MANILA ADVENTIST COLLEGE

AUDITING PROBLEMS
MIDTERM EXAMINATION

INSTRUCTION: Select the best answer and show your neat, logical and readable solution in a separate
paper. No point for answer with no solution.

PROBLEM 1:

Shown below is the May 31, 2019, bank reconciliation prepared by your client’s staff.

RECONCILIATION
May 31, 2019

Bank balance 652,000

Add: Deposit in transit 10,000
Total 662,000
Less: Outstanding
checks
No. 640 10,000
652 8,000
653 2,000 20,000
Adjusted bank balance 642,000

Book balance 570,800

Add: Proceeds of note 70,000
receivable collected in
May
Deposit on May 31 not 2,000 72,000
recorded on books
until June
Total 642,800
Less: Bank service 800
charge
Adjusted book balance 642,000

June 2019 bank statement is shown below:

Period covered: May 31, 2019-June 30, 2019

Date Checks Deposit

June 1 8,000 10,000
June 8 2,000
June 11 14,000 20,000
June 13 1,000 DM 1,000
June 16 4,000
June 21 12,000 56,000
June 29 18,000
June 30 1,000 EC 1000 EC
June 30 200 SV
June 30 3,000 DM
SV-Service Charge DM-Debit memo

EC-Error Corrected CM-Credit memo

The paid checks accompanying this bank statement (all clearing in June) are the following:

No. 652 P8,000 No. 654 P14,000 No. 657 P12,000

No. 653 P2,000 No. 655 P4,000 No. 658 P18,000

The check register reveals that the last check issued in June is No. 659 for P5,000 and that check no. 656
is for P2,600.

Cash received for the period June 22 through June 30 of P70,000 was deposited in the bank on July 1.

The debit memos on June 13 and June 30 represents customers’ NSF checks returned by the bank. The
June 13 NSF was immediately redeposited without entry. The June 30 NSF was redeposited on July 1
without entry.

1. What is the total bank receipts in June?

A. P77,000 B. P78,000 C. P87,000 D. P88,000
2. What is the total bank disbursement in June?
A. P58,000 B. P58,200 C. P59,200 D. P63,200
3. What is the total book receipts in June?
A. P88,000 B. P146,000 C. P218,000 D. P220,000
4. What is the total book disbursements in June?
A. P53,000 B. P56,400 C. P57,400 D. P63,200
5. What is the book balance on June 30, 2019?
A. P676,800 B. P732,200 C. P732,400 D. P729,200

PROBLEM 2

ABC Company loaned P16,500,000 to Nanlaban Co. Company on January 1, 2016. The initial loan
repayment terms include a 10% interest rate plus annual principal payments of P3,300,000 on January 1
each year.

Nanlaban Co. made the required interest payment in 2016 but did not make the P3,300,00 principal
payment nor the P1,650,000 interest payment for 2017. ABC Company is preparing its annual financial
statements on December 31, 2017. Nanlaban Co. is having financial difficulty and ABC has concluded
that the loan is impaired.

Analysis of Nanlaban Co.’s financial condition on December 31, 2017 indicates the principal payments
will be collected but the collection of interest is unlikely. ABC did not accrue the interest on December
31, 2017.

The projected cash flows are:

December 31, 2018 P5,250,000

December 31, 2019 6,000,000
December 31, 2020 5,250,000
Total P16,500,00

6. What is the loan impairment loss on December 31, 2017?

A. P0 B. P1,650,000 C. P2,824,500 D. P16,500,000
7. What is the interest income to be reported by ABC in 2018?
A. P979,305 B. P1,367,550 C. P1,504,305 D. P1,650,000
8. What is the carrying value of loan receivable on December 31, 2019?
A. P4,772,355 B. P5,250,000 C. P9,793,050 D. P13,675,500
9. What is the interest income in 2019?
A. P477,237 B. P979,305 C. P1,367,550 D. P1,650,000
10. What is the interest income in 2020?
A. P477,645 B. P979,305 C. P1,367,550 D. P1,650,00
PROBLEM 3

DEF Company is a distributor of various engine parts. In testing the sales and purchases cut off of the
company in connection with your audit of its financial statements for the year ended August 31, 20x1,
you find the following information:

The company has ceased operation during the physical count on September 2, except for receiving
goods from suppliers and making shipments to essential wholesale customers. On the morning of the
physical count, you noted in your working papers the last shipping document (no. 314) and receiving
report (no. 682) issued the previous day.

