ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 43  May 2022 CPA Licensure Examination  Preweek Lectures
AUDITING (Auditing Problems)
S. IRENEO  C. ESPENILLA
AP-701: SUMMARY LECTURE NOTES
NOTE TO REVIEWEE:
These are guidelines and summarized financial accounting standards under Full PFRS which are generally the same under
PFRS for SMEs and PFRS for Small Entities (Effective January 1, 2019). Comments in textboxes highlight provisions of PFRS
SMEs and PFRS for Small Entities which deviate from Full PFRS. Consider the following figure in determining which set of
standards shall be applicable depending on the size of an entity:
Is the reporting entity any of the following?
1. Required to file FS under Part II of SRC Rule 68 (e.g. publicly traded
entities)
2. In the process of filing its FS for the purpose of issuing any class of
instrument in a public market?
3. Public utility or holder of secondary license(s) issued by regulatory
agencies (e.g. banks, trust companies, investment houses, etc.)
PUBLICLY
ACCOUNTABLE
ENTITY/LARGE
ENTITY:
YES
NO
FULL PFRS
ASSETS > 350M or LIABILITIES > 250M
YES
NO
MEDIUM ENTITY:
ASSETS > 100M to 350M or LIABILITIES > 100M to 250M
ASSETS =3M to 100M or LIABILITIES =3M to 100M
NO
PFRS FOR SMEs
YES
NO
SMALL ENTITY:
YES
ASSETS < 3M and LIABILITIES < 3M
PFRS FOR SMALL ENTITIES
(Effective January 1, 2019)
MICRO ENTERPRISE:
PFRS FOR SMALL ENTITIES OR
INCOME TAX BASIS
QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities (d) PFRS for Small Entities or Income Tax Basis - for each of the following scenarios:
1.
ABC Financing, a trust and banking company with total assets of 2.99M and total liabilities at 2.99M
2.
ABC Co., a manufacturing company with total assets of 2.99M and total liabilities at 2.99M
3.
XYZ Trading, a publicly traded company with total assets of 3M and total liabilities of 100M
4.
XYZ Co., a merchandising company with total assts of 3M and total liabilities of 100M
5.
DEF Co., a manufacturing company with total assets of 2.99M and total liabilities at 3M
6.
GHI Co., a property leasing company with total assets of 100M and total liabilities at 251M
7.
JKL Co., a pharmaceutical company with total assets of 350M and total liabilities at 250M
1. PESENTATION OF FINANCIAL STATEMENTS
A complete set of financial statements under PAS 1 shall include:
1. a statement of financial position as at the end of the period;
2. a statement of comprehensive income for the period;
3. a statement of changes in equity for the period;
4. a statement of cash flows for the period;
5. notes, comprising a summary of significant accounting policies and other explanatory information;
6. when applicable, a statement of financial position as at the beginning of the earliest comparative period when
an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements.
I. STATEMENT OF FINANCIAL POSITION * minimum line items as per PAS 1
ASSETS
Current Assets (if presented according to liquidity)
Cash and cash equivalents*
Trading securities/Financial assets at fair value through P&L/Marketable securities*
Trade and other receivables*
Inventories*
Prepayments and other current assets
Noncurrent Assets
Property, plant and equipment*
Intangibles*
Investment in associates and joint ventures*
Investment property*
Financial assets (at amortized cost and at fair value through OCI/L)*
Other long-term investments (e.g. Fund investments, Cash surrender value)
Page 1 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
Deferred tax assets*
Other assets (e.g. Noncurrent non-trade receivables)
LIABILITIES
Current Liabilities
Trade and other payables*
Current provisions*
Financial liabilities at fair value through profit or losses
Financial liabilities at amortized cost (Short-term borrowings, Current portion of long-term debt,
Short term portion of a Finance lease liability)
Current tax liability (Income tax payable)*
Noncurrent Liabilities
Noncurrent provisions*
Financial liabilities at amortized cost (Noncurrent portion of long-term debt,
Long-term portion of a Finance lease liability)
Deferred tax liability*
STOCKHOLDERS’ EQUITY
Contributed Capital
Paid-in Capital* (Issued, Subscribed, Share Dividends Declared)
Additional Paid-in Capital (Excess over par, Treasury stock trans, other gains from capital transactions)
Less: Subscriptions receivable (if non-current)
Accumulated OCI/L
Accumulated Revaluation Surplus
Accumulated Unrealized Holding Gains/Losses on Investment at Fair Value Through OCI/L
Accumulated Foreign Exchange Translation Gains/Losses
Accumulated Hedging Gains/Losses
Accumulated Remeasurement Gains/Losses from Plan Asset and Accum. Benefit Obligation
Accumulated Profits
Appropriated(Voluntary, Legal and Contractual)
Unappropriated
Less: Treasury shares at cost
(a) Additional separate line items should be provided for the following as per PAS 1, where necessary:
Biological assets;
Total assets classified as held for sale and assets included in disposal groups classified as held for sale under PFRS 5,
Non-current asset held for sale and discontinued operations;
Liabilities included in disposal groups classified as held for sale under PFRS 5;
Non-controlling interest, presented within equity.
(b) Subscriptions receivables are presented as current assets if collectible within 12 months after the balance sheet date,
otherwise, deducted from contributed capital,
(c) Treasury stocks are deducted at cost from total stockholders equity with an automatic accumulated profits appropriation
equal to the cost of the treasury shares (legal appropriation).
II. STATEMENT OF COMPREHENSIVE INCOME
* minimum line items as per PAS 1
EXPENSES ACCORDING TO NATURE:
Net Sales/Revenue*
Other Income
Total Income
Expenses
Net Purchases
(Increase)/Decrease in Inventories
Employee Benefits Costs
Depreciation Expense
Advertising Expense
Supplies Expense
Total Operating Income/(Loss)
Finance Cost*
Share from net income/net loss of
Associate/Joint Ventures*
Other Non-operating Income/(Loss)
Net Income/(Loss) before Tax
Income Tax (Expense)/Benefit*
Net Income/(Loss) after Tax from
Continuing Operations
Post tax Income/(Loss) from
Discontinued Operations*
EXPENSES ACCORDING FUNCTION:
XX
XX
XX
XX
(X)X
XX
XX
XX
XX
X(X)
X(X)
X(X)
(X)X
X(X)
X(X)
Net Income/(Loss) after tax*
Other Comprehensive Income/(Losses)
Revaluation Surplus, net of Tax*
Unrealized Holding Gains/(Losses),
net of Tax*
Foreign Translation Gains/(Losses),
net of Tax*
Hedging Gains(Losses), net of Tax*
Remeasurement Gains(Losses) from
Plan Asset and Accum. Ben. Oblig.,
net of Tax*
Total Comprehensive Income/(Loss)*
(XX)
XX
(XX)
X(X)
XX
X(X)
X(X)
X(X)
X(X)
X(X)
X(X)
Net Sales/Revenue*
Cost of Sales
Gross Profit/Income
Other Income
Total Income
Expenses:
Selling/Distribution Expenses
General/Administrative Expenses
Total Operating Income/(Loss)
Finance Cost*
Share from net income/net loss of
Associate/Joint Ventures*
Non Operating Income/(Loss)
Net Income/(Loss) before Tax
Income Tax (Expense)/Benefit*
Net Income/(Loss) after Tax from
Continuing Operations
Post tax Income/(Loss) from Discontinued
Operations*
Net Income/(Loss) after tax*
Other Comprehensive Income/(Losses)
Revaluation Surplus, net of Tax*
Unrealized Holding Gains/(Losses),
net of Tax*
Foreign Translation Gains/(Losses),
net of Tax*
Hedging Gains(Losses), net of Tax*
Remeasurement Gains(Losses) from
Plant Asset and Accum Ben. Oblig.,
net of Tax*
Total Comprehensive Income/(Loss)*
XX
(XX)
XX
XX
XX
XX
XX
(XX)
XX
XX
(XX)
X(X)
X(X)
X(X)
(X)X
X(X)
X(X)
X(X)
XX
X(X)
X(X)
X(X)
X(X)
X(X)
X(X)
III. STATEMENT OF CHANGES IN EQUITY
Balances, January 1
Prior Period Adjustments
Change in Accounting Policy
Correction of Prior Period Errors
Issuance of shares (at above par/stated value)
Comprehensive income for the period
Page 2 of 24
Share Capital
XX
Reserves
XX
Accum. Profits
XX
X(X)
X(X)
XX
XX
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
Net Income/(Loss)
Other Comprehensive Income/(Loss)
Dividends declaration
Losses from capital transactions (if APIC is not enough)
Appropriations (Voluntary, Legal, Contractual)
Reversal of Appropriations
Balances, December 31
X(X)
X(X)
(X)
X
(X)
XX
__
XX
(X)
(X)
(X)
X
XX
IV. STATEMENT OF CASH FLOWS (INDIRECT METHOD)
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME
NON-OPERATING (INCOME)/EXPENSES
(Gains or losses from sale of assets, investment income/losses, etc.)
NON-CASH (INCOME)/EXPENSES
(Depreciation, Amortization, Bond premium/discount amortization, etc.)
CHANGES IN WORKING CAPITAL: (Increase)/Decrease
(Changes in current assets including trading securities and current liabilities
excluding short term debt)
Net cash provided/(used) in operating activities
XX
(X)/X
(X)/X
(X)/X
X(X)
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM SALE OF INVESTMENTS (except trading securities)
PROCEEDS FROM SALE OF NON-CURRENT ASSETS (e.g. PPE/Intangibles)
PURCHASE OF INVESTMENTS (except trading securities)
PURCHASE OF NON-CURRENT ASSETS (e.g. PPE/Intangibles
Net cash provided/(used) in investing activities
XX
XX
(X)
(X)
X(X)
CASH FLOWS FROM FINANCING ACTIVITES
PROCEEDS FROM LOAN/ISSUANCE OF LONG-TERM DEBT SECURITIES (e.g. Bond
PROCEEDS FROM ISSUANCE OF SHARE CAPITAL
PROCEEDS FROM TREASURY SHARES REISSUANCE
PAYMENT OF DIVIDENDS
PAYMENT OF LOANS/RETIREMENT OF LONG-TERM DEBT SECURITIES
REACQUISITION OF SHARE CAPITAL
Net cash provided/(used) in financing activities
Increase/(Decrease) in Cash and cash equivalents
Add: Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
XX
XX
XX
(X)
(X)
(X)
X(X)
X(X)
XX
XX
*Interest expense are presented as operating cash outflow (benchmark), or financing (allowed alternative)
**Interest income are presented as operating cash inflow (benchmark), or investing (allowed alternative)
***Dividend income are presented as operating cash inflow (benchmark), or investing (allowed alternative)
****Dividend payments are presented as financing cash outflow (benchmark), or operating (allowed alternative)
V. NOTES TO FINANCIAL STATEMENTS
ORDER
A.
B.
C.
D.
OF PRESENTING THE NOTES
Statement of compliance with PFRS.
Summary of significant accounting policies used.
Supporting information or computation for line items presented in the financial statements.
Other disclosures, such as contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures.
FOR MEDIUM ENTITIES (PFRS for SMEs):
Generally the same components of a complete set of financial statements as full PFRS with the following exceptions:
If an entity has no other comprehensive income items, it may present a Statement of Income and Retained Earnings (SIRE),
provided further, that the only change to equity during the period arise from profit or loss, payment of dividends, correctio n
of prior period errors and changes in policies.
Unrealized Holding Gains or Losses from Investment at Fair Value are not recognized in the Other Comprehensive
Income/Losses for SMEs.
FOR SMALL ENTITIES (PFRS for Small Entities):
Generally the same components of a complete set of financial statements as full PFRS with the following exceptions:
Statement of Income in lieu of Statement of Comprehensive Income (as there are no Other Comprehensive Income or
Losses for Small Entities)
If the only changes to equity in the current period or any comparative period presented in the FS arise from profit or loss,
payment of dividends, correction of prior period error and changes in accounting policy, the entity may present a single
Statement of Income and Retained Earnings (SIRE) in lieu of the Statement of Income and Statement of Changes in Equity
QUICK TEST: Determine the applicable financial reporting framework – (a) Full PFRS (b) PFRS for SMEs (c) PFRS for
Small Entities - for each of the following scenarios:
1. An entity whose complete set of financial statements included a Statement of Income and Retained
2.
Earnings (which included gain on the remeasurement of PPE at the BS date under FMV Method
reported in the profit/loss), a Statement of Financial Position, a Statement of Cash Flows and Notes
to Financial Statements.
An entity whose complete set of financial statements included a Statement of Comprehensive
Income (which included an unrealized holding gain on FA at FMV and Revaluation Surplus on PPE,
both reported as components of Other Comprehensive Income/Losses), Statement of Changes in
Equity a Statement of Financial Position, a Statement of Cash Flows and Notes to Financial
Statements.
3.
Page 3 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
An entity whose complete set of financial statements included a Statement of Comprehensive
Income (which included Unrealized Holding Gain on all FA at FMV reported in the profit or loss as
it is only allowed to report such in the profit or loss and Revaluation Surplus reported as a
component of Other Comprehensive Income/Losses), Statement of Changes in Equity a
Statement of Financial Position, a Statement of Cash Flows and Notes to Financial Statements.
3.
2. CORRECTION OF ERRORS
- Where the requirement is the EFFECT OF ERRORS TO NET INCOME:
1. Consider all Current Period Errors (Counter Balancing* or Non-counter balancing**)
2. Consider all Immediate Prior Year Counter Balancing Errors
3. Ignore all Prior Years’ Non-counter balancing errors
* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and the year following the
year of incurrence shall be:
NET INCOME OF THE
NET INCOME OF THE
YEAR OF INCURRENCE
SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued income, Inventory,
DIRECT
INDIRECT
end, AR/Sales, Advances to suppliers)
Counter Balancing Error in a LIABILITY
(e.g. Unearned income, Accrued expense,
INDIRECT
DIRECT
AP/Purchases, Advances from customers)
** The effect of a NON-COUNTERBALANCING ERROR in net income of the year of incurrence and the year
following the year of incurrence shall be:
NET INCOME OF THE
NET INCOME OF THE
YEAR OF INCURRENCE
SUBSEQUENT YEAR
Non-Counter Balancing Error in an ASSET
DIRECT
NO EFFECT
Non-Counter Balancing Error in a LIABILITY
INDIRECT
NO EFFECT
- Where the requirement is the EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’ net income)
- Where the requirement is the EFFECT OF ERRORS TO WORKING CAPITAL (CURRENT ASSETS – CURRENT LIAB)
1. Consider all errors affecting current assets and current liab. as of the end of the current period only.
2. The error in the current asset is DIRECTLY related to the WC (overstated current asset means
overstated
WC, and vice versa)
3. The error in the current liability is INVERSELY related to the WC (overstated current liability means
understated WC, and vice versa)
3. CASH/ACCRUAL AND SINGLE ENTRY
For CASH-ACCRUAL PROBLEMS related to SALES and PURCHASES:
Accounts Receivable/
Notes Receivable-Trade
Beg. Bal (AR/NR)
XXX
Advances from
Customers
XXX Beg. Bal. (Advanc.)
Recoveries of**
prev. write offs
XX
End. Bal (AR/NR)
XXX
XX
XX
XX
XX
XXX
Sales on Account XX
(Accrual basis)
Advances to
Suppliers
Beg. Bal (Advanc.) XXX
XX Collections
(Cash basis)
Payments
XX
(Cash basis)
Sales discounts
Sales returns*
Sales allowances
Write offs
End. Bal (Adv)
*excluding refunded sales return to customers
**included in the analysis only if collections
included the said recovery
Accounts Payable/
Notes Payable-Trade
XXX Beg. Bal (AP/NP)
XX
Purchase on Acc.
(Accrual basis)
Purchase discounts XX
Purchase returns* XX
Purchase allowance XX
End Bal. (Adv.)
XXX
XXX End Balance
*excluding refunded purchase returns
from suppliers
For CASH – ACCRUAL PROBLEMS related to item of INCOME and EXPENSES (e.g. rental income and expense,
royalty income and expense and other similar items)
Accrued Income/Unearned Income
Beg bal. (Acc Inc.) XX
XX
Beg bal. (Unear. Inc.)
Recog. Income
(Accrual basis)
XX
XX
Collection of cash
(Cash basis)
End bal. (Acc Inc.)
XX
XX
End bal. (Unear. Inc.)
Prepaid Expense/Accrued Expense
Beg bal. (Prep.)
XX
XX Beg bal (Acc. Exp)
Payment of cash
(Cash basis)
XX
XX
End bal. (Prep.)
XX End bal. (Acc. Exp)
XX
Recogn. of Exp.
(Accrual basis)
Note: if the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning and
ending balances, simply place in the beginning balance if it is net decrease (since this indicates that the beginning is high er
than ending balance) or place in the ending balance if it is net increase (since this indicates that ending balance is higher
than the beginning balance).
4. CASH
FOR CASH COUNT PROBLEMS:
1. Identify the accountability:
a. If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger
b. If Undeposited Collections, the accountability is total undeposited collections per books/records adjusted
Page 4 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
further for any unrecorded collections (based on additional information of the problem)
If there is no direct information about collections per records, accountability is collections per Official
Receipts, Cash receipt vouchers or other documents evidencing collections.
c. Other collections (e.g. return of expense advance, collection for charities or any other purposes not in
tact and assumed to have been included among currencies on hand. If the said collections for
any other purpose is in tact, the same shall be ignored in the cash count.
2. Identify valid supports to the accountability as presented in the problem
a. For Petty Cash Fund, acceptable valid support shall include:
- Bills and Coins, Replenishment Check, encashable Accommodated Checks (Valid cash items)
- Unreplenished Petty Cash Expense Vouchers (Adjusted to various expense accounts)
- Employee IOUs (Adjusted to receivables)
- Post dated/NSF Checks (Assumed to be an accommodated checks to be adjusted to receivable)
* unused postage is not a valid support where the accountability is the Petty Cash Fund
**return of an expense advances (e.g. excess from travel advance) is added to the accountability.
b. For Undeposited Collections
- Bills and Coins, Money Orders and Bank Drafts
- Depositable Customer Collection Checks as of the count date (Postdated, stale and NSF collection checks as of
the count date are not recorded as collection, thus should not be included as valid support)
- Any evidence of the use of collections to pay certain expenses
- Unused postage stamps (valid support where accountability is Undeposited Collections.)
FOR BANK RECONCILIATION PROBLEMS:
Unadjusted Balance
Deposits in Transit/
Undeposited Collections
Outstanding Checks (excluding
certified checks)
Bank errors
Adjusted Balance
BANK
XX
BOOK
XX (b)
XX
XX
(XX)
(XX)
XX(XX)
XX (a)
XX(XX)
XX(c)
Unadjusted Balance
Unrecorded Bank Credits
(Note and interest collection by bank,
Customer payments to bank, Loan proceeds)
Unrecorded Bank Debits
(BSC, NSF Checks, Note/Loan and interest
payments directly thru bank)
Book Errors
Adjusted Balance
(a): the adjusted balance per bank shall be the CORRECT CASH BALANCE
(a) – (b): the net adjustment to cash shall be the difference between the unadjusted balance per books and the adjusted
balance per bank
(a) – (c): the cash shortage/overage shall be the difference between the two adjusted balances
SHORTAGE if: Bank < Book; OVERAGE if: Bank > Book
FOR PROOF OF CASH PROBLEMS (Adjusted Balance Method):
Unadjusted balance per bank
Deposits in transit, beginning
, end
Outstanding checks, beginning
, end
Bank Errors (Receipt, beg is over)
(Receipt, beg is under)
(Disbursement, beg is over)
(Disbursement, beg is under)
(Receipt, end is over)
(Receipt, end is under)
(Disbursement, end is over)
(Disbursement, end is under)
Bank errors in the previous month, not yet
corrected by the current month
Bank errors in the current month, corrected in
the current month (overstatement error)**
Adjusted Balances
Beg.
XX
XX
(XX)
(XX)
XX
XX
(XX)
Receipts
XX
(XX)
XX
Disburse.
XX
(XX)
XX
(XX)
XX
(XX)
(XX)
(XX)
(XX)
XX
(XX)
(XX)
XX
X(X)
(XX)
XX
Beg.
XX
XX
End
XX
XX
Receipts
XX
(XX)
XX
(XX)
XX
XX
(XX)
X(X)
(XX)
XX
Disburse.
XX
XX
End
XX
Unadjusted balance per book
Unrecorded credit, beginning
, end
XX
Unrecorded debit, beginning
(XX)
(XX)
, end
XX
(XX)
NSF check, beginning
(XX)
(XX)
NSF check, end
XX
(XX)
NSF check received and redeposited the
same period (not recorded by book)*
XX
XX
Book Errors (Receipt, beg is over)
(XX)
(XX)
(Receipt, beg is under)
XX
(XX)
(Disbursement, beg is over)
XX
(XX)
(Disbursement, beg is under)
(XX)
(XX)
(Receipt, end is over)
(XX)
(XX)
(Receipt, end is under)
XX
XX
(Disbursement, end is over)
(XX)
XX
(Disbursement, end is under)
XX
(XX)
Book error in the previous month, not yet
X(X)
X(X)
corrected by the current month
Bank errors in the current month, corrected in
(XX)
(XX)
the current month (overstatement error)**
Adjusted Balances
XX
XX
XX
XX
*An NSF check which is recorded correctly during the current period is no longer a reconciling item.
