AUDITING PROBLEMS TEST BANK 2
PROBLEM NO. 1
You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2017. 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 company’s
statement of financial position and statement of income as of and for the year ended December
31, 2017. Audit findings are as follows:
I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2018. 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 2018.
You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank
Add: Deposit in transit
Bank debit memos
Returned check
Less: Outstanding checks
Book error
Balance per books
P277,994
248,836
712,750
63,000
(174,580)
(72,000)
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, 2018.
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, 2017 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2018.
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, 2017. 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 company’s policy to provide allowance for doubtful accounts as follows:
Less than 3 months
3 to 6 months
Over 6 months
Total
P2,500,960
843,200
274,500
P3,618,660
1%
5%
10%
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.
Page
III. AUDIT OF MARKETABLE SECURITIES – TRADING
2
The company’s equity portfolio as of year-end showed the following:
Bacnotan Cement
Fil-Estate
Ionics
La Tondena
Selecta
Union Bank
Total
Shares
7,000
10,000
2,400
2,000
8,000
1,600
The securities are listed in the stock exchange.
accounting.
Market Value
Cost
P108,500
195,000
49,200
67,000
31,600
50,880
P502,180
per Share
P16.00
19.75
24.00
26.00
1.20
27.50
The company follows the fair value
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,
2017. No interest has been accrued on the note as of December 31, 2017.
V. AUDIT OF PREPAYMENTS
Prepaid expenses account consists of the following:
Prepaid
Prepaid
Prepaid
Unused
advertising
insurance
rent
office supplies
P 640,000
490,000
420,000
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, 2017. Payment was made on July 20,
2017, 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, 2017, a check for P420,000 was issued in payment of threemonth rental as per renewal contract which was effective on November 1, 2017. Rental
deposit remained at three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1,
2018. No adjustment has been made as of December 31, 2017.
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, 2017 and included the same in their office supplies inventory. As at year-end,
unused office supplies amount to P102,500.
Page 3
VI. AUDIT OF INVENTORIES
A physical count of inventories was conducted simultaneously in all stores on December 29
and 20, 2017. Your review of the list submitted by the accountant disclosed the following:
1.
Some deliveries made in December 2017 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, 2018. 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, 2017. 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, 2017, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 on December 31, 2017. Depreciation booked from October 1,
2017 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 2017 were recorded when paid in January 2018 which
included the following:
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, 2017. Accrued interest on this loan was
not taken up at year-end.
Page 4
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, 2017, payable on January 31, 2018.
Ayala Merchants Corporation
UNADJUSTED TRIAL BALANCE
December 31, 2017
Petty cash fund
Cash in bank
Trading securities
Accounts receivable – trade
Allowance for doubtful accounts
Notes receivable
Inventories
Prepaid advertising
Prepaid insurance
Prepaid rent
Office supplies inventory
Furniture and fixtures
Delivery equipment
Accumulated depreciation
Other assets
Accounts payable – trade
Notes payable
Accrued expenses
Bonds payable
Discount on bonds payable
Ordinary share capital
Retained earnings
Sales
Cost of goods sold
Operating expenses
Other income
Other charges
Debit
P 60,000
1,056,000
483,640
3,618,660
1,300,000
7,274,900
640,000
490,000
420,000
361,000
1,298,400
2,770,000
548,000
500,000
8,034,000
3,357,000
625,280
P32,836,880
Credit
P 110,360
1,177,500
2,356,320
3,300,000
169,040
5,000,000
5,400,000
792,160
13,078,000
1,453,500
P32,836,880
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
C. P130,316
D. P88,217
5. Allowance for doubtful accounts
A. P110,360
B. P152,640
Page
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
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
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
10. Prepaid advertising
A. P325,000
B. P13,523,866
5
Page
6
PROBLEM NO. 2
To substantiate the existence of the accounts receivable balances as at December 31, 2017 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
Customer
Concordia
Balance
Per Books
P150,000
Falcon
P30,000
Lazaro
P144,000
Silang
P112,500
Yakal
P135,000
Comments
From Customers
P90,000 was returned on December 30,
2017. Correct balance as is P60,000.
Your CM representing price adjustment
dated December 28, 2017 cancels this.
You have overpriced us by P150. Correct
price should be P300.
We received the goods only on January 6,
2018.
Balance was offset by our December
shipment of your raw materials.
Audit Findings
Returned
goods
were
received December 31, 2017.
