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Ateneo de Naga University

College of Business and Accountancy


Accountancy Department

SOLUTION
MANUAL

Submitted by:

Jenniline N. Antonio
Philip G. Arines
Sharmaine C. De Vera
Rica Mae S. Perez
Jaenelle T. Saldivar

Submitted to:

Dr. Marcial C. Paglinawan, CPA


CASH AND RECEIVABLES

PROBLEM 1: You were able to gather the following from the December 31, 2008 trial balance of RHEA
INC. in connection with your audit of the company:

Petty cash fund 50,000


Cash on hand 1,500,000
Cash in bank- Metrobank current 4,000,000
Cash in bank- BDO Acct No. 1 3,160,000
Cash in bank- BDO Acct. No. 2 (160,000)
Cash in bank- Coco bank savings 4,500,000
Time deposits-BPI 2,000,000

The petty cash fund consisted of the following items as of December 31,2008:
Currency and coins P 10,000
Employees’ vales 8,000
Currency in an envelope marked
“collections for charity” with
Names attached 6,000
Unreplenished petty cash vouchers 6,500
Check drawn by RHEA, payable to the
Petty cashier 20,000
Unused postage stamps 1,500
P 52,000

Cash on hand represents undeposited collections as of December 31,2008 and includes the following
items:
a. Customer’s check for P 160,000 returned by bank on December 26,2008 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 3,2009.
b. Customer’s check for P 80,000 dated January 2,2009, received on December 29,2008.
c. A customer checks for P 90,000 dated June 1,2008 received on the same date and yet to be
deposited since the same has been missing.
d. Postal money orders received from customers, P 100,000.

Included among the checks drawn by RHEA against the Metrobank current account and recorded in
December 2008 are the following:
a. Check written on December 29,2008 dated January 2,2009, delivered to payee on December
29,2008, P 160,000.
b. Check written and dated December 29,2008 and delivered to payee on January 2,2009, P
200,000.

The credit balance in the BDO Current Account No. 2 represents checks drawn in excess of the deposit
balance. These checks were still outstanding at December 31,2008.
The savings account deposit in Coco Bank has been set by board of directors for acquisition of new
computers. This account is expected to be disbursed in the next 3 months from the balance sheet date.

The time deposit with BPI was purchased on November 1,2008 and shall mature on November 1,2009.

Determine the audited balances of the following:


1. Petty cash fund
a. 30,000
b. 36,000
c. 10,000
d. 24,500

Solution:

Petty cash fund per total P 52,000


Employees’ vales (8,000)
Currency in an envelope marked (6,000)
“collections for charity” with Names
attached
Unreplenished petty cash vouchers (6,500)
Unused postage stamps (1,500)
Petty Cash Fund 30,000

Alternative Solution:
Currency and Coins 10,000
Check drawn by RHEA, payable to the 20,000
Petty cashier
Petty Cash Fund 30,000

2. Petty cash shortage/overage


a. 4,000 short
b. 5,500 short
c. 2,000 over
d. 500 over

Solution:

Currency and coins P 10,000


Employees’ vales 8,000
Unreplenished petty cash vouchers 6,500
Check drawn by RHEA, payable to the 20,000
Petty cashier
Petty cash accounted 44,500
Custodian’s accountability 50,000
Petty cash shortage P 5,500
3. Cash on hand
a. 1,070,000
b. 1,170,000
c. 1,260,000
d. 1,500,000

Solution:

Unadjusted Cash on hand P 1,500,000


NSF check (160,000)
Post-dated check (80,000)
Lost check (90,000)
Adjusted Cash on hand 1,170,000

4. Cash in bank- Metrobank current


a. 4,000,000
b. 4,160,000
c. 4,200,000
d. 4,360,000

Solution:
Unadjusted Cash in bank-Metrobank P 4,000,000
Post-dated check delivered 160,000
Undelivered check 200,000
Adjusted Cash in bank-Metrobank 4,360,000

5. Cash and Cash equivalents to be reported in the 2006 balance sheet


a. 8,560,000
b. 8,566,000
c. 10,560,000
d. 15,060,000

Solution:

Question No. 5.
Cash on hand P 1,170,000
Petty Cash fund 30,000
Cash in bank-Metrobank current 4,360,000
Cash in bank- BDO (net of 160,000 bank 3,000,000
overdraft)
Cash and cash equivalents 8,560,000
PROBLEM 2: A count of the Petty Cash Fund having an imprest balance of P 10,000 of Reyes Corp.
showed its composition as follows:

Coins and currency P 2,900


Paid vouchers:
Transportation P 600
Gasoline 400
Office Supplies 500
Postage Stamps 300
Due from employees 1200 3,000
Manager’s check returned by bank
Marked “NSF” 1,000
Check drawn by company to the order
Petty cash custodian 2,700
Unused postage stamps 300
Petty cash receipt voucher 500

The petty cash receipt is for a return of travel expense advance.

What is the petty cash shortage?

a. 0 b. 500 c. 900 d. 1,000

Solution:

Question No. 1.
Coins and Currency P 2,900
Paid Vouchers 3,000
NSF check 1,000
Replenishment check 2,700
Petty cash receipt voucher (500)
Petty Cash accounted 9,100
Custodian’s Accountability 10,000
Petty cash shortage 900
PROBLEM 3: A count of the undeposited receipts under the custody of U. Rita, cashier of Ube Corp., on
September 30,2008 showed the following composition:

Currency and coins P 24,620


Unused postage and documentary stamps 220

Checks:
Date Payee Drawer
3-24-08 Cash U. Rita 2,000
9-20-08 Ube Corp. Tams Co. 4,700
9-27-08 Ube Corp. Jonli Inc. 3,920
9-30-08 MERALCO Ube Corp. 1,800

Cash disbursements/advance vouchers paid out of receipts 3,000


Total per count 40,620

Assuming the cashier’s accountability to be P 36,940 per the client’s record, what was the amount of
shortage/overage on September 30,2008?

