Auditing Problems
Summer 2011
AUDIT OF CASH
Problem 1
The auditor of Beeboo, Inc. examined the petty cash fund immediately after the close of business, July 31,
2010, the end of the company’s business year. The petty cash custodian presented the following during the
count:
Currency
Petty cash vouchers:
Postage
Office supplies expense
Transportation expense
Computer repairs
Advances to office staff
A checken drawn by Beeboo, Inc., payable
to the petty cash custodian
Postage stamps
An employee's check, returned by bank, marked NSF
An envelope containing currency of P1,890for a gift
a retiring employee
The general ledger shows an imprest petty cash fund balance of P16,000.
1. How much is the petty cash shortage or overage?
a. P2,190 overage
b. P2,190 shortage
c. P1,890 shortage
d. P1,890 overage
2. What is the adjusted balance of the petty cash fund at July 31, 2010?
a. P10,470
c. P7,200
b. P3,540
d. P8,850
Solution:
1.
Currency
Petty cash vouchers (420+900+340+800+1500)
Replenishment check
Employee's NSF check
Petty cash accounted
Petty cash fund per ledger
Petty cash shortage
1,650
3,960
7,200
1,000
13,810
16,000
2,190
2.
Currency
Replenishment check
Adjusted petty cash balance
1,650
7,200
8,850
Class Schedule: M-F 7:30-9:30; 11:30-1:30
1,650
420
900
340
800
1,500
7,200
300
1,000
1,890
16,000
Auditing Problems
Summer 2011
Problem 2
Beeboo, Inc.’s newly hired accountant prepared the following cash reconciliation as of June 30, 2010:
Unadjusted balance
Deposits in transit
Bank service charges
Check written and recorded on June 30
but was released on July 4
Outstanding checks
NSF checks
Loan proceeds (company not informed)
Erroneous bank debit
Customers' checks received on June 29
(all dated July 6), included in deposits in transit
Certified check
Unlocated difference
BANK
268,367
BOOK
79,367
(15,000)
1,000
(12,000)
36,000
17,000
200,000
15,000
9,000
11,000
477,367
345,000
477,367
The adjusted cash balance of Beeboo, Inc. on June 30, 2010 should be
a. P265,367
c. P273,367
b. P253,367
d. P264,367
Solution:
Unadjusted balances
Deposits in transit, net of post-dated checks
(15,000-9,000)
Bank service charges
Unreleased check
Outstanding checks, net of certified check
(36,000-11,000)
NSF check
Loan proceeds
Erroneous bank debit
Post-dated checks
Adjusted balances
Book
79,367
Bank
268,367
6,000
(1,000)
12,000
(25,000)
(17,000)
200,000
15,000
(9,000)
264,367
264,367
Problem 3
The cash account shows a balance of P225,000 before reconciliation. The bank statement does not include a
deposit of P11,500 made on the last day on the month. The bank statement shows a collection by the bank of
P4,700 and a customer’s check for P1,600 was returned because it was NSF. A customer’s check for P2,250
was recorded on the books as P2,700 and a check written for P395 was recorded as P485.
What should be the correct cash balance?
a. P227,740
b. P239,240
c. P228,640
d. P227,560
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
ssSolution:
Balance per books
Bank collection
Customer's NSF check
Overstatement of cash receipt (2,700-2,250)
Overstatement of cash disbursement (485-395)
Adjusted cash balance
225,000
4,700
(1,600)
(450)
90
227,740
Problem 4
On July 5, 2010, Beeboo, Inc. received its bank statement for the month ending June 30. The statement
showed a P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the
balances, the auditor discovered that:
1. The June 30 collections of P176,000 were recorded on the books but were not deposited until July.
2. The bank service charges for the month of June totaled P3,000.
3. A paid check for P24,300 was entered incorrectly in the cash payments journal as P34,200.
What is the total outstanding checks at June 30, 2010?
a. P75,400
b. P343,600
c. P363,400
d. P353,500
Solution:
Balance per books, June 30, 2010
Bank service charges
Overstatement of disbursement (34,200-24,300)
Adjusted cash balance
35,000
(3,000)
9,900
41,900
Balance per bank, June 30, 2010
Add: Undeposited checks
Total
Less: Adjusted cash balance
Oustanding checks, June 30, 2010
209,500
176,000
385,500
41,900
343,600
BY: BONGHANOY, Jayssa
Problem 5
Shown below is the bank reconciliation for Mutya Company for May 2010:
Balance per bank, May 31, 2010
Deposit in transit
Outstanding checks
Bank credit recorded in error
Cash balance per book, May 31, 2010
P300 000
48 000
(56 000)
(20 000)
P272 000
The bank statement for June 2010 contains the following data:
Total deposits
Total charges, including an NSF of P16 000
and service charge of P800
P220 000
192 000
All outstanding checks on April 30, including the bank credit, were cleared in the bank on May 31. There were
outstanding checks of P60 000 and deposits in transit of P76 000 on May 31, 2010.
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
What is the cash balance per bank on June 30, 2010?
a. P300 000
b. P328 000
c. P344 000
d. P344 800
Solution:
Answer B
Balance, May 31, 2010
Add: Receipts (deposits)
Total
Less: Disbursements
Balance, June 30, 2010
P300 000
220 000
P520 000
192 000
P328 000
Problem 6
The cashier of Momay Company misplaced all the bank statements for the past years. You reviewed the
accounting records and discovered that the following journal entries were made to reconcile the June 30, 2010
bank records and accounting records.
Accounts Receivable
Miscellaneous Expense
Notes Receivable
Interest Revenue
Cash
76, 012
625
10 000
500
66 137
Pre-adjustment cash balance in the accounting records was P371 023.50, outstanding checks were P10 375
and no other adjustments were required.
What is the balance of the cash account per bank statement as of June 30, 2010?
a. P304 886.50
b. P315 261.50
c. P371 023.50
d. P381 523.50
Solution:
Answer B
Balance per books
Outstanding checks
NSF checks
Bank charges
Proceeds of note
Interest on note
Balance per bank statement
P371 023.50
10 375.00
(76 012.00)
( 625.00)
10 000.00
500.00
P315 261.50
Problem 7
Imortal Co. provided the following information about the composition of its cash on December 31, 2010:
o Commercial savings account of P600 000 and a commercial checking account balance of P900 000
are held at BPI.
o Money market fund account held by Citibank that permits Imortal to write checks in this balance,
P5 000 000.
o Travel advances of P180 000 for executive travel for the first quarter of next year (employee to pay
through salary deduction.)
o A separate cash fund in the amount of P1 500 000 is restricted for the retirement of long term assets.
o Petty cash fund, P10 000.
What is the correct amount of cash and cash equivalent Imortal Company should report in its December 31,
2010 statement of financial position?
a. P 610.00
b. P1 510.00
c. P6 400.00
d. P6 510.00
Solution:
Answer D
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Commercial – savings account
Commercial – checking account
Money market fund
Petty cash fund
Correct cash and cash equivalents
P 600 000
900 000
5 000 000
10 000
P6 510 000
Problem 8
Green Rose Company is preparing its March 31 bank reconciliation. The following data are available:
From the February 28 bank reconciliation
Deposits in transit, P1 700
Outstanding checks, P3 900
March Data:
Balance, February 28
March deposits reflected
March checks reflected
Note collected (including P200 interest)
Service charge
Balance, March 31
Per Bank
74 140
47 600
( 61 700)*
20 000
(
120)
79 920
Per Book
71 940
49 000
( 61 000)
________
59 940
*Erroneously includes a check drawn by Green Company for P1 500.
