Summer 2011

Auditing ProblemsSummer 2011

AUDIT OF CASH

Problem 1

The auditor of Beeboo, Inc. examined the petty cash fund immediately after the close of business, July 31, 2010, the end of the company’s business year. The petty cash custodian presented the following during the count:

Currency 1,650 Petty cash vouchers:

Postage 420 Office supplies expense 900 Transportation expense 340 Computer repairs 800 Advances to office staff 1,500

A checken drawn by Beeboo, Inc., payableto the petty cash custodian 7,200

Postage stamps 300 An employee's check, returned by bank, marked NSF 1,000 An envelope containing currency of P1,890 for a gift

a retiring employee 1,890 16,000

The general ledger shows an imprest petty cash fund balance of P16,000.

1. How much is the petty cash shortage or overage?a. P2,190 overage c. P1,890 shortageb. P2,190 shortage d. P1,890 overage

2. What is the adjusted balance of the petty cash fund at July 31, 2010?a. P10,470 c. P7,200b. P3,540 d. P8,850

Solution:1.Currency 1,650 Petty cash vouchers (420+900+340+800+1500) 3,960 Replenishment check 7,200 Employee's NSF check 1,000 Petty cash accounted 13,810 Petty cash fund per ledger 16,000 Petty cash shortage 2,190

2.Currency 1,650 Replenishment check 7,200 Adjusted petty cash balance 8,850

Class Schedule: M-F 7:30-9:30; 11:30-1:30


Problem 2

Beeboo, Inc.’s newly hired accountant prepared the following cash reconciliation as of June 30, 2010:

BANK BOOKUnadjusted balance 268,367 79,367 Deposits in transit (15,000) Bank service charges 1,000 Check written and recorded on June 30

but was released on July 4 (12,000) Outstanding checks 36,000 NSF checks 17,000 Loan proceeds (company not informed) 200,000 Erroneous bank debit 15,000 Customers' checks received on June 29

(all dated July 6), included in deposits in transit 9,000 Certified check 11,000 Unlocated difference 345,000

477,367 477,367

The adjusted cash balance of Beeboo, Inc. on June 30, 2010 should bea. P265,367 c. P273,367b. P253,367 d. P264,367

Solution:

Book BankUnadjusted balances 79,367 268,367 Deposits in transit, net of post-dated checks

(15,000-9,000) 6,000 Bank service charges (1,000) Unreleased check 12,000 Outstanding checks, net of certified check

(36,000-11,000) (25,000) NSF check (17,000) Loan proceeds 200,000 Erroneous bank debit 15,000 Post-dated checks (9,000) Adjusted balances 264,367 264,367

Problem 3

The cash account shows a balance of P225,000 before reconciliation. The bank statement does not include a deposit of P11,500 made on the last day on the month. The bank statement shows a collection by the bank of P4,700 and a customer’s check for P1,600 was returned because it was NSF. A customer’s check for P2,250 was recorded on the books as P2,700 and a check written for P395 was recorded as P485.

What should be the correct cash balance?a. P227,740 c. P228,640b. P239,240 d. P227,560



ssSolution:Balance per books 225,000 Bank collection 4,700 Customer's NSF check (1,600) Overstatement of cash receipt (2,700-2,250) (450) Overstatement of cash disbursement (485-395) 90 Adjusted cash balance 227,740

Problem 4

On July 5, 2010, Beeboo, Inc. received its bank statement for the month ending June 30. The statement showed a P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the balances, the auditor discovered that:

1. The June 30 collections of P176,000 were recorded on the books but were not deposited until July.2. The bank service charges for the month of June totaled P3,000.3. A paid check for P24,300 was entered incorrectly in the cash payments journal as P34,200.

What is the total outstanding checks at June 30, 2010?a. P75,400b. P343,600c. P363,400d. P353,500

Solution:

Balance per books, June 30, 2010 35,000 Bank service charges (3,000) Overstatement of disbursement (34,200-24,300) 9,900 Adjusted cash balance 41,900

Balance per bank, June 30, 2010 209,500 Add: Undeposited checks 176,000 Total 385,500 Less: Adjusted cash balance 41,900 Oustanding checks, June 30, 2010 343,600

BY: BONGHANOY, Jayssa

Problem 5

Shown below is the bank reconciliation for Mutya Company for May 2010:

Balance per bank, May 31, 2010 P300 000Deposit in transit 48 000Outstanding checks (56 000)Bank credit recorded in error (20 000)Cash balance per book, May 31, 2010 P272 000

The bank statement for June 2010 contains the following data:

Total deposits P220 000Total charges, including an NSF of P16 000

and service charge of P800 192 000

All outstanding checks on April 30, including the bank credit, were cleared in the bank on May 31. There were outstanding checks of P60 000 and deposits in transit of P76 000 on May 31, 2010.



What is the cash balance per bank on June 30, 2010?a. P300 000b. P328 000c. P344 000d. P344 800

Solution:Answer B

Balance, May 31, 2010 P300 000Add: Receipts (deposits) 220 000Total P520 000Less: Disbursements 192 000Balance, June 30, 2010 P328 000

Problem 6

The cashier of Momay Company misplaced all the bank statements for the past years. You reviewed the accounting records and discovered that the following journal entries were made to reconcile the June 30, 2010 bank records and accounting records.

Accounts Receivable 76, 012Miscellaneous Expense 625

Notes Receivable 10 000Interest Revenue 500Cash 66 137

Pre-adjustment cash balance in the accounting records was P371 023.50, outstanding checks were P10 375 and no other adjustments were required.

What is the balance of the cash account per bank statement as of June 30, 2010?a. P304 886.50b. P315 261.50c. P371 023.50d. P381 523.50

Solution:Answer B

Balance per books P371 023.50Outstanding checks 10 375.00NSF checks (76 012.00)Bank charges ( 625.00)Proceeds of note 10 000.00Interest on note 500.00Balance per bank statement P315 261.50

Problem 7

Imortal Co. provided the following information about the composition of its cash on December 31, 2010:o Commercial savings account of P600 000 and a commercial checking account balance of P900 000

are held at BPI.o Money market fund account held by Citibank that permits Imortal to write checks in this balance,

P5 000 000.o Travel advances of P180 000 for executive travel for the first quarter of next year (employee to pay

through salary deduction.)o A separate cash fund in the amount of P1 500 000 is restricted for the retirement of long term assets.o Petty cash fund, P10 000.

What is the correct amount of cash and cash equivalent Imortal Company should report in its December 31, 2010 statement of financial position?

a. P 610.00b. P1 510.00c. P6 400.00d. P6 510.00

Solution:Answer D



Commercial – savings account P 600 000Commercial – checking account 900 000Money market fund 5 000 000Petty cash fund 10 000Correct cash and cash equivalents P6 510 000

Problem 8

Green Rose Company is preparing its March 31 bank reconciliation. The following data are available:

From the February 28 bank reconciliationDeposits in transit, P1 700Outstanding checks, P3 900

March Data: Per Bank Per BookBalance, February 28 74 140 71 940March deposits reflected 47 600 49 000March checks reflected ( 61 700)* ( 61 000)Note collected (including P200 interest) 20 000Service charge ( 120) ________Balance, March 31 79 920 59 940

*Erroneously includes a check drawn by Green Company for P1 500.