The CM was taken up by
Lukas Company in 2018.
The complaint is valid.
Term is shipping point.
Shipped in 2017.
Lukas
Company
credited
accounts
payable
for
P135,000
to
record
purchases.
Yakal is a
supplier.
21. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000.
B. Decrease by P90,000.
C. Increase by P18,000.
D. Increase by P90,000.
22. The effect on 2017 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over.
B. P30,000 under.
C. P6,000 over.
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.
B. P112,500 over.
C. P112,500 under.
D. P225,000 under.
25. The adjusting entry to correct the receivable from Yakal is
A. Purchases
Accounts receivable
B. Accounts payable
Purchases
C. Accounts receivable
Accounts payable
D. Accounts payable
Accounts receivable
135,000
135,000
135,000
135,000
135,000
135,000
135,000
135,000
Page 7
PROBLEM NO. 3
Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile,
Inc. for the year ending December 31, 2017. After obtaining an understanding of the client’s
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 entity’s assertion of rights and obligations related to inventories:
A. Trace the test counts noted during the entity’s physical count to the entity’s
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.
28. From the auditor’s point of view, inventory counts are more acceptable prior to the yearend 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 retailer’s 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 retailer’s 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.
Page 8
PROBLEM NO. 4
A portion of the SPARK COMPANY’s statement of financial position appears as follows:
Assets:
Cash
Notes receivable
Inventory
Liabilities:
Accounts payable
December 31, 2017
December 31, 2016
P353,300
0
?
P100,000
25,000
199,875
?
75,000
Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2017, cash totaling P471,700 was paid on accounts payable. Operating expenses for
2017 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 2017 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 2016 was valued at
P32.50 per unit.
31. Number of units sold during 2017
A. 7,066
B. 18,400
C. 4,268
D. 13,400
32. Accounts payable balance at December 31, 2017
A. P190,100
B. P50,000
C. P199,100
D. P200,000
C. 17,084
D. 10,750
C. P192,950
D. P189,660
33. Inventory quantity on December 31, 2017
A. 5,750
B. 2,750
34. Cost of inventory on December 31, 2017
A. P187,450
B. P186,875
35. Cost of goods sold for the year ended December 31, 2017
A. P609,125
B. P609,700
C. P606,915
D. P603,625
Page 9
PROBLEM NO. 5
A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested
by your auditor soon after December 31, 2017, showing the additions, retirements,
depreciation, and other data affecting the income of the company in the 4-year period 2014 to
2017, inclusive.
The following data were ascertained.
Balance of Trucks account, Jan. 1, 2014
Truck No. 1 purchased
Truck No. 2 purchased
Truck No. 3 purchased
Truck No. 4 purchased
Balance, Jan. 1, 2014
Jan. 1, 2011, cost
July 1, 2011, cost
Jan. 1, 2013, cost
July 1, 2013, cost
P180,000
220,000
300,000
240,000
P940,000
The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2014, 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, 2014.
Transactions between January 1, 2014, and December 31, 2017, which were recorded in the
ledger, are as follows.
July 1, 2014
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, 2015
Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.
July 1, 2016
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, 2016
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.
Page 10
Entries for depreciation had been made at the close of each year as follows: 2014, P210,000;
2015, P225,000; 2016, P250,500; 2017, P304,000.
36. What is the total depreciation expense for the year ended December 31, 2014?
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, 2014?
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, 2017?
A. P414,000
B. P348,000
C. P228,500
D. P894,000
39. The total depreciation expense recorded for the 4-year period (2014-2017) is overstated
by
A. P185,500
B. P265,500
C. P287,500
D. P275,500
40. The books have not been closed for 2017. What is the compound journal entry on
December 31, 2017 to correct the company’s errors for the 4-year period (2014-2017)?
A. Accumulated depreciation
Trucks
Retained earnings
Depreciation expense
B. Accumulated depreciation
Trucks
Retained earnings
Depreciation expense
C. Accumulated depreciation
Trucks
Retained earnings
D. Accumulated depreciation
Trucks
629,500
665,500
665,500
665,500
480,000
9,500
140,000
480,000
45,500
140,000
480,000
185,500
665,500
Page 11
PROBLEM NO. 6
The cash account of NUNAL COMPANY shows the following activities:
Date
Nov. 30
Dec. 2
4
15
20
21
31
31
Balance
November bank charges
November bank credit for notes
receivable collected
NSF check
Loan proceeds
December bank charges
Cash receipts book
Cash disbursements book
RECEIPTS
Date
Dec. 1
2
3
4
5
8
9
10
11
12
15
16
17
18
19
22
23
23
23
26
28
28
29
29
29
Totals
OR No.