a. P 480 shortage b. P 3,220 shortage c. P 3,320 overage d. No shortage/overage

Solution:
Question No. 1.
Custodian’s Accountability P 36,940
Petty Cash accounted:
Total per count 40,620
Less: Cashier’s stale check 2,000
Unreleased
Disbursement check 1,800 3,800
Over footing of cash 360
36,460
480

* Currency and coins 24,620


Unused postage and documentary stamps 220
Payee Drawer
Cash U. Rita 2,000
Ube Corp. Tams Co. 4,700
Ube Corp. Jonli Inc. 3,920
MERALCO Ube Corp. 1,800
Cash disbursements/advance vouchers paid out of receipts 3,000
Total per count 40,260
Recorded amount 40,620
360
PROBLEM 4: You obtained the following information on the current account of BUGOY CORP.
During your examination of its financial statements for the year ended December 31,2008.

The bank statement on November 30,2008 showed a balance of P 918,000. Among the bank credits in
November was customer’s note for P 300,000 collected for the account of the company which the
company recognized in December among its receipts. Included in the bank debits were cost of
checkbooks amounting to P 3,600 and a P 120,000 check which was charged by the bank in error against
Bugoy’s account. Also in November you ascertained that there were deposits in transit amounting to P
240,000 and outstanding checks totaling P 510,000.

The bank statement for the month of December showed total credits of P 1,248,000 and total charges of
P 612,000. The company’s books for December showed total debits of P 2,206,800, total credits of P
1,221,600 and a balance of P 1,456,800. Bank debit memos for December were: No. 121 for service
charges, P 4,800 and No. 122 on a customer’s returned check marked “ Refer to Drawer “ for P 72,000.

On December 31, 2008 the company placed with the bank a customer’s promissory note with a face
value of P 360,000 for collection. The company treated this note as part of its receipts although the bank
was able to collect on the note only in January, 2009.

A check for P 11,880 was recorded in the company cash payments books in December as P 118,800.

1. How much is the undeposited collections as of December 31,2008?


a. 1,018,800
b. 538,800
c. 658,800
d. 418,800

Solution:

Deposit in Transit, 11/30/08 240,000


Add: Collections in December
December Book Receipts 2,206,800
Less: Receipts not representing coll. in Dec.
Customer’s note collected by bank in Nov.
Recorded in Dec. 300,000
Uncollected customer’s note treated as receipt 360,000 1,546,800
Total 1,786,800
Less: Deposits credited by bank in Dec.
December Bank Receipts 1,248,000
Less: Receipts not representing deposits
Erroneous bank dr. Nov, corrected Dec 120,000 1,128,000
Deposit in Transit, 12/31/09 658,800
2. How much is the outstanding checks as of December31,2008?
a. 575,880
b. 1,192,800
c. 1,085,880
d. 1,089,480

Solution:

Outstanding Check, 11/30/08 510,000


Add: Checks issued in Dec.
Dec. Book Disbursements 1,221,600
Less: Disbursements not representing checks
Bank Service Charge, Nov. 3,600
Book Error in Dec. (118,800-11,800) 106,920 1,111,080
Total 1,621,080
Less: Checks paid by the bank in Dec.
Dec. Bank Disbursements 612,000
Less: Disbursements not representing checks
Bank Service Charge, Dec. 4,800
NSF Check, Dec. 72,000 535,200
Outstanding Check. 12/31/09 1,085,880

3. How much is the adjusted cash balance as of November 30,2008?


a. 648,000
b. 768,000
c. 528,000
d. 471,600

4. How much is the adjusted cash balance as of December 31,2008?


a. 1,876,920
b. 586,920
c. 660,000
d. 1,126,920

Solution for No. 3 and 4:

Bugoy Corporation
Proof of Cash
For the month ended December 31, 2009

Beginning Ending
Nov.30 Receipts Dec. Disb. Dec. Dec. 31
Balance per bank
statement 918,000 1,248,000 612,000 1,554,000
Deposit in Transit
30-Nov 240,000 (240,000)
31-Dec 658,800 658,800
Outstanding
Check
30-Nov (510,000) (510,000)
31-Dec 1,085,880 (1,085,880)
Erroneous bank
dr. - Nov. 120,000 (120,000)
Adjusted Bank
Balance 768,000 1,546,800 1,187,880 1,126,920

Balance per book


statement 471,600 2,206,800 1,221,600 1,456,800
Customer's note
coll by bank -
Nov. 300,000 (300,000)
Bank Service
Charge
30-Nov (3,600) (3,600)
31-Dec 4,800 (4,800)
NSF Check Dec. 72,000 (72,000)
Erroneous book
dr. - Dec. (106,920) 106,920
Erroneous book
receipt (360,000) (360,000)
Adjusted Book
Balance 768,000 1,546,800 1,187,880 1,126,920
PROBLEM 5: In your audit of JAMES COMPANY for the year 2008, you concluded that the allowance for
doubtful accounts should be adjusted to equal the estimated amount required based on aging of the
accounts as of December 31. During your audit, you were able to gather the following data:

Allowance for doubtful accounts, Jan 1,2008 P 600,000


Provision for doubtful accounts during (2008 : 3%
of 10 million sales 300,000
Bad debts written-off in 2008 375,000
Recovery of bad debts written-off during 2008 100,000
Estimated doubtful accounts per aging of
accounts on December 31,2008 400,000
Accounts Receivable, December 31,2008 2,375,000

1. Based on the result of your audit, what is the correct doubtful accounts expense for the year
2008?
a. 375,000
b. 300,000
c. 175,000
d. 75,000

Solution:

Question No. 1.
AFDA, 12/31/08 P 400,000
Write-offs during the year 375,000
AFDA, 1/1/08 (600,000)
Recovery of write-offs (100,000)
Doubtful accounts expense 75,000

2. What is the correct net book value of the receivable?


a. 2,375,000
b. 1,775,000
c. 2,000,000
d. 1,975,000

Solution:

Question No. 2.
Unadjusted accounts receivable P 2,375,000
AFDA, 12/31/08 400,000
Adjusted accounts receivable 1,975,000
PROBLEM 6: From inception of operations to December 31,2008, PDA Corporation provided for
uncollectible accounts receivable under the allowance method: provisions were made monthly at 2% of
credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts
previously written off were credited to the allowance account; and no year-end adjustments to the
allocation account were made. PDA’s usual credit terms are net 30 days.