1. How much is the deposits in transit at March 31?a. P 300 c. P3 100b. P1 400 d. P4 500

Solution:Answer C

Book deposits P49 000Less: Bank deposits – March

Total deposits during March P47 600Less: Deposits in Transit – beg 1 700 45 000

Deposits in transit, end P 3 100

2. How much is the outstanding checks at March 31?a. P4 700 c. P6 900b. P1 400 d. P4 500

Solution:Answer A

Book checks P61 000Less: Bank checks – February

Checks paid P61 700Outstanding checks, beg ( 3 900)Bank error ( 1 500) 56 300

Outstanding checks, March 31 P 4 700

BY: LAO, Malou

Problem 9

In preparing its August 31,2010 bank reconciliation, Mutya Company has available the following :Balance per bank statement P1, 805,000Deposit in transit 325,000Return of customer’s check for insufficient fund 60,000Outstanding checks 275,000Bank service charge for August 10,000

At August 31, 2010, Mutya’s correct cash balance is

a. 1,855,000b. 1,795,000c. 1,785,000d. 1,755,000



Solution:Answer ABal. per bank 1,805,000Add: deposit in transit 325,000Less: outstanding checks 275,000Total 1,855,000

Problem 10

In your audit of Minsan lang Kitang Iibigin Company as of December 31,2010, you gathered the following:

Balance per book P1, 000,000Bank service charge 3,000Outstanding checks 235,000Deposit in transit 300,000Customer not collected by bank 375,000Interest in customer note 15,000Return of customer’s check for insufficient fund 62,000Depositor’s note charged to account 250,000

The correct cash balance amounts to:

a. 1,575,000b. 1,065,000c. 1,075,000d. 1,325,000

Solution: Answer C

Per book 1000000Bank charges (3000)Note collected by bank 375,000Interest in customer note 15,000NSF (62,000)Note charged to account (250,000)Adjusted book balance 1,075,000

Problem 11

On December 21,2010 Green Rose Company had the following cash balances:

Cash balance 1,800,000Petty cash fund(all funds were reimbursed on 12/31/2010 50,000Time deposit (due Feb. 1,2011) 250,000

Cash in bank includes P600,000 of compensating balance against short-term borrowing arrangement at December 31,2010/ The compensating balance is legally restricted as to withdrawal by Green rose. In the current asset section of Green Rose’s December 31,2010 balance sheet, what total amount should be reported as cash and cash equivalent?

a. 1,850,000b. 1,250,000c. 2,100,000d. 1,500,000

Solution:Answer DCash in bank (1,800,000-600,000) 1,200,000Petty cash fund 50,000Time deposit 250,000Total cash 1,500,000



Problem 12

The following information pertains to 100 Day’s to Heaven Company at December 31,2010:

Bank statement balance 1,000,000Checkbook balance 1,400,000Deposit in transit 500,000Outstanding Check 100,000

In 100 Day’s to Heaven Company at December 31,2010 balance sheet, cash should be reported at

a. 900,000b. 1,000,000c. 1,400,000d. 1,500,000

Solution:Answer CBal. per bank 1,000,000Add; deposit in transit 500,000Less: outstanding checks 100,000Total 1,400,000

Problem 13

The cash account in the ledger of American Idol Company shows a balance of P 1,652,000 at September 30,2010. The bank statement however shows a balance of P 2,090,000 at the same date. The only reconciling items consist of a bank service charge of P2,000, a large number of outstanding checks totaling P 590,000 and a deposit in transit. What is the deposit in transit in September 30,2010 bank reconciliation?

a. 150,000b. 440,000c. 154,000d. 592,000

Solution:Answer ABal. per book 1,652,000Service charge ( 2,000)Adjusted book bal. 1,650,000

Bal. per bank 2,090,000Deposit in transit(squeeze) 150,000Outstanding checks (590,000)Adj, Bank Balance 1,650,000

BY: MAGHANOY, Jolly Ann



AUDIT OF RECEIVABLES

Problem 1

On the December 31, 2010 Balance Sheet of IPANABI NA NI REYMAR KAW (INNRK) Company, the current receivables consisted of the ff.:

Trade Accounts Receivable 93,000.00Allowance for Doubtful Accounts (2,000.00)Claim against shipper for goods lost in transit(November 2010) 3,000.00Selling Price of unsold goods sent by INNRKOn consignment at 130% of cost(not included in INNRK’S ending inventory) 26,000.00Security deposit on lease of warehouse usedFor storing some inventories 30,000.00Total

What is the correct total of INNRK Company’s current net receivables?a. 94,000.00b. 120,000.00c. 124,000.00d. 150,000.00

Solution: Answer A

Trade accounts receivable 93,000.00Allowance for Doubtful Accounts (2,000.00)Claims receivable 3,000.00Total 94,000.00

Problem 2

On January 1, 2010, AHLITA Company’s Allowance for Doubtful Accounts had a credit balance of 30,000.00. During 2010 AHLITA charged 64,000.00 to doubtful accounts expense, wrote off 46,000.00 of uncollectible accounts, and unexpectedly recovered 12,000.00 of bad debts written off in the prior year. The allowance for doubtful accounts at December 31, 2010 should be

a. 48,000.00b. 60,000.00c. 64,000.00d. 94,000.00

Solution: Answer B

Allowance 1/1 30,000.00Add: Doubtful Accoutns 64,000.00

Recovery 12,000.00Less: Write-off 46,000.00Allowance 12/31 60,000.00

Problem 3

MALOU’S EATERY’S allowance for doubtful accounts was 1,000,000.00 at the end of 2010 and 900,000.00 at the end of 2009. For the year ended December 31, 2010, MALOU’S EATERY reported bad debt expense of 160,000.00 in its income statement. What amount did MALOU’S EATERY debit to the appropriate account in 2010 to write off actual bad debts?

a. 60,000.00b. 100,000.00c. 160,000.00d. 260,000.00

Solution: Answer A


150,000.00


Allowance 12/31/09 900,000.00Bad debts expense 160,000.00Less: Accounts written off (squeeze) 60,000.00Allowance 12/31/10 1,000,000.00

Problem 4

At January 1, 2010, NOVA PIATTOS had a credit balance of 260,000.00 in its allowance for uncollectible accounts. Based on past experience, 2% of NOVA PIATTOS’ credit sales have been uncollectible. During 2010 NOVA PIATTOS wrote off 325,000.00 of uncollectible accounts. Credit sales for 2010 were 9,000,000.00. In its December 31, 2010 balance sheet, what amount should NOVA PIATTOS report as allowance for uncollectible accounts?

a. 115,000.00b. 180,000.00c. 245,000.00d. 440,000.00

Solution:Answer A

Allowance 1/1 260,000.00Uncollectible accounts expense 180,000.00Less: write off 325,000.00Allowance 12/31 115,000.00

Problem 5

The following information is from CLAIRE BUSY AKO’S first year of operations:

1. Merchandise purchased 450,000.002. Ending Merchandise Inventory 123,000.003. Collections from customers 150,000.004. All sales are on account and goods sell at

30% above cost.

