AUDITING PROBLEMS

FIRST SET OF PROBLEMS

PROBLEM NO. 1

The following are selected unadjusted account balances and adjusting information
of TANYING CORP. for the year ended December 31, 2015.

Retained earnings, January 1, 2015 P

1,322,010
Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense sales representatives 13,680
Depreciation expense sales/delivery equipment 18,300
Depreciation expense office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1, 2015 269,100
Inventory, December 31, 2015 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31, 2015 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000

Adjusting information:

(a) Cost of inventory in the possession of consignees as of December 31, 2015,

was not included in the ending inventory balance...................................P55,800

(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance............................................................................2%

(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in)..........................................6%

(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day........................................................................................ P9,180
Average sales commissions as a percent of sales............................................3%

(e) No accrual had been made for a freight bill received on January 2, 2016, for
goods received on December 29, 2015.....................................................P1,710

(f) An advertising campaign was initiated November 2, 2015. This amount was
recorded as Prepaid advertising and should be amortized over a six-month
Page 1 of 26 Pages
AUDITING PROBLEMS

period. No amortization was recorded......................................................P5,454

Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2015..................................................................P10,500

(g) Interest earned but not accrued.................................................................P1,680

(h) Depreciation expense on a new forklift purchased March 1, 2015, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price.......................................................................................... P23,400
Estimated life in years...................................................................................... 10

(i) A real account is debited upon the receipt of office supplies. Office supplies
on hand at
year-end..................................................................................................... P3,675

(j) Income tax rate (on all items)........................................................................30%

Compute the adjusted balances of the following:

1. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500

2. Cost of goods available for sale

A. P684,900 B. P824,697 C. P686,697 D. P779,913

3. Inventory, December 31, 2015

A. P61,500 B. P61,350 C. P56,250 D. P117,450

4. Distribution costs
A. P181,649 B. P167,513 C. P178,013 D. P176,453

5. Administrative expenses
A. P207,345 B. P193,785 C. P194,265 D. P194,595

6. Allowance for doubtful accounts

A. P15,660 B. P16,140 C. P15,180 D. P480

7. Total income
A. P817,143 B. P811,653 C. P779,913 D. P822,153

8. Income from continuing operations before taxes

A. P231,360 B. P436,795 C. P218,995 D. P239,695

9. Office supplies inventory

A. P6,540 B. P3,675 C. P2,865 D. P 0

10. Net income

A. P237,296 B. P210,299 C. P250,289 D. P216,296

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PROBLEM NO. 2

The following accounts were included in the unadjusted trial balance of BUNCHING
COMPANY as of December 31, 2015:

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

Page 2 of 26 Pages
AUDITING PROBLEMS

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

1. Receipts for January 2016 of P654,600 were recorded in the December 2015
cash receipts book. The receipts of P360,100 represent cash sales and P294,500
represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2016. The payments, on

which discounts of P12,400 were taken, were included in the December 2015
check register.

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

following information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a
purchase on December 31, 2015. The related goods, shipped FOB
destination, were received on January 4, 2016, and thus were not included in
the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2015, terms

FOB destination, are not included in the year-end inventory. The goods cost
P130,000 and were delivered to the customer on January 3, 2016. The sale
was properly recorded in 2016.

c. Goods costing P637,500 were shipped on December 31, 2015, and were
delivered to the customer on January 3, 2016. The terms of the invoice were
FOB shipping point. The goods were included in the 2015 ending inventory
even though the sale was recorded in 2015.

d. Goods costing P217,500 were received from a vendor on January 4, 2016.

The related invoice was received and recorded on January 6, 2016. The
goods were shipped on December 31, 2015, terms FOB shipping point.

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

are not included in the inventory figure.

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

are not included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of
the following as of December 31, 2015:

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

12. Accounts receivable

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

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

14. Accounts payable

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

15. Current ratio

A. 2.00 B. 1.83 C. 1.84 D. 2.01

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PROBLEM NO. 3

The following are independent situations:

Page 3 of 26 Pages
AUDITING PROBLEMS

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

Date Item Debit Credit

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

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

17. Assuming depreciation is recorded on a monthly basis at 10% a year, how

much was the depreciation charge for 2015?
A. P234,150 B. P300,000 C. P316,200 D. P227,400

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

Depletion expense..................................P1,215,000
DepreciationMachinery.............................120,000

18. Recorded depletion expense was

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

19. Recorded depreciation expense was

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

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

Separation pay for laborer laid off upon acquisition of new machine......P3,600
Loss on sale of machine replaced..............................................................3,900
Transportation in....................................................................................... 3,000
Installation cost....................................................................................... 12,000

The new machine is estimated to have a useful life of 10 years and a residual value
of P12,000.

