ATT (AUDITING PROBLEMS)

1. Arellano Corporation uses leases as a method of selling its products . In early 2015,
Arellano Corporation completed construction of a passenger ferry for use between Quiapo
and Guadalupe. On April 1, 2015, the ferry was leased to Metro Ferry line on a contract
specifying that the ownership of the ferry will transfer to the lessee at the end of the lease
period. The ferry is expected to be economically useful for 25 years. Annual lease payments
do not include executor costs. Other terms of the agreement are as follows:

Original cost of the ferry 1,500,000

Annual lease payments 250,000
Estimated residual value 78,000
Interest rate implicit in the lease 10%
Date of first lease payment April 1, 2015
Lease period 30 years

Which of the following statements are correct?

A. Gross investment in the lease is P5, 00,000 and net investment in the lease is P2,871,600
B. Gross investment in the lease is P4,500,000 and total finance income to be earned over
the lease term is P2,854,440
C. Gross investment in the lease is P4,500,000 and total finance income to be earned over
the lease term is P2,392,897
D. Gross investment in the lease is P5, 00,000 and net investment in the lease is P2,658,775

Answer: D
Gross investment in the lease (P250,000 x 20) Php5,000,000.00
Net investment in the lease (P250,000 x 9.3649) 2,341,225 ANNUITY DUE
Total finance income to be earned over the lease term Php2,658,775.00
Reference: Asset Mockboard Examination

2. Reid Company has been using the accrual basis of accounting. However, an examination
of the records reveals that some expenses and revenues have been handles on a cash basis
by the inexperienced bookkeeper of the company. The statements of comprehensive
income prepared by the bookkeeper reported by P133,333 profit for 2014 and P174,025
profit in 2015 . Further review of the records reveals that the following items were handled
improperly.

a. Rent of P6,500 was received from a lessee on December 23,2014. This amount
represents rent for 2013.
b. Invoices for the supplies purchases were charged to expense accounts upon receipt.
Inventories of supplies on hand at the end of each year have been ignored and no adjusting
entry has been made. Office supplies inventories at the end of 2013, 2014, and 2015 were
P7,666 , P4,735 and P7,100, respectively.

c. Salaries payable at the end of each year was consistently omitted from the records and
were recorded as expense when paid in the following year. Accrued salaries at the end of
2013,2014, and 2015 were P8,502 P9,999, and P10,003 respectively.

Compute the corrected profit for the years 2014 and 2015

A. P 122, 405 and P176,386

B. P128,905 and P182,886
C. P122,405 and P182,886
D. P128,905 and P176,386

Answer: A
Solution:
2013 2014
Unadjusted profit 133,333 174,025
a. -6,500 -
b. -7,666 -
4,735 -4,735
- 7,100
c. 8,502 -
-9,999 9,999
-10,003
Corrected profit 122,405 176,386
Reference: Asset Mockboard Examination

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

The carrying value of debt securities on December 31, 2014, at amortized cost using the
effective interest rate method is
A. P771,840
B. P759,016
C. P765,540
D. P600,000
Answer: B. P759,016
Solution
Premium
NI EI Amortized CA
1-Jan-14 765,540
30-Jun 30,000 26,794 3,206 762,334
31-Dec 30,000 26,682 3,318 759,016
Reference: REYES

4. LizQuen Company reported net assets totaling P8,750,000 at year-end which

included the following:

Treasury shares of LizQuen Company at cost 250,000

Idle machinery 100,000
Trademark 150,000
Allowance for inventory writedown 200,000

What amount should be reported as net assets at year-end?

A. 8,200,000
B. 8,300,000
C. 8,400,000
D. 8,500,000

Answer : D. 8,500,000

Reported net assets 8,750,000

Less: Treasury shares of LizQuen Company at cost 250,000
Adjusted net assets 8,500,000
Reference : PRACTICAL ACCOUNTING 1 (VALIX ET AL.)

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

What is the amount of gross margin?