Accounts Receivable balance at the end of the company’s first year is:a. 275,100.00b. 78,900.00c. 595,000.00d. 435,000.00

Solution:Answer A

Purchases 450,000.00Less: Merchandise Inventory end 123,000.00Cost of Goods Sold 327,000.00Multiply by sales ratio 130%Sales 425,100.00Less: collections 150,000.00 Accounts Receivable, end 275,100.00

BY: SUDARIO, ElmerProblem 6

Roxy Company had the following information for 2010 relating to its accounts receivable:

Accounts receivable at January 1 1,300,000Credit Sales 5,400,000Collections from customers, excluding recovery 4,750,000Accounts written off 125,000Collection of accounts written off in prior year

(customer credit was not reestablished) 25,000Estimated uncollectible receivables per aging of

receivables at December 31 165,000

On December 31,2010, the balance of account receivable, before allowance for doubtful accounts, should bea. 1,825,000 c. 1,950,000



b. 1,850,000 d. 1,990,000

Solution:Answer A

Accounts receivable- January 1 1,300,000

Add: Credit sales 5,400,000

Total 6,700,000

Less: Collection from customers 4,750,000

Accounts written off 125,000 4,875,000

Accounts receivable-December 31 1,825,000

Problem 7

The following data relate to accounts receivable of Jay Company for the year 2010:Accounts receivable, January 1 650,000Credit sales 2,700,000Sales returns 75,000Accounts written off 40,000Collections from customers 2,150,000Estimated future sales returns at December 31 50,000Estimated uncollectible accounts at 12/31 per aging 110,000

What amount should Jay report as net realizable value of accounts receivable at December 31,2010?a. 1,200,000b. 1,125,000c. 1,085,000d. 925,000

Solution:Answer D

Accounts receivable-January 1 650,000

Credit sales 2,700,000

Total 3,350,000

Less: Collections from customers 2,150,000

Accounts written off 40,000

Sales returns 75,000 2,265,000

Accounts receivable-December 31 1,085,000

The net realizable value of accounts receivable is computed as follows:

Accounts receivable 1,085,000

Less: Allowance for doubtful accounts 110,000

Allowance for sales returns 50,000 160,000

Net realizable value 925,000

Problem 8

Saga Company had a P3,000,000 balance in accounts receivable on January 1. The balance in allowance for bad debts on January 1 was P360,000. Sales for the year totaled P17,000,000. All sales were credit sales. Bad debt expense is estimated to be 2% of sales. Writeoffs of uncollectible accounts for the year were



P280,000 . The debit balance in accounts receivable on December 31 was P3,450,000. All receivables are trade receivables. What is the amount of cash collected from customers?

a. 16,270,000b. 16,550,000c. 15,930,000d. 15,570,000

Solution:Answer A

Accounts receivable- January 1 3,000,000

Sales for the year 17,000,000

Total 20,000,000

Accounts receivable-December 31 (3,450,000)

Writeoffs of uncollectible accounts (280,000)

Cash collected from customers 16,270,000

Problem 9

Orr Company prepared an aging of its accounts receivable at December 31, 2010 and determined that the net realizable value of the accounts receivable 2010 was P2,500,000. Additional information is available as follows:Allowance for uncollectible accounts

At January 1- credit balance 280,000Accounts written off as uncollectible 230,000Accounts receivable at December 31 2,700,000Uncollectible accounts recovery 50,000

For the year ended December 31,2010, Orr’s uncollectible accounts expense would bea. 230,000b. 200,000c. 150,000d. 100,000

Solution:Answer D

Allowance-January 1 280,000

Recovery of accounts written off 50,000

Uncollectible accounts expense(SQUEEZE) 100,000

Total 430,000

Accounts written off (230,000)

Allowance-December 31 200,000

Since the December 31,2010 accounts receivable balance is P2,700,000 and the net realizable value is P2,500,000, the December 31,2008 allowance should be P200,000.

The uncollectible accounts expense is squeezed by working back from the December 31,2008 allowance balance of P200,000.

Problem 10

1. Computation of Accounts Receivable Balance The following amounts are shown on the 2010 and 2009 financial statements of San Francisco Co.:



2010 2009 Accounts Receivable ? P 470,000 Allowance for Bad Debts 20,000 10,000 Net Sales 2,600,000 2,400,000 Cost of Goods Sold 1,900,000 1,752,000

San Francisco Co.’s accounts receivable turnover for 2010 is 6.5 times. What is the accounts receivable balance at December 31, 2010?

A. P820, 000 C. P360, 000B. P340, 000 D. P470, 000

Solution:Answer C

(X- Net Receivables, December 31, 2010) A/R Turnover = Net Sales ÷ Ave. Net Receivables

6.5 = P2, 600,000 ÷ P460, 000 – X 2 P2, 990,000+6.5X = P2, 600, 000 2 P2, 990, 000 + 6.5X = P5, 200, 000 6.5X = P2, 210, 000 X = P340, 000

Net Receivables, Dec. 31, 2010 P340,000 Add: Allowance for Bad Debts, Dec. 31, 2010 P 20,000Accounts Receivable, Dec. 31, 2010 P360,000

BY: BUSICO, Ann ClaireProblem 11

Computation of Accounts Receivable Written-Off

The policy of Ilang-Ilang, Inc. is to debit bad debt expense for 3% of all new sales. The following are the company’s sales and allowance for bad debts for the past four years. Year Sales Allowance for Bad Debts Year-End Balance 2007 P3, 000, 000 45, 0002008 2, 950,000 56,0002009 3, 120,000 60,0002010 2, 420,000 75,000

The accounts written-off in 2008, 2009, and 2010 amounted to 2008 2009 2010 A. P99,500 P97,600 P87,600B. 77,500 89,600 57,600C. 11,000 4,000 5,000D. 12,500 22,400 62,400

Solution:Answer B 2008 2009 2010Allowance balance, beg. P 45,000 P 56,000 P 60,000Add: Estimated uncollectibles* 88,500 93,600 72,600 Total allowance before write offs 133,500 149,600 132,600 Less: Allowance balance, Ending 56,000 60,000 75,000Accounts written-off 77, 500 89,600 57,600 * 3 % of Sales

Problem 12

Estimating Bad Debts Using the Percentage of Sales Method The following selected transactions occurred during the year ended December 31, 2010:

Gross sales (cash and credit) P750, 000 Collections from credit customers, net of 2% cash discount 245, 000



Cash sales 150, 000

Uncollectible accounts written off 16, 000Credit memos issued to credit customers for sales returns and allowances 8, 400

Cash refunds given to cash customers for sales returns and allowances 12, 640

Recoveries on accounts receivable written off in prior years (not including in cash received stated above) 5,421

At the year-end, the company provides for estimated bad debt losses by crediting the Allowance for Bad Debts Account for 2% of its net credit sales for the year.

1. What is the company’s net credit sale in 2010? A. P600, 000 C. P591, 600 B. P586, 600 D. P595, 000

2. The bad debt expense for 2010 is A. P11, 832 C. P11, 732 B. P11, 900 D. P12, 000

Solution:

Answer B

1. Gross credit sales (P750, 000-150,000) P600, 000 Less: Sales Discount (P245, 000÷98%= P250, 000×2%) P5, 000 Sales Returns and Allowances 8, 400 13,400 Net credit sales P586, 600

Answer C

2. Bad Debt Expense (P586, 600×2%) P11, 732

Problem 13

Computation of Accounts Receivable BalanceThe following information is available for Faith Company relating to 2010 operations: Accounts Receivable, beg 4, 000,000Accounts Receivable collected 8, 400,000Cash Sales 2, 000,000Inventory, beg. 4, 800,000Inventory, end 4, 400,000Purchases 8,000,000Gross Margin on Sales 4, 200,000

What is Faith Company’s accounts receivable balance at December 31, 2010? A. 8, 200,000 C. 2, 000,000B. 6, 200,000 D. 4, 200,000