Page 4 of 26 Pages
AUDITING PROBLEMS

On January 1, 2015, new parts which cost P37,800 were added to the machine so as
to reduce its fuel consumption, but with no change in its estimated life or residual
value.

20. The annual depreciation charge on the machine for 2015 was
A. P34,080 B. P35,494 C. P36,450 D. P35,700

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PROBLEM NO. 4

Presented below are unrelated situations.

1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on

short-term differences in price. During 2016, Harlington Company purchased the
following trading securities:
Fair Value
Security Cost Dec. 31, 2016
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company

had net income of P2,700,000.

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

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

2. LABADA CO.s portfolio of trading securities includes the following on December

31, 2015:

Cost Fair Value

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

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

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

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

The Labada Co. portfolio of trading securities appeared as follows on December

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

23. What amount of unrealized gain on these securities should be reported in the
2016 income statement?
Page 5 of 26 Pages
AUDITING PROBLEMS

A. P31,050 B. P79,050 C. P84,000 D. P36,000

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

25. What amount should be reported as trading securities in Labadas statement of

financial position on December 31, 2016?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 5

On January 1, 2014, SAMSON MFG. CO. began construction of a building to be used

as its office headquarters. The building was completed on June 30, 2015.

Expenditures on the project were as follows:

January 3, 2014 P2,500,000

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

On January 3, 2014, the company obtained a P5 million construction loan with a

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

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

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

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

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

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

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

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

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

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

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PROBLEM NO. 6

At the beginning of year 1, an entity grants to a senior executive 30,000 share

options. The grant is conditional upon the executive remaining in the entitys
employ until the end of year 3.

The share options can be exercised if the entitys share price increases from P20 at
the beginning of year 1 to above P30 at the end of year 3. If the share price is
above P30 at the end of year 3, the share options can be exercised at any time
during the next five years, i.e., by the end of year 8.

Page 6 of 26 Pages
AUDITING PROBLEMS

The entity estimates the fair value of the share options on grant date to be P5 per
option. This estimate takes into account the following market condition:
The possibility that the share price will exceed P30 at the end of year 3, i.e., the
share options become exercisable; and
The possibility that the share price will not exceed P30 at the end of year 3, i.e.,
the share options will be forfeited.

The following actual events occurred in years 1 to 3:

Year 1

The share price has increased to P24.

The entitys estimate of the fair value of the options is P4 at the end of year 1.
This takes into account whether the market condition will be satisfied by the end
of year 3.

Year 2

The share price has decreased to P22. However, the entity remains optimistic
that the share price target will be met by the end of year 3.
The estimated fair value of the share options is P3. Again, this estimate takes
into account the market condition noted above.

Year 3

The share price only reaches P28 by the end of year 3.

The estimated fair value of the share options is zero, as the market condition has
not been satisfied.

Based on the preceding information, determine the following:

31. Compensation expense for year 1

A. P30,000 B. P40,000 C. P50,000 D. P60,000

32. Compensation expense for year 2

A. P30,000 B. P40,000 C. P50,000 D. P60,000

33. Compensation expense for year 3

A. P 0 B. P30,000 C. P40,000 D. P50,000

34. Share options outstanding at the end of year 2

A. P70,000 B. P80,000 C. P90,000 D. P100,000

35. Cumulative compensation expense for the three-year period

A. P 0 B. P70,000 C. P100,000 D. P150,000

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PROBLEM NO. 7

The following independent situations relate to the audit of shareholders equity.

Answer the questions at the end of each situation.

BRANDY CO. was organized at the beginning of the current year. The following
shareholders equity accounts are included in the entitys year-end trial balance.