*An NSF check which is recorded as a reduction against the receipts for the period shall be added to both receipt and disbursement columns.
(cash ending balance is unaffected)
*An NSF check received from the bank and redeposited during the same period shall no longer be included in the proof of cash statement if
receipt and redeposit were recorded in the books correctly, otherwise if the same was not recorded in the book, the item shall be added to
both the receipt and disbursement columns. (cash ending balance is unaffected)
Bank and book errors:
Page 5 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
a.
b.
c.
d.
Error in the current month not yet corrected – if the error is in recording receipt, the correction is in the receipt column; if the
error is in recording disbursement, the correction is in the disbursement column.
**Error in the current month corrected in the current month – if the error is in recording receipt (over), the correction will be
recorded as a disbursement, thus the reconciliation is a reduction from both receipt and disbursement columns. If the error is in
recording disbursement (over), the correction will be recorded as a receipt, thus the reconciliation is also a reduction from both
receipt and disbursement columns.
Notice that if the error, whether receipt or disbursement is an understatement error, the correction will be recorded also in
receipt or disbursement, thus a current month error that is understatement, whether receipt or disbursement is no longer a
proof-of-cash reconciling item.
Error in the prior month, corrected in the current month – If the prior month error is an understatement in receipt the correction
is recorded by adding to cash, thus the reconciliation is a reduction in the receipt column in the current month. If the prior month
error is an overstatement in receipt, the correction is recorded by deducting from cash, thus the reconciliation is a reduction in
the disbursement column in the current moth. If the prior month error is an understatement in disbursement, the correction is
recorded by deducting from cash, thus the reconciliation is a reduction in the disbursement column in the current month. If the
prior month error is an overstatement in disbursement, the correction is an addition to cash, thus the reconciliation is a reduction
from the receipt column in the current month.
Error in the prior month, not yet corrected – If the prior month error is yet to be corrected in the current month, the reconciling
item will be in the cash balance of the prior month (first column) and in the current month (last column)
5. RECEIVABLES
FOR AGING OF ACCOUNTS RECEIVABLE PROBLEMS:
- The aging schedule should be based on and should agree with the subsidiary ledger
- The aging schedule should be adjusted first with all possible adjustments before a required allowance is
computed. Possible adjustments include:
a. Adjustment to both the GL and SL (thus to Aging)
- additional write-off of accounts
- unrecorded sale/over recorded sale; unrecorded collections
- credit balance in accounts receivable (adjusted to advances from customers)
b. Adjustment to SL only (no adjusting entry required, but Aging schedule may be adjusted)
- sales/collections already recorded in the GL but not yet in the SL
- posting errors
c. Adjustments to GL only - will not affect the aging schedule anymore (e.g. sales/collections
not yet
recorded by the GL but already posted to the SL)
- The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted balance of the
accounts
receivable gross of the required allowance.
- If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an additional adjustment
should be in place to correct the general ledger to equal the Adjusted Balance of the subsidiary ledger. The
adjustment is either debited or credited to SALES account
- To compute for the Bad Debt Expense for the period, the adjusted balance per computation is compared to the
unadjusted balance. (Do not forget to consider write-off of accounts receivable, recoveries of previously written-off
accounts and interim bad debt provisions, if there are any):
Allowance for Bad Debt Expense
Beginning Balance
Dr: Write-off of Receivables (including
Cr: Recovery of Previous Write-off
additional write-off per audit)
Cr:Bad Debt Expense (Squeeze)
Required Ending Balance
FOR LOANS RECEIVABLE PROBLEMS (SIMILAR TO FINANCIAL ASSET AT AMORTIZED COST)
INITIAL MEASUREMENT:
Initial measurement of loans receivable shall be at fair market value, which shall be the
given-up on the loan transaction. More specifically, the net initial investment shall be:
Principal amount of the loan
Add: Origination costs*
Less: Origination fees**
FMV of the loan/Initial investment
net initial investment or the net cash
xx
xx
(xx)
xx
*Origination costs are costs that are directly attributed to the loan transaction such as brokers’ fees & commissions, prof.
fees (e.g.to lawyers for drafting debt agreements or to accountants for assessment of any asset collateral on the loan).
**Origination fees are origination costs chargeable to the debtor as per the debt agreement. It can be an amount higher or
lower than the actual origination cost incurred.
BALANCE SHEET MEASUREMENT
Loans receivable shall be measured at the balance sheet date at amortized cost, which shall be:
Initial amount recognized/FMV at initial recognition
xx
Less: Principal collections
(xx)
Less: Amortization of premium on loan or
xx
Add: Amortization of discount on loan
(xx)
Less: Impairment loss*, if any
(xx)
Amortized cost
xx
*IMPAIRMENT LOSS OF LOANS RECEIVABLE
Carrying value of the Loans and Receivable**
XX
Less: Present value of expected cash to be recovered
using the ORIGINAL EFFECTIVE INTEREST RATE (XX)
Impairment Loss/Bad Debt Expense
XX.
**include accrued interest as a general rule.
*IMPAIRMENT RECOVERY
PV of remaining future cash flows as revised
as a result of impairment recovery, if any
Less: Amortized cost based on the remaining
future cash flows at original effective interest
Gain on recovery – IS*
XX
(XX)
XX
Where maximum impairment recovery shall be to the extent of the Amortized cost of the
investment had there been no impairment.
Page 6 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
BALANCE SHEET MEASUREMENT UNDER THE EXPECTED CREDIT LOSS (ECL MODEL)
Credit loss arises when a debtor fails to pay some or all of the contractual payments, including instances of late payment.
IFRS 9 adopts an expected loss model for the recognition of impairment losses on financial assets that are measured at
amortized cost and financial assets with contractual cash flows measured at fair value through other comprehensive income.
The general approach, the entity recognizes the expected loss for a financial asset in accordance with the requirements for:
STAGE 1:
As soon as a financial asset is
originated, 12-month credit loss is
recognized in the P&L with an
allowance being established.
INITIAL RECOGNITION
12-Month ECL
(PV of Estimated Credit
Loss*Probability of
Default)
STAGE 2:
If the credit risk increases
significantly but that do not have
objective evidence of a credit loss
event and the resulting credit
quality is not considered to be
low credit risk, life-time ECL is
recognized.
STAGE 3:
If there is objective evidence that
the receivables are impaired (E.g.
probability of insolvency,
significant financial difficulties of
the debtor and default, significant
delay in payments)
SIGNIFICANT
INCREASE IN CREDIT
RISK AT THE BS DATE
Life-time ECL
(PV of Estimated Credit
Loss*Probability of Default)
EVIDENCE OF
IMPAIREMENT EXISTS
Impairment Loss
(CV/Amortized Cost
Less: PV of New Future
Cash Flows at Original
Effective Rate)
Entry:
Loss/Expense XX
Allowance
XX
Subsequent interest
income shall remain
to be based on:
Gross CV of
Receivables*Eff. %
Entry:
Loss/Expense XX
Allowance
XX
(Increase from the
previous allowance
balance)
Subsequent interest
income shall remain
to be based on:
Gross CV of
Receivables*Eff. %
Entry:
Loss/Expense XX
Allowance/
Receivable
XX
Subsequent interest
income shall now be
based on:
Net CV of
Receivables*Eff. %
6. INVENTORY
FOR CUT-OFF PROBLEMS:
1. Determine validity of the Sales or Purchase Transaction*
2. Determine whether Sales/AR or Purchases/AP has been recorded in the Sales or Purchases Journals.
(Based on the recording of the related sales/purchase invoice)
3. Determine whether inventories were Excluded or Included in the year-end physical count**
If
If
If
If
it
it
it
it
is
is
is
is
a Valid Sale, the Receivable should be recorded, the Inventory should be excluded.
not a Valid Sale, the Receivable should not be recorded, the Inventory should be included.
a Valid Purchase, the Payable should be recorded, the Inventory should be included.
not a Valid Purchase, the Payable should not be recorded, the Inventory should be excluded.
*VALIDITY OF SALES/PURCHASE TRANSACTION:
In considering the validity of Sale or Purchase transaction, consider the following items:
As a rule of thumb assumption, a Sale is valid upon delivery and a Purchase is valid upon receipt.
Exceptions to the rule of thumb assumption:
A. Goods in Transit
- FOB Shipping Point/FOB Seller or Seller’s Location include as inventory of buyer (plus freight in)
- FOB Destination/FOB Buyer or Buyer’s Location include as inventory of seller (exclude freight out)
- Cost of insurance and freight (CIF) include as inventory of buyer upon delivery to carrier
(plus cost of insurance and freight)
- Free Alongside (FAS) the Vessel include as inventory of buyer upon possession of the carrier
(exclude freight cost to Vessel, include freight cost from Vessel to Customer)
B. Special Sale/Purchase Agreement
a. With delivery/receipt but not yet valid sale/purchase
1. Consignment agreement – Valid upon sale of consignee to third-party customer
2. Inventory financing/Park sale/Product financing – Loan agreement only, inventories were merely used as a
collateral for the loan.
b. Without delivery/receipt but is already valid sale/purchase
1. Bill and hold agreement (e.g. Special Order from customers)
Segregated goods – mere segregation of goods does not exclude the same from the seller’s inventory,
unless the problem identified that sale is covered by a special sale agreement.
**DETERMINING WHETHER INVENTORIES ARE INCLUDED OR EXCLUDED FROM THE COUNT:
If the problem did not indicate whether goods under consideration has been included or excluded from the count, the
following assumptions are to be made:
SALES CUT-OFF
Deliveries on/before the count date: EXCLUDED
Deliveries after the count date: INCLUDED
COUNT DATE
Receipts on/before the count date: INCLUDED
Receipts after the count date: EXCLUDED
PURCHASES CUT-OFF
1.
count
2.
count
All deliveries (on sale) made on or before the count date are excluded from the count, all deliveries made after the
date are included in the count, unless otherwise stated by the problem.
All receipt (on purchases) of goods on or before the count date shall be included in the count, all receipts after the
date are excluded from the count, unless otherwise stated by the problem.
Page 7 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
FOR INVENTORY ESTIMATION PROBLEMS:
1. Gross Profit Method
Cost of Goods Available for Sale (Actual)*
Less: Cost of Sales (Estimate)**
Estimated ending inventory
XX
(XX)
XX
*COGAS is actual that is consider all items included in the computation of Cost of goods available for sale
(Inventory, beg + Purchases + Freight-in – Purch discount – Purch returns & allow + Dept transfer in
– Dept transfer out – Abnormal spoilage, breakage, shrinkage)
**COS is estimated by:
Gross Sales x Cost Rate (if GP is based on sales)
Gross Sales / Selling Price Rate (if GP is based on cost)
***For the purpose of estimating Cost of Sales:
Assume that all sales were made under the normal GP rate thus, when computing Gross Sales:
- Ignore sales discount to customers
- Add back special discounts to Gross Sales (e.g. Employee Discounts)
- Deduct sales returns from Gross Sales
- Ignore sales allowances (Deduct if Sales returns and allowances as single account is provided)
- Normal spoilage, breakage, shoplifting losses shall be added back to gross sales at selling price
2. Retail Method
Cost of Goods Available for Sale (at Retail) (a)
Less: Cost of Sales (at Retail)=Gross Sales (b)
Estimated ending inventory (at Retail)
Multiply by: Cost rate (LCA or Ave) (c)
Estimated ending inventory (at Cost)
XX
(XX)
XX
x%
XX
Cost
XX
XX
XX
(XX)
(XX)
(XX)
XX
(XX)
(XX)
Beginning Inventory
Add: Purchases
Freight-in
Less: Purchase allowance
Purchase discount
Purchase returns
Add: Departmental transfer-in or Debit
Less: Departmental transfer-out or Credit
Less: Abnormal spoilage/breakage/shrinkage
Add: Mark-ups, net of cancellations
COGAS under CONSERVATIVE/LCA
(c)
Less: Mark-downs, net of cancellations
COGAS under AVERAGE APPROACH
(c)
Gross Sales
Less: Sales Return
Add: Special Discounts (Employee Disc)
Normal Spoilage/Breakages/Shoplifting losses
Sales/ Cost of Sales at Retail
Retail
XX
XX
XX
/
XX
/
(XX)
XX
(XX)
(XX)
XX
XX
(XX)
XX(a)
Retail
XX
(XX)
XX
XX
XX(b)
x%
Cost rate under Lower of Cost
or Average (Conservative)
x%
Cost rate under Average
* For FIFO Average, simply disregard in the computation the cost % the beginning inventories:
Cost% = COGAS @ Cost – Beg inventory at Cost or Net Purchases @ Cost
COGAS @ Retail – Beg inventory at Retail
Net Purchases @ Retail
FOR INVENTORY VALUATION PROBLEMS:
Inventories shall be valued at lower of COST or NRV:
a. COST shall be measured through
1. SPECIFIC IDENTIFICATION/Perpetual
2. FIFO/Periodic - the cost shall be computed as: (# Inventory on hand * Cost of latest purchases)
3. FIFO/Perpetual – the computation of cost shall be the same as FIFO/Periodic
4. AVE/Periodic (aka WEIGHTED AVERAGE): (# of Inventory on hand * WA unit Cost)
WA unit Cost = COGAS / # of GAS
5. AVE/Perpetual (aka MOVING AVERAGE): (# of Inventory on hand * MA unit Cost)
The average cost is recomputed after every purchase transaction. The last Moving average unit cost shall
be used for the computation of the inventory cost at year end.
b. Net realizable value shall be:
1. Finished goods/Merchandise Inventory = Est. Selling Price – Est. cost to sell
2. Work-in-process inventory = Est. Selling Price – Est. cost to complete – Est. cost to sell
3. Raw materials and Supplies – The NRV is the Current Replacement Cost (Current Purchase Price).
Written down only if the finished goods to which they are related to are also written down.
Notes:
1.
2.
The DIRECT WRITE-OFF METHOD is used in instances where the company holds inventories that are not relatively the
same from year-end to year-end. Thus, there shall be no chances to recover any loss on write-down from one year over
the next. If NRV is lower than the cost, the difference is automatically the loss on write-down for the year. (which is either
added to cost of sale or recognized as a separate loss in the statement of comprehensive income)
The ALLOWANCE METHOD is used in instances where the company holds inventories that are relatively the same from one
year-end to another. Thus, there shall be a possibility of recovery from inventory write-down from one year, unto the next
year. The difference between cost and NRV, where NRV is lower becomes the required allowance for inventory write-down
(similar to allowance for bad debts), to determine how much is the loss during the period, the increment from the
unadjusted balance of the account shall be determined. Thus, if cost is lower the NRV, required balance is zero/nil,
any unadjusted credit balance of the account shall be recognized as gain from recovery in the income
statement (or deducted from cost of sale)
Page 8 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
Allowance for Inventory Write-down
Beginning Balance
Dr Adjustment for Gain on Recovery (or
Cr Adjustment for Loss on write-down for
reduction from COS)
the period (or addition to COS)
Required Ending Balance
FOR MEDIUM ENTITIES (PFRS for SMEs):
Generally the same as full PFRS.
FOR SMALL ENTITIES (PFRS for Small Entities, Section 21 Impairment of Assets):
Generally the same as full PFRS with the following exceptions:
Balance sheet measurement: Lower of Cost or Market Value, where the difference if market value is lower recognized
in the profit or loss.
QUICK TEST:
1.
ABC Corporation, a Merchandising Co. reported the following inventory items as of December 31, 2021:
Item A – Cost P900,000; Estimated Selling Price P1,200,000; Cost to Sell 20% of Selling Price.
Item B – Cost P600,000; Estimated Selling Price P800,000; Cost to Sell 30% of Selling Price.
Item C – Cost P400,000; Estimated Selling Price P380,000; Cost to Sell 10% of Selling Price.
Assuming ABC Corporation is a Medium Entity which uses PFRS for SMEs, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000
2.
Assuming ABC Corporation is a Small Entity which uses PFRS for Small Entities, how much should each
inventory be reported at as in the December 31, 2021 SFP?
a) Item A – P900,000; Item B – P600,000; Item C – P400,000
b) Item A – P900,000; Item B – P560,000; Item C – P342,000
c) Item A – P960,000; Item B – P560,000; Item C – P342,000
d) Item A – P900,000; Item B – P600,000; Item C – P380,000
7. INVESTMENTS
FOR INVESTMENT IN EQUITY SECURITIES (SHARES):
a) Control Exists (>50% equity in voting shares, that is ordinary shares) – Investment in Subsidiary
b) Significant Influence exists (20% - 50% in voting shares, that is ordinary shares)
– Investment in Associate (Equity Method)
c) No Ctrl nor Sign. Infl. - Financial Asset at Fair Value (PFRS 9, effective 1/1/2018):
c.1) FA at Fair value through profit or loss (PFRS 9) (aka Trading Securities)
c.2) FA at Fair value through OCI/L (PFRS 9) (aka Available for Sale Security)
Investment in Associate/Equity Method
- At cost adjusted for share in the post acquisition changes in the net assets (capital) of the associate
Beginning Balance (Cost of Acquisition including transaction cost)
XX
Share from Dividends
(XX)
Share in net income/(net loss)**
XX(XX)
Share in the other comprehensive income/(losses) of the associate
XX(XX)
Ending Balance
XX
**Share in net income or net loss:
Associates Net income or Net loss
XX
Multiply by % of interest
x% XX
Adjusted for: Excess of acquisition cost over book value
Depreciable asset understatement/remaining life
(XX)
Adjusted share in net income
XX
•Excess of Acquisition cost over Fair value of identifiable asset (Goodwill) shall not be included in the computation of
share in net income/loss, except if there is an impairment.
•Excess of fair value over book value of non-depreciable asset (e.g. land) shall not be included in the computation of
share in net income/loss, except if there is an impairment.
•If the acquisition cost is lower than the FMV of identifiable asset, the negative excess shall be included (added) in
the share in the net income in the year of acquisition.
•If investment was acquired other than at the beginning of the year, share from net income should be proportionate
over the number of months the investment had been held.
CESSATION (Disposal of shares to the extent that the company losses significant influence)
Proceeds from the portion disposed (net of trans. cost)
Add: FMV of the remaining portion not sold and reclassified
Total
Less: CV of the investment in associate prior to cessation
Gain/(loss) on cessation, before recycling of OCI/OCL
Recycling of Other Comp Income/(Loss)
Gain/(loss) on Cessation (Recognized in the Profit or Loss)
Page 9 of 24
Realized
Gain(Loss)
XX
Unrealized
Gain(Loss)
XX
(XX)*
X(X)
X(X)*
X(X)
(XX)**
X(X)
X(X)**
X(X)
Total
Gain(Loss)
XX
XX
XX
(XX)
X(X)
X(X)
X(X)
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
*Prorated based on the portion sold
**Prorated based on the portion retained and reclassified
DEEMED SALE/DILUTION (Happens when the company’s interest in associate decreases because of the issuance of
the associate of additional shares to other parties, with the company not participating on such new issuance)
Deemed share from the increase in the associates
net assets as a result of the issuance of shares
(Proceeds from issue of new shares*% of interest, after dilution)
CV of the investment deemed sold:
CV*(% decrease in interest/% original interest)
Gain/(loss) on deemed sale, before recycling of OCI/L
Recycling of Other Comp Income/(Loss)
Gain/(loss) on deemed sale/ Dilution gain(loss)
XX
(XX)
X(X)
X(X)
X(X)
STEP-ACQUISITION OF INVESTMENT IN ASSOCIATE
If as a result of acquiring additional shares of stocks, the entity acquired significant influence in the investee
company, the transition from investment in financial asset at fair market value (no significant influence) to investment in
associate (with significant influence) shall be accounted for under any of the following methods:
a. COST-BASED APPROACH WITH CATCH-UP ADJUSTMENT (RETROSPECTIVE) TO RETAINED EARNINGS.
As if equity method had been used from the date the original investment had been acquired. The difference
between income that should have been recognized under the equity method and the income recognized under
fair market value approach shall be retrospectively adjusted to the retained earnings.
b. FAIR MARKET VALUE APPROACH (PFRS 3-BASED APPROACH)
The initial cost of the investment shall be the sum of the current fair value of the original investment (original
investment shall be measured at its current fair value) and the cost of the new investment.
FOR MEDIUM ENTITIES (PFRS for SMEs, Sec. 14: Investment in Associate)
SMEs have an option in accounting for investment in Associate between and among the following methods:
a.
Equity method (almost similar to full PFRS with specific distinctions:
- Goodwill identified under equity method is treated separately and is amortized (if indefinite, use 10 years)
- Under equity method, accounting policies of the associate are adjusted to that of the investor (thus there will be no
recognition of the share from unrealized holding gains/losses from financial assets to other comprehensive
income/loss)
b. At cost less impairment, provided there is no published price quotations for the investment.
c.