1. How much is the deposits in transit at March 31?
a. P 300
c. P3 100
b. P1 400
d. P4 500
Solution:
Answer C
Book deposits
Less: Bank deposits – March
Total deposits during March
P47 600
Less: Deposits in Transit – beg
1 700
Deposits in transit, end
P49 000
45 000
P 3 100
2. How much is the outstanding checks at March 31?
a. P4 700
c. P6 900
b. P1 400
d. P4 500
Solution:
Answer A
Book checks
Less: Bank checks – February
Checks paid
Outstanding checks, beg
Bank error
Outstanding checks, March 31
P61 000
P61 700
( 3 900)
( 1 500)
56 300
P 4 700
BY: LAO, Malou
Problem 9
In preparing its August 31,2010 bank reconciliation, Mutya Company has available the following :
Balance per bank statement
P1, 805,000
Deposit in transit
325,000
Return of customer’s check for insufficient fund
60,000
Outstanding checks
275,000
Bank service charge for August
10,000
At August 31, 2010, Mutya’s correct cash balance is
a.
b.
c.
d.
1,855,000
1,795,000
1,785,000
1,755,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Solution:
Answer A
Bal. per bank
Add: deposit in transit
Less: outstanding checks
Total
1,805,000
325,000
275,000
1,855,000
Problem 10
In your audit of Minsan lang Kitang Iibigin Company as of December 31,2010, you gathered the following:
Balance per book
Bank service charge
Outstanding checks
Deposit in transit
Customer not collected by bank
Interest in customer note
Return of customer’s check for insufficient fund
Depositor’s note charged to account
P1, 000,000
3,000
235,000
300,000
375,000
15,000
62,000
250,000
The correct cash balance amounts to:
a.
b.
c.
d.
1,575,000
1,065,000
1,075,000
1,325,000
Solution:
Answer C
Per book
Bank charges
Note collected by bank
Interest in customer note
NSF
Note charged to account
Adjusted book balance
1000000
(3000)
375,000
15,000
(62,000)
(250,000)
1,075,000
Problem 11
On December 21,2010 Green Rose Company had the following cash balances:
Cash balance
Petty cash fund(all funds were reimbursed on 12/31/2010
Time deposit (due Feb. 1,2011)
1,800,000
50,000
250,000
Cash in bank includes P600,000 of compensating balance against short-term borrowing arrangement at
December 31,2010/ The compensating balance is legally restricted as to withdrawal by Green rose. In the
current asset section of Green Rose’s December 31,2010 balance sheet, what total amount should be
reported as cash and cash equivalent?
a.
b.
c.
d.
1,850,000
1,250,000
2,100,000
1,500,000
Solution:
Answer D
Cash in bank (1,800,000-600,000)
Petty cash fund
Time deposit
Total cash
1,200,000
50,000
250,000
1,500,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Problem 12
The following information pertains to 100 Day’s to Heaven Company at December 31,2010:
Bank statement balance
Checkbook balance
Deposit in transit
Outstanding Check
1,000,000
1,400,000
500,000
100,000
In 100 Day’s to Heaven Company at December 31,2010 balance sheet, cash should be reported at
a.
b.
c.
d.
900,000
1,000,000
1,400,000
1,500,000
Solution:
Answer C
Bal. per bank
Add; deposit in transit
Less: outstanding checks
Total
1,000,000
500,000
100,000
1,400,000
Problem 13
The cash account in the ledger of American Idol Company shows a balance of P 1,652,000 at September
30,2010. The bank statement however shows a balance of P 2,090,000 at the same date. The only reconciling
items consist of a bank service charge of P2,000, a large number of outstanding checks totaling P 590,000 and
a deposit in transit. What is the deposit in transit in September 30,2010 bank reconciliation?
a.
b.
c.
d.
150,000
440,000
154,000
592,000
Solution:
Answer A
Bal. per book
Service charge
Adjusted book bal.
1,652,000
( 2,000)
1,650,000
Bal. per bank
Deposit in transit(squeeze)
Outstanding checks
Adj, Bank Balance
2,090,000
150,000
(590,000)
1,650,000
BY: MAGHANOY, Jolly Ann
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF RECEIVABLES
Problem 1
On the December 31, 2010 Balance Sheet of IPANABI NA NI REYMAR KAW (INNRK) Company, the current
receivables consisted of the ff.:
Trade Accounts Receivable
Allowance for Doubtful Accounts
Claim against shipper for goods lost in transit
(November 2010)
Selling Price of unsold goods sent by INNRK
On consignment at 130% of cost
(not included in INNRK’S ending inventory)
Security deposit on lease of warehouse used
For storing some inventories
93,000.00
(2,000.00)
3,000.00
26,000.00
30,000.00
150,000.00
Total
What is the correct total of INNRK Company’s current net receivables?
a. 94,000.00
b. 120,000.00
c. 124,000.00
d. 150,000.00
Solution:
Answer A
Trade accounts receivable
Allowance for Doubtful Accounts
Claims receivable
Total
93,000.00
(2,000.00)
3,000.00
94,000.00
Problem 2
On January 1, 2010, AHLITA Company’s Allowance for Doubtful Accounts had a credit balance of 30,000.00.
During 2010 AHLITA charged 64,000.00 to doubtful accounts expense, wrote off 46,000.00 of uncollectible
accounts, and unexpectedly recovered 12,000.00 of bad debts written off in the prior year. The allowance for
doubtful accounts at December 31, 2010 should be
a. 48,000.00
b. 60,000.00
c. 64,000.00
d. 94,000.00
Solution:
Answer B
Allowance 1/1
Add: Doubtful Accoutns
Recovery
Less: Write-off
Allowance 12/31
30,000.00
64,000.00
12,000.00
46,000.00
60,000.00
Problem 3
MALOU’S EATERY’S allowance for doubtful accounts was 1,000,000.00 at the end of 2010 and 900,000.00 at
the end of 2009. For the year ended December 31, 2010, MALOU’S EATERY reported bad debt expense of
160,000.00 in its income statement. What amount did MALOU’S EATERY debit to the appropriate account in
2010 to write off actual bad debts?
a. 60,000.00
b. 100,000.00
c. 160,000.00
d. 260,000.00
Solution:
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Answer A
Allowance 12/31/09
Bad debts expense
Less: Accounts written off (squeeze)
Allowance 12/31/10
900,000.00
160,000.00
60,000.00
1,000,000.00
Problem 4
At January 1, 2010, NOVA PIATTOS had a credit balance of 260,000.00 in its allowance for uncollectible
accounts. Based on past experience, 2% of NOVA PIATTOS’ credit sales have been uncollectible. During
2010 NOVA PIATTOS wrote off 325,000.00 of uncollectible accounts. Credit sales for 2010 were
9,000,000.00. In its December 31, 2010 balance sheet, what amount should NOVA PIATTOS report as
allowance for uncollectible accounts?
a. 115,000.00
b. 180,000.00
c. 245,000.00
d. 440,000.00
Solution:
Answer A
Allowance 1/1
Uncollectible accounts expense
Less: write off
Allowance 12/31
260,000.00
180,000.00
325,000.00
115,000.00
Problem 5
The following information is from CLAIRE BUSY AKO’S first year of operations:
1. Merchandise purchased
2. Ending Merchandise Inventory
3. Collections from customers
4. All sales are on account and goods sell at
30% above cost.