The balance in the allowance for doubtful accounts was P 130,000 at January 1,2008. During 2008, credit
sales totaled P 9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales; P
90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P
15,000. PDA installed a computer facility in November 2008, and an aging of accounts receivable was
prepared for the first time as of December 31,2008. A summary of the aging is as follows:

Classification by Month of Sale Balance in Each Category Estimated %


November-December 2008 P 1,140,000 1.5%
July-October 600,000 8.0
January-June 400,000 35.0
Prior to 1/1/08 130,000 70.0
P 2,270,000

Further audit procedures revealed that a P 160,000 customer credit balance resulting from overpayment
was included in the “November-December 2008” receivables and that based on the review of
collectability of the account balances in the “prior to 1/1/08” aging category, additional receivables
totaling P 60,000 were written off as of December 31,2008.

Effective with the year ended December 31,2005, PDA adopted the revised accounting standards in
recognizing bad debts.

1. What is the correct balance of the allowance for doubtful accounts at year end?
a. 254,100
b. 256,500
c. 296,100
d. 298,500

Solution:

November-December 1,300,000 1.50%


2008 (1,140,000+160,000) 19,500
July-October 600,000 8%
48,000
January-June 400,000 35%
140,000
Prior to 1/1/08 70,000 70%
(130,000-60,000) 49,000

256,500
2. What is the correct bad debt expense for the year?26
a. 261,500
b. 201,500
c. 81,500
d. 76,500

Solution:

Required Allowance, 12/31/08 256,500


Accts written-off (60,000+90,000) 150,000
Recoveries of Bad Debt (15,000)
Allowance for Doubtful Accounts, 1/1/08 (130,000)
Doubtful accounts expense 2008 261,500

3. What is the carrying value of the accounts receivable at year end?


a. 2,013,500
b. 2,108,500
c. 2,113,500
d. 2,370,000

Solution:

Accounts Receivable (2,270,000+160,000-60,000) 2,370,000


Allowance for Doubtful Accounts (per aging) (256,500)
Net realizable value, Dec. 31, 2008 2,113,500
PROBLEM 7: The balance sheet of DWARF CORP reported the following long-term receivables as of
December 31,2007:

Note receivable from sale of plant P 4,500,000


Note receivable from officer 1,200,000

In connection with your audit, you were able to gather the following transactions during 2008 and other
information pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable
in 3 annual installments of P 1,500,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1,2008.
b. The note receivable from officer is dated December 31,2007, earns interest at 10% per
annum, and is due on December 31,2008. The principal and interest were received on
December 31,2008.
c. The corporation sold a piece of equipment to SNOW INC. on April 1,2008, in exchange for an
P 600,000 non-interest bearing note due on April 1,2010. The note had no ready market,
and there was no established exchange price for the equipment. The prevailing interest rate
for a note of this type at April 1,2008 was 12%. The present value factor of 1 for two periods
at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two periods at
12% is 1.690.
d. A tract of land was sold by the corporation to WHITE CO. on July 1,2008, for P 3,000,000,
under an installment sale contract. White signed a 4-year 11% note for P 2,100,000 on July
1,2008, in addition to the down payment of P 900,000. The equal annual payments of
principal and interest on the note will be P 676,875 payable on July 1,2009,2010,2011, and
2012. The land had an established cash price of P 3,000,000, and its cost to the corporation
was P 2,250,000. The collection of the installments on this note is reasonably assured.

1. How much is the total noncurrent notes receivables as of December 31,2008?


a. 6,778,200
b. 4,832,325
c. 4,875,363
d. 3,675,363

Solution:

Note Receivable from Plant:


Balance, 12/31/08 (4,500,000-1,500,000) 3,000,000
Less: Installment due April 1, 2009 1,500,000 1.500,000
Note Receivable from sale of equipment:
Present Value of note on April 1, 2008
(600,000*.797) 478,200
Add: Interest Income April 1- Dec.31
(478,200*12%*9/12) 43,038 521,238
Note Receivable from sale of land:
Balance, 12/31/08 2,100,000
Less: Installment due July 1, 2008
Total amt to be received 676,875
Less: Int (2,100,000*11%) 231,000 445,875 1,654,125
Total 3,675,363

2. How much is the total current portion of long-term notes receivable as of December
31,2008?
a. 1,945,875
b. 2,176,875
c. 1,500,000
d. 0

Solution:

Note Receivable from sale of plant 1,500,000


Note Receivable from sale of land (see no.1) 445,875
Total 1,945,875

3. What is the accrued interest receivable as of December 31,2008?


a. 385,500
b. 428,538
c. 270,000
d. 505,500

Solution:

Note Receivable from sale of plant, 04/01-12/31


(3,000,000*12%*9/12) 270,000
Note Receivable from sale of land, 07/01-12/31
(2,100,000*11%*6/12) 115,500
Total 385,500
4. What is the correct interest income for the year 2008?
a. 640,500
b. 818,538
c. 683,538
d. 756,000

Solution:

Note Receivable from sale of plant:


Interest Income, 1/1-3/31
(4,500,000*12%*3/12) 135,000
Interest Income, 04/01-12/31
(3,000,000*12%*9/12) 270,000 405,000
Note Receivable from officer (1,200,000*10%) 120,000
Note Receivable from sale of equipment (see no.1) 43,038
Note Receivable from sale of land (see no.3) 115,500
Total 683,538
PROBLEM 8: Kapoy company provided the following information from its accounting records for the
year ended December 3,2017:

Inventory at December 31,2017


(per on physical count on 12/31/17) P 980,000
Accounts payable at December 31,2017 586,000
Net Sales (sales less sales returms) 10,048,000

Additional information follows:


a. Goods held on consignment amounting to P 9,000, were included in the physical count of goods
in Kapoy’s warehouse on December 31,2017, and in accounts payable at December 31,2017
b. Retailers were holding P 50,000, at cost, of goods on consignment from Kapoy, at their stores on
December 31,2017.
c. Included in the physical count were goods billed to a customer FOB shipping point on December
31,2017. These goods had a cost of P 31,000 and were billed at P 40,000. The shipment was on
Kapoy’s loading dock waiting to be picked up by the common carrier.
d. P 15,000 worth of goods were sold in the last week of 2017 and appropriately recorded as sales
of P 21,000. The goods were included in the physical count on December 31,2017, because the
goods were on the loading dock waiting to be picked up by the customer.
e. Goods were in transit from a vendor to Kapoy on December 31,2017. The invoice cost was P
71,000, and the goods were shipped FOB shipping point on December 29,2017.
f. Work in process inventory costing P 30,000 was sent to an outside processor for plating on
December 30,2017.
g. Goods returned by customers and held pending inspection in the returned goods area on
December 31,2017, were not included in the physical count. On January 8,2018, the tools
costing P 32,000 were inspected and returned to inventory. Credit memos totaling P 47,000
were issued to the customers on the same date.
h. Goods shipped to a customer FOB destination on December 26,2017, were in transit at
December 31,2017, and had a cost of P 21,000. Upon notification of receipt by the customer on
January 2,2018, Kapoy issued a sales invoice for P 42,000.
i. Goods with an invoice cost of P 27,000 were recorded on a receiving report dated January
2,2018. The goods were not included in the physical count, but the invoice was included in
accounts payable at December 31,2017.
j. Goods received from a vendor on December 26,2017, were included in the physical. However,
the related P 56,000 vendor invoice was not included in accounts payable at December 31,2017,
because the accounts payable copy of the receiving report was lost.
k. On January 3,2018, a monthly freight bill in the amount of P 6,000 was received. The bill
specifically related to merchandise purchased in December 2017, one-half of which was still in
the inventory at December 31,2017. The freight charges were not included in either the
inventory or accounts payable at December 31,2017.
QUESTIONS:
Based on the above and the result of your audit, answer the following:

1. The adjusted inventory as of December 31,2017 is


a. 1,158,000
b. 1,119,000
c. 1,190,000
d. 1,160,000

2. The adjusted accounts payable as of December 31,2017 is


a. P 710,000
b. 639,000
c. 719,000
d. 633,000

3. The adjusted net sales for the year ended December 31,2017
a. P 10,008,000
b. P 10,001,000
c. P 9,919,000
d. P 9,961,000

Solution:

Question Nos. 1 to 3

Inventory Accounts Payable Net Sales


Unadjusted balances 980,000 586,000 10,048,000

(a) (9,000) (9,000)

(b) 50,000

(c)

(d) (15,000) (40,000)

(e) 71,000 71,000

(f) 30,000

(g) 32,000 (47,000)

(h) 21,000

(i) 27,000

(j) 56,000
(k) 3,000 6,000

Adjusted balances 1,190,000 710,000 9,961,000

4. Which statement is incorrect regarding audit of inventories in accordance with Philippine


Standards on Auditing?
a. When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory by attendance at physical inventory counting, unless impracticable.
b. The procedures involve in the attendance at physical may serve as test of controls or
substantive procedures depending on the auditor’s risk assessment, planned
approach and the specific procedures carried out.
c. If attendance at physical inventory counting is impracticable, the auditor shall
modify the opinion in the auditor’s report.
d. When inventory under the custody and control of a third party is material to the
financial statements, the auditor may obtain sufficient appropriate audit evidence
regarding the existence and condition of that inventory by requesting confirmation
from the third party as to the quantities and condition of inventory held on behalf of
the entity.

Solution:

The incorrect statement is statement letter c.

PSA 501, paragraph 7 states that “If attendance at physical inventory counting is
impracticable, the auditor shall perform alternative audit procedures to obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory.

5. The audit of year-end inventories should include steps to verify that the client’s purchases
and sales cutoffs were adequate. These audit steps should be designed to detect whether
merchandise included in the physical count at year-end was recorded as a
a. Sale in the subsequent period.
b. Purchase in the current period.
c. Sale in the current period.
d. Purchase in the subsequent period.

Solution:

FRS 18 states that revenue from the sale of goods should be recognized when the entity
has transferred to the buyer the significant risks and rewards of ownership of the goods
(FRS 18, paragraph 14a). In most cases, the transfer of the risks and rewards of
ownership coincides with the transfer of the legal title or the passing of possession to
the buyer. For local purchases, the auditors will need to obtain delivery orders of
suppliers and check that the dates of receipt of the goods by the company are in the
same accounting period in which the purchases are recognized.
PROBLEM 9: You were asked by Samuka Corporation to audit its financial statements for the years
ended December 31, 2016 and 2017. While reviewing the entity’s records for 2016 and 2017, you
discovered that no adjustments have yet been made for the items listed below.