At fair value with changes in fair value being recognized in the profit or loss, provided that the determination of the
investment’s fair value will not cause undue cost or effort.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 9: Investment in Associate)
A small entity shall account for all its investment in associate using one of the following:
a.
At cost less impairment. Where the asset is impaired once its recoverable amount (higher between fair value less cost
to sell and value in use) becomes lower than cost.
b.
Equity method (similar to equity method applied under PFRS for SMEs)
QUICK TEST:
Tomi Corp’s 20% investment in ordinary shares of ABC Corp. (with 100,000 shares outstanding) was acquired on
January 1, 2021 at P50 per share which included P2 per share transaction cost. The book value of ABC Corp.’s Net
assets which approximated their fair value was at P6M. ABC Corp. declared a total comprehensive income of
P800,000 which included a P500,000 net income for the year, a P400,000 Revaluation Surplus on PPE and a
P100,000 Unrealized Holding Loss on FA at FMV. ABC Corp. also declared and distributed P250,000 cash
dividends in 2021. ABC Corp. shares had a fair market value of P59 per share as of December 31, 2021. Estimated
transaction cost to sell the shares remained P2 per share.
1.
2.
3.
2.
Assuming Tomi Corp. is applying Full PFRS, what is the carrying value of the investment as of December
31, 2021?
a) P1,110,000
b) P1,090,000 c) P1,180,000 d) P1,140,000
Assuming Tomi Corp. is applying PFRS for SMEs as a medium entity, all of the following are allowed to be
the investments’ carrying value as of December 31, 2021, EXCEPT:
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000
Assuming Tomi Corp. is applying PFRS for Small Entities, all of the following are allowed to be the
investments’ carrying value as of December 31, 2021, EXCEPT (2 possible answers)
a) P1,090,000 b) P1,000,000 c) P1,180,000 d) P1,140,000
Assuming Tomi Corp. is applying PFRS for SMEs as a medium entity, all of the following are allowed to be
Financial Asset at Fair Value (Through P/L or OCI/L) PFRS 9 WHERE RECYCLING IS NOT ALLOWED for
the investments’ carrying value as of December 31, 2021, EXCEPT:
equity securities categorized as FA at FMV through OCI/L:
a) P1,090,000 Investment
b) P1,000,000
P1,180,000
d) P1,140,000
at Fairc)
Value
through Profit
Investment at Fair Value through other
Assuming Tomi Corp. is applying
PFRS
for Small
Entities, all of the
following areincome
allowed
to be the
or Losses
(Trading
security)
Comprehensive
(Available
for sale)
a) Initial
recognition
Fair as
value
(fair value 31,
of 2021, EXCEPT (2
At possible
Fair valueanswers)
(fair value of consideration
investments’
carryingAt
value
of December
given
given up) plus any transaction costs
a) P1,090,000 consideration
b) P1,000,000
c)up),
P1,180,000 d) P1,140,000
3.
b) Balance sheet
valuation (temporary
changes in value)
Page 10 of 24
- Transactions costs shall be expensed
as incurred
- Exclude accrued dividends(Note 1)
Fair Value Balance Sheet Date
Less: Carrying Value
Unrealized gain/loss – I/S
incurred.
- Exclude accrued dividends
(Note 1)
Fair Value Balance Sheet Date
Less: Original Cost
Unrealized gain/loss – SHE of SFP
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
Fair Value Balance Sheet Date
Less: Carrying Value
Unrealized gain/loss – OCI in SCI
Upon disposal:
a) Before the disposal. the financial asset is
remeasured to its fair value with the
gain/loss recognized in the OCI/L. Thus as a
result, the FMV/CV shall be equal to the
sales price.
b) The Financial Asset shall be derecognized
without gain/loss from the disposal (Sales
Price = CV/FMV)
c) Any Cumulative unrealized holding gain
or loss in the SHE shall be transferred to RE
Decreases in FMV whether temporary or
permanent are recognized in the OCL/SHE
c) Disposal
Proceeds
Less: Carrying Value
Realized gain/loss – I/S
d) Impairment loss
(permanent decline)
Decreases in FMV whether temporary
or permanent are recognized in the
profit or loss
At initial recognition, an entity may make an irrevocable election to present in other
comprehensive income. (PFRS 9, par 5.4.4) Thus, transfer into and out of
Investment at FMV through P&L (out of and into Investment at FMV through OCI) is
not allowed.
e) Reclassification
NOTES
1.
2.
3.
4.
5.
6.
7.
8.
If shares are acquired Dividend on (Between Declaration and Record date of Dividends), the purchase price shall be
debited to dividend receivable first before debiting the investment account for the balance. (Initial Cost = Purchase Price –
Dividend Receivable)
Cash dividends shall be credited to dividend income upon declaration at face value.
Property dividends shall be credited to dividend income at fair value on declaration date.
Stock dividend shall be recorded only through memo (update carrying value per share)
Stock in lieu of Cash shall be recorded as dividend income at the fair value of shares received or the supposed cash
dividend (in order of priority)
Cash in lieu of Stock shall be accounted for under the “as if” approach, that is, as if shares were received and sold at the
cash received. Gain or loss shall be recorded accordingly. (see disposal of FA at FMV)
Special dividends (preference shares received as dividend on ordinary shares held) shall be accounted for by allocating the
carrying value of the original shares held (if trading) or the original cost of the original shares held (if AFS) to the
preference dividends received and to the original investment based on aggregate fair values on a PRORATA basis.
Share assessment shall be debited to the investment account and credited to cash
FOR INVESTMENT IN DEBT SECURITIES (BONDS)
Under PFRS 9, effective 1/1/2018, the category of the debt security shall be based on the BUSINESS
MODEL, to wit:
a) The business model of the company has an objective of holding debt security investments primarily to
collect contract cash flows; cash flows are in the form of principal and interest with fixed maturity date;
does not apply fair value option to eliminate accounting mismatch – Investment at Amortized Cost.
b) The business model of the company has an objective of holding the debt security investment primarily
to collect contractual cash flows but also has an objective of holding the debt security available for sale
to take advantage of business opportunities; does not apply fair value option to eliminate accounting
mismatch – at Fair Market Value through OCI/L
c) The business model has an objective of holding the securities for short-term profits or the entity uses
fair value option to eliminate accounting mismatch – at Fair Market Value through Profit or Loss.
Financial Asset at Fair Value Through P/L and at Amortized Cost: PFRS 9 where recycling IS ALLOWED
for debt security investments categorized as FA@FMV through OCI/L:
a) Initial
recognition
b) Balance
sheet
measurement
c) Disposal
d) Impairment
Loss
e)
Reclassification
Page 11 of 24
At FMV Through Profit or Loss
(Trading security)
At Fair value (fair value of
consideration given up),
- Transactions costs shall be
expensed as incurred
- Exclude accrued interest(a)
Fair Value Balance Sheet Date
Less: Carrying Value
Unrealized gain/loss – I/S
At FMV Through OCI/L
(Available for sale security)
At Fair value (fair value of
consideration given up) plus any
transaction costs incurred,
excluding any accrued interest. (a)
Investment at Amortized Cost
(Held to maturity security)
At fair value which is assumed
to be equal to the fair value of
bonds plus any transaction cost,
excluding any accrued interest.
(a)
Fair Value @ Balance Sheet Date
Less: Amortized Cost(b)
Cumm. Unrealized gain/loss –
SHE in SFP
At Amortized Cost(b)
Fair Value @ Balance Sheet Date
Less: Carrying Value
Unrealized gain/loss – OCI in SCI
Proceeds, net of transactions
Proceeds, net of transactions
Proceeds, net of transactions
costs, net of accrued interest (a)
costs, net of accrued interest (a)
costs, net of accrued interest(a)
Less: Carrying Value
Less: Amortized Cost
Less: Amortized Cost
Accrued Interest
Realized gain/loss – IS*
Gain/loss on sale
Realized gain/loss – I/S
*including recycling of OCI/L
N/A (as any decline in the
PV of New future cash flows at
PV of New future cash flows at
value of the investment is
original effective rate
original effective rate
recognized as UHL-P&L)
Less: Amortized Cost
Less: Amortized Cost
Impairment loss -IS*
Impairment loss -IS*
*including recycling of OCI/L
- Reclassification from one category to another is allowed when and only when the entity changes its
business model in holding debt security investment.
- The transfer shall be made at the beginning of the following reporting period from the date business
model has been changed.
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
- The following table summarizes the different reclassification scenarios and their accounting
consequences:
RECLASSIFICATION DUE TO CHANGE IN BUSINESS MODEL
FROM/TO
FMVP&L
FMVOCI&L
- No gain/loss on the reclass date
FMVP&L
- Future amortization based on
prevailing effective rate on reclass
date
AMORTIZED COST
- No gain/loss on the reclass date
- Amortization based on prevailing
effective rate on reclass date
- No more future remeasurement
- Subsequent remeasurement
gain/loss to OCI/L
FMVOCI&L
- Cumm OCI/L is recycled to
P&L on the reclass date
- No more future amortization
- Subsequent remeasurement
gain/loss to profit or loss
- Cum. OCI/L is derecognized against
the initial valuation of the investment,
as a result the investment is transferred
at amo. cost, as if it has been originally
designated at amo. cost
- Subsequent amortization is based on
the original effective interest rate
AMORTIZED
COST
-Gain/loss on reclassification
date is recognized in the P&L
- No more future amortization
- Subsequent remeasurement
gain/loss to profit or loss
-Gain/Loss on reclassification date
is recognized in the OCI/L
-Subsequent amortization shall be
based on the original effective
interest
- Subsequent remeasurement
gain/loss to OCI/L
Notes (a) If bonds were acquired or sold in between interest payment dates, the acquisition price or the selling price includes accrued
interest not unless specifically expressed by the problem (e.g. at 105 plus accrued interest)
(b) If bonds were acquired at a premium (acquisition price > face value), the premium is a loss to be allocated over the remaining
term of the bonds by deducting the same to the related interest income. If bonds were acquired at a discount (acquisition price <
face value), the discount is a gain to be allocated over the remaining term of bonds by adding the same to the related intere st
income. In summary:
Amortization of premium, decreases carrying value of investment and interest income.
Amortization of discount, increase carrying value of investment and interest income.
(c) Computation of impairment loss on investment at amortized cost is actually the same with the computation of
impairment of loans and receivables.
FOR MEDUIM ENTITIES (PFRS for SMEs, Sec. 11: Financial Instruments)
Financial instruments in bonds shall be categorized as:
(a) Debt instrument at amortized cost
(b) Debt instrument classified as current, measured at undiscounted value (Cost) (unless from a financing transaction)
(c) If financing transaction, current debt instrument shall be measured at the present value of future cash flows at
market rate of interest for similar debt instrument (at Fair Value)
Financial instrument in shares shall be measured at:
(a) Fair value (if publicly traded or fair value can otherwise be measured reliably with changes in fair value recognized in
the profit or losses).
(b) All other investment shall be measured at cost less impairment.
FOR SMALL ENTITIES (PFRS for Small Entites, Sec. 6: Basic Financial Instruments)
Initial Measurement:
Financial instrument in bonds and in shares shall be initial recognized at transaction price (including transaction cost),
unless arrangement constitute financing in which case the debt security shall be initially measured at present value of
future cash flows at market rate.
Balance Sheet Measurement:
Financial Instruments in bonds – at amortized cost
Financial Instrument in shares – at cost less impairment, unless shares are traded in an active market, which shall be
measured a lower of cost or fair value, with changes in fair value recognized in the profit or loss.
QUICK TEST:
An investment in 10,000 shares of ABC Corporation were acquired originally at P50 per share. At the balance sheet date, the shares
had a fair market value of P52 per share with cost to sell estimated at P4 per share.
1.
2.
3.
4.
Page
Assuming the reporting entity is applying Full PFRS, what is the carrying value of the investment in equity securities as at
the balance sheet date?
a) P500,000
b) P520,000
c) P480,000
d) None of these
Assuming the reporting entity is applying PFRS for SMEs, being a medium entity, what is the carrying value of the
investment in equity securities as at the balance sheet date?
a) P500,000
b) P520,000
c) P480,000
d) None of these
Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the investment in equity
securities as of the balance sheet date, assuming further that the shares are not traded in the active market?
a) P500,000
b) P520,000
c) P480,000
d) None of these
Assuming the reporting the entity is applying PFRS for Small Entities, what is the carrying value of the investment in equity
securities as of the balance sheet date, assuming further that the shares are traded in the active market?
a) P500,000
b) P520,000
c) P480,000
d) None of these
Balance Sheet Measurement:
Financial Instruments in bonds – at amortized cost
Financial Instrument in shares – at cost less impairment, unless shares are traded in an active market, which shall be
12 ofmeasured
24
 www.resacpareview.com
a lower of cost or fair value, with changes0915-2303213/0908-6567516
in fair value recognized in the profit
or loss.
QUICK TEST:
An investment in 10,000 shares of ABC Corporation were acquired originally at P50 per share. At the balance sheet date, the shares
had a fair market value of P52 per share with cost to sell estimated at P4 per share.
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
8. PROPERTY, PLANT AND EQUIPMENT
INITIAL MEASUREMENT at Cost. Cost of PPE shall include:
a.
b.
c.
Cost of acquisition*
Incidental cost in bringing the asset to its present location and condition necessary for use.
Present value of the initial estimate of dismantling, removal or site restoration cost (credit goes to a provision
account – asset retirement obligation)
*Cost of acquisition depends on the mode of acquisition:
a. Cash purchase = Cash price + import duties + nonrefundable taxes (net of discount and rebates)
b. On account = at Cash price (net of discounts whether taken or not taken)
c. Installment/Deferred payment basis – at cash price equivalent or at present value of deferred payment
d. Share/Bond issue – at fair value of asset received, if not determinable, at fair value of shares issued
+ cash paid or – cash received
e. Exchange with commercial substance – at fair value of asset received (which is equal to the fair value
of asset given-up + cash paid or – cash received
f. Exchange without comm. substance – at book value of asset given-up, after impairment loss (where
appropriate) +cash paid or – cash received
g. Donation where the donor is a related party – at fair value (credit to APIC/Donated capital)
h. Donation where the donor is a non-related party (e.g. Government Grant) – at fair value (credit to
Income, if unconditional grant or Deferred Income, if conditional grant)
SUBSEQUENT MEASUREMENT
a. Cost method: At Cost, net of accumulated depreciation, and impairment loss
b. Appraisal/Revaluation method: At fair market value
Depreciation Methods
1. Uniform/Fixed Charge Method
Straight line = Depreciable cost / Useful life
2. Variable Charge Methods
Working hours
= Depreciable cost / life in terms of working hours * actual hours used
Output method = Depreciable cost / life in terms of total output * actual output
3. Diminishing balance Methods
SYD = Depreciable cost * SYD rate
Declining balance = Cost*DB rate (consider salvage value only on the last year of depr.)
4. Others (useful for depreciating small tools and similar items)
Inventory method = Beg tools + Purchases – End tools – Proceeds from disposal of tools
Replacement method = Tools disposed * Cost of latest purchases – Proceeds from disposal
Retirement method = Tools disposed * Cost of earlier purchases – Proceeds from disposal
** For the computation of depreciation, where there are several transactions happening during the period
List down all the items which became outstanding at one time or another during the period:
Disposed (Depreciate from Jan. 1 to date of disposal)
Newly Acquired (Depreciate from Date of acquisition to Dec. 31)
Outstanding during the entire year
IMPAIRMENT LOSS
An asset is impaired if only if the Carrying value is > that the Net recoverable value
* Net recoverable value is the higher between the Fair Value less Cost to Sell or the Value in use
Where: Fair Value less Cost to Sell = Estimated Selling Price – Estimated Cost to Sell
Value in use = PV of the future net cash flows from the continued use of the asset
and from its ultimate disposal using a pre-tax discount rate.
REVALUATION/APPRAISAL
A. If asset have an active market, thus FMV is readily determinable:
Fair value of Asset – Carrying Value = Revaluation Surplus (OCI)
B. If asset have no active market, thus appraisal is determined through the current replacement cost:
Replacement Cost
XX - XX
Original Cost
Replacement AD
(XX) - (XX) Accum. Depr. on Cost
Fair Value/Sound Value
XX - XX
Carrying Value
Fair Value/Sound Value = Replacement cost*Condition Percent
Condition Percent = (remaining life/total life, original estimate) or
(carrying value/depreciable cost, original estimate)
Transfer of Revaluation Surplus: (credit to retained earnings)
a. Piecemeal: RS/Remaining life of depreciation asset.
b. Lump sum: Realize upon disposal or retirement
Impairment with subsequent revaluation
a) Recognized impairment loss on the year of incurrence.
b) Continue Depreciation based on the impaired value.
c) Upon revaluation, recognize the gain on recovery =
CV had there been no impairment – CV based on impaired value
d) Recognize as revaluation surplus (under revaluation method) =
Fair Value – CV had there been no impairment
Revaluation with subsequent impairment
a) Recognize the revaluation surplus in the stockholders’ equity
b) Continue Depreciation based on the revalued amount (realize revaluation surplus on a piecemeal
basis if applicable)
c) Upon impairment, write off the remaining rev. surplus =
CV based on revalued amt. – CV had there been no revaltn.
d) Recognize as impairment loss in the income statement =
CV had there been no revaluation - Impaired value/Fair value
Page 13 of 24
0915-2303213/0908-6567516  www.resacpareview.com
-
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
Compensation for Impairment Loss of PPE
a) Compensation for impairment loss of PPE shall be recognized as an asset in the BS and income in the IS, when
and only when it becomes virtually certain (when it becomes receivable).
b) The impairment loss shall be recognized separately at gross amount in the income statement.
c) The impairment loss and the compensation shall be separately recognized and are not to be offset.
FOR MEDUIM ENTITIES (PFRS for SMESs, Sec. 17: PPE)
Generally the same provisions with that of full PFRS except for the following:
under Sec. 25: Borrowing Cost, all borrowing cost are to be expensed as incurred
FOR SMALL ENTITES (PFRS for Small Entities, Sec. 12: PPE)
Generally the same provisions with that of full PFRS except for the following:
- Balance sheet measurement - a small entity is allowed to choose between:
Cost Model – Cost less Accumulated Depreciation and Impairment (same as full PFRS)
Fair Market Value Mode – an entity shall measure the PPE at fair value at each reporting date with change in fair value
recognized in the profit or loss.
under Sec. 19: Borrowing Cost, all borrowing cost are to be expensed as incurred
9. INTANGIBLES AND GOODWILL
INTIAL MEASUREMENT
a.
b.
c.
d.
Separate Acquisition: Cash purchase, installment basis, share/bond issue (see PPE)
Grants – At Fair Value or Zero/Nominal Amount
Business Combination – At Fair Value of Identifiable Intangibles acquired (regardless of intent to use)
Exchange – With Commercial Substance – At Fair Value
- W/out Commercial Substance – At Book Value of asset given + cash paid/ - cash received
e. Internally Developed Intangibles
e.1. For Patents, Brands, Mastheads, Publishing Titles, Recipes and Formulas, Customer Lists
- All research and development costs shall be recognized as outright expense. Only the cost
directly associated to acquiring the legal rights over the intangible forms part the initial cost of
the asset.
e.2. For other internally developed intangibles (e.g. Computer Software)
- All research and development cost incurred prior to achieving the capitalization criteria under
PAS 38 shall be recognized as outright expense)
- Development costs that qualify for capitalization under PAS 38 (e.g. after establishment of
technical feasibility)
SUBSEQUENT MEASUREMENT
COST METHOD
For Intangibles without definite useful life (including Goodwill): Cost net of Impairment Loss
For Intangibles with definite useful life: Cost net of Amortization and Impairment Loss
REVALUATION METHOD (similar to PPE, except that intangibles shall only be revalued if it has an active market)
MATTERS ABOUT GOODWILL: Initial Measurement
Indirect:
Direct: a)
b)
c)
d)
Acquisition Cost
XX
Less: Fair Value of identifiable net assets, excluding goodwill (XX)
Goodwill
XX
Purchase of excess earnings (Excess Earnings*#years)
Present value (Excess Earnings*PV factor)
Capitalization of excess earnings (Excess Earnings/%)
Capitalization of normal/average earnings (Acq Price – (Norm Earnings/%))
Where: Excess Earnings is computed as:
1) If Average or Normal Earnings is given as a percentage:
Fair market value of net asset, excl goodwill * (Entity normal earnings % - Industry ave. earnings% )
2) If Normal Earnings is given in terms of actual historical earnings:
Historical accumulated earnings (usually 5 years)
XX
Adj: Non-operating (gains)/losses
X(X)
Historical earnings from operations
XX
Divide by: number of year (usually 5 years)
xyears
Average earnings
XX
Add/Ded: Incremental/Decremental expenses
X(X)*
Entity Average earnings
XX
Less: Industry normal earnings
(XX)
Excess earnings
XX
*eg. Bonuses to officers are no longer incurred after the business combination.
Depreciation and amortization shall either increase or decrease after the bus. com.