A. 5,000,000 C.5,200,000
B. 5,150,000 D.5,300,000

Answer: B. 5,150,000

Solution: (1900,000 +1,000,000) /2 =1,950,000 x 5

=9,750,000

(1,100,000 + 1,200,000)/2 =1,150,000 x 4

=4,600,000

9,750,000-4,600,000 = 5,150,000

Reference : PRACTICAL ACCOUNTING 1 (VALIX ET AL.)

6. AlJames Company provided the following information for the current year:

Sales 5,000,000
Cost of goods sold 2,800,000
Foreign Translation adjustment-credit 400,000
Selling expenses 700,000
Unusual and infrequent gain 400,000
Correction of inventory error 200,000
General and administrative expenses 600,000
Income tax expense 150,000
Gain on sale of investment 50,000
Proceeds from sale of land at cost 800,000
Dividends 300,000

What amount should be reported as income from continuing operations?

A. 1,200,000
B. 1,350,000
C. 1,600,000
D. 2,000,000

Answer: A. 1,200,000

Solution:

Sales 5,000,000
Cost of goods sold 2,800,000
Gross income 2,200,000
 Other income 450,000
Total income 2,650,000
Expenses:
Selling expenses 700,000
Gen. and admin 600,000 1,300,000
Income before income tax 1,350,000
Income tax expenses (150,000)
Income from continuing operations 1,200,000

Foreign Translation adjustment-credit is a component of other comprehensive income.

7. Mackerel, a company listed on a recognized stock exchange, reports operating results

from its North American activities to its chief operating decision maker. The
segment information for the year is:
Revenue PHP 3,675,000
Profit PHP 970,000
Assets PHP 1,700,000
Number of employees 2,500

Mackerel's results for all of its segments in total are:

Revenue PHP39,250,000
Profit PHP 9,600,000
Assets PHP17,500,000
Number of employees 18,500

According to IFRS8 Operating segments, which piece of information determines for

Mackerel that the North American activities are a reportable segment?
A Revenue
B Profit
C Assets
D Number of employees

Answer : B Profit

The correct answer is profit, because it is the only criterion out of profits, revenue and
assets that exceeds 10% of the total for all segments. The number of employees is
not one of the criteria.
See IFRS8 para 13.

8. Bonus obligation:
Sonic Company’s president gets an annual bonus of 10% of net income after bonus
and income tax. Assume the tax rate of 30% and the correct income before bonus and
tax is P9,600,000. (Ignore the effects of other given items on net income.) Determine the
amount that should be reported as current liability in Dec. 31,2005 balance sheet.
A. P722,600 B. P395,000 C. P2,240,000 D. P628,000

Answer: D. P628,000
B = 10% (P9,600,000 - B - T)
T = 30% (P9,600,000 - B)
T = P2,880,000 - .3B

B = 10% [P9,600,000 - B - (P2,880,000 - .3B)]

B = 10% (P9,600,000 - B - P2,880,000 + .3B)
B = 10% (P6,720,000 - .7B)
B = P672,000 - .07B
1.07B = P672,000
B = P628,000 (rounded off)

8. The following information relates to Sonic Company’s obligations as of December 31,

2005. Determine the amount ,if any, of accounts payable that should be reported as
current liability in Sonic’s December 31, 2005 balance sheet.

Accounts payable per general ledger control amounted to P5,440,000, net of P240,000
debit balances in suppliers’ accounts. The unpaid voucher file included the following
items that not had been recorded as of December 31, 2005:

a) A Company – P224,000 merchandise shipped on December 31, 2005, FOB

destination; received on January 10, 2006.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2005, FOB shipping
point; received on January 16, 2006.
c) C Super Services – P144,000 janitorial services for the three-month period ending
January 31, 2006.
d) MERALCO – P67,200 electric bill covering the period December 16, 2005 to
January 15, 2006.