Item No. 1 Insurance premiums of P 300,000 for the three-year period beginning January
1,2016, had been paid and fully expensed in 2016.
Item No. 2 The merchandise inventories at the end of 2016 and 2017 did not include
merchandise that was then in transit and to which the company had title.
These shipments of P 50,000 and P 30,000 were recorded as purchases in
January 2017 and 2018, respectively.
Item No. 3 Rental of P 60,000 on an equipment, applicable for six months, was received
on November 1, 2016. The entire amount was reported as income upon
receipt.
Item No. 4 The entity purchased a machine on January 2, 2016 at a cost of P 120,000. An
additional P 50,000 was spent for installation, but this amount was charged
erroneously to repairs expense. The machine has a useful life of five years and
a residual amount of P 20,000.
Item No. 5 The entity received P 360,000 from a customer at the beginning of 2016 for
services that it is to perform evenly over a 3-year period beginning in 2016.
None of the amount received was reported as unearned revenue at the end of
2016.

QUESTIONS:

1. In relation to Item No. 1, which of the following is correct?


a. The 2016 profit is overstated.
b. The 2017 profit is overstated.
c. The December 31, 2016 retained earnings is correctly stated.
d. The December 31, 2017 retained earnings is correctly stated.

2. In relation to Item No. 2, which of the following is incorrect?


a. The 2016 profit is understated.
b. The 2017 profit is correctly stated.
c. The December 31, 2016 retained earnings is correctly stated.
d. The December 31, 2017 retained earnings is correctly stated.

3. In relation to Item No. 3, which of the following is correct?


a. The 2016 profit is overstated by P 60,000.
b. The 2017 profit is understated by P 60,000.
c. The 2017 profit is understated by P 40,000.
d. The December 31, 2016 retained earnings is correctly stated.
4. In relation to Item No. 4, which of the following is correct?
a. Retained earnings at December 31, 2017, was understated by P 30,000 and 2017
income was overstated by P 6,000.
b. Retained earnings at December 31, 2017, was understated by P 38,000 and 2017
income was overstated by P 6,000.
c. Retained earnings at December 31,2017, was understated by P 30,000 and 2017 income
was overstated by P 10,000.
d. 2016 income was understated by P 50,000.

5. In relation to Item No. 5, which of the following is incorrect?


a. The 2016 profit is overstated by P 240,000.
b. The 2017 profit is understated by P 120,000.
c. The December 31, 2016 retained earnings isoverstated by P 240,000.
d. The December 31, 2016 retained earnings is correctly stated.

SOLUTION:
INCOME RETAINED EARNINGS
2016 2017 2016 2017
Item no. 1 200,000 (100,000) 200,000 (100,000)
Item no.2 - 50,000 - 50,000
Item no. 3 (40,000) 40,000 (40,000) 40,000
Item no. 4 30,000 (10,000) 30,000 (10,000)
50,000
Item no. 5 (240,000) 120,000 (240,000) 120,000
PROBLEM 10: Tabang Corporation, a manufacturer of steel products, began operation on October 1,
2015. The accounting department of Tabang has started the fixed-asset and depreciation schedule
presented below.

TABANG CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30,2016, and September 30,2017
Depreciation Expense
Estimated Year Ended
Assets Acquisition Cost Salvage Depreciation Life in September 30
Date Method Years 2016 2017
Land A 10/1/15 ? N/A N/A N/A N/A N/A
Building A 10/1/16 ? P 40,000 Straight-line ? P 17,450 ?

Land B 10/1/16 ? N/A N/A N/A N/A N/A


Under
Building B Construction P 320,000 - Straight-line 30 - ?
150%
Donated 10/2/15 ? 3,000 declining 10 ? ?
Equipment balance
Sum-of-the-
Machine A 10/2/15 ? 6,000 years’-digits 8 ? ?
Machine B 10/1/16 ? - Straight-line 20 - ?

**N/A- Not applicable

You have been asked to assist in completing this schedule. In addition in ascertaining that the data
already on the schedule are correct, you have obtained the following information from the Company’s
records and personnel:

a. Land A and Building A were acquired from a predecessor corporation. Tabang paid P 820,000 for
the land and building together. At the time of acquisition, the land had an appraised value of P
90,000, and the building had an appraised value of P 810,000.
b. Land B was acquired on October 2,2015, in exchange for 2,500 newly issued ordinary shares of
Tabang. At the date of acquisition, the shares had a par value of P 5 per share and a fair value of
P 30 per share. During October 2015,Tabang paid P 16,000 to demolish an existing building on
this land so it could construct Building B.
c. Construction of building B on the newly acquired land began on October 1,2016. By September
30,2017, Tabang has paid P 320,000 of the estimated total construction costs of 450,000. It is
estimated that the building will be completed and occupied by July 2018.
d. Certain equipment was donated to the corporation by a local university. An independent
appraisal of the equipment when donated placed the fair value at P 30,000 and the salvage
value at P 3,000.
e. Machinery A’s total cost of P 164,900 includes installation expense of P 600 and normal repairs
and maintenance of P 14,900. Salvage value is estimated at P 6,000. Machinery A was sold on
February 1,2017.
f. On October 1,2016, Machinery B was acquired with a down payment of P 5,740 and the
remaining payments to be made in 11 annual installments of P 6,000 each beginning October
1,2016. The prevailing interest rate was 8%. The following data were abstracted from the
present-value tables (rounded):

Present value of P 1 at 8% for 11 years 0.429


Present value of an ordinary annuity of P 1 at 8% 7.139
for 11 years
Present value of an annuity due of P 1 at 8% for 7.710
11 years

QUESTIONS:
Based on the above and the result of your audit, answer the following:

1. The cost of Building A is:


a. 82,000
b. 820,000
c. 738,000
d. 0

Solution:

Allocation of lump sum price in proportion to fair values:

Land A (90,000/900,000 x 820,000) P 82,000


Buiilding A (810,000/900,000 x 820,000) (C) 738,000
TOTAL P 820,000

2. The cost of machine B is:


a. 46,260
b. 48,722
c. 48,574
d. 52,000

Solution:

Down payment P 5,740


First installment payment on 10/1/16 6,000
Present value of succeeding 10 installment payments
(6,000 x 6.710) 40,260
TOTAL COST OF MACHINERY B (D) P 52,000
3. The total depreciation expense for the year ended September 30,2017 is:
a. 33,037
b. 33,208
c. 51,875
d. 32,826