IMPAIRMENT LOSS ON GOODWILL:
Carrying value of the Cash Generating Unit (including Goodwill)
XX
Recoverable Value of the cash generating unit*
(XX)
Impairment loss
XX
*Higher between the Value in use (present value of remaining future cash flows from continued use and eventual disposal of
the net assets comprising the CGU) and the fair value less cost to sell of the CGU.
a. Impairment loss shall be charged first against the goodwill attributed to the CGU,
b. if not enough any excess shall be charged to all other assets of the CGU in the ratio their carrying value before any
impairment. In allocating the remaining loss, the resulting carrying value of all other assets should not result to amounts
lower than the higher between and among: (a) the individual asset’s fair value less cost to sell; (b) the individual asset’s
value in use; and, (c) zero
Page 14 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 19: Business Combination and Goodwill)
require to measure goodwill at each balance sheet date at cost less accumulated amortization and impairment losses. If
an entity cannot determine the period which the economic benefits are expected, goodwill shall be amortized over a
period not to exceed 10 years.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 14, Business Combination and Goodwill)
Essentially the same with PFRS for SMESs
FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 18: Intangibles)
requires all research and development costs to be expensed as incurred unless it forms part of the cost of another asset
that meets the recognition criteria in terms of IFRS for SMEs
internally generated intangibles are expensed: development costs may not be capitalized
cost of intangible acquired through government grant is at fair value only: zero/nominal amount is not allowed valuation.
requires intangibles be subsequently measured at each balance sheet date at cost less any accumulated amortization and
impairment loss (and does not allow the use of revaluation method)
require to consider that all intangibles have finite(definite) useful life (if not reliably measurable, use management’s best
estimate but not more that 10 years)
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 13, Intangible Assets Other than Goodwill)
Essentially the same with PFRS for SMESs
QUICK TEST:
A reporting entity incurred the following costs at the beginning of the reporting year: Research costs aimed at the
discovery of a new knowledge, P20,000; Development costs incurred before establishment of technical feasibility,
P30,000; Development cost incurred after technical feasibility, P40,000; Cost of separately acquiring an intangible
asset, P60,000; Goodwill recognized through a business combination, P50,000. Assuming the following useful lives:
Internally developed intangible – Indefinite; Separately acquired intangible – 15 years; Goodwill – Indefinite.
1. Assuming the reporting entity uses Full PFRS, what is the total carrying values of the intangibles and
goodwill as at the end of the reporting period?
a) P150,000
b) P146,000
c) P137,000
d) 135,000
2. Assuming the reporting entity uses PFRS for SMEs, being a medium entity, what is the total carrying values
of the intangibles and goodwill as at the end of the reporting period?
a) P110,000
b) P106,000
c) P137,000
d) 101,000
3. Assuming the reporting entity uses PFRS for Small Entities, what is the total carrying values of the
intangibles and goodwill as at the end of the reporting period?
a) P110,000
b) P106,000
c) P137,000
d) 101,000
10. LIABILITIES
REFINANCING AND BREACH OF CONTRACTS (PAS 1)
Refinancing: Generally, a currently maturing obligation must be presented as current liability. A currently maturing
obligation may be presented as a long term liability under refinancing agreement, only if:
1. The company (as of the BS date) has the option/right to refinance the liability on a long-term basis OR
2. If there is no right but the long-term refinancing agreement was completed before or at the BS date.
Note: Long-term refinancing may be thru: a) extension of maturity date for another 12 months,
b) issuance of bonds the proceeds of which is used to settle the currently maturing obligation.
Breach of Contract:
Generally, if the company breaches
due and demandable, thus is presented as short term liability.
a
covenant
the
long-term
obligation
becomes
The obligation may still be presented as long-term only under the following conditions:
1. If the creditor agreed to give the debtor a grace period for at least 12 months after the balance sheet date AND
2. The said grace period should have been provided on or before the balance sheet date.
PROVISIONS (PAS 37)
- A liability whose either amount or timing is uncertain. ACCRUED, under the following conditions:
1.
Present obligation (legal or constructive) resulting form a past event or transaction (obligation event should
have happened on or before the balance sheet date)
2.
It is probable that an outflow of economic benefits will be required to settle the obligation.
3.
The amount of obligation should be capable of being reliable measured.
Common examples of provision are: Product warranties and guarantees, Premiums and coupon obligations,
Liability from litigations, Guarantee of liability of others, Provisions from onerous
contracts,
Unlawful
environmental damages
FOR PROVISIONS FOR WARRANTIES (as part of promotional program):
Total expense, per estimation policy
XX
Less: Actual cost incurred to date
(xx)
*Provision/Estimated Liability at year end
XX
* Before accruing liability at year end, consider if all provision/estimated liability are still valid, that is, are still
probable to be settled in the next period (e.g. if warranty, consider warranty period, if GCP consider validity period,
etc.)
- REIMBURSEMENTS OF PROBABLE LOSSES UNDER PAS 37 – these are amounts expected to be received as
reimbursements if entity settles the provision. Reimbursements shall be accounted for as follows:
Page 15 of 24
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
1.
2.
3.
If the entity has no obligation for the part of the expenditure to be reimbursed, the reimbursable amount shall
be deducted against the losses recognized in the income statement. The liability shall be presented in the
balance sheet net of the reimbursable amount.
If the obligation for the amount expected to be reimbursed remains with the entity and reimbursement is Virtually
Certain, the reimbursements shall be accrued as an asset (receivable) in the balance sheet any may be offset
against the losses recognized in the income statement. The amount recognized for the expected reimbursement
should not exceed the liability.
If the obligation for the amount expected to be reimbursed remains with the entity and the reimbursement is
not virtually certain, the expected reimbursement is not recognized as an asset. The expected reimbursement
may be disclosed.
CONTINGENT LIABILITIES
1.
2.
Possible obligation whose existence is to be determined in the future contingent upon the happening of a future
event; or
Present obligation, but is not accrued because it is either remotely possible that economic benefits will be
required to settle the obligation and/or the amount of the obligation is not capable of being reliably measured.
FOR BONDS PAYABLE PROBLEMS:
Bonds issued at a Discount (Proceeds < Face Value; Effective Interest > Nominal Interest)
-
discount is a transaction loss (amount received/proceed is lower than the amount to be paid/face value) to be
amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
the amortization is added to the related expense – INTEREST EXPENSE
Dr: Interest Expense
XX
Cr:
Discount on Bonds Payable
XX
as a result of the amortization, the interest expense recognized in the income statement is higher than the interest
paid and/or accrued. The difference is the amount of amortization.
Correct interest is computed as: (Carrying value of Bonds * Effective interest)
Nominal interest is computed as: (Face value of Bonds * Nominal interest)
Bonds issued at a Premium (Proceeds > Face Value; Effective Interest < Nominal Interest)
-
premium is a transaction gain (amount received/proceed is higher than the amount to be paid/face value) to be
amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
the amortization is deducted from the related expense – INTEREST EXPENSE
Dr: Premium on Bonds Payable
XX
Cr:
Interest Expense
XX
as a result of the amortization, the interest expense recognized in the income statement is lower than the interest
paid/accrued. The difference is the amount of amortization.
Bond Issue Costs – are deducted from net cash proceeds, thus in the process are deducted from premium or added to
discount on bonds payable (after which a new effective interest rate shall be computed)
Retirement of Bonds – if bonds are retired prior to their maturity dates, gain or loss shall be recognized in the profit or
loss (difference between the retirement price and updated amortized cost of the bonds plus accrued interest, where
applicable)
Accrued Interest – in accounting for bond issuance and retirement, consider inclusion of accrued interest specifically if
bonds were issued or retired in between interest payment dates.
CONVERTIBLE BONDS
1.
ISSUANCE – Proceeds from the issuance of Convertible Bonds should be allocated between the debt component
(bonds payable) and the equity component (Share Premium form Bond Conversion Privilege) using the RESIDUAL
APPROACH. To wit, the pro-forma entry to record issuance is:
Dr: Cash
XX
Dr: Discount on Bonds Payable
XX (or)
Cr:
Premium on Bonds Payable
XX
Cr:
Bonds Payable
XX
Cr: Share Premium from Bonds Conv. Priv.
XX
2.
CONVERSION – If Convertible bonds are converted into ordinary shares, the carrying value of the bonds (updated
amortized bonds payable) shall be cancelled out. The difference between the carrying value of the bonds and the
aggregate par value of the converted shares shall be credited to share premium account. An allowed alternative is
the cancel out the equity component originally credited to share premium account upon issuance of the bonds. The
same shall be added to the amount credited to the share premium account upon conversion. To wit, the pro-forma
entry to record the conversion is:
Alternative 1
Alternative 2
Dr: Bonds Payable
XX
Dr: Bonds Payable
XX
Dr: Premium on Bonds Payable
XX (or)
Dr: Sh Prem from Bond Conv. Priv.
XX
Cr:
Discount on Bonds Payable
XX Dr: Premium on Bonds Payable
XX (or)
Cr:
Ordinary Shares
XX Cr:
Discount on Bonds Payable
XX
Cr:
Share Premium
XX Cr:
Ordinary Shares
XX
Cr:
Share Premium
XX
3. EARLY RETIREMENT – If Convertible bonds are retired prior to maturity date, the retirement price shall
be allocated between the Bonds and the equity component, consistent with how the original issue price was
allocated (Residual Approach). The difference between the retirement price of the allocated to the debt component
and the carrying value of the bonds payable shall be recognized in the income statement, while the difference
between the retirement price allocated to the equity component and the original share premium from bond
conversion privilege shall be credited to share premium account.
LEASE – LESSEE (PFRS 16, effective January 1, 2019)
LEASE – a contract of part of a contract that conveys the RIGHT TO USE an underlying asset for period of time in exchange
for a consideration.
RIGHT TO USE – right to control the use of an IDENTIFIED ASSET
Page 16 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
IDENTIFIED ASSET – by being explicitly identified in the contract or implicitly specified when made available to the
customer
1. right to direct the use of an asset (how and for what purpose the asset is used throughout the period of use)
2. right to obtain substantially all the economic benefits from the use of the identified asset
*LEASES ARE FINANCE LEASE ON THE POINT OF VIEW OF THE LESSEE. PFRS 16 HOWEVER PERMITS THE LESSEE TO MAKE
AN ACCOUNTING POLICY ELECTION TO APPLY OPERATING LEASE UNDER THE FOLLOWING OPTIONAL EXCEPTIONS:
1. SHORT TERM LEASE – lease term is for a period of 12 months or less. Election to be made on a per class of
underlying asset basis (similar asset of nature and use)
2. LOW VALUE LEASE – low value asset based on professional judgment and based on the value of the asset
when it was brand new regardless of its age on the lease date. Typically low value underlying assets include
computers, office furniture and equipment. Election for low value lease is made on a lease by lease basis.
OPERATING LEASE
1. Periodic Payments – recognized as rent expense over the lease term on a straight-line uniform basis unless a more
systematic method is warranted.
2. Lease Inducements – effect of lease inducement is a reduction from the periodic rent expense on a straight-line
uniform basis, unless a more systematic method is warranted
3. Lease Bonus – recognized as additional rent expense over the lease term on a uniform or straight-line basis, unless
a more systematic method is warranted
4. Contingent Rentals – recognized as additional rent expense when incurred, that is when the condition or the
contingent event occurs.
FINANCE LEASE
1. INITIAL RECOGNITION/ACQUISITION OF RIGHT OF USE ASSET ON INSTALLMENT BASIS
ENTRY:
Right of Use Asset (at COST) XX
Lease Liability
(1)
XX
Cash (2 and 3)
XX
Asset Retirement Obligation (4)
XX
Where the COST of the asset shall include:
1. Present value of the Minimum Lease Payments (MLP) – Credited to LEASE LIABILITY
1.1. Periodic Payments (Fixed and Variable)
1.2. Certain Purchase Option or Guaranteed Residual Value
1.3. Additional periodic payments upon extension (if with certain extension option)
1.4. Termination penalties (if with certain termination option)
*The PV of MLP shall be based on the IMPLICIT LEASE RATE if known to both parties, otherwise, the
INCREMENTAL BORROWING RATE
2. Lease payment before or at commencement date such as LEASE BONUS less any LEASE INCENTIVES (reimbursable
expenses incurred by the lessee in relation to the lease agreement) – Credited to Cash
3. Initial direct cost incurred by the lessee – Credited to Cash (when paid in Cash)
4. PV of Estimated Retirement Cost – Cr. to Prov. on Asset Retirement / Asset Retirement Obligation (PAS 37)
2. PERIODIC PAYMENTS
ENTRY:
Interest expense (CV of Liab*%) XX
Lease Liability (balance)
XX
Cash
XX
3. Depreciation
Entry:
Depreciation Expense
XX
Accumulated Depreciation
XX
Where:
1. If there is transfer of ownership (whether as directly agreed upon or as a result of a certain purchase option):
(Cost minus Estimated Residual Value / Useful Life)
2. If there is no transfer of ownership (whether as agreed upon or as a result of a certain termination option):
(Depreciable Cost / Term)
Where: Depreciable Cost is:
Cost Minus the Lower between the Guaranteed Residual Value or the Estimated Residual Value
LEASE – LESSOR (PFRS 16, effective January 1, 2019)
Leases are generally OPERATING, unless FINANCE under specific criteria/requirements under PAS 17: (1) Transfer of
ownership to lessee; (2) Bargain Purchase Option; (3) Term at least 75% of life of asset; (4) PV of minimum lease
payments (MLP) is at least 90% of the FMV of the leased asset; (5) The asset is specialized in nature that only lessee
can use with very minimal alterations.
If the lessor is the manufacturer/dealer of the asset, the lessor shall be recognizing gross profit from the lease which shall
be accounted for as SALES TYPE LEASE.
Upon sale:
DR: FINANCE LEASE RECEIVABLE
XX
CR:
SALES
XX
Or, if payments are made in advance (at the beginning of each lease period)
DR: CASH
XX
DR: FINANCE LEASE RECEIVABLE (balance)
XX
CR:
SALES
XX
To recognize the related cost of sales:
DR: COST OF SALES
CR:
INVENTORY/ASSET
a.
b.
c.
d.
Page 17 of 24
XX
XX
The amount of sale shall be the fair market value of the asset sold or the present value of the minimum lease
payments (MLP), whichever is lower.
The minimum lease payments (MLP) shall include a) Periodic Payments and b) Bargain Purchase Option or
Guaranteed Residual Value.
If the residual value is not guaranteed, the same shall still be added in the determination of the Finance lease
receivable, but instead of it being added to sale, it will now be deducted from the cost of sales. The rationale is
that if the residual value is not guaranteed, that portion of the asset is not deemed sold, while it will still accrue
to the benefit of the lessor at the expiration of the lease (no transfer of ownership).
As a result, the gross profit to be recognized shall be the same whether the residual value is guaranteed or
unguaranteed.
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
If the lessor is a mere financing company (as in the case of a bank) instead of a manufacturer/dealer, the lease is under
DIRECT FINANCE LEASE. There will be no manufacturer’s profit to be recognized, instead income shall be derived merely
through interest. Upon sale:
DR: FINANCE LEASE RECEIVABLE
XX
CR:
ASSET
XX
Or, if payments are made in advance (at the beginning of each lease period)
DR: CASH
XX
DR: FINANCE LEASE RECEIVABLE (balance)
XX
CR:
ASSET
XX
Regardless whether the lease is under sales-type or direct financing, upon periodic collection:
DR: CASH
XX
CR:
FINANCE LEASE REC. (Balancing fig.)
XX
CR:
INTEREST INCOME (CV of REC.*eff %)
XX
a.
b.
The interest is computed based on the finance lease receivable balance.
The credit to the finance lease receivable is the balancing figure, that is the periodic collection less interest
income computed in a.
Direct lease costs incurred by the lessor shall be recognized as outright operating expense (alternatively added to cost of sales),
under Sales-type lease or are recognized as an addition to the initial investment on the lease by the lessor, under Direct finance
lease (added to the amount receivable by the lessor).
SALE AND LEASEBACK AGREEMENT (Sales Price = Fair Market Value)
1. Since lease agreements on the books of the lessee are by default, finance lease, the sale and lease back agreement
shall be considered simultaneously as sale of an asset and an acquisition of right of use asset:
DR: Cash
XX
DR: Right of Use Asset(b)
XX
DR/CR: Loss/Gain on Sale and Leaseback (c)
XX/ XX
CR:
Asset (at carrying value)
XX
CR:
Lease Liability(a)
XX
(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a)
XX
Divide by: FMV of the Asset
/XX
Portion of the asset reacquired in %
X%
Multiplied by: CV of the Asset
XX
Portion of the asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset
XX
Portion of the Asset Sold
XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback
XX
Less: PV of the MLP (CR to Lease Liability)
(XX)
Proceeds from portion sold
XX
CV of the portion sold (see b)
(XX)
Loss/Gain on Sale and Lease back
XX
SALE AND LEASEBACK AGREEMENT (Sales Price not equal to Fair Market Value)
1. If Sales price is higher than the Fair market value, the excess shall be treated as additional financing provided by
the buyer-lessor to the seller-lessee, thus is automatically included in the minimum lease payment credited to the
Lease Liability account.
DR: Cash
XX
DR: Right of Use Asset(b)
XX
DR/CR: Loss/Gain on Sale and Leaseback (c)
XX/ XX
CR:
Asset (at carrying value)
XX
CR:
Lease Liability(a)
XX
(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY (including payment
of the excess of sales price over the fair value of asset)
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a)
XX
Less: Excess of Sales price over FMV of Asset
(XX)
PV of MLP related to the lease liability or portion reacquired
XX
Divide by: FMV of the Asset
/XX
Portion of the asset reacquired in %
X%
Multiplied by: CV of the Asset
XX
Portion of the Asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset
XX
Portion of the Asset Sold
XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback
XX
Less: PV of the MLP (CR to Lease Liability)
(XX)
Proceeds from portion sold
XX
CV of the portion sold (see b)
(XX)
Loss/Gain on Sale and Lease back
XX
2.
If Sales price is lower than the Fair market value, the excess shall be treated as prepayment of the lease liability by
the seller-lessee to the buyer-lessor, thus is automatically deducted from the the minimum lease payment credited
to the Lease Liability account.
DR: Cash
XX
DR: Right of Use Asset(b)
XX
DR/CR: Loss/Gain on Sale and Leaseback (c)
XX/ XX
CR:
Asset (at carrying value)
XX
CR:
Lease Liability(a)
XX
Page 18 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
(a) Is the Present value of the Minimum Lease Payments (MLP): Credited to LEASE LIABILITY (net of the excess of
fair market value of asset over the selling price)
(b) Portion of the asset as if reacquired through the finance lease agreement:
PV of the MLP (a)
XX
Add: Excess of FMV of asset over Sales price
(XX)
PV of MLP related to the lease liability or portion reacquired
XX
Divide by: FMV of the Asset
/XX
Portion of the asset reacquired in %
X%
Multiplied by: CV of the Asset
XX
Portion of the Asset Reacquired (DR to Right to Use Asset) XX
Less: CV of the Asset
XX
Portion of the Asset Sold
XX
(c) The loss on gain on the portion sold shall be computed as follows:
Proceeds from Sale and leaseback
XX
Less: PV of the MLP (CR to Lease Liability)
(XX)
Proceeds from portion sold
XX
CV of the portion sold (see b)
(XX)
Loss/Gain on Sale and Lease back
XX
INCOME TAXES (PAS 12)
The reconciliation between financial income and taxable income is shown below:
Financial Income before any differences (Net income before tax in the SCI)
Add: Permanent Difference, Non-deductible expenses
Less: Permanent Difference, Non-taxable income
Financial Income before Temporary Difference
Add:
Future Deductible Amounts creating
Deferred Tax Asset and Deferred Tax Benefit (FDAAB)
Less:
Future Taxable Amounts creating
Deferred Tax Liability and Deferred Tax Expense (FTALE)
Taxable Income
XX
XX
(XX)
XX
XX
(XX)
XX
If there are no expected changes in tax rates in the future:
a. Total Tax Expense = Financial Income before temporary differences * Tax%
b. Current Tax Expense (Payable to BIR) = Taxable Income * Tax%
c.
Deferred Tax Asset (in the Balance Sheet) and Deferred Tax Benefit (in the Income Statement) = FDAAB*Tax%
d. Deferred Tax Liability (in the Balance Sheet) and Deferred Tax Expense (in the Income Statement) = FTALE*Tax%
e. To Reconcile:
Current Tax Expense (Taxable Income*Tax%)
XX
Add: Deferred tax expense (FTALE*Tax%)
XX
Less: Deferred tax benefit (FDAAB*Tax%
(XX)
Total Tax Expense (Fin. Inc. before Temp. Diff.*Tax%)
XX
f.
Entry to recognize the same shall be:
DR: INCOME TAX EXPENSE (TOTAL)
XX
DR: DEFERRED TAX ASSET
XX
CR:
INCOME TAX PAYABLE (CURRENT TAX)
XX
CR:
DEFERRED TAX LIABILITY
XX
If tax rates are expected to change in the future years:
Current Tax Expense (Taxable Income*Tax%)
XX
Add: Deferred tax expense (FTALE*Future Tax%)
XX
Less: Deferred tax benefit (FDAAB*Future Tax%
(XX)
Total Tax Expense
XX
PERMANENT DIFFERENCES
a. Non-deductible expenses
o
Fines, penalties, surcharges and compromise penalties for non-payment or late payment of taxes
o
life insurance expense
o
a portion of interest expense (33% of interest income gross of applicable final tax)
o
a portion of charitable contributions expense (excess of 5% of taxable income)
o
a portion of entertainment, amusement and representation expense (excess of 0.5% of net sales for
merchandising and manufacturing entities or excess of 1% of net revenue for service entities
o
goodwill impairment
b.