On December 28, 2005, a supplier authorized Sonic to return goods billed at P160,000
and shipped on December 20, 2005. The goods were returned by Sonic on December
28, 2005, but the P160,000 credit memo was not received until January 6, 2006.
A. P5,923,200 B. P5,712,000 C. P5,601,600 D. P5,841,600

Answer: D. P5,841,600
Solution
Accounts payable per general ledger 5,440,000
Debit balances in suppliers' accounts 240,000
Goods in transit on 12/31/05, FOB shipping point 192,000
Unrecorded purchase return (160,000)
Adjusted accounts payable 5,712,000
Accrued janitorial expenses (P144,000 x 2/3) 96,000
Accrued utilities (P67,200 x 15/30) 33,600
Total 5,841,600 D

9. Liton Company buys and sells securities expecting to earn profits on short-term
differences in price. During 2014, Liton Company purchased the following trading
securities:

Security Cost Fair Value Dec.31, 2014

A P195,000 P225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Liton Company had net
income of P900,000.

What is Liton’s net income after making any necessary trading security adjustments?
A. P900,000 B. P810,000 C.P762,000 D.P948,000

Answer: B. P810, 000

Solution:
Net income before trading security adjustment 900,000
Unrealized loss (P1,155,000 – P 1,065,000) (90,000)
Net income, as adjusted 810,000

Security Cost Fair Value Dec.31, 2014

A P195,000 P225,000
B 300,000 162,000
C 660,000 678,000
1,155,000 1,065,000

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

The carrying value of the debt securities on December 31, 2014, at amortized cost using
the effective interest method is
A. P771,840 B. P759,016 C. P765,540 D. P600,000

Answer : B. P759,016
Solution:
Carrying value, Jan.1, 2014 765,540
Amortization of premium, Jan. 1- June 30
Nominal interest (600,000x10%x1/2) 30,000
Effective interest (765,540x7%x1/2) (26,794) (3,206)
Carrying value, June 30,2014 762,334
Amortization of premium, July 1- December 31
Nominal interest (600,000x10%x1/2) 30,000
Effective interest (762,334x7%x1/2) (26,682) (3,318)
Carrying value at amortized cost, December 31,2014 759,016

11. Andes Corporation expended P510,000 in research and development costs. These
activities resulted to a new product called the Oido Organ. It was patented at
additional legal and other costs of P54,000. The patent application was filed on
October 1, 2010, and the patent was estimated to have useful life of 10 years.

On June 1, 2012 , Andes spent P28,440 to successfully prosecute a patent infringement.

In addition, the patent’s estimated useful life was extended to 12 years from June 1,
2012. At the beginning of 2014, Andes determined that a competitor’s product
would make the Oido Organ obsolete and the patent worthless by December
31,2015.

Based on the preceding information, calculate the patent amortization 2010?

A. 14,100 B. 12,750 C. 5,400 D. 1,350

Answer: D. 1,350
Solution:
Patent amortization for 2010
October 1- December 31 (54,000/10 x 3/12) 1,350

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

Purchases 4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000

The amount of purchase discounts lost to be recognized is

A. 8,000 B. 0 C.32,000 D. 40,000

Answer: D. 40,000
Discounts on 2014 purchases 80,000
Less: Discounts taken 32,000
Discounts still available in the
accounts payable balance 8,000 40,000
Purchase discounts lost 40,000

13. On January 1, 2014, management of TUVALU Company decided to make a revision

in the estimates associated with its production equipment. The equipment was
acquired on January 3, 2012, for P800, 000 and had been depreciated using straight-
line method. At the date of acquisition, it had an estimated useful life of 10 years
with an estimated salvage value of P50,000. Management has determined that the
equipment’s remaining useful life is 4 years and that it has an estimated residual
value of P60,000.

What is the amount of depreciation expense that should be recognized in 2014 as a

result of the changes in estimates?
A. 147,500 B. 75,000 C. 125,000 D. 150,000

Answer: A. 147,500
Solution:
Cost of equipment 800,000
Less: AD (75,000X2) 150,000
Book Value, Jan 1, 2014 650,000
Less: Revised Salvage Value 60,000
Remaining depreciable cost 590,000
Divide by revised useful life 4
Revised annual depreciation 147,500
14. The audited income statement of Uruguay Co. shows a net income of P175,000 for
the year ended December 31, 2014. Adjustments were made for the following
errors:

a. December 31,2013, inventory overstated by 22,500

b. December 31, 2014, inventory understated by 37,500
c. A P10, 000 customer’s deposit received in December 2014, was credited to sales in
2014. The goods were actually shipped in January 2015.