110-120
121-136
137-150
151-165
166-190
191-210
211-232
233-250
251-275
276-300
301-309
310-350
351-390
391-420
421-480
481-500
501-525
526-555
556-611
612-630
-
Debit
P
P 30,000
145,500
2,121,900
CASH BOOKS
Amount
P 33,000
63,900
60,000
168,000
117,000
198,000
264,000
231,000
63,000
90,000
165,000
24,000
57,000
27,000
51,000
63,000
96,000
222,000
15,000
114,000
P2,121,900
Credit
150
3,900
180
1,224,000
Balance
P345,000
344,850
374,850
370,950
516,450
516,270
2,638,170
1,414,170
PAYMENTS
Check No.
801
802
803
804
805
806
807
808
809
810
811
812
813
814
816
817
818
819
820
821
822
823
824
825
826
Amount
P 6,000
9,000
3,000
9,000
36,000
57,000
78,000
90,000
183,000
21,000
24,000
48,000
60,000
66,000
108,000
33,000
150,000
21,000
12,000
9,000
36,000
39,000
87,000
6,000
33,000
P1,224,000
Page 12
BANK STATEMENT
Date
Dec. 1
2
3
4
5
8
9
10
11
12
15
16
17
18
19
22
23
23
23
26
28
28
29
29
29
Totals
Check
792
802
804
EC
805
CM 16
799
DM 57
808
803
809
DM 61
813
CM 20
815
816
811
801
814
818
DM 112
821
CM 36
820
Charges
P 7,500
9,000
9,000
243,000
36,000
21,150
3.900
90,000
3,000
183,000
180
60,000
18,000
108,000
24,000
6,000
66,000
150,000
360
9,000
12,000
P1,059,090
Additional information:
1.
2.
3.
4.
5.
6.
7.
DMs 61 and 112 are for service charges.
EC is error corrected.
DM 57 is for an NSF check.
CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
CM 16 is for the correction of an erroneous November bank charge.
CM 36 is for customers’ notes collected by bank in December.
Bank balance on December 31 is P1,776,810
Credits
P 25,500
33,000
63,900
60,000
243,000
285,000
36,000
462,000
231,000
63,000
255,000
24,000
57,000
145,500
141,000
96,000
222,000
15,000
36,000
P2,493,900
Page 13
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
C. P441,000
D. P487,650
C. P 0
D. P25,500
C. P132,000
D. P 0
C. P375,000
D. P374,850
42. Outstanding checks at December 31
A. P459,000
B. P477,000
43. Deposit in transit at November 30
A. P58,500
B. P145,500
44. Deposit in transit at December 31
A. P114,000
B. P139,500
45. Adjusted book balance at November 30
A. P410,850
B. P345,000
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
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
C. P1,431,810
D. P1,776,810
C. P1,776,810
D. P342,000
48. Adjusted bank balance at December 31
A. P1,449,810
B. P1,674,810
49. Unadjusted bank balance at November 30
A. P555,060
B. P94,560
50. The best evidence regarding year-end bank balances is documented in the
A.
B.
C.
D.
Cutoff bank statements.
Bank reconciliations.
Interbank transfer schedule.
Bank deposit lead schedule.
Page 14
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 1st 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 5th 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 6th 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 7th year?
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 11th 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
Page 15
PROBLEM NO. 8
The HVR Company included the following in its notes receivable on December 31, 2017:
Note receivable from sale of land
Note receivable from consultation
Note receivable from sale of equipment
P2,640,000
3,600,000
4,800,000
The following transactions during 2017 and other information relate to the company’s notes
receceivable:
a) On January 1, 2017, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s 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,
2018. There was no established exchange price for the land. The prevailing interest rate
for this note on January 1, 2017 was 10%.
b) On January 1, 2017, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2019, 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, 2017.
c) On January 1, 2017, 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, 2017. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January 1,
2017.
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 2017?
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, 2017 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, 2017 is
A. P4,800,000
B. P2,400,200
C. P4,404,900
D. P7,440,000
60. How much interest income should be recognized in 2017?
A. P974,200
B. P756,000
C. P1,378,700
--- END ---
D. P1,160,500