Solution:Answer B

Inventory, beg. 4,800,000 Purchases 8,000,000Goods Available for Sale 12,800,000Inventory, end (4,400,000) Cost of Goods Sold 8,400,000Gross Margin on Sales 4,200,000Gross Sales 12,600,000Cash Sales (2,000,000)Credit Sales 10,600,000Accounts Receivable, beg. 4,000,000Total 14,600,000Accounts Receivable collected (8,400,000) Accounts Receivable, end 6,200,000



Problem 14

On December 31, the accounts receivable control account of Honduras Company had a balance of P8, 200,000. An analysis of the accounts receivable showed the following:

Accounts known to be worthless P 100,000 Advance payments to creditors on purchase orders 400,000 Advances to affiliated companies 1, 000,000 Customer’s accounts reporting credit balances Arising from sales returns (600,000) Interest receivable on bonds 400,000Trade accounts receivable-unassigned 2, 000,000Subscription receivable due in 30 days 2, 200,000 Trade accounts receivable-assigned (Finance Company’s equity in assigned accounts is P500,000) 1, 500,000 Trade installments receivable due 1-18 months, including unearned finance charge of P50, 000 850,000 Trade accounts receivable from officers, due currently 150,000Trade accounts on which postdated checks are held (no entries were made on receipt of checks) 200,000 TOTAL P8, 200,000

The correct balance of trade accounts receivable on December 31 should be

A. 4, 650,000B. 4, 700,000C. 4, 150,000D. 4, 050,000

Solution:Answer A

Accounts receivable-unassigned P2, 000,000Accounts receivable-assigned 1, 500,000 Trade installments receivable (850,000-50,000) 800,000Accounts receivable from officers 150,000Accounts on which postdated checks are held 200,000 Total trade accounts receivable P4, 650,000

BY: Navidad, Karen Mae



AUDIT OF INVENTORIES

Problem 1

The balance in Pacquiao Company’s inventory account on December 31, 2010 was P1,225,000 before the following information was considered:

o Goods shipped FOB destination, on December 20, 2010 from a vendor to Pacquiao were lost in transit. The invoice cost of P45,000 was not recorded by Pacquiao. On December 28. 2010, Pacquiao notified the vendor of the lost shipment.

o Goods were in transit from a vendor to Pacquiao on December 31, 2010. The invoice cost was P60,000 and the goods were shipped FOB shipping point on December 28, 2010. Pacquiao received the goods on January 4, 2011.

What amount of inventory should be reported in the December 31, 2010 balance sheet?a. P1,225,000 c. P1,285,000b. P1,270,000 d. P1,330,000

Answer C Balance per books P1,225,000 Goods in transit shipped FOB ship point 60,000 Correct balance, Dec 31, 2010 P1,285,000

Problem 2

Rose Company reviewed its year-end inventory and found the following items:A. A package containing a product costing P81,600 was standing in the shipping area when the physical inventory was conducted. This was not included in the inventory because it was marked “Hold for shipping instructions”. The purchase order was dated December 19 but the package was shipped and the customer was billed January 2, 2011.

B. A special machine, fabricated to order for a particular customer, was finished and in the shipping room on December 30, 2010. The customer was billed on that date and the machine was excluded in the inventory. The machine costing P230,000 was shipped January 4, 2011.

C. Merchandise costing P23,500 was received on January 3. 2011 and the related purchase invoice was recorded January 5, 2011. The invoice showed the shipment was made December 29, 2010, FOB destination.

D. Goods costing P150,000 were sold and delivered on December 20, 2010. The sale was accompanied by a repurchase agreement that Rose will “buyback” the inventory in February 2011.

How much is the inventory adjustment on December 31, 2010?

a. P81,600 increase c. P461,600 increaseb. P231,600 increase d. P485,999 increase

Answer B A. Since no shipment made as of 12/31/10 P81,600 D. Sold with buyback agreement 150,000 Increase P231,600

Problem 3

Noynoy Company’s inventory at June 30, 2010 was P750,000 based on a physical count of goods priced at cost and before any necessary year-end adjustment relating to the following:



o Included in the physical count were goods billed to a customer FOB shipping poing on June 30, 2010. These goods costing P15,000 were picked up by the carrier on July 9, 2010.

o Goods shipped FOB destination on June 28, 2010 from a vendor to Noynoy was received on July 1, 2010. The invoice cost was P25,000.

What amount should Noynoy report as inventory in its June 30, 2010 balance sheet?

a. P735,000 c. P750,000b. P740,000 d. P765,000Answer C Balance per books/ count P750,000

Problem 4

On December 28, 2010, Kabataan Company purchased goods costing P1,000,000. The terms were FOB destination.

The following costs were incurred in connection with the sale and delivery of the goods:Packaging for shipment P20,000Shipping 30,000Special handling charges 40,000

These goods were received on December 31, 2010.

In Kabataan’s December 31, 2010 balance sheet, how much of these goods should be included in inventory?

a. P1,000,000 c. P1,070,000b. P1,040,000 d. P1.090.000

Answer A Under FOB destination terms of shipment, all costs incurred in transporting the goods to the buyer’s place shall be borne by the seller.

Problem 5

Anakpawis Company had the following consignment transactions during December 2010. Inventory shipped on consignment to A Company P36,000Freight paid by Anakpawis 1,800Inventory received on consignment to B Company 24,000Freight paid by B 1,000

No sales of consigned goods were made through December 31, 2010.

What amount of consigned inventory should be included in Anakpawis’ December 31, 2010 balance sheet?

a. P24,000 c. 36,000b. P25,000 d. 37,800

Answer D Inventory shipped on consignment to A Company P36,000 Freight paid by Anakpawis 1,800 Total inventory on consignment P37,800

BY: DENILA, Jun Marlon

Problem 6

An analysis of the ending inventory of Phil Company on December 31, 2010 disclosed the inclusion of the following items:

Merchandise in transit purchased on terms:FOB shipping point 165,000FOB destination 100,000

Merchandise out on consignment at sales price(Including mark-up of 30% on cost) 195,000Merchandise sent to customer for approval (Cost of goods, P30,000) 40,000Merchandise held on consignment 35,000

The inventory at December 31, 2010 should be reduced by:



a) 355,000b) 190,000c) 203,500d) 222,000

Solution:Answer B

Merchandise in transit purchased FOB destination 100,000Mark-up on goods out on consignment

(195,000-150,000) 45,000Mark-up on merchandise for approval 10,000Merchandise held on consignment 35,000Total reduction 190,000

Problem 7

Based on a physical inventory taken on December 31, 2010, Maria Company determined its chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000. Maria estimated that, after further processing costs of P2,400,000, the chocolate could be sold as finished candy bars for P8,000,000. Maria’s normal profit margin is 10% of sales. Under the lower of cost or market rule, what amount should Maria report as chocolate inventory on December 31, 2010?

a) 5,600,000b) 4,000,000c) 5,200,000d) 4,800,000

Solution:Answer C

Estimated sales price 8,000,000Cost to complete (2,400,000)Net realizable value 5,600,000Thus, the cost of P5,200,000 is the inventory valuation because it is lower than the net realizable value.