450,000.00
123,000.00
150,000.00
Accounts Receivable balance at the end of the company’s first year is:
a. 275,100.00
b. 78,900.00
c. 595,000.00
d. 435,000.00
Solution:
Answer A
Purchases
Less: Merchandise Inventory end
Cost of Goods Sold
Multiply by sales ratio
Sales
Less: collections
Accounts Receivable, end
450,000.00
123,000.00
327,000.00
130%
425,100.00
150,000.00
275,100.00
BY: SUDARIO, Elmer
Problem 6
Roxy Company had the following information for 2010 relating to its accounts receivable:
Accounts receivable at January 1
Credit Sales
Collections from customers, excluding recovery
Accounts written off
Collection of accounts written off in prior year
(customer credit was not reestablished)
Estimated uncollectible receivables per aging of
receivables at December 31
1,300,000
5,400,000
4,750,000
125,000
25,000
165,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
On December 31,2010, the balance of account receivable, before allowance for doubtful accounts, should be
a. 1,825,000
c. 1,950,000
b. 1,850,000
d. 1,990,000
Solution:
Answer A
Accounts receivable- January 1
1,300,000
Add: Credit sales
5,400,000
Total
Less: Collection from customers
Accounts written off
6,700,000
4,750,000
125,000
Accounts receivable-December 31
4,875,000
1,825,000
Problem 7
The following data relate to accounts receivable of Jay Company for the year 2010:
Accounts receivable, January 1
650,000
Credit sales
2,700,000
Sales returns
75,000
Accounts written off
40,000
Collections from customers
2,150,000
Estimated future sales returns at December 31
50,000
Estimated uncollectible accounts at 12/31 per aging
110,000
What amount should Jay report as net realizable value of accounts receivable at December 31,2010?
a. 1,200,000
b. 1,125,000
c. 1,085,000
d.
925,000
Solution:
Answer D
Accounts receivable-January 1
Credit sales
Total
Less: Collections from customers
Accounts written off
Sales returns
650,000
2,700,000
3,350,000
2,150,000
40,000
75,000
Accounts receivable-December 31
2,265,000
1,085,000
The net realizable value of accounts receivable is computed as follows:
Accounts receivable
Less: Allowance for doubtful accounts
Allowance for sales returns
Net realizable value
1,085,000
110,000
50,000
160,000
925,000
Problem 8
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Saga Company had a P3,000,000 balance in accounts receivable on January 1. The balance in allowance for
bad debts on January 1 was P360,000. Sales for the year totaled P17,000,000. All sales were credit sales.
Bad debt expense is estimated to be 2% of sales. Writeoffs of uncollectible accounts for the year were
P280,000 . The debit balance in accounts receivable on December 31 was P3,450,000. All receivables are
trade receivables. What is the amount of cash collected from customers?
a. 16,270,000
b. 16,550,000
c. 15,930,000
d. 15,570,000
Solution:
Answer A
Accounts receivable- January 1
Sales for the year
Total
3,000,000
17,000,000
20,000,000
Accounts receivable-December 31
(3,450,000)
Writeoffs of uncollectible accounts
(280,000)
Cash collected from customers
16,270,000
Problem 9
Orr Company prepared an aging of its accounts receivable at December 31, 2010 and determined that the net
realizable value of the accounts receivable 2010 was P2,500,000. Additional information is available as
follows:
Allowance for uncollectible accounts
At January 1- credit balance
280,000
Accounts written off as uncollectible
230,000
Accounts receivable at December 31
2,700,000
Uncollectible accounts recovery
50,000
For the year ended December 31,2010, Orr’s uncollectible accounts expense would be
a. 230,000
b. 200,000
c. 150,000
d. 100,000
Solution:
Answer D
Allowance-January 1
280,000
Recovery of accounts written off
50,000
Uncollectible accounts expense(SQUEEZE)
100,000
Total
Accounts written off
430,000
(230,000)
Allowance-December 31
200,000
Since the December 31,2010 accounts receivable balance is P2,700,000 and the net realizable value is
P2,500,000, the December 31,2008 allowance should be P200,000.
The uncollectible accounts expense is squeezed by working back from the December 31,2008 allowance
balance of P200,000.
Problem 10
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
1. Computation of Accounts Receivable Balance
The following amounts are shown on the 2010 and 2009 financial statements of San Francisco Co.:
2010
2009
Accounts Receivable
?
P 470,000
Allowance for Bad Debts
20,000
10,000
Net Sales
2,600,000
2,400,000
Cost of Goods Sold
1,900,000
1,752,000
San Francisco Co.’s accounts receivable turnover for 2010 is 6.5 times. What is the accounts receivable
balance at December 31, 2010?
A. P820, 000
B. P340, 000
C. P360, 000
D. P470, 000
Solution:
Answer C
(X- Net Receivables, December 31, 2010)
A/R Turnover
= Net Sales ÷ Ave. Net Receivables
6.5
= P2, 600,000 ÷ P460, 000 – X
2
P2, 990,000+6.5X = P2, 600, 000
2
P2, 990, 000 + 6.5X = P5, 200, 000
6.5X
= P2, 210, 000
X
= P340, 000
Net Receivables, Dec. 31, 2010
Add: Allowance for Bad Debts, Dec. 31, 2010
Accounts Receivable, Dec. 31, 2010
P340,000
P 20,000
P360,000
BY: BUSICO, Ann Claire
Problem 11
Computation of Accounts Receivable Written-Off
The policy of Ilang-Ilang, Inc. is to debit bad debt expense for 3% of all new sales. The following are the
company’s sales and allowance for bad debts for the past four years.
Year
Sales
Allowance for Bad Debts
Year-End Balance
2007
P3, 000, 000
45, 000
2008
2, 950,000
56,000
2009
3, 120,000
60,000
2010
2, 420,000
75,000
The accounts written-off in 2008, 2009, and 2010 amounted to
2008
2009
A.
P99,500
P97,600
B.
77,500
89,600
C.
11,000
4,000
D.
12,500
22,400
2010
P87,600
57,600
5,000
62,400
Solution:
Answer B
Allowance balance, beg.
Add: Estimated uncollectibles*
Total allowance before write offs
Less: Allowance balance, Ending
Accounts written-off
* 3 % of Sales
2008
P 45,000
88,500
133,500
56,000
77, 500
2009
P 56,000
93,600
149,600
60,000
89,600
Problem 12
Estimating Bad Debts Using the Percentage of Sales Method
The following selected transactions occurred during the year ended December 31, 2010:
Class Schedule: M-F 7:30-9:30; 11:30-1:30
2010
P 60,000
72,600
132,600
75,000
57,600
Auditing Problems
Summer 2011
Gross sales (cash and credit)
Collections from credit customers, net of
2% cash discount
P750, 000
245, 000
Cash sales
150, 000
Uncollectible accounts written off
Credit memos issued to credit customers
for sales returns and allowances
16, 000
8, 400
Cash refunds given to cash customers for sales
returns and allowances
12, 640
Recoveries on accounts receivable written off
in prior years (not including in cash received
stated above)
5,421
At the year-end, the company provides for estimated bad debt losses by crediting the Allowance for Bad Debts
Account for 2% of its net credit sales for the year.
1. What is the company’s net credit sale in 2010?
A. P600, 000
B. P586, 600
C. P591, 600
D. P595, 000
2. The bad debt expense for 2010 is
A. P11, 832
B. P11, 900
C. P11, 732
D. P12, 000
Solution:
Answer B
1. Gross credit sales (P750, 000-150,000)
Less: Sales Discount
(P245, 000÷98%= P250, 000×2%)
Sales Returns and Allowances
Net credit sales
P600, 000
P5, 000
8, 400
13,400
P586, 600
Answer C
2. Bad Debt Expense (P586, 600×2%)
P11, 732
Problem 13
Computation of Accounts Receivable Balance
The following information is available for Faith Company relating to 2010 operations:
Accounts Receivable, beg
4, 000,000
Accounts Receivable collected
8, 400,000
Cash Sales
2, 000,000
Inventory, beg.
4, 800,000
Inventory, end
4, 400,000
Purchases
8,000,000
Gross Margin on Sales
4, 200,000
What is Faith Company’s accounts receivable balance at December 31, 2010?
A. 8, 200,000
C. 2, 000,000
B. 6, 200,000
D. 4, 200,000
Solution:
Answer B
Inventory, beg.
