 20,000
Freight paid on the new machinery 40,000
Cost of removing the old machinery 15,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into regular operation including
 P10,000 in wages of the regular machinery operator 30,000
Loss on premature retirement of the old machinery 5,000
Estimated cost of manufacturing similar machinery including overhead 1,300,000

Cagayan Company exchanged an old truck with a carrying amount of P1,200,000 and a fair value of
P2,000,000 for a new truck and P200,000 cash. The fair value of the new truck received was P1,800,000. The cash
flows from the new truck are expected to be significantly different from the cash flows of the old truck.

48. What amount should Siargao capitalize as cost of land?

A. 3,800,000 C. 3,950,000
B. 3,850,000 D. 4,100,000
49. What amount should Siargao capitalize as cost of building?
A. 5,300,000 C. 5,550,000
B. 5,500,000 D. 5,700,000
50. What should Surigao capitalize as new cost of the new machinery?
A. 1,490,000 C. 1,515,000
B. 1,500,000 D. 1,520,000
51. At what amount should Cagayan record the new truck received in the exchange?
A. 1,600,000 C. 2,000,000
B. 1,800,000 D. 2,200,000

Problem 12
The next four items are based on the following information.
Trey Company provided the following unadjusted balances at year-end:
Cash 850,000 Share premium 600,000
Accounts receivable 1,650,000 Retained earnings 1,100,000
Prepaid taxes 600,000 Translation adjustment – debit500,000
Accounts payable 400,000 Revenue 3,600,000
Share capital 500,000 Expenses 2,600,000

During the current year, estimated tax payments of P600,000 were charged to prepaid taxes. The entity has not yet
recorded income tax expense. There were no differences between financial income and taxable tax income and the
tax rate is 25%. Included in accounts receivable is P500,000 due from a customer. Special terms granted to this
customer require payment in equal semiannual installments of P125,000 every April 1 and October 1.
Brite Company provided the following information on December 31, 2022:
Accounts payable 550,000
Note payable, 8% unsecured, due July 1, 2024 1,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Bonds payable, 7%, due March 31, 2023 5,000,000
Premium on bonds payable 500,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against Brite. The legal counsel
expects the suit to be settled in 2023 and has estimated that the entity will be liable for damages in the range of
P450,000 to P750,000. The deferred tax liability is expected to reverse in 2023.
Dee Company made the following payments to the chief executive officer during the current year:
Annual salary 2,000,000
Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000
Reimbursement of travel expenses for business trips 1,200,000
Rice Company was incorporated on January 1, 2022 with P5,000,000 from the issuance of share capital and
borrowed funds of P1,500,000. During the first year, net income was P2,500,000. On December 14, the entity paid a
P500,000 cash dividend. On December 31, 2022, the liabilities had increased to P1,800,000.

52. What amount should Trey Company report as current assets?

A. 2,250,000 C. 2,600,000
B. 2,475,000 D. 3,100,000
53. What amount should Brite Company report as current liabilities?
A. 4,900,000 C. 6,400,000
B. 5,350,000 D. 6,850,000
54. What amount should be disclosed by Dee as compensation to key management personnel?
A. 2,500,000 C. 3,500,000
B. 3,000,000 D. 4,700,000
55. On December 31, 2022, what amount should Rice Company report as total assets?
A. 6,500,000 C. 8,800,000
B. 6,800,000 D. 9,300,000

Problem 13
You have been assigned to as the Chief Financial Officer of AYALA MERCHANTS CORPORATION for the year 2024.
To Test your Capabilities the Board of Directors has provided you with their Old Financial statement way back 2017
and asked you to Audit and Restructure the Financial Statements the Audit Finding’s of the Prior Auditor was
provided to you and you work you way in Getting that Position.

I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2018. The petty cash fund of P60,000 maintained by
the company on an imprest basis relected a balance of P22,750. Unreplenished expenses totaled P37,250 of
which P9,510 pertains to January 2018.
You were furnished a copy of the company’s bank reconciliation statement with Chartered Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000

Your review of the reconciliation statement disclosed the following:

1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These represent
collections from various customers whose accounts have been outstanding for less than three months.
These checks were actually deposited on January 8, 2018.
2. Included in the deposit in transit is a check from a customer for P63,000 which was returned by the bank on
December 27, 2017 for insufficiency of funds. This account has been outstanding for over six months. The
check was replaced by the customer on January 15, 2018.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes payable including
interest of P10,000 due on December 26, 2017. This was not recorded as of year-end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as P102,900. This was in
payment of accounts payable.
5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is the company’s policy to provide allowance for doubtful accounts as follows:
Less than 3 months P2,500,960 1%
3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660
An analysis of the accounts receivable schedule showed that several long outstanding accounts for more than a
year totaling P152,460 should be written-off.

III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:
Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180
The securities are listed in the stock exchange. The company follows the fair value accounting.

IV. AUDIT OF NOTES RECEIVABLE

The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary. This is covered by a
promissory note with interest at 15% per annum dated November 1, 2017. No interest has been accrued on the
note as of December 31, 2017.

V. AUDIT OF PREPAYMENTS
Prepaid expenses account consists of the following:
Prepaid advertising P 640,000
Prepaid insurance 490,000
 Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion as well as the regular
advertisement of its products. It paid a total of P640,000, P100,000 of which is for the Christmas promotion while
the balance is for the regular promotion and which will run for one year starting on August 1, 2017. Payment was
made on July 20, 2017, and the total amount was reflected as prepaid advertising.