Preference share capital, P100 par, authorized 100,000 shares,

issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium preference 240,000
Subscriptions receivable preference 360,000

Page 7 of 26 Pages
AUDITING PROBLEMS

Ordinary share capital, P10 par value, authorized 200,000 shares,

issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium ordinary 2,850,000
Subscriptions receivable ordinary 1,080,000

The following current year transactions relate to Brandy Co.s shareholders equity:

Immediately after Brandy Co. was organized, it received subscriptions to 60,000

preference shares. Subscriptions to ordinary shares were also received on the
same date.

During the year, subscriptions were received for an additional 12,000 preference
shares at a price of P120 per share.

Cash payments were received from subscribers at frequent intervals for several
months after subscription. The companys policy is to issue share certificates
only upon full payment of the share subscription.

Also during the current year, Brandy Co. issued 24,000 ordinary shares in
exchange for a tract of land with a fair value of P690,000.

36. What is the total subscription price of the ordinary shares originally
subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000

37. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000

38. The companys statement of financial position at the end of the current year
should report contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000

The following shareholders equity accounts are included in the statement of

financial position of CONDESSA CO. on December 31, 2014.

Preference share capital, 8%, P100 par (200,000 shares authorized,

60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share premium 3,750,000
Retained earnings 3,500,000
Total P16,250,000

During 2015, Condessa took part in the following transactions concerning equity.

1. Paid the annual 2014 P8 per share dividend on preference shares and a P2 per
share dividend on ordinary shares. These dividends had been declared on
December 31, 2014.

2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per
share.

3. Reissued 21,000 treasury shares for land valued at P900,000.

4. Issued 15,000 preference shares at P105 per share.

Page 8 of 26 Pages
AUDITING PROBLEMS

5. Declared a 10% stock dividend on the outstanding ordinary shares when the
shares are selling for P45 per share.
6. Issued the stock dividend.

7. Declared the annual 2015 P8 per share dividend on preference shares and the
P2 per share dividend on ordinary shares. These dividends are payable in
2016.

8. Reported net income of P9,900,000 for the current year.

39. What is the retained earnings balance (before appropriation for treasury
shares) on December 31, 2015?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000

40. What amount should be reported as total shareholders equity on December

31, 2015?
A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 8

The following independent situations relate to the audit of intangible assets.

Answer the questions at the end of each situation.

CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that

prevents certain types of air pollution. Caboom does not manufacture or sell the
products and processes it develops; it conducts research and develops products
which it patents, and then assigns the patents to manufacturers on a royalty basis.
The history of Patent No. 112170 is as follows:

Date Activity Cost

2005-2006 Research conducted to develop device P1,259,100
Jan. 2007 Design and construction of a prototype 262,800
Mar. 2007 Testing of models 126,000
Jan. 2008 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2009 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2011 Research aimed at modifying the design of the patented device 129,000
May 2015 Legal fees paid in a successful patent infringement suit against a
competitor 102,000

Caboom assumed a useful life of 17 years when it received the initial device patent.
On January 1, 2013, it revised its useful life estimate downward to 5 remaining
years. Amortization is computed for a full year if the cost is incurred prior to July 1
and no amortization for the year if the cost is incurred after June 30. Cabooms
reporting date is December 31, 2015.

Compute the carrying value of Patent No. 112170 on each of the following dates:

41. December 31, 2008

A. P180,675 B. P186,150 C. P293,788 D. P175,200

42. December 31, 2012

A. P223,200 B. P52,560 C. P131,400 D. P122,640

43. December 31, 2015

A. P120,560 B. P78,840 C. P52,560 D. P98,550

Page 9 of 26 Pages
AUDITING PROBLEMS

BARTOLO COMPANY has provided information on intangible assets as follows:

A patent was purchased from Valenzuela Company for P4,000,000 on January 1,

2014. Bartolo estimates the remaining useful life of the patent to be 10 years.
The patent was carried in Valenzuelas accounting records at a net book value of
P4,000,000 when Valenzuela sold it to Bartolo.

During 2015, a franchise was purchased from Delco Company for P960,000. The
contract which runs for 10 years provides that 5% of revenue from the franchise
must be paid to Delco. Revenue from the franchise for 2015 was P5,000,000.
Bartolo takes a full year amortization in the year of purchase.

The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000

Bartolo estimates that these costs will be recouped by December 31, 2018. The
materials and equipment purchased have no alternative uses.

On January 1, 2015, because of recent events in the field, Bartolo estimates that
the remaining life of the patent purchased on January 1, 2014 is only 5 years
from January 1, 2015.