What is the unadjusted net income of Uruguay Co. for the year ended December 31,
2014?
A. 234,000 B. 125,000 C. 170,000 D. 200,000

Answer: B. 125,000
Solution:
Unadjusted Net Income (SQUEEZE) 125,000
December 31, 2013, Inventory- understated 22,500
December 31, 2014, Inventory- understated 37,500
Customer’s deposit recognized as sales revenue (10,000)
Adjusted Net Income 175,000

15. The following amounts are included in the general ledger of LESTER NEIL
CORPORATION at December 31, 2014:

Organization costs 72,000

Trademarks 45,000
Patents 225,000
Discounts on bonds payable 105,000
Deposits with advertising agency for ads
to promote goodwill of company 30,000
Costs of equipment acquired for various
Research and development projects 320,000
Costs of developing a secret formula for
A product that is expected 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 LESTER NEIL in its statement of financial position at December
31,2014?
A. 342,000 B. 270,000 C. 510,000 D. 830,000
16. Alex Company started operations at the beginning of current year. The entity failed
to recognize accruals and prepayments at the end of the reporting period. The
income before tax, accrual and prepayments at the end of the current year are:

Income before tax 1,400,000

Prepaid insurance 20,000
Accrued wages 25,000
Rent received in advance 30,000
Interest receivable 50,000

What is the corrected income before tax?

A. 1,385,000 B. 1,415,000 C. 1,400,000 D. 1,375,000

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

17. Victoria Company revealed the following:

Ending inventory Depreciation

2014 200,000 understated 50,000 understated
2015 300,000 overstated 90,000 overstated

At what amount should retained earnings be retroactively adjusted on January 1,2016?

A. 260,000 increase C. 410,000 decrease
B. 260,000 decrease D. 210,000 decrease

Answer: B. 260,000 decrease

Solution:
2014 2015
2014 inventory understated 200,000 (200,000)
2015 depreciation understated (50,000) -
2015 inventory overstated (300,000)
2015 depreciation overstated 90,000
Net correction to income 150,000 (410,000)
Net correction to 2014 income 150,000
Net correction to 2015 income (410,000)
Net correction to retained earnings (260,000)

18. Kent Company, a division of National Realty Corporation maintains an escrow

account and pays real estate taxes for the mortgage customers. Escrow funds are
kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the
mortgagee’s account and used to reduce future escrow payments.

Escrow account liability- January 1 700,000

Escrow payments received during the year 1,580,000
Real estate taxes paid during the year 1,720,000
Interest on escrow funds 50,000

What is the escrow account liability on December 31?

A. 510,000 B. 515,000 C. 605,000 D. 610,000

Answer: C. 605,000
Solution:
Escrow accounts liability- January 1 700.000
Add: Escrow payments received 1,580,000
Interest on escrow funds 50,000 1,630,000
Total 2,330,000
Less: Real estate taxes paid 1,720,000
Service fee (50,000x10%) 5,000 1,725,000
Escrow accounts liability- December 31 605,000

19. Herson Company had determined the 2014 and 2015 net income to be P4,000,000
and P5,000,000, respectively.

In a first time audit of the financial statements, the following errors are discovered:
Merchandise inventory was incorrectly determined – P50,000 overstatement for 2014
and P150,000 overstatement for 2015.
Revenue received in advance in 2014 of P300,000 was credited to a revenue account
when received.
Of the total, P50,000 was earned in 2014, P200,000 was earned in 2015 and the
remainder will be earned in 2016.
P400,000 gain on sale of plant asset in 2015 was erroneously credited to retained
earnings.

What is the corrected net income for 2015?