Solution:

Depreciation Expense on Building A,


For the year ended September 30, 2017 P 17,450

Cost of Donated Equipment P 30,000


1
150% declining balance rate ( x150%) 15%
10
Depreciation Expense, 9/30/16 P 4,500

Book value, Oct.1, 2016 (30,000-4,500) P 25,500


1
150% declining balance rate ( x150%) 15%
10
Depreciation Expense, September 30, 2017 3,825

Total cost recorded P 164,900


Less: Normal repairs and maintenance 14,900
Correct cost of Machinery A P 150,000

Depreciation Expense – Machinery A,


For the year ended September 30, 2017
7 4
(150,000-6,000=144,000 x x ) 9,333
36 12

Depreciation Expense –Machinery B


For the year ended September 30, 2017
(52,000/20 years) 2,600
TOTAL DEPRECIATION EXPENSE FOR THE YEAR ENDED SEPTEMBER 30, 2017 (B) P 33,208

 Because Building B is not yet available for its intended use as of September 30, 2017, no
depreciation should be provided.
4. The most significant audit step in substantiating additions to the equipment account balance is
a. Comparison to prior year’s acquisition.
b. Review of transactions near the end of the reporting period for proper period cutoff.
c. Calculation of ratio of depreciation expense to gross office equipment cost.
d. Examination of vendors’ invoices and receiving reports for current year’s acquisitions.

Note:

(D) Examination of vendors’ invoices and receiving reports for current year’s acquisitions.

Acquisition of new PPE and improvements to the existing ones should be verified with reference to
supporting documents such as orders, invoices, receiving reports and title deeds and applicable
customs or excise documents. Due care needs to be taken when the purchase is from a related party.
The auditor may employ procedures such as possible comparative prices prevalent in a ready market,
evaluation, justification and approvals for the purchase

5. Analytical estimation of depreciation by the auditor is an important audit test because it does
which of the following?
a. It yields statistical precision in sampling.
b. It signals which additions will be vouched.
c. It gives the auditor an indication of the impaired balances existing in financial
statements.
d. It is a good start point for determining additional procedures.

Note:

(D) It is a good start point for determining additional procedures.

Recalculation is a procedure that consists of checking the mathematical accuracy of documents or


records and that can be used to verify the accuracy of the recording of transactions or of the
application of accounting policies, for example by recalculating depreciation of tangible assets.
Recalculation however does not provide evidence of the accuracy of the estimated rate of
depreciation charged in relation to each class of assets.
PROBLEM 11: On January 1 2016, Kalipay Corporation acquired two assets within the same class of plant
and equipment. Information on these assets follows:

COST EXPECTED USEFUL LIFE


Machine A P 100,000 5 years
Machine B 60,000 3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and
equipment is measured using the revaluation model.

At 31 December 2016, information about the assets follows:

FAIR VALUE EXPECTED USEFUL LIFE


Machine A P 84,000 4 years
Machine B 38,000 2 years

On 1 July 2017, machine B was sold for P 32,000 cash. On the same day, Kalipay Corporation acquired
machine C for P 80,000 cash. Machine C has expected useful life of four years.

At 31 December 2017, information on the machines follows:

FAIR VALUE EXPECTED USEFUL LIFE


Machine A P 61,000 3 years
Machine B 68,500 1.5 years

QUESTIONS:

1. The amount to be recognized in 2016 profit or loss related to the revaluation of the assets is:
a. 4,000
b. 2,000
c. (2,000)
d. 0

Solution:

Machine B

Fair Value 12/31/16 38,000

Book Value 12/31/16 (60,000 x 2/3) 40,000

Revaluation Loss (2,000)

The revaluation surplus on Machine A is not reported in profit and loss but in statement of
comprehensive income.
2. The amount to be recognized in 2016 comprehensive income related to the revaluation of the
assets is
a. 4,000
b. 2,000
c. (2,000)
d. 17,000

Solution:
Revaluation increase (Machine A) 4,000
Revaluation decrease (Machine B) (2,000)
Revaluation increase to be recognize 2,000

3. The gain or loss on sale of Machine B is


a. 13,000 gain
b. 3,500 gain
c. 333 gain
d. 6,000 loss

Solution:

Machine B
Selling Price 32,000
Book Value: 7/1/17
Book Value 12/31/16 38,000
Less: Acc Dep (38,000/4 x 6/12) 9,500 28,500
Gain on sale 3,500

4. The total depreciation for the year 2017 is


a. 40,500
b. 31,000
c. 64,167
d. 50,500

Solution:

Machine A (84,000/4) 21,000


Machine B (38,000/2 X 6/12) 9,500
Machine C (80,000/4 x 6/12) 10,000
Total Depreciation for 2017 40,500
5. The amount to be recognized in 2017 profit or loss related to the revaluation of the assets is
a. (3,500)
b. (1,500)
c. (500)
d. 0

Solution:

Machine C
Fair Value 12/31/17 68,500

Book Value 12/31/17 (80,000 x 7/8) 70,000

Revaluation Loss 1,500


PROBLEM 12: You gathered the following information related to the Patents account of Chicago Cookie
Corporation in connection with your audit of the company’s financial statement for the year 2017.

In 2016, Chicago developed a new machine that reduces the time required to insert the fortunes into its
fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Chicago
patented the machine. The following expenses were incurred in developing and patenting the machine:

Research and development laboratory expenses 1,500,000


Metal used in the construction of the machine 480,000
Blueprints used to design the machine 192,000
Legal expenses to obtain patent 720,000
Wages paid for the employees’ work on the research, development, and
building of the machine (60% of the time was spent in actually building 1,800,000
the machine)
Expense of drawing required by the patent office to be submitted with 102,000
the patent application
Fees paid t the government patent office to process application. 150,000

During 2016, Chicago paid 225,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.