Purchases
Goods Available for Sale
Inventory, end
Cost of Goods Sold
Gross Margin on Sales
Gross Sales
Cash Sales
Credit Sales
4,800,000
8,000,000
12,800,000
(4,400,000)
8,400,000
4,200,000
12,600,000
(2,000,000)
10,600,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Accounts Receivable, beg.
Total
Accounts Receivable collected
Accounts Receivable, end
4,000,000
14,600,000
(8,400,000)
6,200,000
Problem 14
On December 31, the accounts receivable control account of Honduras Company had a balance of P8,
200,000. An analysis of the accounts receivable showed the following:
Accounts known to be worthless
Advance payments to creditors on purchase orders
Advances to affiliated companies
Customer’s accounts reporting credit balances
Arising from sales returns
Interest receivable on bonds
Trade accounts receivable-unassigned
Subscription receivable due in 30 days
Trade accounts receivable-assigned (Finance Company’s equity
in assigned accounts is P500,000)
Trade installments receivable due 1-18 months,
including unearned finance charge of P50, 000
Trade accounts receivable from officers, due currently
Trade accounts on which postdated checks are held
(no entries were made on receipt of checks)
TOTAL
P 100,000
400,000
1, 000,000
(600,000)
400,000
2, 000,000
2, 200,000
1, 500,000
850,000
150,000
200,000
P8, 200,000
The correct balance of trade accounts receivable on December 31 should be
A.
B.
C.
D.
4, 650,000
4, 700,000
4, 150,000
4, 050,000
Solution:
Answer A
Accounts receivable-unassigned
Accounts receivable-assigned
Trade installments receivable (850,000-50,000)
Accounts receivable from officers
Accounts on which postdated checks are held
Total trade accounts receivable
P2, 000,000
1, 500,000
800,000
150,000
200,000
P4, 650,000
BY: Navidad, Karen Mae
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF INVENTORIES
Problem 1
The balance in Pacquiao Company’s inventory account on December 31, 2010 was P1,225,000 before the
following information was considered:
o Goods shipped FOB destination, on December 20, 2010 from a vendor to Pacquiao were lost in
transit. The invoice cost of P45,000 was not recorded by Pacquiao. On December 28. 2010, Pacquiao
notified the vendor of the lost shipment.
o Goods were in transit from a vendor to Pacquiao on December 31, 2010. The invoice cost was
P60,000 and the goods were shipped FOB shipping point on December 28, 2010. Pacquiao received
the goods on January 4, 2011.
What amount of inventory should be reported in the December 31, 2010 balance sheet?
a. P1,225,000
c. P1,285,000
b. P1,270,000
d. P1,330,000
Answer C
Balance per books
Goods in transit shipped FOB ship point
Correct balance, Dec 31, 2010
P1,225,000
60,000
P1,285,000
Problem 2
Rose Company reviewed its year-end inventory and found the following items:
A. A package containing a product costing P81,600 was standing in the shipping area when the physical
inventory was conducted. This was not included in the inventory because it was marked “Hold for shipping
instructions”. The purchase order was dated December 19 but the package was shipped and the customer
was billed January 2, 2011.
B. A special machine, fabricated to order for a particular customer, was finished and in the shipping room on
December 30, 2010. The customer was billed on that date and the machine was excluded in the inventory. The
machine costing P230,000 was shipped January 4, 2011.
C. Merchandise costing P23,500 was received on January 3. 2011 and the related purchase invoice was
recorded January 5, 2011. The invoice showed the shipment was made December 29, 2010, FOB destination.
D. Goods costing P150,000 were sold and delivered on December 20, 2010. The sale was accompanied by a
repurchase agreement that Rose will “buyback” the inventory in February 2011.
How much is the inventory adjustment on December 31, 2010?
a. P81,600 increase
b. P231,600 increase
c. P461,600 increase
d. P485,999 increase
Answer B
A. Since no shipment made as of 12/31/10
D. Sold with buyback agreement
Increase
P81,600
150,000
P231,600
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Problem 3
Noynoy Company’s inventory at June 30, 2010 was P750,000 based on a physical count of goods priced at
cost and before any necessary year-end adjustment relating to the following:
o
o
Included in the physical count were goods billed to a customer FOB shipping poing on June 30, 2010.
These goods costing P15,000 were picked up by the carrier on July 9, 2010.
Goods shipped FOB destination on June 28, 2010 from a vendor to Noynoy was received on July 1,
2010. The invoice cost was P25,000.
What amount should Noynoy report as inventory in its June 30, 2010 balance sheet?
a. P735,000
b. P740,000
Answer C
Balance per books/ count
c. P750,000
d. P765,000
P750,000
Problem 4
On December 28, 2010, Kabataan Company purchased goods costing P1,000,000. The terms were FOB
destination.
The following costs were incurred in connection with the sale and delivery of the goods:
Packaging for shipment
P20,000
Shipping
30,000
Special handling charges
40,000
These goods were received on December 31, 2010.
In Kabataan’s December 31, 2010 balance sheet, how much of these goods should be included in inventory?
a. P1,000,000
b. P1,040,000
c. P1,070,000
d. P1.090.000
Answer A
Under FOB destination terms of shipment, all costs incurred in transporting the goods
to the buyer’s place shall be borne by the seller.
Problem 5
Anakpawis Company had the following consignment transactions during December 2010.
Inventory shipped on consignment to A Company
P36,000
Freight paid by Anakpawis
1,800
Inventory received on consignment to B Company
24,000
Freight paid by B
1,000
No sales of consigned goods were made through December 31, 2010.
What amount of consigned inventory should be included in Anakpawis’ December 31, 2010 balance sheet?
a. P24,000
b. P25,000
c. 36,000
d. 37,800
Answer D
Inventory shipped on consignment to A Company
Freight paid by Anakpawis
Total inventory on consignment
P36,000
1,800
P37,800
BY: DENILA, Jun Marlon
Problem 6
An analysis of the ending inventory of Phil Company on December 31, 2010 disclosed the inclusion of the
following items:
Merchandise in transit purchased on terms:
FOB shipping point
FOB destination
Merchandise out on consignment at sales price
(Including mark-up of 30% on cost)
Merchandise sent to customer for approval
165,000
100,000
195,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
(Cost of goods, P30,000)
Merchandise held on consignment
40,000
35,000
The inventory at December 31, 2010 should be reduced by:
a) 355,000
b) 190,000
c) 203,500
d) 222,000
Solution:
Answer B
Merchandise in transit purchased FOB destination
Mark-up on goods out on consignment
(195,000-150,000)
Mark-up on merchandise for approval
Merchandise held on consignment
Total reduction
100,000
45,000
10,000
35,000
190,000
Problem 7
Based on a physical inventory taken on December 31, 2010, Maria Company determined its chocolate
inventory on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000. Maria estimated that, after
further processing costs of P2,400,000, the chocolate could be sold as finished candy bars for P8,000,000.
Maria’s normal profit margin is 10% of sales. Under the lower of cost or market rule, what amount should Maria
report as chocolate inventory on December 31, 2010?
a) 5,600,000
b) 4,000,000
c) 5,200,000
d) 4,800,000
Solution:
Answer C
Estimated sales price
8,000,000
Cost to complete
(2,400,000)
Net realizable value
5,600,000
Thus, the cost of P5,200,000 is the inventory valuation because it is lower than the net realizable
value.
Problem 8
On September 30, 2010, a fire at ARAGON company’s only warehouse caused severe damage to its entire
inventory. Based on recent history, ARAGON has a gross profit of 30% on cost. The following information is
available from ARAGON’s records or nine months ended September 30, 2010:
Inventory at January 1
1,100,000
Net purchases
6,000,000
Net sales
7,280,000
A physical inventory disclosed usable damaged goods which ARAGON estimates can be sold for P100,000.