A. 5,500,000
B. 5,450,000
C. 5,400,000
D. 5,550,000

Solution: A. 5,500,000

2014 2015
Net income per book 4,000,000 5,000,000
Overstatement of inventory
2014 (50,000) 50,000
2015 (150,000)
Revenue received in advance (250,000) 200,000
Gain on sale of plant asset 400,000
Corrected net income 3,700,000 5,500,000

20. On January 1, 2015, Gumamela Company had monetary assets of P5,000,000 and
monetary liabilities of P3,000,000.

During 2015, the entity’s monetary inflows and outflows were relatively constant and
equal so that it ended the year with the same net monetary assets of P2,000,000.

The index number of January 1, 2015 was 125 and the index number on December
31,2015 was 280.

What is the gain or loss on purchasing power during the year?

A. 2,480,000 gain
B. 2,480,000 loss
C. 3,720,000 gain
D. 3,720,000 loss

Answer: B. 2,480,000 loss

Solution
Monetary assets 5,000,000
Monetary liabilities 3,000,000
Net monetary assets - December 31 at cost 2,000,000
Net monetary assets - December 31 as restated
(2,000,000 x 280/125) (4,480,000)
Loss on purchasing power (2,480,000)

21. Elysee Company leases a machine with a fair value of P1,650,000 for a period of 5
years under a finance lease. The initial direct costs included in negotiating the lease
 amounted to P12,500 . The present value of the minimum lease payments
discounted at the rate implicit in the lease is 1,584,000.

At what amount should the machine be recognized initially in the financial statement?

A. 1,650,000
B. 1,596,500
C. 1,662,500
D. 1,584,000

Answer: B. 1,596,500
Solution:
Present value of minimum lease payments 1,584,000
Initial direct costs 12,500
Total initial cost of machine 1,596,500

22. On January 1, 2015 , Aly Corp. reported the fair value of plan assets at P6,700,000
and projected benefit obligation at P7,600,000. The entity revealed the following for
the current year.

Current service cost 1,450,000

Past service cost 300,000
Discount rate 10%
Actual return on plan assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000

What is the fair value of plan assets on December 31?

A. 8,070,000
B. 7,400,000
C. 7,900,000
D. 8,200,000

Answer: C. 7,900,000
Solution
FVPA-Jan 1 6,700,000
Actual return on plan assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees (800,000)
FVPA-Dec. 31 7,900,000
23. Stabilizer Company reported taxable income of P8,000,000 in the income tax return
for the first year of operations. Temporary differences between financial income and
taxable income for the year as follows:

Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of
Actual claim 1,200,000
Reported installment sales income in excess of
Taxable installment sales income 2,600,000
Income tax rate 30%

What is the deferred tax asset at year-end?

A. 240,000
B. 360,000
C. 780,000
D. 0

Answer: B. 360,000
Deferred tax asset (1,200,000 x 30%) 360,000

24. Adel company reported the following shareholder’s equity on January 1,2015:
Share capital, P10 par, outstanding 225,000 shares 2,250,000
Share premium 900,000
Retained Earnings 2,190,000

During the current year, the entity had the following share transactions:
Acquired 6,000 treasury shares for P270,000
Sold 3,600 treasury shares at P50 a share
Sold the remaining treasury shares at P41 per share

What is the total amount of share premium on December 31,2015?

A. 891,600
B. 870,000
C. 908,400
D. 927,600

Answer: C. 908,400
Solution
Share premium- issuance January 1 900,000
Share premium- treasury (18,000-9,600) 8,400
Total share premium 908,400
25. Dunn Company had 200,000 ordinary shares of P20 par value and 20,000 shares of
P100 par, 6% cumulative, convertible preference share capital outstanding for the
entire year ended December 31, 2015. Each preference share is convertible into 5
ordinary shares. The net income for the current year was P840,000.

What amount should be reported as diluted earnings per share?

A. 2.40
B. 2.80
C. 3.60
D. 4.20

Answer: B. 2.80
Solution
Ordinary shares outstanding 200,000
Potential ordinary shares to be issued for
Conversion of preference shares (20,000 x 5) 100,000
Total ordinary shares 300,000

Diluted earnings per share (840,000/300,000) 2.80