Problem 8

On September 30, 2010, a fire at ARAGON company’s only warehouse caused severe damage to its entire inventory. Based on recent history, ARAGON has a gross profit of 30% on cost. The following information is available from ARAGON’s records or nine months ended September 30, 2010:

Inventory at January 1 1,100,000Net purchases 6,000,000Net sales 7,280,000

A physical inventory disclosed usable damaged goods which ARAGON estimates can be sold for P100,000. Using the gross profit method, the estimated cost of goods sold for the nine months ended September 30, 2010 should be:

a) 5,500,000b) 4,970,000c) 5,096,000d) 5,600,000

Solution:Answer D

Cost of goods sold (7,280,000/130%) 5,600,000The gross profit is 30% on cost. Accordingly, the sales ratio is 100% plus 30% or 130%. Thus, the cost of goods sold is computed by dividing the net sales by the sales ratio.

Problem 9

Met company uses FIFO retail method of inventory valuation. The following information is available:

COST RETAILBeginning inventory 600,000 1,500,000Purchases 3,000,000 5,500,000



Net additional markups 500,000Net markdowns 1,000,000Sales revenue 4,500,000

What would be the estimated cost of the ending inventory?a) 1,200,000b) 1,040,000c) 1,000,000d) 960,000

Solution:Answer A

COST RETAILBeginning inventory 600,000 1,500,000Purchases 3,000,000 5,500,000Net additional markups 500,000Net markdowns (1,000,000)Net purchases 3,000,000 5,000,000Cost ratio (3,000,000/5,000,000) 60%Goods available for sale 3,600,000 6,500,000Sales revenue (4,500,000)Ending inventory 2,000,000FIFO cost (2,000,000 x 60%) 1,200,000

Problem 10

Shaun company had the following consignment transactions during December 2010:Inventory shipped on consignment to Bea company 1,800,000Freight paid by by Shaun 90,000Inventory received on consignment from Ara company 1,200,000Freight paid by Ara 50,000

No sales of consigned goods were made through December 31, 2010. Shaun’s December 31, 2010 statement of financial position should include consigned inventory at

a) 1,200,000b) 1,250,000c) 1,800,000d) 1,890,000

Solution:Answer D

Inventory shipped on consignment to Bea company 1,800,000Freight paid by by Shaun 90,000Total cost of consigned inventory 1,890,000

Only the inventory sent out on consignment plus the corresponding freight charge should be included in the inventory of the consignor.

BY: AGBAY, Ma. Regina



AUDIT OF INVESTMENTS

Problem 1

On January 1, 2009, Kalamay Company bought 15% of Pink Biko Company’s ordinary shares outstanding for P 6,000,000. Kalamay appropriately accounts for this investment by the cost method. The following data concerning Pink Biko are available for the years ended December 31, 2009 and 2010.

2009 2010Net income P 3,000,000 P 9,000,000Cash dividend paid None 10,000,000In its income statement for the year ended December 31, 2010, how much should Kalamay report as income from this investment?

a. P 1,350,000b. P 1,500,000c. P 1,800,000d. P 450,000

Solution : Answer B

Dividend income (P 10,000,000 x 15%) P 1,500,000

Problem 2

On January 1, 2010, GB Company paid P 18,000,000 for 50,000 ordinary shares of BG Company which represent a 25% interest in the net assets of BG. The acquisition cost is equal to the book value of the net assets acquired. GB has the ability to exercise significant influence over BG. GB received a dividend of P 35 per share from BG in 2010. BG reported net income of P9,600,000 for the year ended December 31, 2010. In its December 31, 2010 statement of financial position, GB should report the investment in BG Company at

a. P 22,150,000b. P 20,400,000c. P 18,650,000d. P 18,000,000

Solution: Answer CAcquisition cost , January 1 P 18,000,000Add: Share in net income (9,600,000 x 25%) 2,400,000Total 20,400,000Less: Cash dividend received (50,000 x P35) 1,750,000Investment balance, December 31 P 18,650,000

Problem 3

Hotdog Company owns 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative nonvoting preference shares of Ketchup Company. In 2010, Ketchup declared dividend of P 1,000,000 on its ordinary share capital and P 600,000 on its preference share capital. What amount of dividend revenue should Hotdog report in its income statement for the year ended December 31, 2010?

a. P 900,000b. P 300,000c. P 600,000d. P 0



Answer C

P 600,000 = dividend declared on its preference share capital

Problem 4

RH Company purchased bonds at a discount of P 100,000. Subsequently, RH sold these bonds at a premium of P 140,000. During the period that RH held this held to maturity investment, amortization of the discount amounted to P 20,000. What amount should RH report as gain on the sale of bonds?

a. P 120,000b. P 220,000c. P 240,000d. P 260,000

Solution: Answer B

Premium on sale of bonds P 140,000Unamortized discount (100,000 – 20,000) 80,000Gain on sale of bonds P 220,000

Problem 5

The following accounts appear on the adjusted trial balance of Yellow Cab Company on December 31, 2010:

Petty Cash Fund P 10,000Payroll Fund 100,000Sinking fund cash 500,000Sinking fund securities 1,000,000Accrued interest receivable – sinking fund securities 50,000Plant expansion fund 600,000Cash surrender value 150,000Land held for capital appreciation 3,000,000Advances to subsidiary 200,000Investment in joint venture 2,000,000

How much should be reported as noncurrent investments on December 31, 2010?a. P 7,500,000b. P 4,500,000c. P 7,450,000d. P 2,300,000

Solution: Answer A

All accounts are noncurrent investments except the petty cash fund and the payroll fund.

BY: MONEVA, Ahl Monic



AUDIT OF PROPERTY PLANT AND EQUIPMENT

Problem 1

During 2011, Great Dane Company had the following transactions pertaining to its new office building:

Purchase price- Land P 420 000Legal fees for contracts to purchase land 14 000Architect’s fee 56 000Demolition of old building on site 35 000Sale of scrap from old building 21 000Construction cost of new building (fully completed) 2 450 000

At what amounts should the cost of land and cost of building be shown in Great Dane December 31, 2011 statement of financial position?

Land Buildinga.) P 420, 000 P 2 520 000b.) P 434 000 P 2 520 000c.) P 448 000 P 2 506 000d.) P 455 000 P 2 534 000

Solution: CLand Building

Purchase Price P 420 000Legal fees 14 000Architect’s fee P 56 000Demolition cost 35 000Construction cost of new building 2 450 000Sale of scrap ( 21 000 ) Total P 448 000 P 2 506 000

Problem 2

On January 2, 2006, Big Bang Corporation purchased for P 85 000 a machine having a useful life of ten years and estimated salvage value of P 5 000. The machine was depreciated by the straight- line method. On July 1, 2011, the machine was sold for P 45 000. For the year ended December 31, 2011, how much gain should Big Bang record on the sale?

a.) P 0 c.) P 4 000b.) P 1 000 d.) P 6 750

Solution: C

Cost of the machine P 85 000Less: Accumulated Depreciation P 85 000 – P 5000 X 5.5 years 10 44 000Book Value at date of sale P 41 000Selling price 45 000Gain from sale of machinery ( P 4 000 )

Problem 3

Sleepyhead Corporation, one of the largest mining company, purchased 20 acres of land for P 60 000 000. The company expected to extract 5 million tons of mine from this land over the next 20 years at which time, residual value shall be P 3 000 000. The following costs were also incurred related to the mining activities:



Successful exploration cost, P 5 000 000 and cost of P 800 000 for dry wells. During the first 2 years of the mine’s operations, 300, 000 tons were mined each year and sold for P 80 per ton.