Using the gross profit method, the estimated cost of goods sold for the nine months
ended September
30, 2010 should be:
a) 5,500,000
b) 4,970,000
c) 5,096,000
d) 5,600,000
Solution:
Answer D
Cost of goods sold (7,280,000/130%)
5,600,000
The gross profit is 30% on cost. Accordingly, the sales ratio is 100% plus 30% or 130%. Thus, the
cost of goods sold is computed by dividing the net sales by the sales ratio.
Problem 9
Met company uses FIFO retail method of inventory valuation. The following information is available:
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
COST
600,000
3,000,000
Beginning inventory
Purchases
Net additional markups
Net markdowns
Sales revenue
RETAIL
1,500,000
5,500,000
500,000
1,000,000
4,500,000
What would be the estimated cost of the ending inventory?
a) 1,200,000
b) 1,040,000
c) 1,000,000
d) 960,000
Solution:
Answer A
Beginning inventory
Purchases
Net additional markups
Net markdowns
Net purchases
Cost ratio (3,000,000/5,000,000)
Goods available for sale
Sales revenue
Ending inventory
FIFO cost (2,000,000 x 60%)
COST
600,000
3,000,000
3,000,000
RETAIL
1,500,000
5,500,000
500,000
(1,000,000)
5,000,000
60%
3,600,000
6,500,000
(4,500,000)
2,000,000
1,200,000
Problem 10
Shaun company had the following consignment transactions during December 2010:
Inventory shipped on consignment to Bea company
1,800,000
Freight paid by by Shaun
90,000
Inventory received on consignment from Ara company
1,200,000
Freight paid by Ara
50,000
No sales of consigned goods were made through December 31, 2010. Shaun’s December 31, 2010
statement of financial position should include consigned inventory at
a) 1,200,000
b) 1,250,000
c) 1,800,000
d) 1,890,000
Solution:
Answer D
Inventory shipped on consignment to Bea company
Freight paid by by Shaun
Total cost of consigned inventory
1,800,000
90,000
1,890,000
Only the inventory sent out on consignment plus the corresponding freight charge should be included in
inventory of the consignor.
the
BY: AGBAY, Ma. Regina
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF INVESTMENTS
Problem 1
On January 1, 2009, Kalamay Company bought 15% of Pink Biko Company’s ordinary shares outstanding for
P 6,000,000. Kalamay appropriately accounts for this investment by the cost method. The following data
concerning Pink Biko are available for the years ended December 31, 2009 and 2010.
2009
2010
Net income
P 3,000,000
P 9,000,000
Cash dividend paid
None
10,000,000
In its income statement for the year ended December 31, 2010, how much should Kalamay report as income
from this investment?
a. P 1,350,000
b. P 1,500,000
c.
P 1,800,000
d. P
450,000
Solution : Answer B
Dividend income (P 10,000,000 x 15%) P 1,500,000
Problem 2
On January 1, 2010, GB Company paid P 18,000,000 for 50,000 ordinary shares of BG Company which
represent a 25% interest in the net assets of BG. The acquisition cost is equal to the book value of the net
assets acquired. GB has the ability to exercise significant influence over BG. GB received a dividend of P 35
per share from BG in 2010. BG reported net income of P9,600,000 for the year ended December 31, 2010. In
its December 31, 2010 statement of financial position, GB should report the investment in BG Company at
a. P 22,150,000
b. P 20,400,000
c.
P 18,650,000
d. P 18,000,000
Solution: Answer C
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Acquisition cost , January 1
P 18,000,000
Add: Share in net income (9,600,000 x 25%)
Total
2,400,000
20,400,000
Less: Cash dividend received (50,000 x P35)
Investment balance, December 31
1,750,000
P 18,650,000
Problem 3
Hotdog Company owns 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative
nonvoting preference shares of Ketchup Company. In 2010, Ketchup declared dividend of P 1,000,000 on its
ordinary share capital and P 600,000 on its preference share capital. What amount of dividend revenue should
Hotdog report in its income statement for the year ended December 31, 2010?
a. P 900,000
b. P 300,000
c.
P 600,000
d. P 0
Answer C
P 600,000 = dividend declared on its preference share capital
Problem 4
RH Company purchased bonds at a discount of P 100,000. Subsequently, RH sold these bonds at a premium
of P 140,000. During the period that RH held this held to maturity investment, amortization of the discount
amounted to P 20,000. What amount should RH report as gain on the sale of bonds?
a. P 120,000
b. P 220,000
c.
P 240,000
d. P 260,000
Solution: Answer B
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Premium on sale of bonds
P 140,000
Unamortized discount (100,000 – 20,000)
Gain on sale of bonds
80,000
P 220,000
Problem 5
The following accounts appear on the adjusted trial balance of Yellow Cab Company on December 31, 2010:
Petty Cash Fund
P 10,000
Payroll Fund
100,000
Sinking fund cash
500,000
Sinking fund securities
1,000,000
Accrued interest receivable – sinking fund securities
50,000
Plant expansion fund
600,000
Cash surrender value
150,000
Land held for capital appreciation
Advances to subsidiary
Investment in joint venture
3,000,000
200,000
2,000,000
How much should be reported as noncurrent investments on December 31, 2010?
a. P 7,500,000
b. P 4,500,000
c.
P 7,450,000
d. P 2,300,000
Solution: Answer A
All accounts are noncurrent investments except the petty cash fund and the payroll fund.
BY: MONEVA, Ahl Monic
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF PROPERTY PLANT AND EQUIPMENT
Problem 1
During 2011, Great Dane Company had the following transactions pertaining to its new office building:
Purchase price- Land
Legal fees for contracts to purchase land
Architect’s fee
Demolition of old building on site
Sale of scrap from old building
Construction cost of new building (fully completed)
P
420 000
14 000
56 000
35 000
21 000
2 450 000
At what amounts should the cost of land and cost of building be shown in Great Dane December 31, 2011
statement of financial position?
a.)
b.)
c.)
d.)
Land
P 420, 000
P 434 000
P 448 000
P 455 000
Building
P 2 520 000
P 2 520 000
P 2 506 000
P 2 534 000
Solution: C
Purchase Price
Legal fees
Architect’s fee
Demolition cost
Construction cost of new building
Sale of scrap
Total
Land
P 420 000
14 000
Building
P
56 000
35 000
2 450 000
( 21 000 )
P 448 000
P 2 506 000
Problem 2
On January 2, 2006, Big Bang Corporation purchased for P 85 000 a machine having a useful life of ten years
and estimated salvage value of P 5 000. The machine was depreciated by the straight- line method. On July 1,
2011, the machine was sold for P 45 000. For the year ended December 31, 2011, how much gain should Big
Bang record on the sale?
a.) P 0
c.) P 4 000
b.) P 1 000
d.) P 6 750
Solution: C
Cost of the machine
Less: Accumulated Depreciation
P 85 000 – P 5000
X 5.5 years
10
Book Value at date of sale
Selling price
Gain from sale of machinery
P 85 000
44 000
P 41 000
45 000
( P 4 000 )
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Problem 3
Sleepyhead Corporation, one of the largest mining company, purchased 20 acres of land for P 60 000 000.
The company expected to extract 5 million tons of mine from this land over the next 20 years at which time,
residual value shall be P 3 000 000. The following costs were also incurred related to the mining activities:
Successful exploration cost, P 5 000 000 and cost of P 800 000 for dry wells. During the first 2 years of the
mine’s operations, 300, 000 tons were mined each year and sold for P 80 per ton.