It is the company’s policy to take full year amortization in the year of acquisition.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of machine
a. 1,854,000
b. 2,472,000
c. 1,560,000
d. 1,752,000

Solution:

Metal used in the construction of machine 480,000

Blueprints used to design the machine 192,000


Wages paid to the employees (1,800,000 x 60%) 1,080,000
Cost of machine 1,752,000
2. Amount that should charge to expense when incurred in connection with the development of
the patented machine
a. 2,220,000
b. 1,500,000
c. 2,412,000
d. 0

Solution:

Research and development laboratory expenses 1,500,000


Wages paid to the employees (1,800,000 x 40%) 720,000
Research and development expense 2,220,000

3. Carrying amount of patent as of December 31,2017


a. 783,000
b. 1,522,800
c. 874,800
d. 1,256,850

Solution:

Legal expenses to obtain patent 720,000


Expense of drawing required by the patent office 102,000
Fees paid to the government patent office 150,000
Cost of patent 972,000
Less: Amortization (972,000 x 2/20) 97,200
Carrying amount of patent as of December 31, 2007 874,800

4. Which statement is correct regarding audit of intangible assets


a. When testing a client’s additions to an asset for research and development, the auditor
must remember that such costs should be amortized over the lesser of thei r legal lives
or useful lives.
b. Accounting principles require goodwill to be amortized over a maximum period of 20
years.
c. Patents are amortized over the longer of the remaining legal life or their useful life.
d. Expenditures incurred after the initial recognition of an acquired intangible asset or
after completion of an internally generated intangible asset are rarely recognized in the
carrying amount of an asset.
Note:

D
PAS 38 paragraph 20 states that “It is often difficult to attribute subsequent expenditure directly
to a particular intangible asset rather than to the business as a whole. Therefore, only rarely will
subsequent expenditure - expenditure incurred after initial recognition of an acquired intangible
asset or after the completion of an internally generated intangible asset – be recognized in the
carrying amount of an asset.”

5. In evaluating control risk and effectiveness for intangible assets, controls should be designed for
numerous purposes. Which of the following is not a usual control for intangible assets?
a. Ensure that decisions are appropriately made as to when to capitalize or expense
research and development expenditures.
b. Develop amortization schedules that reflect the remaining useful life of patents or
copyrights associated with the assets.
c. Identify and account for intangible asset impairment.
d. All of the above are usual controls for intangible assets.

Note:

D
Intangible assets are divided into two categories according to IAS 38: goodwill and research and
development expenses. For research and development expenses the question is whether they
should be recognized as expenses when they arise or as asset. Their recognition as an asset
should be carried out, if and only if, the asset definition is met: future economic benefits are
likely and the cost can be reliably measured. According to IAS38, no intangible asset arising from
research shall be recognized. IAS 38- Intangible assets provides the basis for measuring
intangible assets separated from goodwill

The cost less residual value of an intangible asset with a finite useful life should be amortized on
a systematic basis over that life: [IAS 38.97] The amortization method should reflect the pattern
of benefits. If the pattern cannot be determined reliably, amortize by the straight-line method.

At each balance sheet date, according to the requirements of IAS 36- Impairment of Assets, an
enterprise should consider whether there are indications that intangible assets have lost some
of their book value. If any such indication exists, the enterprise should determine the
recoverable amount of intangible assets, defined as: „The highest value between the value in
use of the asset or cash-generating unit and the fair value less costs for sale"; also, IAS 38
requires a test for impairment annually, regardless of whether exists or not an indication of
impairment, in the following two cases: (CECCAR, IAS 38, 2013)
PROBLEM 13: On January 10, 2018, you started the audit of the financial records of the Kinsa Company
for the year ended December 31, 2017. From your investigation, you discovered the following:

a. The bookkeeper also acts as the cashier. On December 31, 2017, the bookkeeper’s year-end
cash reconciliation contains of the following items.

Cash per ledger, 12/31/17 491,200


Cash per bank, 12/31/17 518,800
Outstanding checks 41,760
Check of another entity charged by
bank in error 12/20/17; corrected by 1,200
bank on 1/5/18
Cash in transit, credited by bank 1/2/18 5,760

b. The cash account balances per ledger as of 12/31/17 were:


i. Cash 491,200
ii. Petty Cash 1,200

c. The count of the cash on hand at the close of business on January 10,2018, including the petty
cash, was as follows:

Currency and coin 3,080


Expense voucher 160
Employees’ IOU’s 440
dated 1/5/18
Customers’ checks in 2,320
payment of account

d. From January 2, 2018 to January 10, 2018, the date of your cash count, total cash receipts
appearing in the cash records were 68,800. According to the bank statement, for the period
from January 2, 2018 to January 10, 2018, total deposits were 60,800.

e. On July 5, 2017, cash of 3,200 was received from an account customer; the Allowance for
Doubtful Accounts was charged and Accounts Receivable credited.

f. On December 5, 2017, cash of 2,400 was received from an account customer; Inventory was
charged and Accounts Receivable credited.

g. Cash of 5,840 received during 2017 was not recorded.

h. Checks received from customers from January 2, 2018 to January 10,2018, totaling 3,360, were
not recorded but were deposited in bank.
i. On July 1, 2017, the bank refunded interest of 160 because a note of the Kinsa Company was
paid before maturity. No entry had been made for the refund.

j. In the cashier’s petty cash, there were receipts for collections from customers on January 9,
2018, totaling 6,800; those were unrecorded and undeposited.

k. In the outstanding checks, there is one for 400 made payable to a trade creditor; investigations
that the check had been returned by the creditor on June 14,2011 and a new check for 800 was
issued in its place; the original check for 400 was made in error as to amount.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The correct balance as of December 31,2017 is


a. 484,400
b. 484,000
c. 503,200
d. 483,200

2. The cash shortage as of December 31,2017 is


a. 19,200
b. 18,400
c. 18,800
d. 0

Solution:

Bank Book
Unadjusted Balance 518,800 491,200
Outstanding Check (41,760)
Cash in transit 5,760
Bank Debit error 1,200
AJE
1 3,200
2 2,400
3 5,840
4 160
5 400 400
Corrected Balance 484,400 503,200
Shortage 12/31/17 (18,800)
Adjusted Balance 484,400 484,400
3. The cash shortage for the period January 1 to 10, 2018 is
a. 13,360
b. 10,160
c. 20,320
d. 0

Solution:

Cash in transit, 12/31/2017 5,760


Add: Company collections, 68,800
Jan 2-10,2018
AJE
6 6,800
7 3,360 10,160 78,960
Total 84,720
Less: Deposits credited by 60,800
bank, Jan 2-10,2018
Deposit in transit, Jan 10,2018 23,920
Cash and cash items per count (22400)
on Jan 10,2018
Cash shortage, Jan 2-10,2018 1,520
Add: Cash shortage as of Dec. 18,800
31,2017
Total Shortage as of Jan. 20,320
10,2018

4. Which of the following misstatements is most likely to be uncovered during an audit of a client’s
bank reconciliation?
a. Duplicate payment of a vendor’s invoice
b. Billing a customer at a lower price than indicated by company policy
c. Failure to record a collection of a note receivable by the bank on the client’s behalf
d. Payment to an employee for more than the hours actually worked

Note:

A bank reconciliation is the process of matching the balances in an entity’s accounting


records for a cash account to the corresponding information on a bank statement. There
may be differences in the client’s cash balance and bank statement due to transactions that
does not appear in either’s records. Transactions that usually appear in bank statements but
not in the company’s records are the collections of receivables by the bank. This collection is
most likely to be discovered during an audit on the bank reconciliation.

5. Which of the following would normally be discovered as part of the audit of the bank
reconciliation?
a. Failure to bill a customer
b. Failure to include a deposit in transit on the bank reconciliation
c. Duplicate payment of a vendor’s invoice
d. Payment to an employee for more than the hours actually worked

Note:

Deposits which have been sent by the company to the bank but have not been received by the
bank at proper time before the issuance of bank statement are called “Deposit in Transit”. These
transactions usually appear in the company’s records but not in the bank statement. This is
discovered in a bank reconciliation as the client’s records and bank statement is matched.
PROBLEM 14:Unsa Corporation is engaged in buying and selling manufacturing equipment. On 1 January
2016, Unsa Corporation sold equipment, with a cash price of 1,500,000. The cost of the equipment is
750,000. The buyer signed a deferred payment contract that provides for a down payment of 300,000
and a 5 year note for 1,705,900. The note is to be paid in 5 equal annual payments of 341,180. The
payments include interest and are made on December 31 of each year, beginning on December 31,
2016.

Unsa Corporation made the following entries in relation to the sale of the equipment and the related
note receivable:

January 1, 2016

Cash 300,000
Notes Receivable 1,705,900
Cost of goods Sold 750,000
Sales 2,005,900
Inventory 750,000

December31, 2016

Cash 341,180
Notes Receivable 341,180

December31, 2017

Cash 341,180
Notes Receivable 341,180

QUESTIONS: Based on the above and the result of your audit, answer the following:

1. The interest rate on the note is


a. 10%
b. 11%
c. 12%
d. 13%

Solution:

PVF used to calculate the annual payment (1,200,000/341,180) 3.5172


Ordinary annuity factor at 13% for 5 periods 3.5172
2. Profit for 2016 is overstated by
a. 349,900
b. 361,900
c. 505,900
d. 49,900

Solution:
Profit
Over (under)
Sales – over Reported should be
(2,005,900 – 1,705,900) P 505,900
Interest income – under Reported should be
(0 - 156,000) (156,000)
Net Misstatement of Profit, 12/31/17 – over (under) (A) P 349,900

3. Retained Earnings as of December 31,2017 is overstated by


a. Nil
b. 349,900
c. 241,562
d. 217,973

Solution:

Retained Earnings, 12/31/17

2016 profit overstated (see no.2) P 349,900


2017 profit understated (interest income under)
Reported should be (refer to amortization table)
(0 – 131,927) (131,927)
Net Misstatement of RE, 12/31/17 – over (under) (D) P 217,973
4. The working capital as of December 31,2017 is overstated by
a. 776,197
b. 682,360
c. 787,084
d. Nil

Solution:

Amount reported under current assets


(1,705,900 – (341,180 x 2) 1,023,540
Should be 236,456
Net Misstatement of WC, 12/31/17 – over (under) (C) P 787,084
Amortization Schedule:

Date Payment Interest (13%) Principal CA


1/1/12 1,200,000
12/31/13 341,180 156,000 185,180 1,014,820
12/31/14 341,180 131,927 209,253 805,567
12/31/15 341,180 104,724 236,456 569,111
12/31/16 341,180 73,984 267,196 301,915
12/31/17 341,180 39,265 301,915 -
1,705,900

5. A logical substantive test for accrued interest receivable would be to


a. Verify the cost, carrying value and market value of notes receivable
b. Verify the interest income by a calculation based on the face amount of notes and the
nominal interest rate.
c. Recalculate interest earned and compare it to the amounts received.
d. Compare the interest income with published interest investment records.

Note:

(C) Recalculate interest earned and compare it to the amounts received.

A logical substantive test for accrued interest receivable would be to recalculate interest earned
and compare it to the amounts received. The following tests would not be logical: comparing
the interest income with published interest-investment records; verifying the interest income by
calculation based on the face amount of notes and the nominal interest rate; or verifying the
carrying value, and market value of notes receivable. These three tests do not calculate interest
earned for checking its accuracy and do not compare to the amounts received, which is the
focus of the substantive test.