Non-taxable income
o
dividend income by a domestic or resident foreign corporation from another domestic corporation
o
life insurance policy settlement
o
interest income subject to final tax
o
royalty income subject to final tax
o
gifts, bequests and devises
o
gains from sale, exchange, or retirement of bonds
TEMPORARY DIFFERENCES
FUTURE DEDUCTIBLE AMOUNTS (FDAAB)
Amounts that are deductible for tax purposes in the future. These items are not yet deductible from current
income, thus are being added back to financial income to determine taxable income.
Future deductible amounts create deferred tax asset (in the balance sheet) and deferred tax benefit (deducted
from current tax expense in determining the total tax expense in the income statement)
Generally includes the following:
o
Accrued expenses – deducted only upon payment in the future.
o
Unearned income – taxed upon collection, thus are taxable in the current period but are not yet
recognized as income for financial accounting purposes. (no longer taxable in the future, thus are
deductible in the future)
o
Excess financial depreciation over tax depreciation.
o
Excess taxable income over financial income
o
Bad debts (under allowance method) – deductible upon write-off in the future.
Page 19 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
o
Impairment losses (other than on goodwill)
FUTURE TAXABLE AMOUNTS (FTALE)
Amounts that are taxable for tax purposes in the future. These items are not yet taxable in the current period,
thus are being deducted from financial income to determine taxable income.
Future taxable amounts create deferred tax liabilities (in the balance sheet) and deferred tax expense (added to
the current tax expense in determining the total tax expense in the income statement)
Generally includes the following:
o
Accrued income – taxed only upon collection in the future.
o
Prepaid expenses – deductible upon payment, thus are already deductible in the current period for tax
purposes. (no longer deductible in the future, thus are taxable in the future)
o
Excess tax depreciation over financial depreciation
o
Excess financial income over taxable income
POST RETIREMENT BENEFITS PROBLEMS (PAS 19)
TYPES OF POST RETIREMENT BENEFITS PLANS
A. DEFINED CONTRIBUTION – Under a defined contribution plan, what is defined, that is what has been agreed upon
with the employees, shall be the periodic contribution of the company to the employees retirement fund. The
periodic pension expense shall therefore be equal to the periodic agreed-upon contribution to the plan. As a result,
any future income that shall be earned by the employees’ retirement fund shall accrue to the benefit of the
employees and shall not affect in any way the computation of the company’s periodic pension expense.
B.
DEFINED BENEFIT – under a defined benefit plan, what is defined, that is what has been agreed upon with the
employees, shall be the final amount the employee will be able to receive in the future upon their retirement. The
amount is usually based on a certain percentage of the final salary of the employee on their retirement date multiplied
by the number of years the employee has been in service. (%*Final Salary*#of years in service). The future amount
to be settled upon retirement, where funded, shall be paid through the employees retirement fund (plan asset) which
the company funds through the periodic contribution.
In a defined benefit plan, contribution to the employees retirement fund is separately accounted for in a separate
memorandum account, PLAN ASSET (PA), to account for any income that it may earn (reduction from pension
expense, since it will accrue to the benefit of the company). The accumulated benefit obligation is also maintained in
a separate memorandum account, ACCUMULATED BENEFIT OBLIGATION (ABO), to monitor the balance of the
benefits earned by the employees (incurred by the company). The difference between these two memorandum
accounts will actually be the year-end Accrued Pension Expense (ABO>PA) or Prepaid Pension (PA>ABO).
DEFINED CONTRIBUTION PLAN
Entry: Periodic Contribution to the Plan
DR: Pension Expense
XX
CR:
Cash
XX
DEFINED BENEFIT PLAN
Entry: Periodic Contribution to the Plan
DR: Pension Expense
XX
CR:
Cash
XX
Year-end AJE:
If, Contribution = Required Expense*
No AJE necessary
Year-end AJE:
If, Contribution = Required Expense**
No AJE necessary
If, Contribution < Required Expense*
DR: Pension Expense
XX
CR:
Accrued Pension Expense XX
If, Contribution < Required Expense**
DR: Pension Expense
XX
CR:
Accrued Pension Expense XX
If, Contribution > Required Expense*
DR: Prepaid Pension Expense XX
CR:
Pension Expense
XX
If, Contribution > Required Expense**
DR: Prepaid Pension Expense XX
CR:
Pension Expense
XX
- the prepaid pension is subjected to an asset
ceiling test first (see discussion below) before the
entry to set it up.
Where *Required Expense = Defined contribution or
the periodic contribution to the plan as per
agreement with employees.
Where **Required Expense shall be computed as
follows:
Service Cost
Net Interest Expense/(Income)
Net Remeasurement Loss(Gain)
Total
XX
X(X)
X(X)
XX
Service Cost and Net Interest Expense(Income) shall
be recognized in the profit or loss while the Net
Remeasurement Loss(Gain) shall be recognized as
other comprehensive income or loss.
SERVICE COST
Service cost shall comprise the (1) current service cost, (2) past service cost, (3) settlement gain or loss.
component of pension expense recognized in the profit or loss.
Service cost is a
CURRENT SERVICE COST - This is the increase in accumulated benefits obligation (ABO) for the current period due
to the services of employees for the current year.
PAST SERVICE COST - This is the increase in the accumulated benefits obligation (ABO) in the current period due
to the services of employees in the past years. This results from introduction of significant changes in the defined
contribution plan during the year. As for instance the, increase in the agreed percentage of final salary (e.g. from 10% to
20%) as a basis for the computation of the defined benefit will result to substantial increase in the obligation for the current
period, not only due to services of the current year but also for the services in the previous years. Whether vested
Page 20 of 24
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
immediately or not vested immediately, past service cost is immediately recognized as a component of service cost and
pension expense for the current year.
SETTLEMENT GAIN OR LOSS - This result from the difference between an obligation’s settlement price (retirement
benefits actually paid to retiring employees) against the carrying value of the accumulated benefit obligation being settled.
One possible reason for such difference would be when the company offers early retirement plans to employees. To
encourage employees to take advantage of early retirement offers, the company usually offers to settle retirement plans at
amounts which are significantly higher that that earned by the employee (thus leading to a possible loss on the said
settlement).
NET INTEREST EXPENSE (INCOME)
Net interest expense (income) is the difference between the Interest Expense on the accumulated benefit obligation (ABO,
beg*settlement or discount %) and the Interest Income on the plan asset (PA, beg*settlement or discount %).
Like any liabilities, the accumulated benefit obligation increases periodically due to interest incurred. Interest incurred on
the ABO shall be recognized as a component of pension expense in the profit or loss.
The expected return on the plan asset on the other hand, shall be the interest income on the plan asset. The interest
income rate shall be assumed to be equal to the settlement or discount rate used to determine the interest expense on the
ABO. The interest income on the plan asset shall be recognized as a reduction from pension expense in the profit or loss.
The net interest expense (income) is also effectively, the interest expense (income) on the beginning balance of the accrued
pension expense (ABO>PA) or the prepaid pension expense (PA>ABO).
NET REMEASUREMENT LOSS (GAIN)
The net remeasurement loss (gain) or the actuarial loss (gain) shall comprise: (1) Actuarial loss (gain) on the plan asset;
(2) Actuarial loss (gain) on accumulated benefit obligation, and; (3) Effect of the asset ceiling (impairment on the prepaid
pension). The net remeasurement loss (gain) shall be recognized as an element of pension expense as other
comprehensive income or loss.
REMEASUREMENT LOSS (GAIN) ON PLAN ASSET - At year end, the employees retirement fund (plan asset) shall be
remeasured at fair market value. As a result any difference between the plan asset’s current fair market value and carrying
value shall be recognized as actuarial loss (gain).
PLAN ASSET
Beginning Balance
XX
Contribution to the plan
XX
XX
Settlement price to retirees
Interest income on the plan asset
XX
Actuarial gain (squeeze) or
XX
XX
Actuarial loss (squeeze)
Ending Balance (at Fair Value)
XX
The actuarial gain/loss is actually the difference between the actual return on the plan asset and the
expected return on the plan asset (interest income on the plan asset).
REMEASUREMENT LOSS (GAIN) ON ACCUMULATED BENEFIT OBLIGATION - At year end, the accumulated benefit
obligation is determined by computing the present value of the projected benefits earned by employees using an
appropriate assumed settlement rate. The difference between the computed present vale of projected benefits and the
accumulated benefit obligations’ carrying value shall be the actuarial loss (gain).
ACCUMULATED BENEFIT OBLIGATION
XX
Beginning balance
Settlement to retirees at CV
XX
XX
Current service cost
XX
Past service cost
XX
Interest expense on ABO, Beg
Actuarial gain (squeeze) or
XX
XX
Actuarial loss (squeeze)
XX
Ending balance (Present Value of the
Projected Benefits)
EFFECT OF THE ASSET CEILING - If the fair market value of the plan asset at year-end is higher than the present
value of the projected benefits (PA>ABO), the prepaid pension expense is tested for asset ceiling (tested for possible
impairment), before the same is set-up as prepayment at year end. The ASSET CEILING shall be the sum of the present
value of any expected future benefits from over-funding the benefit obligation (usually in the form of reduction in future
contribution or future refunds). If the asset ceiling is higher than the prepaid pension (PA – ABO) there is no loss. If the
asset ceiling however is lower that the prepaid pension (PA – ABO) the prepaid pension is written-down to the ceiling and
additional loss shall be recognized as a component of pension expense as other comprehensive income/loss.
FOR MEDIUM ENTITIES (PFRS for SMESs, Sec. 28, Employee Benefits)
Generally the same provisions with that full PFRS except:
A medium entity may elect to report the remeasurement/actuarial gain or loss from plan asset and accumulated
benefit obligation either in the profit or loss or in other comprehensive income or losses.
FOR SMALL ENTITIES (PFRS for Small Entities, Sec. 22, Employee Benefits)
An entity should account for the post-employment benefit plan using the accrual approach by calculating the expected
liability as of reporting date using the current salary rate of the employees and the employee’s years of service, without
consideration of future changes in salary rates and service periods. The entity shall recognize the liability for such postemployment benefit plan at the net total of (1) the accrued amount of the retirement benefits at the reporting date; less
(2) the fair value of plan asset (if any) at the reporting date out of which the obligations are to be settled directly.
QUICK TEST:
A reporting entity has 5 employees all employed 5 years ago as at the beginning of the current reporting period.
Each employee has an average current salary rate at P20,000 per month as of the current reporting period. The
agreement
with the labor union (under a defined benefit
obligation plan) included an agreement
to pay each
Page
21 of 24
0915-2303213/0908-6567516
 www.resacpareview.com
employee 50% of their final monthly salary for each year of service upon retirement. The company estimates a 20%
annual increase in salaries. The employees are expected to retire in 4 years as at the end of the current reporting
period. The settlement rate is assumed at 10%. The fair market value of the Plan Asset as at the end of the year is
P250,000.
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
QUICK TEST:
A reporting entity has 5 employees all employed 5 years ago as at the beginning of the current reporting period.
Each employee has an average current salary rate at P20,000 per month as of the current reporting period. The
agreement with the labor union (under a defined benefit obligation plan) included an agreement to pay each
employee 50% of their final monthly salary for each year of service upon retirement. The company estimates a 20%
annual increase in salaries. The employees are expected to retire in 4 years as at the end of the current reporting
period. The settlement rate is assumed at 10%. The fair market value of the Plan Asset as at the end of the year is
P250,000.
4. Assuming the entity uses the Full PFRS, what is the accrued pension as to be reported in the SFP as at the
end of the reporting period?
a) P372,080
b) P217,378
c) P174,889
d) P50,000
5. Assuming the entity uses PFRS for SMEs, being a medium entity, what is the accrued pension to be
reported in the SFP as at the end of the reporting period?
a) P372,080
b) P217,378
c) P174,889
d) P50,000
6. Assuming the entity uses PFRS for Small Entities, what is the accrued pension to be reported in the SFP as
at the end of the reporting period?
a) P372,080
b) P217,378
c) P174,889
d) P50,000
11. STOCKHOLDERS’ EQUITY
SHARE ISSUE
1. Issuance of Share Capital for Cash – Preference or ordinary shares are credited equal to par and the excess to
additional paid in capital.
Share Issuance Costs – include registration fees, underwriter commissions, legal fees, accounting fees,
share certificate cost, promotional costs and postage.
Generally, For subsequent issuances – charged to APIC relative to that particular issue.
For initial issuance – charged to Organization Expense
Issuance of Preference and Ordinary Shares for a Lump-sum Price – This is accounted as follows:
a. If preference are effectively equity securities, use pro-rata approach in reference to the aggregate market
value of preference and ordinary shares.
b. If preference are effective debt securities (e.g. redeemable), use residual approach assigning the fair value of
the preference shares first with the residual value assigned to the ordinary shares.
2. Issuance of Share Capital on a Subscription Basis – The agreed purchase price is debited to Subscriptions Receivable,
Share Capital Subscribed is credited at par and the difference is credited to
APIC. Upon full payment, the Share
Capital Subscribed is closed to Issued Share Capital.
3. Issuance of Share Capital for Non-cash Consideration (PFRS 2)
Noncash consideration (Asset or Services) received shall be valued at their fair value, unless the
fair value of shares are more clearly determinable (as when the shares are traded in the market).
If the non-cash consideration received are in the form of employee services (e.g. Options), the fair value of services
received shall be based on the fair value of the equity security issued.
4. Issuance of Share Capital in settlement of a liability:
a. Under normal credit terms – accounted for as equity conversion and shall not result to gain or loss reported
in the profit or loss (e.g. conversion of a convertible bonds)
b. Under debt restructuring agreement (Equity Swap) – as if the shares are issued at prevailing fair market
value, and as if the assumed issue price (fair market value of shares) becomes the retirement price of the
liability. As a result: FMV of Shares – CV of Liability = Gain/Loss on debt restructuring (profit or loss)
TREASURY SHARES
- Acquisition of Treasury Shares, use cost model
Treasury Stock at cost
XX
Cash
XX
- Sale of Treasury Shares – When treasury shares are reissued, the journal entry is:
a. Sold at a price higher than the cost, resulting in a “capital gain”
Cash
XX
Treasury shares (at cost)
XX
APIC from TSTransactions
XX
b.
At a price less than the cost, resulting in a “capital loss”
Cash
XX
(1) APIC from TSTransactions
XX
(2) Retained Earnings
XX
Treasury shares (at cost)
XX
* Note: When treasury shares are acquired at different costs, specific shares may be identified.
or average cost per share is used to determine the cost of the treasury shares sold.
Otherwise a FIFO
- Retirement of Treasury Shares
Retire treasury shares at their carrying value, which is the original issue price:
If Original Issue Price (carrying value) > Cost of TS: “capital gain”
Ordinary share (at par)
XX
Paid in Capital in Excess of Par (from orig. issue/pro-rata) XX
Treasury Shares (at cost)
XX
APIC from Treasury Shares Transactions
XX
If Original Issue Price (carrying value) < Cost of TS: “capital loss”
Ordinary shares (at par)
XX
Paid in Capital in Excess of Par (from orig. issue/pro-rata) XX
Page 22 of 24
0915-2303213/0908-6567516  www.resacpareview.com
AP-701
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Summary Lecture Notes
(1) Paid in Capital from Treasury Shares Transactions XX
(2) Retained Earnings
XX
Treasury Shares (at Cost)
XX
- Restrictions of Retained Earnings for Treasury Shares – has to appropriate Retained Earnings equal to
balance of its treasury shares. (Appropriation = cost of TS)
the
RIGHTS, WARRANTS AND OPTIONS
–
These securities entitle holders to acquire shares at an exercise rate ordinarily lower than the prevailing market rate.
The following illustrate how to account for their issuance, exercise and expiration:
RIGHTS – are issued to entitle
the general stockholders in
relation to their pre-emptive
rights,
to
protect
their
proportional interest whenever
corporations issue fresh new
shares.
WARRANTS – normally issued
attached to a principal security
(Bond or Pref. Shares) as an
inducement to buyers of the
principal securities.
Issuance
No entry (memo entry only)
1 right for every 1 share
outstanding, subscribed, share
dividends
declared
(preemptive right)
PS with warrants:
Cash
XX
PS
XX
Share Prem
XX
OSWO
XX
*Use
pro-rata
or
residual
approach
Exercise
Normal entry for issuance of
shares:
Cash (Ex. P) XX
OS
Share Prem
Expiration
No entry (memo entry only)
XX
Xx
Cash (Ex P)
XX
OSWO**
XX
OS
XX
Share Premium XX
**carrying value of
warrants exercised.
OSWO**
XX
Share premium
from expired
warrants
XX
the
Bonds with warrants:
Cash
XX
Discount
XX (or)
Premium
XX
Bonds Pyable
XX
OSWO
XX
*Use residual approach.
OPTIONS – normally issued to
key executives and officers as
additional compensation for
either past or future services
provided to the company.
Comp exp.
XX
OSOO
XX
At FMV of options or the
intrinsic value, whichever is
appropriate
(see note below)
Cash (Ex P)
XX
OSOO**
XX
OS
XX
Share Premium XX
**carrying value of
warrants exercised.
OSOO**
XX
Share premium
from expired
options
XX
the
Notes on Accounting for Option Issuance (Equity-settled share based payment):
1. Determine if options VESTED IMMEDIATELY or NOT VESTED IMMEDIATELY.
a. If options vest immediately (charge compensation/salaries expense for the entire valuation of the options)
**The value of option should be at FAIR VALUE of option, otherwise at INTRINSIC VALUE
If fair value method is used, value of the option shall be fixed at whatever is the fair value of the options on the
grant date.
If intrinsic value (FMV of stocks – Exercise Price) is used, the intrinsic value is updated at each balance sheet
date before and after the vesting period, until the options are exercised. Any changes in intrinsic value shall be
treated as mere change in estimate (current and prospective), charged to profit or loss.
2. If options are not vested immediately, determine if option plan is FIXED or VARIABLE
a. If options are under FIXED OPTION PLAN (the only vesting condition is the vesting period), charge compensation
expense to the vesting period by allocating the valuation of the options to the said vesting period. (Options/VP)
b. In estimating the compensation expense for each period, always consider in the analysis the estimated number
options which will become exercisable based on number of employees who shall remain within the company’s employs
until the end of the vesting period. Any changes in the number of employees remaining with the company until the
options vest (thus number of options that will become exercisable) shall be accounted for as a mere change in
estimate.
3. If options are under VARIABLE OPTION PLAN (if apart from the vesting period, there is an additional vesting condition),
determine what is the nature of the additional vesting condition (MARKET BASED OR NON-MARKET BASED)
a. If additional vesting condition is MARKET BASED (e.g. share price), account for the option as if it is FIXED. That is,
compensation expense shall be recognized over the vesting period regardless whether the additional market condition
is achieved or not. This is because the determination of the fair valuation of the options considers the probability
that market based condition will be achieved or not achieved. In addition, market based condition cannot be directly
influenced by key employees, that is, services of employees are not related to the achievability of the condition, thus
whether the market-based condition is achieved or not, in principle, the company received the services of the
employees thus compensation expense shall be recognized.
4. If additional vesting condition is NONMARKET BASED (e.g. target sales, earnings, increase in sales etc.), consider whether
the additional nonmarket based condition is achieved or not in vesting the options. This means that compensation expense
shall only be recognized if the additional vesting condition (apart from the vesting period) is achievable/achieved. In
addition, ascertain which among the following items are variable/varies in response to the nonmarket based condition: (a)
Number of options; (b) Vesting period; (c) Fair value of options
*If non-market based vesting condition is not achieved, the option shall be reverted to equity.
STOCK APPRECIATION RIGHTS (Cash-settled share-based payments)
SARs are accounted for similar with options (follow the same steps above) with the following exceptions:
SAR Payable is a financial liability to pay in cash.
Measurement: the value of the SAR Payable (at fair value or intrinsic value) shall be updated at the end of each
reporting year during and after the vesting period until the liability is settled.
The liability is settled at the prevailing fair/intrinsic of the SAR on the settlement date.
Any changes in fair valuation at each balance sheet date and on the settlement date shall be treated as mere change
in estimate (current and prospective), charged to profit or loss.