How much would be the depletion for the first year?
a.) P 3 000 000
c.) P 3 720 000
b.) P 3 500 000
d.) P 3 768 000
Solution: C
Purchase price
Successful cost of exploration
Total cost
Less: Estimated Salvage Value
Depletable Cost
/ Estimated Life in tons
Depletion rate per ton
P 60 000 000
5 000 000
P 65 000 000
3 000 000
62 000 000
5 000 000
P
12. 40
Depletion = P 12. 40 X 300 000 tons = P
3 720 000
Problem 4
You were assigned to audit the fixed assets of Oink, Inc. for December 31, 2011. In your permanent file was a
machine purchased by the corporation on Januray 2, 2008 for P 300 000 which was being depreciated on a
10- year estimated life with no scrap value. Straight- line basis of depreciation was being used. On January 1,
2011, Oink, Inc. decided that the machine should have been depreciated on a 15- year life counted from the
date of acquisition, Recorded depreciation for 2011 was P 30 000.
If the change in life is to be recognized, the depreciation expense to be recorded in 2011 should have been
a.) P 14 000
c.) P 20 000
b.) P 17 500
d.) P 25 000
Solution: B
Cost of the machine
Accumulated Depreciation:
2008 to 2011 ( P 30 000 x 3 years )
Remaining depreciable value of machine
Remaining useful life of machine
Depreciation expense for 2011
P 300 000
90 000
P 210 000
12 years
P 17 500
Problem 5
Honey Bee Company exchanged a delivery van and P 50 000 cash for a newer van owned by Sweet
Corporation. The following data relate to the values of the vans on the date of exchange:
Honey Bee
Sweet
Carrying Value
P 300 000
P 400 000
Fair Value
P 450 000
P 500 000
Immediately after the exchange, Honey Bee Company determined that the cash flows of the van received
differ from the cash flows of the van transferred.
What is the cost of the new asset acquired as basis for recording in the book of Honey Bee Company?
a.) P 300 000
b.) P 400 000
c.) P 450 000
d.) P 500 000
Solution: D
Cash paid
Fair Value of the van transferred
Fair Value of asset received
P 50 000
450 000
P 500 000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
BY: GILLAMAC, Kuozzela Dianne N.
Problem 6
On July 1, Town Company purchased for P5,400,000, including appraiser’s fee of P50,000, a warehouse
building and the land on which it is located. The following dta were available concerning the property:
Current
Apprasied value
2,000,000
3,000,000
Land
Warehouse building
Seller’s
original cost
1,400,00
2,800,000
Town sould record the land at
a.) P 2,140,000
b.) P 1,800,000
c.) P 2,000,000
d.) P 2,160,000
Solution: D
Cost of Land (2/5 x 5,400,000)
2,160,000
Problem 7
On August 1, Bamco Company purchased a new machine on a deferred payment basis. A down payment of
P100,000 was made and 4 monthly installments of P250,000 each are to be made beginning on September 1.
The cash equivalent price of the machine was P950,000. Bamco incurred and paid installation costs
amounting to P30,000. The amount to be capitalized as the cost of the machine is
a.) P 950,000
b.) P 980,000
c.) P 1,100,000
d.) P 1,130,000
Solution: B
Cash price
Installation Cost
Total Cost
P
P
950,000
30,000
980,000
Problem 8
Siquijor Company was organized in June 2010. You find the following land and building account:
June
1
30
30
July
1
Aug 31
Sept. 1
Dec. 31
31




Organization fees paid to the state
Land site and old building
Corporate organization cost
Title clearance fee
Cost of razing old building
Salaries of Siquijor executives
Real estate tax
Cost of the new building completed and
occupied on this date
150 000
3 000 000
300 000
50 000
100 000
600 000
90 000
8 000 000
The building acquired on June 30, 2010 was valued at P 300,000.
The company paid P 100,000 for the demolition of the old buidling and then sold the scrap for P
10,000 and credited the proceeds to miscellaneous revenue.
The company execuitves did not participate in the construction of the new building.
The real estate tax was for the 6-month period ended December 31, 2010, and was assessed on
the land.
What is the cost of the land for financial accounting purposes?
a.) P 3,150,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
b.) P 3,140,000
c.) P 2,850,000
d.) P 3,250,000
Solution: B
Purchase price
Title clearance fee
Cost of razing old building
Scrap value of old building
Total Cost
P 3,950,000
50,000
100,000
(10,000)
P 3,140,000
Problem 9
ABC Company had the following general borrwing during 2009 which used to finance construction of the
company’s new building.
Principal
Borrowing costs
10% bank loan
2,800,000
280,000
10% short-term
1,600,000
160,000
12% long-term loan
2,000,000
240,000
6,400,000
680,000
The construction began on January 1, 2009 and the building was completed on December 31, 2009.
Expenditres on the building were made as follows:
January 1
400,000
March 31
1,000,000
June 30
1,200,000
September 30
1,000,000
December 31
400,000
4,000,000
The company follows the alternative allowed treatment for borrowing cost. What is the amount of capitalizable
borrowing cost?
a.)
b.)
c.)
d.)
P
P
P
P
212,500
680,000
425,000
340,000
Solution: A
Date
January 1
March 31
June 30
September 30
December 31
(a)
Expenditures
400,000
1,000,000
1,200,000
1,000,000
400,000
4,000,000
(b)
Months outstanding
(a x b)
Amount
12
9
6
3
0
4,800,000
9,000,000
7,200,000
3,000,000
0
24,000,000
Average expenditures (24,000,000 / 12)
Multiply by capitalization rate (680,000 / 6,400,000)
Capitalizable borrowing cost
2,000,000
10.625 %
212,500
Problem 10
In January 2007, Naval Company purchased equipment at a cost of P6,000,000 to be ysed in its
manufacturing operations. The equipment was estimated to have a useful life of eight years with residual value
estimated at P600,000. Naval considered various methods of depreciation and selected the sum of years’
digits method. On december 31, 2008, the accumulated depreciation should have a balance of
a.) P 750,000 less than under the straight line method
b.) P 750,000 less than under the double declining method
c.) P 900,000 greater than under the straight line method
d.) P 900,000 greater than under the double declining balance method
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Solution: C
SYD
=
=
1+2+3+4+5+6+7+8
36
2007 depreciation (5,400,000 x 8/36)
2008 depreciation (5,400,000 x 7/36)
Accumulated depreciation – 12/31/2008 (SYD)
Accumulated depreciation – 12/31/2008 (SL)
Cash price
Total Cost
P1,200,000
1,050,000
2,250,000
1,350,000
P
900,000
BY: POTOT, Jay-Nova S.