You observed the client’s counting procedures and performed test of counts of selected inventory items.
You found the counts and descriptions to be accurate.

Before leaving the warehouse at the end of day after all counting is completed, you performed the
following:

1. Examined the receiving reports book. The last number used was 686. The receiving clerk
informed you that all goods received on September 2 were kept in the receiving department
with other goods received during the past two or three days.
2. Examined the shipping documents book. The last number used was 318.
3. Asked the receiving department to identify all goods received September 1. He told you that
receiving 680 through 682 are those goods received on September 1.
4. Asked the shipping department to identify all goods shipped or sold over the counter on
September 1. He informed you goods on shipping documents 311 to 313 were shipped on
September 1.
5. Examined the client’s inventory counts in the receiving department. Inventory had been
counted only for receiving reports 674 to 684.
6. Your examination showed that inventory for all shipments made on September 2 were included
in the counts in the department from which the inventory was taken.

During the year-end work you obtained the selling prices, cost, terms and recording data for each
receipt and shipment. They are shown below.

PURCHASE OF INVENTORY

Receiving Date shipped Date received Peso amount Included in (I) FOB Term
report date of acquisition or Excluded
from ( E )
August
Purchases
Journal
679 8-29 8-30 P 25,800 I Destination
680 8-27 9-01 36,330 I Shipping point
681 8-20 9-01 5,790 I Shipping point
682 8-27 9-01 140,220 I Destination
683 8-30 9-02 13,500 E Destination
684 8-30 9-02 3,180 E Shipping point
685 9-02 9-02 84,000 E Shipping point
686 8-30 9-02 20,580 E Destination
 SHIPMENT OF INVENTORY

Shipping Document No Date shipped Peso amount of sales Included in (I) or

Excluded ( E ) August
sales journal
310 8-31 P23,400 I
311 9-01 1,680 I
312 9-01 95,280 I
313 9-01 19,050 I
314 9-01 5,790 I
315 9-02 48,630 E
316 9-02 10,350 E
317 9-02 2,340 E
318 9-02 108,330 E

11. The entry to adjust the records as of August 3 for cutoff errors in accounts payable is:
A. Accounts payable 182,340
Purchases 182,340
B. Purchases 37,260
Accounts payable 37,260
C. Accounts payable 137,040
Purchases 137,040
D. Purchases 25,800
Accounts payable 25,800
12. The entry to adjust the records as of August 31 for cutoff errors in sales is:
A. Accounts receivable 23,400
Sales 23,400
B. Accounts receivable 169,650
Sales 169,650
C. Sales 98,940
Accounts receivable 98,940
D. Sales 122,340
Accounts receivable 122,340

For the following questions assume that no adjustments in questions 11 and 12 affected inventory and
the gross profit percentage is approximately 30 percent

13. As a result of the purchases cutoff test, how much should be removed from the client’s physical
inventory?
A. P140,220 B. P143,400 C. P146,010 D. P153,720
14. As a result of the sales cutoff test, how much should be added to the client’s physical inventory?
A. P38,094 B. P81,585 C. P102,018 D. P118,755
15. The net adjustment to the client’s inventory is:
A. P41,382 decrease
B. P64,425 decrease
C. P72,135 decrease
D. P102,126 decrease

PROBLEM 4

The following information pertains to GHI Company’s depreciable assets:

1. Machine X was purchased for P150,000 on January 1, 2014. The entire cost was expensed in the
year of acquisition. The estimated useful life of this machine is 15 years with no residual value.
2. Machine Y cost P525,000 and was acquired on January 1, 2015. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight line depreciation method
was used. On January 2, 2019, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25,000 residual value.
3. A building was purchased on January 3, 2016 for P3,000,000. The building was expected to have
a useful life of 20 years with no residual value. The straight line depreciation method was used.
On January 1, 2019, a change was made to the sum-of-the-year’s -digit method of depreciation.
No change was made to the estimated useful life and residual value of the building.
 16. The adjusting entry on January 1, 2019, relative to the machine X should include a credit to
A. Accumulated depreciation of P60,000
B. Retained earnings of P100,000
C. Machinery of P150,000
D. No adjusting entry is necessary
17. What is the carrying value of Machine Y on December 31, 2018?
A. P306,250 B. P325,000 C. P350,000 D. P525,000
18. What is the depreciation expense on machine Y for 2019?
A. P41,667 B. P77,083 C. P81,250 D. P87,500
19. What is the book value of the building at December 31, 2018?
A. P1,942,857 B. P2,185,714 C. P2,266,667 D. P2,550,000
20. What is the book value of the building at December 31, 2019?
A. P1,942,857 B. P2,185,714 C. P2,266,667 D. P2,550,000

PROBLEM 5

JKL Company was incorporated on January 2, 2018. The corporation’s financial statement for its first
year of operations were not examined by a CPA. You have been engaged to audit the financial
statements for the year ended December 31, 2019 and your audit is substantially completed. The
corporation’s trial balance appears below.

JKL Company
TRIAL BALANCE
December 31, 2019
Debit Credit
Cash P450,000
Accounts receivable 2,190,000
Allowance for doubtful P43,800
accounts
Inventories 1,506,000
Machinery and equipment 3,570,000
Accumulated depreciation 786,000
Patents 3,846,000
Leasehold improvements 900,000
Prepaid expenses 1,350,000
Goodwill 900,000
Licensing agreement No 1 1,800,000
Licensing agreement No 2 1,680,000
Accounts payable 2,190,000
Unearned revenue 518,400
Share capital 9,000,000
Retained earnings, January 1, 4,771,800
2018
Sales 21,600,000
Cost of goods sold 14,250,000
Selling and administrative 5,583,000
expenses
Interest expense 285,000
Loss on extinguishments of debt 600,000
Totals P38,910,000 P38,910,000

The following information relates to accounts that may ye require adjustment.

A. Patents for JKL Company manufacturing process were acquired January 2, 2019 at a cost of
P2,805,000. An additional P1,041,000 was spent on December 29, 2019, to improve machinery
covered by the patents and charged to the Patents account. Depreciation on property, plant and
equipment has been properly recorded in 2019. JKL Company uses the straight-line method for
all depreciation and amortization and the legal life on its patents.
B. On January 3, 2018, JKL Company purchase Licensing Agreement No 1 which was believed to
have an indefinite useful life. The balance in the Licensing Agreement No 1 account includes its
purchase price of P1,710,000 and expenses of P90,000 related to the acquisition. On January 1,
2019 JKL Company purchases Licensing Agreement No. 2 which has a life expectancy of 10 years.
The balance in the Licensing Agreement No 2 account includes its P1,620,000 purchase price and
 P180,000 in acquisition expenses, but it has been reduced by a credit of P120,000 for the
advance collection of 2020 revenue from the agreement.
In late December 2018, an explosion caused a permanent reduction in the expected revenue-
producing value of Licensing Agreement No 1 and in January 2020, a flood caused additional
damage that rendered the agreement worthless. The recoverable amount of Licensing
agreement No. 1 was determined to be P720,000 at December 31, 2018.
C. The balance in the Goodwill account represents amount paid on December 30, 2018 for a four
year advertising program, estimated to assist in increasing JKL Company sales.
D. The leasehold improvement account includes (1) the P450,000 cost of improvements with a
total estimated useful life of 12 years which JKL Company as tenant made to leased premises in
January 2018 and (2) a movable assembly line equipment costing P450,000 that was installed in
the leased premises in December 2019. JKL Company paid its rent in full during 2019. A 10-year
non-renewable lease was signed on January 3, 2018, for the leased building that JKL used in
manufacturing operations.