RETAINED EARNINGS/ACCUMULATED PROFITS
Page 23 of 24
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-701
PREWEEK LECTURES: Summary Lecture Notes
RETAINED EARNINGS/ACCUMULATED PROFITS - UNAPPOPRIATED
RE, beginning
Prior period adjustments:
(a) PPErrors
(a) PPErrors
(b) Change in Policies
(b) Change in Policies
RE, beg as adjusted
(c) Dividends declared from earnings
(d) Possible losses from capital
transactions*
(e) Appropriations (legal, contractual,
(f) Reversal of appropriations
voluntary)
(g) Net Loss
(g) Net income
(h) Quasi-reorganization
(h) Quasi-reorganization
RE, end
*Possible losses from capital transactions are first charged to the APIC from similar transactions, if not
enough, the balance is charged to the accumulated profits account
Cash Dividend
Number of shares outstanding and subscribed * (% of cash dividend*PAR per share)
Property Dividend (IFRIC 17)
•
An entity should measure the dividend payable at Fair value of the assets to be distributed.
•
At the end of each reporting period and at the date of settlement, the entity shall review and adjust the carrying
amount of the dividend payable (restate at fair value), with any changes in the amount of the dividend payable
recognized in equity (retained earnings) as adjustments to the amount of the distribution.
•
Upon distribution, an entity should recognize the difference between the dividend payable and the carrying amount
of the asset distributed in the profit or loss.
Stock Dividends or Capitalization or Bonus Issue
An ordinary stock dividend is a stock dividend of the same class; i.e., ordinary shares to ordinary shareholders. A special
stock dividend is a stock dividend of a different class; i.e., preference shares to ordinary shareholders.
a) less than 20% of the shares previously outstanding and subscribed, the stock dividend is termed small, in which
case the amount to be charged to retained earnings is equal to its current market value.
b) at least 20% of the shares previously outstanding and subscribed, the stock dividend is termed large in which case
the amount charged against Retained Earnings is equal to par value.
Scrip Dividends
A corporation may declare a scrip dividend by issuing promissory notes called scrip. This arises when the corporation
may have adequate retained earnings to meet the legal dividend requirements but has insufficient funds to disburse. If the
promissory note bears interest, this is charged to Interest Expense.
Balance Sheet Classification
Dividends Payable, Property Dividends Payable and Scrip Dividends Payable are classified as liabilities whereas Stock
Dividends Distributable presented as contributed capital in the Stockholders’ Equity
Page 24 of 24
0915-2303213/0908-6567516  www.resacpareview.com
ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 43  May 2022 CPA Licensure Examination  Preweek Lectures
AUDITING (Auditing Problems)
S. IRENEO  C. ESPENILLA
AP-702: RISK ASSESSMENT PROCEDURE (RAP), TEST OF CONTROLS (TOC) AND
SUBSTANTIVE TESTING (ST) – ALL TRANSACTION CYCLES
Risk Assessment Procedures (RAP)
1. If the internal control structure is deemed to be effective during the obtaining an understanding phase, the test of
transactions will usually be planned to be performed:
a. At the balance sheet date
b. At an interim date
c. At the beginning of the client’s fiscal period
d. After the tests of balances are completed
2. If the controls necessary to satisfy one of the objectives are inadequate, the likelihood of errors related to that
objective
a. Is increased, regardless of the controls for the other objectives
b. May be increased if the controls for other objectives don’t mitigate it
c. May be decreased if management is aware of the poor controls
d. Is indeterminate
3. Which one of the following statements is true? In deciding on substantive tests of transactions,
a. Some procedures are commonly employed on every audit regardless of the circumstances
b. All procedures are dependent on the adequacy of the controls and the results of the test of controls
c. Results obtained in the prior year’s audit will not affect the procedures used this year
d. The materiality of the item will not influence the choice of procedures used.
4. Which of the following statements is true?
a. If control risk is assessed at maximum, the nature of related substantive tests should be changed from
more to less effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should be changed from
less to more effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should be changed from
year-end to an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should be changed from a
larger to a smaller sample.
5. After the audit planning procedures, your audit team decided to place the preliminary audit risk at a high level.
Which of the following is correct?
a. The risk the planned further audit procedures will not be able to detect misstatement should be increased.
b. The audit materiality levels should be decreased.
c. The auditors should plan extensive substantive testing through analytical procedures.
d. The auditors should plan set the timing of its extensive compliance testing at year-end.
6. In rendering a preliminary financial ratio analysis on Atom Inc.’s financials, you have observed that the clients’
accounts receivable turn-over ratio decreased from 10 times last year (based on audited financial statement) to 6
times this year (based on unaudited figures). Which of the following is correct regarding the implication of this
information in your audit plan?
a. Accounts receivables may be materially misstated thus the auditor should issue a qualified opinion due to
departure from PFRS.
b. Accounts receivables are materially misstated thus the auditor should issue an adverse opinion due to
material and pervasive departure from PFRS.
c. The auditor increases his assessment of inherent risk in the financial statement thus shall plan to do
extensive substantive analytical procedures.
d. The auditor increases his assessment of risk of misstatement in the financial statement thus shall plan to
render test of details at year-end.
7. To obtain an understanding of the client’s internal control over its revenue/receipt transactions, an audit staff was
assigned to do inquiries with the department’s involved (Sales Department, for order processing; Credit
Department, for credit authorization; Warehouse, for determining the availability of goods; Shipping, for the
preparation and actual shipment of goods, and; Billing Department, for the invoice preparation). Which of the
following shall be rendered next?
a. Assessment of control risk at below the maximum level if the staff is satisfied that the design, operation
and effectiveness of internal control can reasonably detect/prevent potential misstatements in the financial
statements.
b. Assessment of the control risk at the maximum level if the design and operations of the internal controls
are inappropriate to detect or prevent potential misstatement in the financial statements.
c. Confirm his understanding of the internal control through inspection of documents and/or observation of
the performance of policies and procedures.
d. Test the effectiveness of the controls as to consistency of their application.
8. After obtaining and understanding of the Atom Inc.’s internal control policies and procedures over its purchasing
and disbursements transactions, the auditor was satisfied regarding’s the internal control’s potential reliability.
Which of the following shall be rendered next?
a. Test the effectiveness of the internal control in terms of their consistent application by extending the
analytical procedures done during the audit planning.
b. Sending confirmation letters to suppliers to confirm their agreements with Atom Inc.’s reported balances.
c. Examine the consistency of the application of the control by inspecting documents where control
performance are documented.
d. Render purchases cut-off to ascertain whether purchases were recorded in the correct period.
Page 1 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
Test of Controls (TOC) and Substantive Testing (ST):
Receipt/Disbursement Cycle (Audit of Cash Balances)
1. Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client’s
employee?
a. A bank lockbox system
b. Prenumbered remittance advice
c. Monthly bank reconciliations
d. Daily deposit of cash receipts
2. To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a
sample of paid vouchers and determine whether each voucher is:
a. Supported by a vendor’s invoice
b. Stamped “PAID” by check signer
c. Prenumbered and accounted for
d. Approved for authorized purchases
3. In testing over cash disbursements, the auditor most likely would determine that the person who signs checks also:
a. Reviews the monthly bank reconciliation
b. Returns the checks to accounts payable
c. Is denied access to the supporting documents
d. Is responsible for mailing the checks
4. To determine that each voucher is paid only once, when a payment is approved, supporting documents should be
cancelled by the:
a. Authorized members of the audit committee
b. Accounting department
c. Individual who signs the checks last
d. Chief executive officer.
5. Which of the following is correct regarding cash counts?
a. An auditor who decides to render cash count has an objective to gather valuation assertion over cash
items on hand.
b. Where the custodian’s accountability is petty cash fund, the auditor shall consider as a valid support the
unused postage stamps.
c. Where the custodian’s accountability is undeposited collections, the auditor shall consider as a valid
support, customer collection checks including those that are post-dated.
d. Where the custodian’s accountability is petty cash fund, the auditor shall consider as valid support
personnel checks accommodated by the fund including those that are rendered NSF.
6. To gather evidence regarding the balance per bank in a bank reconciliation, the auditor would examine any of the
following except:
a. Cutoff bank statement
b. Year-end bank statement
c. Bank confirmation
d. General ledger
7. Which of the following errors would not be discovered during the test of the bank reconciliation?
a. Cash received by the client subsequent to the balance sheet date but recorded as cash receipt in the
current year.
b. Deposits recorded in the cash book near the end of the year, deposited in the bank, and included in the
bank reconciliation as a deposit in transit
c. The existence of payments on notes payable that were debited directly to the bank balance by the bank
but were not entered in the client’s records
d. Payment to an employee for more hours than he worked.
8. You have been assigned to the year-end audit of financial institution and are planning the timing of audit
procedures relating to cash. You decided that it would be preferable to:
a. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end.
C
b. Coordinate the count of cash with the cutoff of accounts payable.
c. Coordinate the count of cash with the count of marketable securities and other negotiable assets.
d. Count the cash immediately upon the return of the confirmation letters from the financial institution.
9. Which of the following procedures would the auditors most likely perform to test controls relating to management’s
assertion about the completeness of cash receipts for cash sales in a grocery store which inevitably operates on a
cash basis?
a. Observe the consistency of employees’ use of cash registers and tapes
A
b. Inquire about employees’ access to recorded but undeposited cash
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger
d. Compare the cash balance in the general ledger with the bank confirmation request.
10. Reconciliation of the bank account should not be performed by individual who also:
a. Process cash disbursements
A
b. Has custody of securities
c. Prepares the cash budget
d. Reviews inventory reports
11. The auditors suspects that a clients’ cashier is misappropriating cash receipts for personal use by lapping customer
checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would
compare the:
a. Details of deposit slips with details of credits to customer accounts
A
b. Daily cash summaries with the sums of the cash receipts journal entries
c. Individual bank deposit slips with the details of the monthly bank statements
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are recorded.
12. The cashier diverted cash received over the counter from a customer to his own use and wrote off the receivable as
bad debt. Select the control that should have prevented the error.
Page 2 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
B
D
a.
b.
c.
d.
Aging schedules of accounts receivable are prepared
Journal entries are approved by a responsible official
Receipts are given directly to the cashier by the person who opens the mail
Remittance advises, letters, or envelopes that accompany receipts are separated and given directly to the
accounting department
13. The audit procedure referred to as proof of cash receipts is useful to test
a. Whether all recorded cash receipts have been deposited in the bank
b. Time lags in making deposits
c. Whether there are cash receipts that have not been recorded in the journals
d. All of the these.
Items 13 and 14 are based on the following:
The information below was taken from the bank transfer schedule prepared during the audit of Prime Co.’s financial
statements for the year ended December 31, 2020. Assume all checks are dated and issued on December 30, 2020.
Disbursement Date
Receipt Date
14.
B
15.
B
16.
C
17.
B
Check
Bank Accounts
Per
Per
Per
Per
No.
Books
Bank
Books
Bank
From
To
101
FEB TC
PNB
Dec. 30
Jan. 4
Dec. 30
Jan. 3
202
PCIB
MBTC
Jan. 3
Jan. 2
Dec. 30
Dec. 31
303
PNB
CBC
Dec. 31
Jan. 3
Jan. 2
Jan. 2
404
MBTC
BPI
Jan. 2
Jan. 2
Jan. 2
Dec. 31
Which of the following checks might indicate kiting?
a.
#101 and #303.
b.
#202 and #404.
c.
#101 and #404.
d.
#202 and #303.
Which of the following checks illustrate deposits/transfers in transit at December 31, 2021?
a.
#101 and #202.
b.
#101 and #303.
c.
#202 and #404.
d.
#303 and #404.
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to
detect whether
a.
the cash receipts journal was held open for a few days after the year end.
b.
the last checks recorded before the year and were actually mailed by the year end.
c.
cash balances were overstated because of kiting.
d.
any unusual payments to or receipts from related parties occurred.
Which of the following cash transfers results in a misstatement of cash at December 31, 2020?
Bank Transfer Schedule
Disbursement
Receipt
Recorded
Transfer in books
Paid by
Recorded in
Received
bank
books
by bank
a.
12/31/20
1/4/21
12/31/20
12/31/20
b.
1/4/21
1/5/21
12/31/20
1/4/21
c.
12/31/20
1/5/21
12/31/20
1/4/21
d.
1/4/21
1/11/21
1/4/21
1/4/21
Items 17 and 18 are based on the following:
Miles Company
Bank Transfer Schedule
December 31, 2020
Check
Bank Accounts
Date disbursed per
Date deposited per
Number
From
To
Amount
Books
Bank
Books
Bank
2020
FEBTC
PNB
P32,000
12/31
1/5*
12/31
1/3^
2021
FEBTC
PNB
21,000
12/31
1/4*
12/31
1/3^
3217
PCIB
FEBTC
6,700
1/3
1/5
1/3
1/6
0659
PCIB
FEBTC
5,500
12/30
1/5
12/30
1/3^
18. The tick mark * most likely indicates that the amount was traced to the
a.
December cash disbursements journal.
B
b.
Outstanding check list of the applicable bank reconciliation.
c.
January cash disbursements journal.
d.
Year-end bank confirmations.
19. The tick mark^ most likely indicates that the amount was traced to the
a.
Deposits in transit of the applicable bank reconciliation.
A
b.
December cash receipts journal.
c.
January cash receipts journal.
d.
Year-end bank confirmations.
20. A cash shortage may be concealed by transporting funds one location to another or by converting negotiable assets
to cash. Because of this, which of the following is vital?
a.
Simultaneous confirmations.
C
b.
Simultaneous bank reconciliations.
c.
Simultaneous verification.
d.
Simultaneous surprise cash count.
TOC & ST: Revenue Cycle (Audit of Trade Receivables)
1. The overall objective in the audit of the sales and collection cycle is to evaluate whether:
Page 3 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
a.
b.
c.
D
2.
B
3.
A
4.
D
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
The sales account and the accounts receivable account are free of errors
The sales account and the accounts receivable account are free of materials errors
The sales account and the accounts receivable account are presented fairly in accordance with financial
reporting standards
d. The accounts balances affected by the cycle are fairly presented in accordance with financial reporting
standards.
For the most part, the audit of the sales and collection cycle
a. Cannot be performed until the audit of cash is completed
b. Can be performed independently of the audit of the other cycles
c. Must be performed simultaneously with the audit of the purchases and disbursement cycle
d. Must be performed first so that the audit of the other cycles can rely on the data
For the most part, the evidence gathered during the audit of the sales and collection cycle can be subjectively
combined with the other parts of the audit
a. As the evidence accumulation process proceeds
b. Only when all fieldwork processes of the engagement are completed
c. Only after the audit of the sales and collections cycle is concluded
d. After the conclusion of both the cash cycle and the sales and collection cycle.
Which of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances
b. Bad debt expense
c. Allowance for uncollectible accounts
d. Cash credits from the cash disbursement journal
The customer’s request for merchandise, the customer order, would be in the form of
a. An oral request
b. A written request on customer’s letterhead
c. A written request on pre-printed form
d. Any of the above three formats
A document for recording the description, quantity and related information for goods ordered by a customer is the
a. Customer order
b. Sales order
c. Shipping document
d. Remittance advice
The document used to indicate to the customer the amount of a sale and due date of the payment is the
a. Sales order
b. Shipping document
c. Bill of lading
d. Sales invoice
The document used as the basis for recording sales transactions and updating the accounts receivable master file is
the
a. Sales order
b. Bill of lading
c. Sales journal
d. Sales invoice
A document prepared to initiate shipment of goods sold is the
a. Sales order
b. Bill of lading
c. Sales invoice
d. Customer order
When posting the Sales Journal, details of the journal are posted to ____________; and journal totals are posted
to ____________.
a. The sales account; the general ledger
b. The accounts receivable master file; the general ledger
c. The sales account; the accounts receivable subsidiary ledger
d. The accounts receivable subsidiary account in the general ledger; the sales account in the general ledger.
The report which typically includes information analyzed by key components as sales person, product and territory
is the:
a. Remittance advice
b. Summary sales report
c. Accounts receivable master file
d. Monthly statement
The document which supports reductions in accounts receivable is
a. Remittance advice
b. Credit memo
c. Sales invoice
d. Monthly statement
The document which accompanies the customer’s payment and is used to permit the immediate deposit of cash to
improve the control over the custody of asset is the:
a. Credit memo
b. Remittance advice
c. Sales invoice
d. Monthly statement
The daily entry in the cash receipt journal are supported by the
a. Sales invoice
b. Shipping document
c. Remittance advice
Page 4 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
C
B
B
D
A
A
D
D
D
D
A
A
d. Credit memo
15. A file for recording individual sales, cash receipt and sales returns and allowances for each customer is the:
a. Sales journal
b. Cash receipt journal
c. General ledger
d. Accounts receivable subsidiary ledger
16. A document sent to each customer showing their beginning accounts receivable balance and the amount and date
of each sale, cash payment received, credit memo issued, and the ending accounts receivable balance is the:
a. Accounts receivable subsidiary ledger
b. Monthly statement
c. Remittance advice
d. Sales invoice
17. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice
b. Approve the journal entry
c. Approve credit
d. Verify the unit price is accurate
18. For the most firms, the function of indicating credit approval is recorded on the
a. Customer order
b. Sales order
c. Remittance advice
d. Sale invoice
19. Most companies recognize sales when
a. A customer order is received
b. The merchandise is shipped
c. The merchandise is received by the customer
d. Cash is received on account
20. Which of the following would an auditor be concerned with when examining the billing function of client?
a. All shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All three are of concern
21. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible
b. Customer files for bankruptcy
c. A collection agency cannot inspire customer to pay the debt
d. The account is at least six month old.
22. In many audits of sales transactions, no substantive tests of transactions are made for the completeness objective
on the ground that
a. Overstatements of assets and income are greater concern than understatement
b. Understatements of assets and income are greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the reduced revenue
and net income is correct
d. The reduced sales causes a reduction of the accounts receivable therefore the ratios of the two financial
statements will not be misleading.
23. Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
a. Restrictions placed on sales by laws and regulations
b. Decline in sales due to economic declines
c. Decline in sales due to product obsolescence
d. Over-recorded sales due to a lack of control over the sales entry function
24. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping document
b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
25. Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?
a. Inaccurate billing due to a lack of controls
b. Lapping of accounts receivable
c. Misbilling a client due to a data input error
d. Recording sales when the customer is likely to return the goods
26. Which of the following is an example of misappropriation of assets relating to sales?
a. Accidentally recording cash that represents a liability as revenue
b. Holding the sales journal open to recorded next year’s sales as having occurred in the current year
c. Intentionally recording cash received from a new debt agreement as revenue
d. Theft of cash register sales
27. There is a presumption that auditors will confirm accounts receivable unless the auditor’s assessment of the risk of
material misstatement is low
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective
b. And accounts receivable are composed of large accounts
c. And the effectiveness of confirmations is absolutely determined
d. Or accounts receivable are from extremely reputable customers.
28. To determine that all valid sales have been recorded, the auditors would select sample of transactions from the
__________; This is necessary to support the __________ assertion over sales.
a. Shipping documents file; Completeness
b. Sales journal; Existence
Page 5 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
29.
D
30.
C
31.
B
32.
33.
34.
A
35.
B
36.
D
37.
A
38.
A
39.
c. Accounts receivable subsidiary ledger; Existence
d. Remittance advices; Completeness
Which of the following would most likely be detected by an auditor’s review of the client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
To test existence assertion of recorded receivables, the auditors would select sample from the:
a. Sales order file
b. Customer purchase orders
c. Accounts receivable subsidiary ledger
d. Shipping documents (bill of lading) file.
Which of the following relating to sales is most directly addressed when the auditors compare a sample of shipping
documents to related sales invoices?
a. Existence or occurrence
b. Completeness
c. Rights and obligation
d. Presentation and disclosure
Park, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent
residents’ delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of
the accounts receivable balances at the balance sheet date. Park, CPA most likely would:
a. Send negative confirmation letter
b. Examine evidence of subsequent cash receipt
c. Inspect the internal records, such as copies of tax invoices that were mailed to the residents
d. Sent positive confirmation request
Fork, CPA is engaged in audit of a cable TV firm which services a rural community. All receivable balances are
small, customers are billed monthly an internal control is effective. To determine the validity of accounts receivable
balances at the balance sheet date, Fork would most likely:
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation request.
Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper
write-off of a trade accounts receivable:
a. Write-offs must be approved by a responsible official after review of credit department recommendations
and supporting evidence
b. Write-offs must be approved by accounts receivable department
c. Write-offs must be authorized by shipping department
d. Write-offs must be supported by an aging schedule showing that only receivables overdue by several
months have been written-off.
An effective procedure to test for unbilled shipments is to trace from the _________. This is to support the
financial statement assertion of __________ over sales and receivables.
a. Sales journal to shipping documents; existence/occurrence.
b. Shipping documents to the sales journal; completeness.
c. Sales journal to the accounts receivable subsidiary ledger; existence/occurrence.
d. Sales journal to the general ledger sales account; completeness.
Bok No Manufacturing received a substantial sales return on December 31, 2020, but credit memorandum for the
returns were not prepared and recorded until March 4, 2021. The returned merchandise was included in the yearend physical inventory taken on December 31, 2021. The most effective procedure for preventing this type of error
and its implication on the net income are:
a. Prepare an aged schedule of accounts receivable monthly; Net income is overstated by the gross profit on
sales.
b. Prenumber and account for all credit memorandums; Net income is overstated by the amount of gross
sales.
c. Reconcile the subsidiary accounts receivable ledger with the general ledger control account monthly; Net
income is overstated by the cost of inventory.
d. Prepare and numerically control receiving reports for all materials received; Net income is overstated by
the amount of gross sales.