Problem 11
Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the Aliaga’s property
and equipment transactions:
Cost of land, which included an old apartment building appraised at
P 3,000,000
P300,000
Apartment building mortgage assumed, including related interest due
80,000
at the time of purchase
Delinquent property taxes assumed by Aliaga
30,000
Payments to tenants to vacate the apartment building
20,000
Cost of razing the apartment building
40,000
Proceeds from the sale of salvaged materials
10,000
Architect’s fee for new building
60,000
Building permit for new construction
40,000
Fee for title search
25,000
Survey before construction of new building
20,000
Excavation before construction of new building
Payment to building contractor
100,000
10,000,000
Assessment by city for drainage project
15,000
Cost of grading and leveling
50,000
Temporary quarters for construction crew
80,000
Temporary building to house tools and materials
50,000
Cost of changes during construction to make building more energy
efficient
Interest cost on specific borrowing incurred during construction
90,000
360,000
Payment of medical bills of employees accidentally injured while
inspecting building construction
18,000
Cost of paving driveway and parking lot
60,000
Cost of installing lights in parking lot
12,000
Premium for insurance on building during construction
30,000
Cost of open house party to celebrate opening of new building
50,000
Cost of windows broken by vandals distracted by the celebration
12,000
1. Cost of Land
a. P2,980,000
b. P3,270,000
c. P3,185,000
d. P3,205,000
2. Cost of Building
a. P10,810,000
b. P10,895,000
c. P10,875,000
d. P11,110,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
3. Cost of Land Improvements
a. P12,000
b. P72,000
c. P122,000
d. P 0
4. Amount that should be expensed when incurred
a. P80,000
b. P110,000
c. P62,000
d. P50,000
5. Total depreciable property and equipment
a, P11,182,000
b. P10,967,000
c. P10,947,500
d. P10,882,000
1)B; 2)A; 3)B; 4)A; .5)D
1) B. 3,270,000
Cost of land, which included an old apartment building appraised at
P300,000
Apartment building mortgage assumed, including related interest due
at the time of purchase
P 3,000,000
80,000
Delinquent property taxes assumed by Aliaga
30,000
Payments to tenants to vacate the apartment building
20,000
Cost of razing the apartment building
40,000
Proceeds from the sale of salvaged materials
(10,000)
Fee for title search
25,000
Survey before construction of new building
20,000
Assessment by city for drainage project
15,000
Cost of grading and leveling
50,000
Total cost of Land
P3,270,000
2.) A. 10,810,000
Architect’s fee for new building
P60,000
Building permit for new construction
Excavation before construction of new building
Payment to building contractor
40,000
100,000
10,000,000
Temporary quarters for construction crew
80,000
Temporary building to house tools and materials
50,000
Cost of changes during construction to make new building
more energy efficient
90,000
Interest cost on specific borrowing incurred during
construction
Premium for insurance on building during construction
Total cost of building
360,000
30,000
P10,810,000
3.) B. 72,000
Cost of paving driveway and parking lot
Cost of installing lights in parking lot
P60,000
12,000
Total cost of Land Improvements
P72,000
4.) A. 80,000
Payment of medical bills of employees
P18,000
Cost of open house party
50,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Cost of windows broken by vandals
12,000
Total cost amount that should be expensed
P80,000
5.) D. 10,882,000
Building
P10,810,000
Land Improvements
72,000
Total depreciable PPE
P10,882,000
BY: LAURON, Carmela Marie
AUDIT OF PREPAYMENTS AND INTANGIBLE ASSETS
Problem 1
On July 1, 2009, Dean Company leased office premises for a three-year period at an annual rental income of
P360,000 payable on July1 each year. The first rent payment was made on July 1, 2009. Additionally on July
1, 2009, Dean Company paid P 240,000 as a lease bonus to obtain a three year lease instead of the lessor’s
usual term of six years. In its December 31, 2009 statement of financial position, Dean Company should report
prepaid rent of
a.180,000
b.220,000
c.240,000
d.380,000
Solution
Answer D
Rent payment on 7/1/2009 (360,000 x 6/12)
Lease Bonus (240,000 x 30/36)
Prepaid Rent – 12/31/2009
180,000
200,000
380,000
Problem 2
At December 31, 2011, Mars Corp. pension plan administrator provided the following information:
Fair Value of plan assets
Present Value of benefit obligation
Unrecognized acturial net gain
Unrecognized past service cost
P
5,500,000
5,300,000
200,000
500,000
What is the amount of prepaid pension that should be shown on Mars’ December 31, 2011 statement of
financial position?
a. 100,000
b. 200,000
c.500,000
d.700,000
Solution
Answer C
Present value of benefit obligation – Credit
Unrecognized Actuarial net gain – Credit
Fair Value of plan assets – Debit
Unrecognized past service cost –Debit
Prepaid Pension
5,300,000
200,000
(5,500,000)
( 500,000)
500,000
Problem 3
Zamboanga Company acquired a 5 year fire insurance on July 1, 2010 for P 500,000.
What would be the Prepaid fire insurance balance to be presented in the Statement of financial position ending
June 30, 2011?
a.100,000
b.50,000
c.400,000
d.450,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Solution
Answer C
Prepaid Fire insurance, July 1,2010
Insurance expense, ending June 30,2011(500,000 x 1/5)
Prepaid Fire Insurance, June 30, 2011
500,000
(100,000)
400,000
Problem 4
On January 1, 2006, Tricky Problem Company issued for P 939,000, one thousand of its 9%, 1,000 bonds.
The bonds were issued to yield 10%. The bonds are dated January 1, 2006, and mature on December 31,
2016. Tricky Problem Company uses the interest method of amortizing bond discount. In its December 31,
2006 balance sheet, Tricky Problem Company should report unamortized bond discount o
a. 51,700
b. 54, 900
c. 51, 161
d. 51, 000
Solution:
Answer A
Balance of Bond Discount, 1Amortized bond discount
Nominal
Effective
Unamortized Bond Discount
1-06
61,000
90,000
93,900
5. Tricky Ni Company presented the following
Cash
Inventories
Prepaid Expenses
Total non-current asset
Property Plant and Equipment
Other non-current assets
Total liabilities and equity
(3,900)
57,100
90
80
?
50
20
10
250
What is the balance of the prepaid expenses?
a. 0
b.30
c.20
d.10
Solution 5 Answer b
Total liabilities and equity( Total assets)
Less Total non-current assets
Total Current assets
Less: Cash
90
Inventories
80
Prepaid balance
250
(50)
200
(170)
30
BY: VELOS, Joseph Anthony
Problem 6
Kenya Enterprises developed a new machine that reduces the time required to mix the chemicals used in one
of its leading products. Because the process is considered very valuable to the company, Kenya patented the
machine.Kenya incurred the ff. expenses in developing and patenting the machine:
Research and development laboratory expenses
Materials used in the construction of the machine
Blueprints used to design the machine
Legal expenses to obtain the patent
Wages paid for the employees’ work on the research development,
and building of the machine (60% of the time was spent in actually
building the machine)
Expense of drawing required by the Bureau of Patents to be submitted
with the patent application
Class Schedule: M-F 7:30-9:30; 11:30-1:30
P 750, 000
240, 000
96, 000
360, 000
900, 000
51, 000
Auditing Problems
Summer 2011
Fees paid to Bureau of Patents to process application
75, 000
One year later, Kenya Enterprises paid P525, 000 in legal fees to successfully defend a patent against an
infringement suit by Gaya-gaya Company.
1.
a.
b.
c.
d.
What is the total cost of the patent?
P993, 000
P486, 000
P564, 000
P126, 000
Solution:
Answer B
Legal expenses to obtain the patent
Expense of drawing required by Bureau of Patents
Fees paid to process patent application
Total cost of patent
2.
a.
b.
c.
d.
360,000
51,000
75,000
P486,000
What is the total cost of the new machine?
P 1,362,000
P0
P780, 000
P876,000
Solution:
Answer D
Materials used in the construaction of the machine
Blueprints used to design the machine
Wages paid for the employees’ work on the construction
of the machine (P900,000xP60)
Total cost of machine
240,000
96,000
540,000
P 876,000
3.
What is the entry to record the legal fees paid for the successful defense of the patent against the
infringement suit?
a.
Patents
525,000
Cash
525,000
b.
Legal fees expense
525,000
Cash
525,000
c.
Machinery
525,000
Cash
525,000
d.
Amortization expense – Patents 525,000
Cash
525,000
Answer B
b. The legal fees paid for the successful defense of the patent should be expensed, and not be capitalized.
This expenditure does not meet the definition of and the recognition criteria for an intangible asset.
Problem 7
The ff. amounts are included in the general ledger of Margherita Peak Corporation at December 31, 2007:
Organization costs
P72,000
Trademarks
45,000
Patents
225000
Discount on bonds payable
105,000
Deposits with advertising agency for ads to promote
goodwill of the company
30,000
Cost of equipment acquired for various research and
development projects
320,000
Cash 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
Margherita Peak on its balance sheet at December 31, 2007?
a.
P342,000
b.
P270,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
c.
d.
P510,000
P830,000
Solution:
Answer B
Trademarks
Patents
Total intangible assets
P 45,000
225,000
P 270,000
Problem 8
Danskin, Inc. is considering purchasing A & B Enterprises, which has the ff. assets and liabilities.