The company leases the main office and store in Makati City at a monthly rental of P140,000. On November 5,
2017, a check for P420,000 was issued in payment of three-month rental as per renewal contract which was
effective on November 1, 2017. Rental deposit remained at three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a total coverage of P2.4
million. Total payment made on November 16, 2017 for the renewal amounted to P490,000 which covers the
period from November 1, 2017 to November 1, 2018. No adjustment has been made as of December 31, 2017.
To take advantage of volume discount ranging from 10% to 20%, the company buys office and store supplies on
a bulk basis. The staff-in-charge bought supplies worth P220,000 on June 10, 2017 and included the same in
their office supplies inventory. As at year-end, unused office supplies amount to P102,500.

VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on December 29 and 20, 2017. Your
review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 have not been invoiced and recorded as of year-end. These
items had a selling price of P146,940 with term of 15 days. The corresponding cost was already deducted
from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January 4, 2018. The
goods were shipped by the supplier on December 28, FOB shipping point.

VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT

The company purchased additional equipment worth P268,000 on June 30, 2017. At the date of purchase, it
incurred the following additional costs which were charged to repairs and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage value of P20,000.
Depreciation for the above equipment has been provided based on original cost.

The company discarded some store equipment on October 1, 2017, realizing no salvage value. The cost of
these equipment amounted to P165,520 with an accumulated depreciation of P138,620 on December 31, 2017.
Depreciation booked from October 1, 2017 to year-end was P10,480. No entry was made on the disposal of the
property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2017 were recorded when paid in January 2018 which included the following:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at an interest rate of
16% per annum on October 1, 2017. Accrued interest on this loan was not taken up at year-end.

X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to shareholders of record as
of December 15, 2017, payable on January 31, 2018.
 Ayala Merchants Corporation
UNADJUSTED TRIAL BALANCE
December 31, 2017

Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880

Determine the adjusted balances of the following: (Ignore tax implications)

56. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
57. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
58. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
59. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
60. Allowance for doubtful accounts
A. P110,360 B. P152,640 C. P130,316 D. P88,217
61. Notes and interest receivable
A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000
62. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
63. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
64. Prepaid rent
A. P140,000 B. P0 C. P420,000 D. P280,000
65. Prepaid advertising
A. P325,000 B. P640,000 C. P373,334 D. P315,000
66. Office supplies inventory
A. P258,500 B. P117,500 C. P361,000 D. P102,500
67. Total current assets
A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666
68. Property, plant, and equipment
A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,88
69. Accumulated depreciation
 A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672
70. Accounts payable
A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320
71. Interest payable
A. P104,000 B. P16,178 C. P4,000 D. P27,644
72. Total current liabilities
A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798
73. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
74. Cost of goods sold
A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700
75. Operating expenses
A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

Problem 14
From inception of operations, AC carried not allowance for doubtful accounts. Uncollectible accounts were expensed
as written off and recoveries were credited to income as collected.

During 2017, management recognized that the accounting policy with respect to doubtful accounts was not correct
and determined that an allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad debt loss percentage
applied to year-end accounts receivable.

The historical bad debt loss percentage is to be recomputed each year based on all available past years up to a
maximum of five years.

Year Credit Sales Write-offs Recoveries

2013 1,500,000 15,000 0
2014 2,250,000 38,000 2,700
2015 2,950,000 52,000 2,500
2016 3,300,000 65,000 4,800
2017 4,000,000 83,000 5,000

The entity reported accounts receivable of P1,250,000 on 31 December 2016 and 2,000,000 on 31 December 2017.

76. What is the bad debt rate in 2016?

a. 1.6%
b. 1.8%
c. 1.7%
d. 2.0%

Problem 15
On January 1, 20x1, the biological assets of Kaboy Co. consist of ten 2 year old animals with fair value less cost to
sell of Php40,000 each for a total of Php400,000.

Transactions during the year include the following:

One animal aged 2.5 years was purchased on July 1, 20x1 for Php43,200
One animal was born on July 1, 20x1
Two animals from the January 1, 20x1 biological assets were sold for Php48,000 each on September 1, 20x1
One animal from the January 1, 20x1 biological assets died of “mad cow” disease on November 1, 20x1

Per unit fair value less costs to sell are as follows:

 Newborn animal at July 1 – Php28,000
 2.5 year old animal at July 1 – Php43,200
 Newborn animal at 31 December – Php28,800
 0.5 year old animal at 31 December – Php32,000
 2 year old animal at 31 December – Php42,000
 2.5 year old animal at 31 December – Php44,400
 3 year old animal at 31 December – Php48,000

77. How much is the total gain from the change in FVLCS during 20x1?
a. Php92,800
b. Php96,000
c. Php76,800
d. Php72,800
Problem 16
You were able to obtain the following information during your audit of Euro Company:
Reconciling items:
Nov. 30 Dec. 31
Undeposited collections Php200,000 Php120,000
Outstanding checks 80,000 60,000
Customer’s notes collected by bank
100,000 120,000
Bank service charges 2,000 3,000
Erroneous bank debits 10,000 20,000
Erroneous bank credits 40,000 30,000
NSF checks not redeposited 5,000 7,000
Customer's check deposited
December 10, returned by bank on
December 16 marked NSF, and
redeposited immediately; no entry
made on books for return or redeposit

10,000

Unadjusted balances:
Books ? 90,000
Bank 230,000 ?

December Transactions:
Bank Books
Receipts Php420,000 Php270,000
Disbursements 500,000 407,000

REQUIRED:
78. How much is the adjusted cash balance as of December 31?
79. How much is the adjusted book disbursement as of December 31?
80. How much is the cash shortage/overage?