44. What is the total carrying value of Bartolos intangible assets on December 31,
2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500

45. As a result of the facts above, compute the total amount of charges against
income for the year ended December 31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 9

The following are two (2) unrelated situations. Answer the questions at the end of
each situation.

1. The December 31 year-end financial statements of SAMOA COMPANY contained

the following errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2014 covering the years 2014,
2015, and 2016. The entire amount was charged to expense in 2014. In addition,
on December 31, 2015, a fully depreciated machinery was sold for P75,000 cash,
but the sale was not recorded until 2016. There were no other errors during 2014
and 2015, and no corrections have been made for any of the errors. Ignore income
tax effects.

46. What is the total effect of the errors on Samoas 2015 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement

Page 10 of 26 Pages
AUDITING PROBLEMS

47. What is the total effect of the errors on the amount of Samoas working capital
at December 31, 2015?
A. P75,500 overstatement
B. P40,500 overstatement
C. P225,500 understatement
D. P144,500 understatement
48. What is the total effect of the errors on the balance of Samoas retained
earnings at December 31, 2015?
A. P156,000 understatement
B. P87,000 overstatement
C. P133,000 understatement
D. P85,000 understatement

2. CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years
ended December 31, 2014 and 2015, respectively. However, the auditor noted that
the following errors had been made:

a. Sales for 2014 included amounts of P191,000 which had been received in cash
during 2014, but for which the related goods were shipped in 2015. Title did not
pass to the buyer until 2015.

b. The inventory on December 31, 2014, was understated by P43,200.

c. The companys accountant, in recording interest expense for both 2014 and
2015 on bonds payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of
6%. They were issued at a discount of P75,000 on January 1, 2014, to yield an
effective interest rate of 7%.

d. Ordinary repairs to equipment had been erroneously charged to the Equipment

account during 2014 and 2015. Repairs of P42,500 and P47,000 had been
incurred in 2014 and 2015, respectively. In determining depreciation charges,
Chile applies a rate of 10% to the balance in the Equipment account at the end
of the year.

49. What is the corrected pretax income for 2014?

A. P303,200 B. P225,300 C. P311,700 D. P307,450

50. What is the corrected pretax income for 2015?

A. P480,042 B. P484,292 C. P575,392 D. P488,992

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 10

The following are two (2) unrelated situations. Answer the questions at the end of
each situation.

OMEGA COMPANY sells its products in expensive, reusable containers. The

customer is charged a deposit for each container delivered and receives a refund for
each container returned within two years after the year of delivery. Omega
accounts for the containers not returned within the time limit as being sold at the
deposit amount. Information for 2015 is as follows:

Containers held by customers at

December 31, 2014,
from deliveries in: 2013 85,000
2014 240,000 325,000

Page 11 of 26 Pages
AUDITING PROBLEMS

Containers delivered in 2015 430,000

Containers returned in 2015
from deliveries in: 2013 57,500
2014 140,000
2015 157,000 354,500

51. How much revenue from container sales should be recognized for 2015?
A. P127,500 B. P267,500 C. P27,500 D. P85,000

52. What is the total amount of Omega Companys liability for returnable
containers at December 31, 2015?
A. P373,000 B. P400,500 C. P267,500 D. P430,000

DP, INC., a dealer of household appliances, sells washing machines at an average

price of P8,100. The company also offers to each customer a separate 3-year
warranty contract for P810 that requires the company to provide periodic
maintenance services and to replace defective parts. During 2015, DP sold 300
washing machines and 270 warranty contracts for cash. The company estimates
that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2015. DPs policy is to recognize income
from the warranties on a straight-line basis. In 2016, DP incurred actual costs
relative to 2015 warranty sales of P18,000 for parts and P36,000 for labor.