COST
P4,800,000
4,800,000
200,000
1,400,000
(3,200,000)
P8,000,000
Accounts receivable
Inventory
Prepaid Insurance
Buildings and equipment (net)
Accounts payable
Net assets
FAIR MARKET VALUE
P4,400,000
5,000,000
200,000
4,000,000
(3,200,000)
P10,400,000
If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the acquisition is
a.
P4,600.000
b.
P2,400,000
c.
P2,200,000
d.
P0
Solution:
Answer C
Purchase price
Fair market value of net assets
Goodwill
P12,600,000
10,400,000
P 2,200,000
BY: SAN PEDRO Maria Elena
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF LIABILITIES
Problem 1
During 2010, ABC Company sold 500,000 boxes of cake mix under a new sales promotional program. Each
box contains one coupon, which entitles the consumer to a baking pan upon remittance of P40. ABC pays P50
per pan and P5 for handling and shipping. ABC estimates that 80% of the coupons will be redeemed, even
though only 300,000 coupons had been processed during 2010. What amount should ABC report as a liability
for unredeemed coupons at December 31, 2010?
a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000
Solution:
Answer: B
Handling and shipping
5
Total
55
Less: Remittance from customer
40
Net premium expense
15
Coupons to be redeemed (80% * 500,000)
400,000
Less: Coupons redeemed
300,000
Coupons outstanding
100,000
Liability for unredeemed coupons (100,000 *1,500,000
15)
Problem 2
ABC Company sells washing machines that carry a three-year warranty against manufacturer’s defects. Based
on company experience, warranty costs are estimated at P300 per machine. During the current year, Mill sold
2,400 washing machines and paid warranty costs of P170,000. In its income statement for the current year,
Mill should report warranty expense of
a. 170,000
b. 240,000
c. 550,000
d. 720,000
Solution:
Answer: D
Warranty expense (2,400 * 300)
720,000
Problem 3
During 2010, ABC Company became involved in a tax dispute with the BIR. At December 31, 2008, ABC’s tax
advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was
P500,000. After the 2010 financial statements were issued, ABC received and accepted a BIR settlement of
P550,000. What amount of accrued liability would ABC have reported in its December 31, 2010 statement for
financial position?
a. 650,000
b. 550,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
c. 500,000
d. 0
Answer: C
The reasonable estimate of P500,000 is recorded. The accepted BIR offer is not recorder because it was
made after the financial statements are issued. In 2011, when the BIR settlement offer of P550,000 is
accepted, an additional liability of P50,000 will be recognized.
Problem 4
ABC Company’s liability account balances at June 30, 2010, included a 10% note payable in the amount of
P3,600,000. The note is dated October 1, 2010, and is payable in three equal annual payments of P1,200,000
plus interest. The first interest and principal payment was made on October 1, 2010. In ABC’s June 30, 2010
statement of financial position, what amount should be reported as accrued interest payable for this note?
a. 270,000
b. 180,000
c. 90,000
d. 60,000
Solution:
Answer: B
Note payable, October 1, 2009
Payment on October 1, 2010
Balance, October 1, 2010
Accrued interest payable from October 1,
June 30,2011 (2.4M*10%*9/12)
3,600,000
1,200,000
2,400,000
2010180,000
Problem 5
ABC Company had the following long-term debt:
Sinking fund bonds, maturing in installments
Industrial revenue bonds, maturing in installments
Subordinated bonds, maturing on a single date
P 2,200,000
1,800,000
3,000,000
The total of the serial bonds amounted to
a.
b.
c.
d.
3,000,000
4,000,000
4,800,000
7,000,000
Solution:
Answer:B
Serial bonds are bonds that mature in a series or by installments.
Sinking fund bonds
Industrial revenue bonds
Total serial bonds
2,200,000
1,800,000
4,000,000
Subordinated bonds are bonds that rank below the amounts owing to general creditors.
BY: PANCITO, Hazeleen Rose
Problem 6
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Nilda, president of the FIRST CLASS COMPANY, has a bonus arrangement with the company under which
she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the
net income before deducting either the provision for income taxes or the bonus is P4, 650, 000.The bonus is
deductible for tax purposes, and the tax rate is 30%. How much is Nilda’s bonus?
a.
P1,303,738
b.
P206,321
c.
P304, 206
d.
P540,962
Solution:
Answer C
Bonus= 10% (4,650,000- bonus-tax)
Tax=30% (4,650,000- bonus)
=1,395,000-.30bonus
Bonus=10%(4,650,000-bonus-1,395,000+.30bonus)
Bonus=325,500-.07bonus
1.07 bonus=325,500
Bonus=P304,206
Problem 7
In an effort to increase sales, Jam Company inaugurated a sales promotional campaign on June 30, 2010.
Jam placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost Jam P20
and five coupons must be presented by a customer to receive a premium. Jam estimated that only 60% of the
coupons issued will be redeemed. For the six months ended December 31, 2010, the following information is
available:
Packages of Cereal Sold
160,000
Premiums Purchased
12,000
Coupons redeemed
40,000
What is the estimated liability for premium claims outstanding at December 31, 2010?
a. P 224,000
b. P 160,000
c.
P 288,000
d. P 384,000
Solution:
Answer A
Coupons to be redeemed (160,000 x 60%)
Less: coupons redeemed
Balance
96,000
40,000
56,000
Number of Premiums (56,000/5)
11,200
Amount of Liability (11,200 x 20)
224,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Problem 8
Jam Company leased office space to Kouch Company for a 5 year term beginning January 1, 2010. Under the
terms of the operating lease, rent for the first year is P800, 000, and rent for years 2 through 5 is P1,250,000
per annum. However, as an inducement to enter the lease, Jam granted Kouch the first six months of the lease
rent free. In its December 31, 2010 income statement, what amount should Jam report as rental income?
a. P 1,200,000
b. P 1,160,000
c.
P 1,080,000
d. P 800,000
Solution:
Answer C
First year (P800,000 x 6/12)
2nd to 5th Year (P1,250,000 x 4)
Total Revenue
Average Annual Rent Revenue (5,400,000/5)
400,000
5,000,000
P 5, 400,000
P1,080,000
Problem 9
On January 1, 2010, Jam Company leased a new machine from Sophy with the following pertinent information:
Lease Term
6 years
Annual rent payable at the beginning of each year
P 500,000
Useful Life of Machine
8 years
Implicit Interest rate in lease
12%
Present Value of an annuity of 1 in advance for 6 periods @ 12%
4.60
Present Value of an ordinary annuity of 1 for 6 periods @ 12%
4.11
The lease is not renewable, and the machine reverts to Sophy at the end of the lease. The cost of the
machine of Jam’s records is P 3, 755, 000. At the beginning of the lease term, Jam should record
lease liability of
a. P 2, 055,000
b. P2, 300,000
c.
P3, 755,000
d. P2, 800,000
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
Solution:
Answer B
Present Value of Rentals P500,000 x 4.60 =P2,300,000
Problem 10
At December 31, 2010, the following information was provided by Jam Company’s pension plan administrator:
Fair Value of Plan Assets
3,450,000
Accumulated Benefit Obligation
4,300,000
Projected Benefit Obligation
5,700,000
What is the amount of the accrued liability that should be shown on Jam’s December 31, 2010
Balance Sheet?
a. P 5,700,000
b. P 2,250,000
c.
P 1,400,000
d. P 850,000
Solution:
Answer B
Fair Value of Plan Assets
Projected Benefit Obligation
Prepaid/ Accrued Benefit Cost
-credit bal
3,450,000
5,700,000
(2,250,000)
BY: SU, Jarmarie Chua
Class Schedule: M-F 7:30-9:30; 11:30-1:30
Auditing Problems
Summer 2011
AUDIT OF SHAREHOLDERS’ EQUITY
Class Schedule: M-F 7:30-9:30; 11:30-1:30