How much would be the depletion for the first year?a.) P 3 000 000 c.) P 3 720 000b.) P 3 500 000 d.) P 3 768 000

Solution: C

Purchase price P 60 000 000Successful cost of exploration 5 000 000Total cost P 65 000 000Less: Estimated Salvage Value 3 000 000Depletable Cost 62 000 000/ Estimated Life in tons 5 000 000Depletion rate per ton P 12. 40

Depletion = P 12. 40 X 300 000 tons = P 3 720 000

Problem 4

You were assigned to audit the fixed assets of Oink, Inc. for December 31, 2011. In your permanent file was a machine purchased by the corporation on Januray 2, 2008 for P 300 000 which was being depreciated on a 10- year estimated life with no scrap value. Straight- line basis of depreciation was being used. On January 1, 2011, Oink, Inc. decided that the machine should have been depreciated on a 15- year life counted from the date of acquisition, Recorded depreciation for 2011 was P 30 000.

If the change in life is to be recognized, the depreciation expense to be recorded in 2011 should have beena.) P 14 000 c.) P 20 000b.) P 17 500 d.) P 25 000

Solution: B

Cost of the machine P 300 000Accumulated Depreciation: 2008 to 2011 ( P 30 000 x 3 years ) 90 000Remaining depreciable value of machine P 210 000Remaining useful life of machine 12 yearsDepreciation expense for 2011 P 17 500

Problem 5

Honey Bee Company exchanged a delivery van and P 50 000 cash for a newer van owned by Sweet Corporation. The following data relate to the values of the vans on the date of exchange:

Carrying Value Fair ValueHoney Bee P 300 000 P 450 000Sweet P 400 000 P 500 000

Immediately after the exchange, Honey Bee Company determined that the cash flows of the van received differ from the cash flows of the van transferred.

What is the cost of the new asset acquired as basis for recording in the book of Honey Bee Company?

a.) P 300 000 c.) P 450 000b.) P 400 000 d.) P 500 000

Solution: D

Cash paid P 50 000Fair Value of the van transferred 450 000Fair Value of asset received P 500 000

BY: GILLAMAC, Kuozzela Dianne N.

Problem 6



On July 1, Town Company purchased for P5,400,000, including appraiser’s fee of P50,000, a warehouse building and the land on which it is located. The following dta were available concerning the property:

Current Seller’s Apprasied value original cost

Land 2,000,000 1,400,00Warehouse building 3,000,000 2,800,000

Town sould record the land ata.) P 2,140,000b.) P 1,800,000c.) P 2,000,000d.) P 2,160,000

Solution: D

Cost of Land (2/5 x 5,400,000) 2,160,000

Problem 7

On August 1, Bamco Company purchased a new machine on a deferred payment basis. A down payment of P100,000 was made and 4 monthly installments of P250,000 each are to be made beginning on September 1. The cash equivalent price of the machine was P950,000. Bamco incurred and paid installation costs amounting to P30,000. The amount to be capitalized as the cost of the machine is

a.) P 950,000b.) P 980,000c.) P 1,100,000d.) P 1,130,000

Solution: B

Cash price P 950,000Installation Cost 30,000Total Cost P 980,000

Problem 8

Siquijor Company was organized in June 2010. You find the following land and building account:

June 1 Organization fees paid to the state 150 000 30 Land site and old building 3 000 000 30 Corporate organization cost 300 000July 1 Title clearance fee 50 000Aug 31 Cost of razing old building 100 000Sept. 1 Salaries of Siquijor executives 600 000Dec. 31 Real estate tax 90 000 31 Cost of the new building completed and

occupied on this date 8 000 000

The building acquired on June 30, 2010 was valued at P 300,000. The company paid P 100,000 for the demolition of the old buidling and then sold the scrap for P

10,000 and credited the proceeds to miscellaneous revenue. The company execuitves did not participate in the construction of the new building. The real estate tax was for the 6-month period ended December 31, 2010, and was assessed on

the land.

What is the cost of the land for financial accounting purposes?

a.) P 3,150,000b.) P 3,140,000c.) P 2,850,000d.) P 3,250,000



Solution: B

Purchase price P 3,950,000Title clearance fee 50,000Cost of razing old building 100,000Scrap value of old building (10,000)Total Cost P 3,140,000

Problem 9

ABC Company had the following general borrwing during 2009 which used to finance construction of the company’s new building.

Principal Borrowing costs10% bank loan 2,800,000 280,00010% short-term 1,600,000 160,00012% long-term loan 2,000,000 240,000

6,400,000 680,000

The construction began on January 1, 2009 and the building was completed on December 31, 2009. Expenditres on the building were made as follows:

January 1 400,000March 31 1,000,000June 30 1,200,000September 30 1,000,000December 31 400,000

4,000,000

The company follows the alternative allowed treatment for borrowing cost. What is the amount of capitalizable borrowing cost?

a.) P 212,500b.) P 680,000c.) P 425,000d.) P 340,000

Solution: A(a) (b) (a x b)

Date Expenditures Months outstanding Amount

January 1 400,000 12 4,800,000March 31 1,000,000 9 9,000,000June 30 1,200,000 6 7,200,000September 30 1,000,000 3 3,000,000December 31 400,000 0 0

4,000,000 24,000,000

Average expenditures (24,000,000 / 12) 2,000,000Multiply by capitalization rate (680,000 / 6,400,000) 10.625 %Capitalizable borrowing cost 212,500

Problem 10

In January 2007, Naval Company purchased equipment at a cost of P6,000,000 to be ysed in its manufacturing operations. The equipment was estimated to have a useful life of eight years with residual value estimated at P600,000. Naval considered various methods of depreciation and selected the sum of years’ digits method. On december 31, 2008, the accumulated depreciation should have a balance of

a.) P 750,000 less than under the straight line methodb.) P 750,000 less than under the double declining methodc.) P 900,000 greater than under the straight line methodd.) P 900,000 greater than under the double declining balance method

Solution: CSYD = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8

= 36



2007 depreciation (5,400,000 x 8/36) P1,200,0002008 depreciation (5,400,000 x 7/36) 1,050,000

Accumulated depreciation – 12/31/2008 (SYD) 2,250,000Accumulated depreciation – 12/31/2008 (SL)Cash price 1,350,000

Total Cost P 900,000

BY: POTOT, Jay-Nova S.Problem 11

Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the Aliaga’s property and equipment transactions:

Cost of land, which included an old apartment building appraised at P300,000

P 3,000,000

Apartment building mortgage assumed, including related interest due at the time of purchase

80,000

Delinquent property taxes assumed by Aliaga 30,000

Payments to tenants to vacate the apartment building 20,000

Cost of razing the apartment building 40,000

Proceeds from the sale of salvaged materials 10,000

Architect’s fee for new building 60,000

Building permit for new construction 40,000

Fee for title search 25,000

Survey before construction of new building 20,000

Excavation before construction of new building 100,000

Payment to building contractor 10,000,000

Assessment by city for drainage project 15,000

Cost of grading and leveling 50,000

Temporary quarters for construction crew 80,000

Temporary building to house tools and materials 50,000

Cost of changes during construction to make building more energy efficient

90,000

Interest cost on specific borrowing incurred during construction 360,000

Payment of medical bills of employees accidentally injured while inspecting building construction