53. What liability relative to these transactions would appear on the December 31,
2015, statement of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P0 P218,700

54. What amount of warranty expense would be shown on the income statement
for the year ended December 31, 2015?
A. P18,000 B. P 0 C. P 36,000 D. P54,000

55. What liability relative to the 2015 warranties would appear on the December
31, 2016, statement of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 11

The TGR Company commenced operations on January 1, 2011. The companys

machinery account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2011 Purchase P157,200
120,000
132,000 P409,200
Sept. 30, 2011 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2011 Freight and installation 6,000 487,200
Dec. 31, 2011 Depreciation P97,440 389,760
2012 Installment payments for acquisition
on Sept. 30, 2011 144,000 533,760

Page 12 of 26 Pages
AUDITING PROBLEMS

June 30, 2012 Purchase 240,000 773,760

Dec. 31, 2012 Depreciation 154,752 619,008
June 30, 2013 Acquisition trade in of old machine150,000 769,008
Dec. 31, 2013 Depreciation 153,802 615,206
Jan. 1, 2014 Sale 71,250 543,956
Dec. 31, 2014 Depreciation 108,791 435,165
Oct. 1, 2015 Sale 24,000 411,165
Dec. 31, 2015 Depreciation 82,233 328,932

The details of the transactions are as follows:

a) On September 30, 2011, a machine was purchased on an installment basis. The

list price was P180,000, but 12 payments of P18,000 each were made by the
company. Only the monthly payments were recorded in the machinery account
starting with September 30, 2011. Freight and installation charges of P6,000
were paid and charged to the machinery account on October 3, 2011.

b) On June 30, 2012, a machine was purchased for P240,000, 2/10, n/30, and
recorded at P240,000 when paid for on July 5, 2012.

c) On June 30, 2013, the machine acquired for P157,200 was traded for a larger
one having a list price of P279,000. Allowance of P129,000 was received on the
old machine, the balance of the list price being paid in cash and charged to the
machinery account.

d) On January 1, 2014, the machine acquired on January 1, 2011 with cost of

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

e) On October 1, 2015, the machine purchased on January 1, 2011 was sold for
P24,000 cash.

Assume a 5-year useful life for TGR Companys machinery.

56. What is the total amount of gain on the sale/trade-in of the machinery acquired
on January 1, 2011?
A. P50,400 B. P40,200 C. P36,450 D. P86,850

57. What is the adjusted balance of the Machinery account on December 31, 2015?
A. P694,200 B. P705,000 C. P700,200 D. P703,950

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

December 31, 2015?
A. P465,600 B. P457,140 C. P462,240 D. P397,740

59. What is the correct total depreciation provision for the years 2011-2015?
A. P737,400 B. P734,040 C. P728,940 D. P669,540

60. The entry to correct the depreciation provision for the years 2011-2015 should
include a debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249

-----------------------------oooOOOooo-----------------------------

Page 13 of 26 Pages
AUDITING PROBLEMS

SECOND SET OF PROBLEMS

PROBLEM NO. 1

You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2015. The company is a dealer of appliances and has
several branches in Metro Manila. Its main office is located in Makati City. You were
given by the company controller the unadjusted balances of the items to be
included in the companys statement of financial position and statement of income
as of and for the year ended December 31, 2015. Audit findings are as follows:

I. AUDIT OF CASH

A cash count was conducted by your staff on January 7, 2016. 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 2016.

You were furnished a copy of the companys 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, 2016.

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, 2015 for insufficiency of funds.
This account has been outstanding for over six months. The check was
replaced by the customer on January 15, 2016.

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, 2015. 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 companys 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%

Page 14 of 26 Pages
AUDITING PROBLEMS

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 companys 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, 2015. No interest has been accrued on the note as of
December 31, 2015.

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,
2015. Payment was made on July 20, 2015, 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, 2015, a check for P420,000 was issued in
payment of three-month rental as per renewal contract which was effective on
November 1, 2015. Rental deposit remained at three months and is included
under other assets.

The companys delivery equipment is insured with Fortune Insurance Corporation

for a total coverage of P2.4 million. Total payment made on November 16, 2015
for the renewal amounted to P490,000 which covers the period from November
1, 2015 to November 1, 2016. No adjustment has been made as of December
31, 2015.

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, 2015 and included the same in their office
supplies inventory. As at year-end, unused office supplies amount to P102,500.

Page 15 of 26 Pages
AUDITING PROBLEMS

VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on

December 29 and 20, 2015. Your review of the list submitted by the accountant
disclosed the following:
1. Some deliveries made in December 2015 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, 2016. 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, 2015.
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, 2015, realizing no

salvage value. The cost of these equipment amounted to P165,520 with an
accumulated depreciation of P138,620 as of December 31, 2015. Depreciation
booked from October 1, 2015 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 2015 were recorded when paid in January 2016.
These are as follows:
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, 2015. 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, 2015, payable on January
31, 2016.