21. What is the carrying value of Patents on December 31, 2019?

A. P2,664,750 B. P2,805,000 C. P3,653,700 D. P3,846,000
22. What amount of impairment loss should be recognized in 2018?
A. P0 B. P990,000 C. P1,080,000 D. P1,710,000
23. What is the carrying value of Licensing agreement no. 2 on December 31, 2019?
A. P1,620,000 B. P1,728,000 C. P1,800,000 D. P1,920,000
24. What is the carrying value of Leasehold improvements on December 31, 2019?
A. P360,000 B. P375,000 C. P405,000 D. P720,000
25. What is the adjusted balance of the Machinery and Equipment account on December 31, 2019?
A. P3,570,000 B. P4,275,000 C. P4,611,000 D. P5,061,000

PROBLEM 6
MNO Co holds debt securities within a business model whose objective is achieved both by collecting
contractual cash flows and selling the debt securities. The contractual cash flows are solely payments of
principal and interest on specified dates.
On December 31, 2017, the company purchased 5-year 1,000,000, 7% bonds for P1,086,565. The bonds
were purchased to yield 5% interest.
The following schedule of presents the fair value of the bonds at year-end.
Date Fair Value
December 31, 2018 P1,065,000
December 31, 2019 1,075,000
December 31, 2020 1,056,500
December 31, 2021 1,030,000
December 31, 2022 1,000,000

26. What amount should be reported as investment in bonds in the statement of financial position
of MNO Co on December 31, 2019?
A. P1,054,438 B. P1,065,000 C. P1,075,000 D. P1,086,565
27. What amount of unrealized gain should be shown as component of other comprehensive
income in the 2019 statement of comprehensive income?
A. P10,000 B. P16,455 C. P20,562 D. P26,455
28. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2020 statement of comprehensive income?
A. P1,222 B. P14,393 C. P18,500 D. P19,340
29. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2021 statement of comprehensive income?
A. P8,358 B. P9,792 C. P10,982 D. P26,500
30. What amount of unrealized gain should be shown in the 2021 statement of changes in equity.
A. P10,990 B. P16,883 C. P25,233 D. P26,455
PROBLEM 7

The following transactions for the long-term, fair value through other comprehensive income
investments of PQR Corporation, took place in 2019:

Feb 10 PQR acquired 10,000 shares of Knock down Co. ordinary shares at P88 per share
March 31 Knock down Co. issues a 10% stock dividend to ordinary shareholders
June 30 Knock down Co. issues rights to ordinary shareholders for the acquisition of one
additional share at P90 for every five shared held. The ordinary share was trading
ex-rights at P114 a share and the rights had a market value P6 per right.
July 13 PQR exercised 10,000 rights to acquire new shares
July 20 The remaining 1,000 rights were sold for P5.5 each
Oct 12 PQR sold 4,000 shares of Knock down Co. ordinary shares for P440,000. The
shares sold were specifically identified as being from those acquired on February
10.

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

31. The cost of stock right to be recorded on June 30, 2019?

A. P13,200 B. P44,000 C. P66,000 D. None
32. The cost of investment acquired on July 13, 2019?
A. P192,000 B. P220,000 C. P240,000 D. None
33. Gain or loss on sale of the remaining rights sold on July 20, 2019?
A. P4,300 gain B. P3,400 loss C. P500 loss D. None
34. The realized loss on the sale of the 4,000 shares sold on October 12, 2019?
A. P88,000 B. P136,000 C. P16,000 D. None
35. The adjusted balance of the investment account for the year ended December 31, 2019?
A. P1,032,000 B. P754,000 C. P1,038,000 D. None