18,000

Cost of paving driveway and parking lot 60,000

Cost of installing lights in parking lot 12,000

Premium for insurance on building during construction 30,000

Cost of open house party to celebrate opening of new building 50,000

Cost of windows broken by vandals distracted by the celebration 12,000

1. Cost of Landa. P2,980,000b. P3,270,000c. P3,185,000d. P3,205,000

2. Cost of Buildinga. P10,810,000b. P10,895,000c. P10,875,000d. P11,110,000

3. Cost of Land Improvementsa. P12,000b. P72,000



c. P122,000d. P 0

4. Amount that should be expensed when incurreda. P80,000b. P110,000c. P62,000d. P50,000

5. Total depreciable property and equipmenta, P11,182,000b. P10,967,000c. P10,947,500d. P10,882,000

1)B; 2)A; 3)B; 4)A; .5)D1) B. 3,270,000

Cost of land, which included an old apartment building appraised at P300,000

P 3,000,000

Apartment building mortgage assumed, including related interest due at the time of purchase

80,000

Delinquent property taxes assumed by Aliaga 30,000

Payments to tenants to vacate the apartment building 20,000

Cost of razing the apartment building 40,000

Proceeds from the sale of salvaged materials (10,000)

Fee for title search 25,000

Survey before construction of new building 20,000

Assessment by city for drainage project 15,000

Cost of grading and leveling 50,000

Total cost of Land P3,270,000

2.) A. 10,810,000Architect’s fee for new building P60,000

Building permit for new construction 40,000

Excavation before construction of new building 100,000

Payment to building contractor 10,000,000

Temporary quarters for construction crew 80,000

Temporary building to house tools and materials 50,000

Cost of changes during construction to make new building more energy efficient

90,000

Interest cost on specific borrowing incurred during construction

360,000

Premium for insurance on building during construction 30,000

Total cost of building P10,810,000

3.) B. 72,000Cost of paving driveway and parking lot P60,000

Cost of installing lights in parking lot 12,000

Total cost of Land Improvements P72,000

4.) A. 80,000Payment of medical bills of employees P18,000

Cost of open house party 50,000

Cost of windows broken by vandals 12,000

Total cost amount that should be expensed P80,000



5.) D. 10,882,000Building P10,810,000

Land Improvements 72,000

Total depreciable PPE P10,882,000

BY: LAURON, Carmela Marie

AUDIT OF PREPAYMENTS AND INTANGIBLE ASSETS

Problem 1

On July 1, 2009, Dean Company leased office premises for a three-year period at an annual rental income of P360,000 payable on July1 each year. The first rent payment was made on July 1, 2009. Additionally on July 1, 2009, Dean Company paid P 240,000 as a lease bonus to obtain a three year lease instead of the lessor’s usual term of six years. In its December 31, 2009 statement of financial position, Dean Company should report prepaid rent ofa.180,000b.220,000c.240,000d.380,000

Solution Answer D

Rent payment on 7/1/2009 (360,000 x 6/12) 180,000Lease Bonus (240,000 x 30/36) 200,000Prepaid Rent – 12/31/2009 380,000

Problem 2

At December 31, 2011, Mars Corp. pension plan administrator provided the following information:

Fair Value of plan assets P 5,500,000Present Value of benefit obligation 5,300,000Unrecognized acturial net gain 200,000Unrecognized past service cost 500,000

What is the amount of prepaid pension that should be shown on Mars’ December 31, 2011 statement of financial position?a. 100,000b. 200,000c.500,000d.700,000

SolutionAnswer C

Present value of benefit obligation – Credit 5,300,000Unrecognized Actuarial net gain – Credit 200,000Fair Value of plan assets – Debit (5,500,000)Unrecognized past service cost –Debit ( 500,000)Prepaid Pension 500,000

Problem 3

Zamboanga Company acquired a 5 year fire insurance on July 1, 2010 for P 500,000.What would be the Prepaid fire insurance balance to be presented in the Statement of financial position ending June 30, 2011?a.100,000b.50,000c.400,000d.450,000

SolutionAnswer CPrepaid Fire insurance, July 1,2010 500,000Insurance expense, ending June 30,2011(500,000 x 1/5) (100,000)



Prepaid Fire Insurance, June 30, 2011 400,000

Problem 4

On January 1, 2006, Tricky Problem Company issued for P 939,000, one thousand of its 9%, 1,000 bonds. The bonds were issued to yield 10%. The bonds are dated January 1, 2006, and mature on December 31, 2016. Tricky Problem Company uses the interest method of amortizing bond discount. In its December 31, 2006 balance sheet, Tricky Problem Company should report unamortized bond discount oa. 51,700b. 54, 900c. 51, 161d. 51, 000

Solution:Answer A

Balance of Bond Discount, 1- 1-06 61,000Amortized bond discountNominal 90,000Effective 93,900 (3,900) Unamortized Bond Discount 57,100

5. Tricky Ni Company presented the followingCash 90Inventories 80Prepaid Expenses ?Total non-current asset 50Property Plant and Equipment 20Other non-current assets 10Total liabilities and equity 250

What is the balance of the prepaid expenses?a. 0b.30c.20d.10

Solution 5 Answer b

Total liabilities and equity( Total assets) 250Less Total non-current assets (50)Total Current assets 200Less: Cash 90 Inventories 80 (170)Prepaid balance 30

BY: VELOS, Joseph Anthony

Problem 6

Kenya Enterprises developed a new machine that reduces the time required to mix the chemicals used in one of its leading products. Because the process is considered very valuable to the company, Kenya patented the machine.Kenya incurred the ff. expenses in developing and patenting the machine:

Research and development laboratory expenses P 750, 000Materials used in the construction of the machine 240, 000Blueprints used to design the machine 96, 000Legal expenses to obtain the patent 360, 000Wages paid for the employees’ work on the research development,and building of the machine (60% of the time was spent in actually building the machine) 900, 000

Expense of drawing required by the Bureau of Patents to be submittedwith the patent application 51, 000

Fees paid to Bureau of Patents to process application 75, 000

One year later, Kenya Enterprises paid P525, 000 in legal fees to successfully defend a patent against an infringement suit by Gaya-gaya Company.



1. What is the total cost of the patent?a. P993, 000b. P486, 000c. P564, 000d. P126, 000

Solution:Answer B

Legal expenses to obtain the patent 360,000Expense of drawing required by Bureau of Patents 51,000Fees paid to process patent application 75,000Total cost of patent P486,000

2. What is the total cost of the new machine?a. P 1,362,000b. P0c. P780, 000d. P876,000

Solution:Answer D

Materials used in the construaction of the machine 240,000Blueprints used to design the machine 96,000Wages paid for the employees’ work on the constructionof the machine (P900,000xP60) 540,000Total cost of machine P 876,000

3. What is the entry to record the legal fees paid for the successful defense of the patent against the infringement suit?a. Patents 525,000

Cash 525,000b. Legal fees expense 525,000

Cash 525,000c. Machinery 525,000

Cash 525,000d. Amortization expense – Patents 525,000

Cash 525,000

Answer Bb. The legal fees paid for the successful defense of the patent should be expensed, and not be capitalized. This expenditure does not meet the definition of and the recognition criteria for an intangible asset.

Problem 7

The ff. amounts are included in the general ledger of Margherita Peak Corporation at December 31, 2007:Organization costs P72,000Trademarks 45,000Patents 225000Discount on bonds payable 105,000Deposits with advertising agency for ads to promote

goodwill of the company 30,000Cost of equipment acquired for various research and

development projects 320,000Cash of developing a secret formula for a product that isexpected to be marketed for at least 20 years 240,000

on the basis of the information above, what is the total amount of intangible assets to be reported by Margherita Peak on its balance sheet at December 31, 2007?a. P342,000b. P270,000c. P510,000d. P830,000

Solution:



Answer B

Trademarks P 45,000Patents 225,000Total intangible assets P 270,000

Problem 8

Danskin, Inc. is considering purchasing A & B Enterprises, which has the ff. assets and liabilities.