Ayala Merchants Corporation

Page 16 of 26 Pages
AUDITING PROBLEMS

UNADJUSTED TRIAL BALANCE

December 31, 2015

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

Based on the above information, determine the adjusted balances of the following:
(Ignore tax implications.)
1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850

3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700

4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140

5. Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217

6. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750

9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000

Page 17 of 26 Pages
AUDITING PROBLEMS

10. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000

11. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

12. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

13. Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

14. Accumulated depreciation

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

15. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

16. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644

17. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

19. Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

20. Operating expenses

A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514
-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 2

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

31, 2015 of LUKAS COMPANY, you have decided to send confirmation requests to
customers. Below is a summary of the confirmation replies together with the
exceptions and audit findings. Gross profit on sales is 20%. The company is under
the perpetual inventory method.

Name of Balance Comments

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

Page 18 of 26 Pages
AUDITING PROBLEMS

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

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

23. The overstatement of receivable from Lazaro is

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

24. The accounts receivable from Silang is

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

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

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

PROBLEM NO. 3

Palito, CPA, has just accepted an engagement to audit the financial statements of
Crocodile, Inc. for the year ending December 31, 2015. After obtaining an
understanding of the clients design of the accounting and internal control systems
and their operation, he then proceeded in performing test of controls related to
production cycle.

The following questions related to test of controls of the production cycle:

26. Which of the following auditing procedures probably would provide the most
reliable evidence concerning the entitys assertion of rights and obligations
related to inventories:
A. Trace the test counts noted during the entitys physical count to the entitys
summarization of quantities.
B. Inspect agreements to determine whether any inventory is pledged as
collateral or subject to any liens.
C. Select the last few shipping documents used before the physical count and
determine whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments that
should be considered for disclosure.

27. Which of the following internal control activities most likely addresses the
completeness assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary
inventory records.
B. Employees responsible for custody of finished goods do not perform the
receiving function
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and
inventory accounting personnel.

Page 19 of 26 Pages
AUDITING PROBLEMS

28. From the auditors point of view, inventory counts are more acceptable prior to
the year-end when
A. Internal control is weak.
B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.

29. A retailers physical count of inventory was higher than that shown by the
perpetual records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not
been taken off and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been
recorded.
C. No journal entry had been made on the retailers books for several items
returned to its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of the
inventory count and had not been reflected in the perpetual records.

30. An auditor will usually trace the details of the test counts made during the
observation of physical inventory counts to a final inventory compilation. This
audit procedure is undertaken to provide evidence that items physically
present and observed by the auditor at the time of the physical inventory
count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory
schedule.
D. Included in the final inventory schedule.
-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 4

A portion of the SPARK COMPANYs statement of financial position appears as

follows:

December 31, 2015 December 31, 2014

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

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

Based on the preceding information, compute the following:

31. Number of units sold during 2015

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

32. Accounts payable balance at December 31, 2015

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

33. Inventory quantity on December 31, 2015

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

Page 20 of 26 Pages
AUDITING PROBLEMS

34. Cost of inventory on December 31, 2015

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

35. Cost of goods sold for the year ended December 31, 2015
A. P609,125 B. P609,700 C. P606,915 D. P603,625
-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 5

A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was

requested by your auditor soon after December 31, 2015, showing the additions,
retirements, depreciation, and other data affecting the income of the company in
the 4-year period 2012 to 2015, inclusive.

The following data were ascertained.

Balance of Trucks account, Jan. 1, 2012
Truck No. 1 purchased Jan. 1, 2009, cost P180,000
Truck No. 2 purchased July 1, 2009, cost 220,000
Truck No. 3 purchased Jan. 1, 2011, cost 300,000
Truck No. 4 purchased July 1, 2011, cost 240,000
Balance, Jan. 1, 2012 P940,000

The Accumulated DepreciationTrucks account previously adjusted to January 1,

2012, and entered in the ledger, had a balance on that date of P302,000
(depreciation on the four trucks from the respective dates of purchase, based on a
5-year life, no salvage value). No charges had been made against the account
before January 1, 2012.

Transactions between January 1, 2012, and December 31, 2015, which were
recorded in the ledger, are as follows.

July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase
price of which was P400,000. Isidro Mfg. Co. paid the automobile
dealer P220,000 cash on the transaction. The entry was a debit to
Trucks and a credit to Cash, P220,000. The transaction has commercial
substance.

Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited
Trucks, P35,000.

July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged
at that amount to the Trucks account. (Assume truck No. 2 was not
retired.)

July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold
as junk for P7,000 cash. Isidro Mfg. Co. received P25,000 from the
insurance company. The entry made by the bookkeeper was a debit to
Cash, P32,000, and credits to Miscellaneous Income, P7,000, and
Trucks, P25,000.

Entries for depreciation had been made at the close of each year as follows: 2012,
P210,000; 2013, P225,000; 2014, P250,500; 2015, P304,000.

36. What is the total depreciation expense for the year ended December 31, 2012?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

37. What is the gain (loss) on trade in of Truck #3 on July 1, 2012?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

38. What is the net book value of the Trucks on December 31, 2015?
A. P414,000 B. P348,000 C. P228,500 D. P894,000

Page 21 of 26 Pages
AUDITING PROBLEMS

39. The total depreciation expense recorded for the 4-year period (2012-2015) is
overstated by
A. P185,500 B. P265,500 C. P287,500 D. P275,500

40. Assuming that the books have not been closed for 2015, what is the compound
journal entry on December 31, 2015 to correct the companys errors for the 4-
year period (2012-2015)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500
-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 6

The cash account of NUNAL COMPANY shows the following activities:

Date Debit Credit Balance

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

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

Page 22 of 26 Pages
AUDITING PROBLEMS

29 612-630 114,000 824 87,000

29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000

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

Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810

Based on the preceding information, determine the following:

41. Outstanding checks at November 30

A. P39,150 B. P28,650 C. P21,150 D. P46,650

42. Outstanding checks at December 31

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

43. Deposit in transit at November 30

A. P58,500 B. P145,500 C. P 0 D. P25,500

44. Deposit in transit at December 31

A. P114,000 B. P139,500 C. P132,000 D. P 0

45. Adjusted book balance at November 30

A. P410,850 B. P345,000 C. P375,000 D. P374,850

46. Adjusted bank receipts for the month of December

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

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47. Adjusted book disbursements for the month of December

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

48. Adjusted bank balance at December 31

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

49. Unadjusted bank balance at November 30

A. P555,060 B. P94,560 C. P1,776,810 D. P342,000

50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
C. Interbank transfer schedule.
D. Bank deposit lead schedule.
-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 7

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

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

Mining machinery installed at the mine was purchased secondhand at a total cost of
P3,600,000. The machinery cost the former owner P9,000,000 and was 50%
depreciated when purchased. 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.

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

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

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

54. What are the estimated depletion and depreciation charges for the 7 th year?

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AUDITING PROBLEMS

Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

55. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000
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PROBLEM NO. 8

The HVR Company included the following in its notes receivable as of December 31,
2015:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2015 and other information relate to the
companys notes receceivable:

a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The
land, purchased 10 years ago, was carried on HVRs books at P1,500,000. HVR
received a noninterest-bearing note for P2,640,000 from Triple X. The note is
due on December 31, 2016. There was no established exchange price for the
land. The prevailing interest rate for this note on January 1, 2015 was 10%.

b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note

in exchange for the consultation services rendered. The note will mature on
December 31, 2017, with interest receivable every December 31. The fair value
of the services rendered is not readily determinable. The prevailing rate of
interest for a note of this type was 10% on January 1, 2015.

c) On January 1, 2015, HVR Company sold an old equipment with a carrying

amount of P4,800,000, receiving P7,200,000 note. The note bears an interest
rate of 4% and is to be repaid in 3 annual installments of P2,400,000 (plus
interest on the outstanding balance). HVR received the first payment on
December 31, 2015. There is no established market value for the equipment.
The market interest rate for similar notes was 14% on January 1, 2015.

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

56. What amount of consultation fee revenue should be recognized in 2015?

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

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

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

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

2015 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600

59. The amount to be reported as current notes receivable on December 31, 2015
is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000

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AUDITING PROBLEMS

60. How much interest income should be recognized in 2015?

A. P974,200 B. P756,000 C. P1,378,700 D. P1,160,500

--- END OF EXAMINATION ---

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