COST FAIR MARKET VALUEAccounts receivable P4,800,000 P4,400,000Inventory 4,800,000 5,000,000Prepaid Insurance 200,000 200,000Buildings and equipment (net) 1,400,000 4,000,000Accounts payable (3,200,000) (3,200,000)Net assets P8,000,000 P10,400,000

If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the acquisition isa. P4,600.000b. P2,400,000c. P2,200,000d. P0

Solution:Answer C

Purchase price P12,600,000Fair market value of net assets 10,400,000Goodwill P 2,200,000

BY: SAN PEDRO Maria Elena



AUDIT OF LIABILITIES

Problem 1

During 2010, ABC Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box contains one coupon, which entitles the consumer to a baking pan upon remittance of P40. ABC pays P50 per pan and P5 for handling and shipping. ABC estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons had been processed during 2010. What amount should ABC report as a liability for unredeemed coupons at December 31, 2010?

a. 1,000,000b. 1,500,000c. 3,000,000d. 5,000,000

Solution:Answer: B

Handling and shipping 5Total 55Less: Remittance from customer 40Net premium expense 15Coupons to be redeemed (80% * 500,000) 400,000Less: Coupons redeemed 300,000Coupons outstanding 100,000Liability for unredeemed coupons (100,000 * 15)1,500,000

Problem 2

ABC Company sells washing machines that carry a three-year warranty against manufacturer’s defects. Based on company experience, warranty costs are estimated at P300 per machine. During the current year, Mill sold 2,400 washing machines and paid warranty costs of P170,000. In its income statement for the current year, Mill should report warranty expense of

a. 170,000b. 240,000c. 550,000d. 720,000

Solution:Answer: D

Warranty expense (2,400 * 300) 720,000

Problem 3

During 2010, ABC Company became involved in a tax dispute with the BIR. At December 31, 2008, ABC’s tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was P500,000. After the 2010 financial statements were issued, ABC received and accepted a BIR settlement of P550,000. What amount of accrued liability would ABC have reported in its December 31, 2010 statement for financial position?

a. 650,000b. 550,000c. 500,000d. 0

Answer: C



The reasonable estimate of P500,000 is recorded. The accepted BIR offer is not recorder because it was made after the financial statements are issued. In 2011, when the BIR settlement offer of P550,000 is accepted, an additional liability of P50,000 will be recognized.

Problem 4

ABC Company’s liability account balances at June 30, 2010, included a 10% note payable in the amount of P3,600,000. The note is dated October 1, 2010, and is payable in three equal annual payments of P1,200,000 plus interest. The first interest and principal payment was made on October 1, 2010. In ABC’s June 30, 2010 statement of financial position, what amount should be reported as accrued interest payable for this note?

a. 270,000b. 180,000c. 90,000d. 60,000

Solution:Answer: B

Note payable, October 1, 2009 3,600,000 Payment on October 1, 2010 1,200,000

Balance, October 1, 2010 2,400,000 Accrued interest payable from October 1, 2010- June 30,2011 (2.4M*10%*9/12) 180,000

Problem 5

ABC Company had the following long-term debt:

Sinking fund bonds, maturing in installments P 2,200,000Industrial revenue bonds, maturing in installments 1,800,000Subordinated bonds, maturing on a single date 3,000,000

The total of the serial bonds amounted to

a. 3,000,000b. 4,000,000c. 4,800,000d. 7,000,000

Solution:Answer:B

Serial bonds are bonds that mature in a series or by installments.

Sinking fund bonds 2,200,000 Industrial revenue bonds 1,800,000 Total serial bonds 4,000,000

Subordinated bonds are bonds that rank below the amounts owing to general creditors.

BY: PANCITO, Hazeleen Rose

Problem 6

Nilda, president of the FIRST CLASS COMPANY, has a bonus arrangement with the company under which she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the net income before deducting either the provision for income taxes or the bonus is P4, 650, 000.The bonus is deductible for tax purposes, and the tax rate is 30%. How much is Nilda’s bonus?



a. P1,303,738b. P206,321c. P304, 206d. P540,962

Solution:Answer C

Bonus= 10% (4,650,000- bonus-tax)

Tax=30% (4,650,000- bonus) =1,395,000-.30bonus

Bonus=10%(4,650,000-bonus-1,395,000+.30bonus) Bonus=325,500-.07bonus1.07 bonus=325,500 Bonus=P304,206

Problem 7

In an effort to increase sales, Jam Company inaugurated a sales promotional campaign on June 30, 2010. Jam placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost Jam P20 and five coupons must be presented by a customer to receive a premium. Jam estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2010, the following information is available:

Packages of Cereal Sold 160,000Premiums Purchased 12,000Coupons redeemed 40,000

What is the estimated liability for premium claims outstanding at December 31, 2010?a. P 224,000b. P 160,000 c. P 288,000d. P 384,000

Solution:Answer A

Coupons to be redeemed (160,000 x 60%) 96,000Less: coupons redeemed 40,000Balance 56,000

Number of Premiums (56,000/5) 11,200

Amount of Liability (11,200 x 20) 224,000

Problem 8

Jam Company leased office space to Kouch Company for a 5 year term beginning January 1, 2010. Under the terms of the operating lease, rent for the first year is P800, 000, and rent for years 2 through 5 is P1,250,000 per annum. However, as an inducement to enter the lease, Jam granted Kouch the first six months of the lease rent free. In its December 31, 2010 income statement, what amount should Jam report as rental income?

a. P 1,200,000b. P 1,160,000c. P 1,080,000d. P 800,000

Solution:Answer C

First year (P800,000 x 6/12) 400,0002nd to 5th Year (P1,250,000 x 4) 5,000,000Total Revenue P 5, 400,000



Average Annual Rent Revenue (5,400,000/5) P1,080,000

Problem 9

On January 1, 2010, Jam Company leased a new machine from Sophy with the following pertinent information:Lease Term 6 yearsAnnual rent payable at the beginning of each year P 500,000Useful Life of Machine 8 yearsImplicit Interest rate in lease 12%Present Value of an annuity of 1 in advance for 6 periods @ 12% 4.60Present Value of an ordinary annuity of 1 for 6 periods @ 12% 4.11

The lease is not renewable, and the machine reverts to Sophy at the end of the lease. The cost of the machine of Jam’s records is P 3, 755, 000. At the beginning of the lease term, Jam should record lease liability of

a. P 2, 055,000b. P2, 300,000c. P3, 755,000d. P2, 800,000

Solution:Answer B

Present Value of Rentals P500,000 x 4.60 =P2,300,000

Problem 10

At December 31, 2010, the following information was provided by Jam Company’s pension plan administrator:Fair Value of Plan Assets 3,450,000Accumulated Benefit Obligation 4,300,000Projected Benefit Obligation 5,700,000What is the amount of the accrued liability that should be shown on Jam’s December 31, 2010 Balance Sheet?

a. P 5,700,000b. P 2,250,000c. P 1,400,000d. P 850,000

Solution:Answer B

Fair Value of Plan Assets 3,450,000Projected Benefit Obligation 5,700,000Prepaid/ Accrued Benefit Cost -credit bal (2,250,000)

BY: SU, Jarmarie Chua



AUDIT OF SHAREHOLDERS’ EQUITY


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