An auditor should perform alternative audit procedures to substantiate the existence of accounts receivable when:
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectibility of the receivable is in doubt.
d. Pledging of receivables is probable.
It is sometimes necessary for an auditor to use alternative audit procedure specially in instances where reply on
positive confirmation requests is not received even for a second set of confirmation requests. In such a situation,
the best alternative procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable gaining schedule prepared at the balance sheet date and at a subsequent
date.
c. Requesting that management increase the allowance for uncollectible accounts by an amount equal to
some percentage of the balance in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year basis.
Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the
auditor decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed
the customer name next to each check listed on the deposit slip; hence, he decided that for each customer for
Page 6 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
B
40.
B
41.
C
42.
D
43.
C
44.
A
which a confirmation ws not received that he would add all amounts shown for that customer on each validated
deposit slip for the two months following the balance sheet date. The major fault in the auditor’s procedure is
that”:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for confirmation of
accounts receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the receivable at
the balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.
When scheduling the audit work to be performed on an engagement, the auditor should consider confirming
accounts receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good
c. Negative confirmations are to be used
d. There is a simultaneous examination of cash and accounts receivable.
The auditor working paper often include a client-prepared aged trial balance of accounts receivable as of the
balance sheet date. This aging is best used by the auditor to ___________, which is relevant to gather evidence
regarding ____________ assertion on receivables.
a. Evaluation internal control over credit sales; Valuation
b. Test of accuracy of recorded charge sales; Existence
c. Estimate credit losses; Valuation
d. Verify the validity of recorded receivables; Existence
Which of the following most likely would give the most assurance concerning the valuation assertion of accounts
receivable?
a.
Tracing amounts in the subsidiary ledger to details on shipping documents.
b.
Comparing receivable turnover ratios to industry statistics for reasonableness.
c.
Inquiring about receivables pledged under loan agreements.
d.
Assessing the allowance for uncollectible accounts for reasonableness.
Confirmation is most likely to be a relevant from of evidence with regard to assertions about accounts receivable
when the auditor has concerns about the receivables’
a.
valuation.
b.
classification.
c.
existence.
d.
completeness.
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
a.
no reply to a positive confirmation request is received.
b.
no reply to a negative confirmation request is received.
c.
collectability of the receivables is in doubt.
d.
pledging of the receivables is probable.
TOC & ST: Expenditure/Purchasing, Payroll and Production Cycles (Audit of Inventories, Trade Liabilities and
Accrued Expenses
1. Which of the following is least likely to be among the auditors’ objective in the audit of inventories and cost of
goods sold?
a. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods
b. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold
c. Establish that the client includes only inventory on hand at year-end in inventory totals
d. Establish completeness of inventories
2. The receiving department is least likely to be responsible for the:
a. Determination of quantities of goods received
b. Detection of damaged or defective merchandise
c. Preparation of a shipping document
d. Transmittal of goods received to the store’s department
3. The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of
the transportation agreement is the:
a. Bill of lading
b. Job time shipping
c. Production order
d. Production schedule
4. An auditor usually examines receiving reports to support entries in the
a.
voucher register and sales returns journal.
b.
sales journal and sales returns journal.
c.
voucher register and sales journal.
d.
check register and sales journal.
5. When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:
a. Existence and Valuation
b. Existence and Completeness
c. Completeness and Valuation
d. Presentation and Valuation
6. Instead of taking a physical inventory count on the balance sheet date, the client may take physical count prior to
the year-end if internal control is adequate and:
a. Well kept records of perpetual inventory are maintained
A
b. Inventory is slow-moving
c. Computer error reports are generated for missing prenumbered inventory tickets
d. Obsolete inventory items are segregated and excluded.
7. The auditor’s analytical procedures will be facilitated if the client:
Page 7 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
A
8.
A
9.
B
10.
A
11.
12.
13.
B
14.
15.
D
16.
D
17.
C
18.
a. Uses a standard cost system that produces variance reports
b. Segregates obsolete inventory before the physical inventory count
c. Corrects material weaknesses in internal control before the beginning of the audit
d. Reduces inventory balances to the lower of cost or net realizable value.
When perpetual inventory records are maintained in quantities and in pesos, and internal control over inventory is
weak, the auditor would probably:
a. Want the client to schedule the physical inventory count at the end of the year
b. Insist that the client perform physical count several times during the year
c. Increase the extent of tests for unrecorded liabilities at year-end
d. Have to disclaim an opinion on the income statement for the year.
Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending
inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities in the prior-year
b. Observe merchandise and raw materials during the client’s physical inventory taking
c. Review the management’s inventory representation letter for accuracy
d. Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry
average.
Henry Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts
on the basis of statistical plan. During the year, Doris Alcaide, CPA, observes such counts as she deems necessary
and is able to satisfy herself to the reliability of the client’s procedures. In reporting on the results of her
examination, Alcaide:
a. Can issue an unqualified opinion without disclosing that she did not observe year-end inventories
b. Must comment in an emphasis-of-a-matter paragraph the auditor’s responsibility section of the audit
report as to her inability to observe year-end inventories, but can nevertheless issue an unqualified
opinion.
c. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a
whole.
d. Must, if the inventories are material, qualify her opinion.
The primary objective of a CPA’s observation of a client’s physical inventory count is to:
a. Discover whether a client has counted a particular inventory item or group of items
b. Obtain direct knowledge that the inventory exists and has been properly counted
c. Provide an appraisal of the quality of the merchandise on hand on the day of the physical count
d. Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory
quantities are reasonably accurate.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s
assertions about
a.
existence or occurrence.
b.
rights and obligations.
c.
presentation and disclosure.
d.
valuation or allocation.
Which of the following audit procedures probably would provide the most reliable evidence concerning the entity’s
assertion of rights and obligations related to inventories?
a.
Trace 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 advices 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.
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing
to obtain evidence that all items __________. This is necessary in relation to the auditor’s objective of validating
____________ assertion over inventories.
a.
included in the listing have been counted; completeness
b.
represented by inventory tags are included in the listing; completeness
c.
included in the listing are represented by inventory tags; existence
d.
represented by inventory tags are bona fide; existence
Which of the following is correct?
a. The overhead charged to inventory at the balance sheet date can be understated if the salaries of the
administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor
to incorrect jobs.
c. Payroll is significant portion of inventory for retail and service industry companies.
d. The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged
to the wrong job or process.
Which of the following circumstances would not cause an auditor to extend payroll procedures considerably?
a. Payroll significantly affects inventory valuation for manufacturing concern
b. There is a possibility of material fraudulent payroll transaction
c. There is a weak internal control structure
d. There is a lack of independent third-party evidence, such as confirmations.
Which of the following is not a type of error that gives the auditor concern in auditing payroll transactions?
a. Classification errors in charging labor to inventory and job cost accounts
b. Computational errors in formulas when a computerized system is used
c. Weaknesses in control system which allows underpayment of employees
d. Any error which indicates possible fraud.
Which of the following best describes proper internal control over payroll?
Page 8 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
C
19.
A
20.
D
21.
C
22.
B
23.
A
24.
D
25.
C
26.
A
27.
B
28.
C
29.
B
30.
a. The preparation of the payroll must be clear under the control of the personnel department
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud
c. The duties of hiring, payroll computation, and payment to employees should be segregated
d. The payment of cash to employees should be replaced by payment through checks.
No individual with access to time cards, payroll records or checks should also be permitted access to
a. Personnel records
b. The computer
c. The canceled check file
d. Job time tickets
Controls should prevent those responsible for the preparation of payroll checks from all but which one of the
following activities?
a. Signing paychecks
b. Distributing paychecks
c. Access to time cards
d. Access to the payroll journal
Which of the following is an effective internal control used to prove that production department employees are
property validating payroll time cards at a time-recording station?
a. Time cards should be carefully inspected by those persons who distribute pay envelopes to employees
b. One person should be responsible for maintaining records of employee time for which salary payment is
not to be made
c. Daily reports showing tie charged to jobs should be approved by the supervisor and compared to the total
hours worked on the employee time cards
d. Internal auditors should make observations of distribution of paychecks on a surprise basis.
The signing and distribution of the checks must be properly handled to prevent their theft. Which of the following is
not an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the preparation of the payroll
b. A check signing machine should not be used to replace a manual signature
c. Distribution of paychecks should be performed by someone who is not involved in the other payroll
function
d. Unclaimed paychecks should be immediately returned for redeposit
To minimize the opportunity for fraud, unclaimed salary checks should be:
a. Deposited in a special bank account
b. Kept in the payroll department
c. Left with the employee supervisor
d. Held for the employee in the personnel department
Effective internal accounting control over unclaimed payroll checks that are kept by the treasury department would
include accounting department procedures that require
a. Effective cancellation and stop payment orders for checks representing unclaimed wages
b. Preparation of a list of unclaimed wages on a periodic basis
c. Accounting for all unclaimed wages in a current liability account
d. Periodic accounting for the actual checks representing unclaimed wages
The most important means of verifying account balances int eh payroll and personnel cycle are:
a. Analytical procedures
b. Test of controls
c. Test of details transaction
d. Test of details of balances
Which of the following would not be a justification for an auditor spending very little time performing tests of
transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background that the former one
b. Employees will detect any underpayments
c. Payroll transactions are uniform and uncomplicated
d. Payroll transactions are extensively audited by government agencies.
Because of the lack of available evidence, it is usually difficult for an auditor to discover if an employee records
more time on his or her time card than actually worked. One procedure is
a. To reconcile the total hours paid this period with a previous period
b. To reconcile the total hours paid according to the payroll records with an independent record of the total
hours worked, such as those maintained by production control
c. To reconcile the total hours worked this period with a previous period
d. To reconcile the total hours worked according to the summary payroll report with the total hours worked
as recorded on the time card for the period.
Control Objective 1: Recorded payroll payments are for work actually performed by non-fictitious employees.
Control Objective 2: Existing payroll transactions are recorded.
Control Objective 3: Recorded payroll transaction are for the amount of time actually worked and at the proper pay
rate; withholdings are properly calculated.
a. Completeness, Existence, Valuation
b. Existence, Valuation, Completeness
c. Existence, Completeness, Valuation
d. Valuation, Completeness, Existence
Which of the following is test of controls in auditing payroll cycle?
a. Review the payroll journal, general ledger, an payroll earnings record for large or unusual amounts
b. Examine time cards for indication of supervisor approval
c. Compare canceled check with payroll journal for name, amount and date
d. Examine canceled checks for proper endorsement.
Which of the following is substantive test of transaction in auditing payroll cycle?
a. Review personnel policies
Page 9 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
C
31.
D
32.
C
33.
D
34.
D
35.
D
36.
C
37.
A
38.
39.
40.
41.
42.
b. Account for a sequence of payroll checks
c. Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement
d. Examine printouts of the transactions rejected by the computer as having invalid employee numbers.
Tracing selected items from payroll register to employee time cards that have been approved by supervisory
personnel provides evidence that
a. Internal controls relating to payroll disbursements were operating effectively
b. Payroll checks were signed by an appropriate officer independent of the payroll preparation process
c. Only bona fide employee worked and their pay was properly computed
d. Employees worked the number of hours for which their pay was computed.
The primary concern in testing payroll-related liabilities is to make sure that
a. Accruals are properly valued
b. Transactions were recorded in the prior period
c. There are no understated or omitted accruals
d. The accruals are not overstated
Client’s liability for payroll taxes withheld but not yet disbursed can be tested by comparing the balances with
a. The payroll journal
b. The payroll tax form prepared in the subsequent period
c. The cash disbursement in the subsequent period
d. All of these
The correct cut-off and valuation of accrued salaries and wages
a. Is to calculate the exact hours of pay that were earned in the current period and paid in the subsequent
period
b. Is to compute an approximate proportion of the wages that were earned in the current period and use that
amount as the accrual
c. Allows the client to choose between a and b above each year
d. Depends on company policy, consistently followed.
Which of the following would not be a test used when auditing accrued sales commission?
a. Confirm the amount of commissions directly with the employees
b. Test the calculations based on the agreement between client and employees
c. Compare the method of accruing commissions with the previous years
d. Test the mechanical accuracy in the Commissions Expense account at interim dates.
Verification of the legitimacy or propriety of year-end unpaid bonuses to officers and employees can be
accomplished by comparing the recorded accrued to the amount _________. This is necessary to gather evidence
regarding _________ assertion on the year-end accrued bonuses.
a. In the expense account; Completeness
b. Use in the prior period; Existence
c. Authorized in the minutes of board meetings; Existence
d. Paid in the subsequent period; Completeness
The most important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay and
other benefits is
a. The consistent accrual of these liabilities relative to those of the preceding year
b. The actual expense incurred for the prior period
c. The amount expended to date in the current period
d. The profitability of the client which will enable these liabilities to be met.
Ordinarily, the most significant assertion relating to accounts payable, in the perspective of a financial statements
auditor is:
a. Completeness
b. Existence
c. Rights and obligation
d. Valuation
Which of the following procedures is least likely to be completed before the balance sheet date?
a. Confirmation of receivables
b. Search for unrecorded liabilities
c. Observation of inventory
d. Review of internal accounting control over cash disbursements.
An audit of the balance in the accounts payable account ordinarily is not designed to:
a. Detect accounts payable that are substantially past due
b. Verify that accounts payable were properly authorized
c. Ascertain the reasonableness of recorded liabilities
d. Determine that all existing liabilities at the balance sheet date have been recorded.
Which of the following is the best audit procedure for determining existence of unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance
of accounts payable.
b. Examine unusual relationships between monthly accounts payable balances and recorded purchases
c. Examine sample of invoices a few days prior to and subsequent to year-end to ascertain whether they
been properly recorded
d. Examine selected cash disbursement sin the period subsequent to year-end.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a.
Examining unusual relationships between monthly accounts payable balances and recorded cash
payments.
b.
Reconciling vendors’ statements to the file of receiving reports to identify items received just
prior to the balance sheet date.
c.
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period.
d.
Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports.
Page 10 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
B
D
43. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
a. This is a duplication of cutoff test
b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed
c. Correspondence with the audit client’s attorney will reveal all legal action by vendors for non-payment
d. There is likely to be other reliable external evidence available to support the balances.
44. When confirming accounts payable, the approach is most likely to be on of
a. Selecting the accounts with the larges balances at year-end, plus a sample of other accounts
b. Selecting accounts of companies with whom the client has previously done the most business, plus a
sample of other accounts
c. Selecting a random sample of accounts payable at year-end
d. Confirming all accounts.
45. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be
most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal
b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts
c. Tracing totals from the purchases journal to the ledger accounts
d. Sending written quarterly confirmation to all vendors.
46. The least likely approach in auditing management’s estimate relating to accrued liability is to:
a. Independently develop an estimate of the amount to compare to management’s estimate
b. Review and test management’s process of developing the estimate
c. Review subsequent events or transactions bearing on the estimate
d. Send confirmation relating to the estimate
ST: Investing Cycle (Audit of Investments, PPE, Intangibles and Other Non-current Assets)
1. In order to guard against the misappropriation of company-owned marketable securities, which of the following is
the best course of action that can be taken by a company with a large portfolio of securities?
a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping are
where securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in a log the exact
reason for their access
c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for
securities on a current basis
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a
custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of directors decided to
purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial
executive. The best person or persons to make periodic reviews of the investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representative be present in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank where the securities are held in a safe deposit box should be asked to
a.
verify differences between the contents of the box and the balances in the client’s subsidiary
ledger.
b.
provide a list of securities added and removed from the box between the balance-sheet date and
the security count date.
c.
confirm that there has been no access to the box between the balance sheet date and the
security-count date.
d.
count the securities in the box so the auditor will have an independent direct verification.
6. Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about
fixed asset additions?
a.
Inspecting documents and physically examining assets.
b.
Recomputing calculations and obtaining written management representations.
c.
Observing operating activities and comparing balances to prior period balances.
d.
Confirmation ownership and corroborating transactions through inquiries client personnel.
7. An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion
that all
a.
Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
b.
Capitalizable costs for property and equipment have not been charged to expense.
c.
Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
d.
Expenditures for property and equipment have been recorded in the proper period.
8. Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related
mortgage acquisition costs would be least likely to include an examination of the related.
Page 11 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
A
9.
C
10.
C
11.
B
12.
B
13.
14.
15.
16.
17.
C
18.
A
19.
20.
a.
deed.
b.
cancelled checks.
c.
closing statement.
d.
interest expense.
When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not
available for inspection. The policy’s absence most likely indicates the possibility of a (an)
a.
insurance premium due but not recorded.
b.
deficiency in the coinsurance provision.
c.
lien on the plant equipment.
d.
understatement of insurance expense.
To assure accountability for fixed asset retirements, management should implement an internal control that
includes:
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds form sale of the plant assets
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired
c. Utilization of serially numbered retirement work orders
d. Periodic observation of plant assets by the internal auditors.
Which of the following is an internal control weakness related to factory equipment
a. Checks issued in payment of purchases of equipment are not signed by the controller
b. All purchases of factory equipment are required to be made by the department in need of the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as indicated in
depreciation schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
To strengthen internal control over custody of heavy mobile equipment, the client would most likely institute a
policy requiring a periodic:
a. Increase in insurance coverage
b. Inspection of equipment and reconciliation with accounting records
c. Verification of liens, pledges and collateralizations
d. Accounting for work orders.
The auditors may conclude that depreciation charges are insufficient (understated) by noting:
a. Insured values greatly in excess of book values
b. Large amounts of fully depreciated assets
c. Continuous trade-ins of relatively new assets
d. Excessive recurring losses on assets retirements.
Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to
property, plant and equipment are not understated?
a. Depreciation
b. Accounts payable
c. Cash
d. Repairs and maintenance
The auditors are most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts
b. Appropriateness of physical inventory observation
c. Existence of obsolete machinery
d. Deferral of procurement of certain necessary insurance coverage.
Which of the following statements is not typical of property, plant and equipment as compared to most current
asset accounts?
a. A property, plant and equipment cutoff near year-end has more significant effect on net income
b. Relatively few transactions occur in property, plant and equipment during the year
c. Auditors normally elect direct substantive testing rather than test of controls in auditing property, plant
and equipment accounts.
d. Property, plant and equipment accounts typically has higher peso value.
For the audit of a continuing non-public client, the emphasis for testing for property accounts is on:
a. All transactions resulting in the ending balance
b. Test of controls over disposal
c. Transactions that occurred during the year
d. Performing analytical procedures on beginning balances of the accounts.
Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of
equipment?
a. Accumulated depreciation
b. Cost of goods sold
c. Purchase returns and allowances
d. Purchase discounts.
An effective procedure for identifying unrecorded retirements of equipment is to ________. This is consistent with
the audit objective of gathering evidence to support __________ assertion on PPE.
a. Foot related property; Existence
b. Recalculate depreciation on related equipment; Valuation
c. Select items of equipment in the accounting records and then locate then in the plant; Existence
d. Select items of equipment while conducting ocular inspections on plants and then locate them in the
accounting records; Completeness
If the auditor believes that there is a high likelihood of significant missing permanent assets that are still recorded
on the accounting records, an appropriate procedure is to select a sample from the assets master file and examine
a. The documents verifying the acquisition
b. The assets
c. All the related journal entries
d. The accumulated depreciation calculations
Page 12 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
C
B
C
C
B
B
D
A
D
D
21. Because failure to record disposal of manufacturing equipment can significantly affect the financial statements, the
search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review the plant modifications and changes in product line, taxes or insurance coverage.
22. When an asset is sold or disposed of without having been traded in for a replacement asset, the valuation of the
transaction can be verified by examining the related
a. Purchase order and property master file
b. Sales invoice and property master file
c. Sales invoice and merchandise inventory listing
d. Purchase order and merchandise inventory listing
23. Which of the following is not an overall test of the annual provision for depreciation expense?
a. Compare rates used in the current year with those used in the prior years.
b. Test computation of depreciation provisions for a representative number of units
c. Test deductions from accumulated depreciation for assets purchased during the year
d. Perform analytical procedures
24. Which of the following is the least audit objective when auditing manufacturing equipment and the related
depreciation and accumulated depreciation?
a. To determine whether costs and related depreciation for all significant retirements, abandonments, and
disposals of property have been properly recorded
b. To determine whether the balances in the property accounts, including the amounts carried forward from
the preceding year, are properly stated
c. To determine whether additions represent properties that are installed, constructed or rented
d. To determine whether the balances in accumulated depreciation accounts are reasonable, considering
expected useful lives of property units and possible net salvage values
25. The emphasis in auditing manufacturing equipment for a continuing audit is on the verification of
a. The balance carried forward in the account form previous period (beginning balance)
b. Current period acquisitions and retirements
c. The balance in the account after the current year’s activities are considered (ending balance)
d. All of these.
26. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior periods because
a. It will not affect the current valuation
b. They were verified in previous audits
c. The related depreciation calculations for the current period are more important
d. The emphasis of the audit is on the income statement items not he balance sheet items.
27. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects
the balance sheet
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
28. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper amount, affects
the income statement
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
29. The test of details of balances procedure which “physically examine assets” is done to satisfy the audit objective of:
a. Classification
b. Completeness
c. Cutoff
d. Validity
30. The test of details of balances procedures to “examine vendors’ invoices of closely related accounts such as repairs
and maintenance to uncover items that should be manufacturing equipment” is done to satisfy the audit objective
of:
a. Classification
b. Valuation
c. Cutoff
d. Validity
31. The most common audit test to verify additions to manufacturing equipment is examination of vendor’s invoices
and receiving reports. The appropriate procedure is:
a. Verifying
b. Tracing
c. Dual referencing
d. Vouching
32. It should ordinarily be unnecessary to examine supporting documentation for each addition to manufacturing
equipment, but it is normal to verify:
a. All large transactions
b. All unusual transactions
c. A representative sample of typical additions
d. All of these
33. The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs
expense, lease expense or supplies is a common client error. The auditor should evaluate the likelihood of these
type of error/misclassifications in conjunction with:
Page 13 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
D
34.
B
35.
A
36.
C
37.
B
38.
A
39.
A
40.
C
41.
D
a. The test of details of balances
b. The test of details of transactions
c. Test of controls
d. Obtaining an understanding of the internal control structure during the audit planning phase
If client fails to record disposals of manufacturing equipment both the original cost of the asset account the net
book value will be incorrect.
a. Both will be overstated indefinitely
b. The original cost will be overstated indefinitely and the net book value will be overstated until the asset is
fully depreciated
c. The original cost will be overstated indefinitely and the net book value will be understated indefinitely
d. The original cost will be overstated indefinitely and the net book value will be understated until the asset
is fully depreciated
The audit of intangible assets typically involves:
a. Vouching the cost of asset and testing allocation methods.
b. Vouching the cost of assets only.
c. Testing the allocation methods only.
d. Neither is involved in audit of intangibles.
A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal
encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective for
a.
validity.
b.
classification.
c.
disclosure.
d.
mechanical accuracy.
Depreciation expense is one of the few expense accounts that is not verified as apart of
a.
tests of controls.
b.
tests of transactions.
c.
test of details of balances.
d.
analytical procedures.
The most important objective for depreciation expense is proper
a.
valuation.
b.
classification.
c.
cutoff.
d.
disclosure.
Occasionally, changing circumstances may necessitate a revaluation of the useful life of an asset. When this occurs,
it involves a change in
a.
accounting estimate rather than a change in accounting principle.
b.
accounting principle rather than a change in accounting estimate.
c.
both accounting principle and accounting estimate.
d.
neither accounting principle nor accounting estimate.
In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of
depreciation expense, whereas the debits are normally tested as a part of the audit of
a.
asset acquisitions.
b.
capital acquisitions.
c.
disposal of assets.
d.
accumulated depreciation.
One typical difference between the asset Prepaid Expenses and other assets, such as Accounts Receivable and
inventory, is the immateriality of the former in many audits. Because of this immateriality, frequently the only
audit procedure necessary to perform is
a.
tests of control.
b.
tests of transactions.
c.
tests of details of balances.
d.
analytical procedures.
ST: Financing Cycles (Audit of Non-trade Liabilities and Stockholders’ Equity)
1. Which of the following is least likely to be an audit objective for debt?
a.
Determine the existence of recorded debt.
b.
Establish the completeness of recorded debt.
c.
Determine that the client has rights to receive proceeds relating to the redemption of debt.
d.
Determine that the valuation of debt is in accordance with financial reporting standards.
2. The auditors would be most likely to find unrecorded long-term liabilities by analyzing:
a.
Interest payments.
b.
Discounts on long-term liabilities.
c.
Premiums on long-term liabilities.
d.
Recorded long-term liability accounts.
3. A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation
of such debt provisions may affect the total recorded.
a.
Number of debt restrictions.
b.
Current liabilities.
c.
Long-term assets.
d.
Share capital.
4. An auditor’s program to examine long-term debt most likely would include steps that require
a.
comparing the carrying amount of the debt to its year-end market value.
b.
correlating interest expense recorded for the period with outstanding debt.
c.
verifying the existence of the holders of the debt by direct confirmation.
d.
inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
5. The auditors can best verify a client’s bond sinking fund transactions and year-end balance by:
Page 14 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-702
PREWEEK LECTURES: RAP, TOC and ST – All Transaction Cycles
a.
6.
7.
8.
C
9.
B
10.
B
11.
A
12.
13.
D
14.
15.
16.
Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
b.
Confirmation with individual holders of retired bonds.
c.
Confirmation with the bond trustee.
d.
Examination and count of the bonds retired during the year.
The auditor’s program for the examination of long-term debt should include steps that require the:
a.
Verification of the existence of the bondholders.
b.
Examination of copies of debt agreements.
c.
Inspection of the accounts payable subsidiary ledger.
d.
Investigation of credits to the bond interest income account.
In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect
to require the least amount of audit time?
a.
Owner’s equity.
b.
Revenue.
c.
Assets.
d.
Liabilities.
Which of the following is most likely to be an audit objective in the audit of owner’s equity?
a.
Establish that recorded owner’s equity incudes all long-term debt and equity balances.
b.
Determine that ordinary share is valued at current market value.
c.
Determine that the presentation and disclosure of owner’s equity is appropriate.
d.
Determine that the existence of recorded owner’s equity is in conformity with equity accounting
rule valuations.
A transfer agent and a registrar are most likely to provide the auditor with evidence on:
a.
Restrictions on the payment of accounts payable.
b.
Shares issued and outstanding.
c.
Preferred stock liquidation value.
d.
Transfers occurring between management and related parties.
The audit procedure of confirmation is least appropriate with respect to:
a.
The trustee of an issue of bonds payable.
b.
Holders of ordinary shares.
c.
Holders of notes receivable.
d.
Holders of notes payable.
An auditor is most likely to trace treasury stock purchase transactions to the:
a.
Numbered stock certificates on hand.
b.
Articles of incorporation.
c.
Year’s interest expense.
d.
Minutes of the audit committee
All corporate share capital transactions should ultimately be traced to the:
a.
Minutes of the board of directors.
b.
Cash receipts journal.
c.
Cash disbursements journal.
d.
Numbered stock certificates.
During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions
on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify
management’s assertion of
a.
existence or occurrence.
b.
completeness.
c.
valuation or allocation.
d.
presentation and disclosure.
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from
the transfer agent and registrar concerning.
a.
restrictions on the payment of dividends.
b.
the number of shares issued and outstanding.
c.
guarantees of preferred stock liquidation value.
d.
the number of shares subject to agreements to repurchase.
An auditor should trace corporate stock issuances and treasury stock transactions to the
a.
numbered stock certificates.
b.
articles of incorporation.
c.
transfer agent’s records.
d.
minutes of the board of directors.
An audit program for the examination of the retained earnings account should include a step that requires verification
of the
a.
market value used to charge retained earnings to account for a two-for-one stock split.
b.
approval of the adjustment to the beginning balance as a result of a write down of an account
receivable.
c.
authorization for both cash and stock dividends.
d.
gain or loss resulting from disposition of treasury shares.
Page 15 of 15
0915-2303213/0908-6567516  www.resacpareview.com
ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 43  May 2022 CPA Licensure Examination  Preweek Lectures
AUDITING (Auditing Problems)
S. IRENEO  C. ESPENILLA
AP-703: AUDIT PROBLEMS/CASES
PROBLEM 1: AUDIT OF CASH
You were assigned to render a cash count of Tindig Corporation’s petty cash fund with an imprest balance of
P40,000. The count was rendered on the morning of January 4 instead of exactly at the Balance sheet date
December 31.
The custodian presented to you the following:
Currencies and coins
A disbursement check payable to the custodian
An officer’s personal check accommodated by the fund
Officer’s check marked NSF
Petty cash expense vouchers:
12/20 Transportation
12/24 Office repairs
12/27 Miscellaneous
1/3
Office supplies
Unused postage stamps
An enveloped marked “collections for charity” with list of
names and corresponding amounts contributed. There is
no money inside the envelope.
1.
2.
3.
11,940
15,600
4,000
2,000
1,500
900
2,100
1,600
500
2,500
What is the petty cash shortage, if there are any?
a. 3,860
c.
3,360
b. 1,360
d.
2,860
What is the adjusted petty cash fund balance as of December 31, 2021?
a. 30,860
c.
30,640
b. 31,360
d.
35,860
Assuming the collections for charity had been intact (the currencies are inside the envelope), what is the
petty cash shortage as of December 31, 2021?
a. 860
c.
360
b. 1,360
d.
1,860
PROBLEM 2: AUDIT OF CASH
You were assigned to audit the financial statement of Jade Corp. on January 15, 2019, for the year ended December
31, 2018. The general ledger shows cash account balance of P726,600 as at December 31, 2018.
The bank reconciliation prepared by the client’s cashier included the following items:
Cash per records, December 31, 2018
Cash per bank statement, December 31, 2018
Note receivable collection by the bank in December, recorded in the books
in January 3
Bank service charge for December, recorded in books in January 3
Outstanding checks, including P11,900 disbursement check certified by
the bank
Check of Jude Corp., charged by the bank in error on December 28, 2018;
corrected by the bank on January 2, 2019
Deposit in transit, including P5,200 customer collection check marked NSF
P726,600
792,285
20,000
5,000
87,875
2,250
15,700
From January 2, 2019, to January 15, 2019, the date of your cash count, total cash receipts appearing in the cash
records amounted to P180,500. During the same period, deposits clearing the bank amounted to P143,895. The
following cash and cash items were on hand at the close of business on January 15, 2019:
Currency
P4,275
Customers’ checks
5,850
Expense vouchers
1,125
Audit notes:
a. Cash collections from accounts receivable were erroneously recorded by the company as follows:
Date
7/05/18
Allowance for bad debts
12,000
Accounts receivable
12,000
12/10/18
Inventory
9,000
Accounts receivable
9,000
12/15/18
Bad debt expense
10,500
Accounts receivable
10,500
b.
Check deposit on January 5, 2019, amounting to P6,000 was not recorded in the books.
c.
Undeposited collections on January 10, 2019 amounting to P13,500 was also not recorded in the books.
Requirements:
1. What is the correct cash in bank balance as of December 31, 2018?
a.
729,060
c.
778,110
b.
773,110
d.
726,810
2. What is the net adjustment to cash as of December 31, 2018?
Page 1 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
3.
4.
a.
46,500
c.
44,040
b.
2,460
d.
4,620
What is the cash shortage as of December 31, 2018?
a.
2,460
c.
44,040
b.
46,500
d.
4,620
What is the total cash shortage as of January 15, 2019?
a.
81,645
c.
44,040
b.
37,605
d.
4,620
PROBLEM 3: AUDIT OF CASH
You are auditing the cash account of Rosas Inc. for the fiscal year ended July 31, 2021. The client has not prepared
the July 31, bank reconciliation. The following information were made available:
Beginning balances
Deposits
Cash receipts journal
Checks clearing the bank
Cash disbursements journal
July bank service charge
Note paid by the bank
NSF check
Ending balances
General Ledger
P138,330
Bank Statement
P207,990
776,680
793,680
(743,850)
(684,330)
P247,680
(2,610)
(183,000)
(9,330)
P45,880
Audit notes:
a. Bank reconciliation in June included the following information: Bank statement balance, June, P207,990;
Deposits in transit, P18,000; Outstanding checks, P52,260, and; Balance per general ledger, June, P138,330.
June bank service charge, P4,600 and June Note Collection by the bank in behalf of Rosas Inc. (recorded in
the books only in July), P40,000.
b.
A check for P31,800 cleared the bank, but had not been recorded in the cash disbursement journal. It was for
a payment of an accounts payable.
c.
A check for P11,880 was erroneously charged by the bank to Rosas Inc.
d.
Deposits included P18,000 from June and P758,680 from July. From the July deposits, reconciliation revealed
that P25,000 has not been recorded per books yet as these were direct deposits by the customer taking
advantage of the company’s bank lockbox services.
e.
The bank charged Rosas Inc.’s account for a non-sufficient-fund check totaling to P9,330. The credit manager
concluded that the customer intentionally closed its account and the owner left the city. The check was turned
over to a collection agency.
f.
A note for P174,000, plus interest, was paid directly by the bank under an agreement signed four months ago.
Required: Based on your audit procedures and appreciation of the above data, answer the following:
1. How much is the deposit in transit as of July 31?
a. 20,940
c. 18,000
b. 30,000
d. 20,000
2. How much is the total outstanding checks as of July 31?
a. 31,820
c. 29,940
b. 41,820
d. 10,020
3. What is the correct cash in bank balance as of July 31?
a. 32,820
c. 20,940
b. 45,940
d. 9,060
PROBLEM 4: AUDIT OF CASH; CASH/ACCRUAL
In line with your audit of Burberry Corporation for the period ended December 31, 2018, your audit staff provided
you the following audit notes:
Audit notes:
a. Accounts receivables from customers increased during the year by P4,200,000. Total discounts taken by
customers was at P1,580,000 while total sales returns which included the customer refunds was at
P2,420,000.
b.
The allowance for bad debts increase during the year by P840,000. During the year, the company wrote-off
P1,120,000 in bad debts. While recovery of previous write-off (included in the cash collections from
customers) was at P420,000.
c.
Advances from customers decreased during the year by P1,900,000.
d.
Accounts payable to suppliers increased during the year by P3,780,000. Total discounts taken by the
company for purchases was at P1,290,000 while total purchase returns which included the supplier refunds
was at P1,960,000.
e.
Advances to suppliers increased during the year by P1,512,000.
f.
g.
Inventories increased during the year by P2,690,000.
The equipment account increased by P2,000,000 during the year while carrying value of the equipment sold
during the year was at P1,600,000.
Page 2 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
h.
The accumulated depreciation account increased by P1,000,000 during the year.
i.
the following information had been provided by the company’s accountant based on its cash records:
Cash collections from customers
P45,780,000
Cash payments to suppliers
24,490,000
Cash payment of operating expenses
8,650,000
Cash payment for acquisition of an Equipment
5,000,000
Cash collection from disposal of an Equipment
1,040,000
Cash refunds received from purchase returns
640,000
Cash refunds paid for sales returns
830,000
Requirements:
1. What is the accrual basis gross sales?
a. 55,750,000
c.
b. 55,000,000
d.
2. What is the accrual basis gross purchases?
a. 31,520,000
c.
b. 30,008,000
d.
3. What is the accrual basis cost of sales?
a. 24,068,000
c.
b. 24,940,000
d.
4. What is the correct bad debt expense for the year?
a. 1,540,000
c.
b. 700,000
d.
5. What is the correct depreciation expense?
a. 2,400,000
c.
b. 2,000,000
d.
56,170,000
56,580,000
30,880,000
29,368,000
23,428,000
25,580,000
1,960,000
140,000
1,600,000
1,400,000
PROBLEM 5: AUDIT OF CASH/ CASH;ACCRUAL
Ford Corp. uses the direct method to prepare its statement of cash flows. Ford
2018 and 2017 are as follows:
12/31/18
Debits
Cash
P 35,000
Accounts receivable
33,000
Inventory
31,000
Property, plant & equipment
100,000
Unamortized bond discount
4,500
Cost of goods sold
250,000
Selling expenses
141,500
General and administrative
expenses
137,000
Interest expense
4,300
Income tax expense
20,400
P756,700
Credits
Allowance for uncollectible
accounts
P 1,300
Accumulated depreciation
16,500
Trade accounts payable
25,000
Income taxes payable
21,000
Deferred tax liability
5,300
8% callable bonds payable
45,000
Share capital
50,000
Share premium
9,100
Retained earnings
44,700
Sales
538,800
P756,700
Corp.’s trial balances at December 31,
12/31/17
P 32,000
30,000
47,000
95,000
5,000
380,000
172,000
151,300
2,600
61,200
P976,100
P
1,100
15,000
17,500
27,100
4,600
20,000
40,000
7,500
64,600
778,700
P976,100
•
Ford purchased P5,000 in equipment during 2018.
•
Ford allocated one-third of its depreciation expense to selling expenses and the remainder to general and
administrative expenses.
Based on the foregoing, what amounts should Ford Corp.’s report in its statement of cash flows for the year ended
December 31, 2018 for:
1. Cash collected from customers?
a. 536,000
c. 535,800
b. 541,600
d. 541,800
2. Cash paid for goods to be sold?
a. 226,500
c. 242,500
b. 257,500
d. 258,500
3. Cash paid for interest?
a. 4,800
c. 3,800
b. 4,300
d. 1,700
4. Cash paid for income taxes?
a. 20,400
c. 19,700
b. 25,800
d. 15,000
Page 3 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
5.
Cash paid for selling expenses?
a. 140,000
b. 141,500
c. 142,000
d. 141,000
PROBLEM 6: AUDIT OF CASH/ CASH;ACCRUAL
An analysis of incomplete records of Journey Corporation produced the following information applicable to 2018:
ACCOUNT INCREASES
Cash
4,200,000
Accounts receivable
1,400,000
Accounts payable
400,000
ACCOUNT DECREASES
Inventory
Notes receivable
1,000,000
600,000
Summary of cash transactions were as follows:
RECEIPTS:
Cash sales
Collections on accounts receivable
Collections on notes receivable
Interest on notes receivable
Purchase returns and allowances
3,000,000
30,000,000
2,400,000
200,000
500,000
DISBURSEMENTS:
Cash purchases
Payments on accounts payable
Sales returns and allowances
1,000,000
16,500,000
400,000
Additional information:
a. Total purchase returns and allowances amounted to P800,000
b. Total sales returns and allowances amounted to P1,200,000.
What is the accrual basis Net Sales?
a. 37,000,000
b. 36,200,000
c. 36,600,000
d. 35,800,000
PROBLEM 7: AUDIT OF CASH/ CASH;ACCRUAL
You are auditing the financial statements of Clarke Co. for the year ended December 31, 2018. Clarke Co. maintains
records under cash basis and only keeps records of its cash receipt and cash disbursements. As part of your audit, you
were requested to convert the records to the accrual basis.
You were able to gather the following information:
Dec. 31,
2017
P536,000
0
544,000
98,000
Outstanding sales invoices
Advance collections from customers
Unpaid merchandise invoices
Advance payments to suppliers
Dec. 31,
2018
P835,000
125,000
423,000
0
The cash receipt and disbursement records revealed the following information:
•
Amount collected from customers, P9,890,000
•
Total payments to suppliers of merchandise, P5,615,000
What is the total sales for 2018 under accrual basis?
a.
10,013,000
b.
9,716,000
c.
d.
10,064,000
10,189,000
PROBLEM 8: AUDIT OF TRADE RECEIVABLES
You are auditing the Accounts Receivable of Generosity Inc. as of December 31, 2018. The general journal reported
Accounts receivable balance of P1,520,000 which was net of the unadjusted allowance for bad debts expense
amounting to P46,720.
The accounts receivable subsidiary ledger had the following details:
Customer
Invoice date
Amount
Grace Inc.
9/12/2018
P139,200
Truth Corp.
12/12/2018
153,600
12/02/2018
99,200
Gusto Co.
11/17/2018
185,120
10/08/2018
176,000
National Co.
12/08/2018
160,000
10/25/2018
144,800
8/20/2018
40,000
Nano Inc.
9/27/2018
96,000
Bruce Inc.
8/20/2018
71,360
Privacy Corp.
12/06/2018
112,000
11/29/2018
169,440
Total
Page 4 of 18
Balance
P139,200
252,800
361,120
344,800
96,000
71,360
281,440
P1,546,720
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-703
PREWEEK LECTURES: Audit Problems/Cases
Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus
your suggested that the amount receivable from the same shall be written off.
b.
Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice
dated 10/25/2018 was erroneously invoiced at P144.80 per unit of the merchandise sold to the
company, the correct invoice price should have been P114.80 per unit.
c.
You also discovered that the invoice dated 10/25/2018 has already been settled by Truth Corp. per OR
number 34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger
as a settlement for an invoice dated 11/05/2018 for the same amount.
d.
The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts
% of Collectibility
0 – 30 days
98%
31 – 60 days
95%
61 – 90 days
90%
91 – 120 days
80%
Over 120 days
50%
Required:
1. What is the correct allowance for bad debt expense for the year ended December 31, 2018?
a.
117,344
c.
124,344
b.
130,320
d.
127,320
2. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt
expense for the year?
a.
80,600
c.
154,960
b.
151,960
d.
148,984
3. What it the carrying value of the company’s accounts receivable as of December 31, 2018?
a.
1,318,040
c.
1,321,016
b.
1,345,040
d.
1,315,040
4. What is the necessary adjusting entry to adjust any unlocated difference between the SL and GL?
a.
Bad debt expense
20,000
Accounts receivable
20,000
b.
Sales
20,000
Accounts receivable
20,000
c.
Accounts receivable
20,000
Other income
20,000
d.
No necessary entry
PROBLEM 9: AUDIT OF TRADE RECEIVABLES
You were assigned to audit the existence assertion of Colors Inc.’s receivables as of December 31, 2021. You have
decided to send confirmation letters to pre-selected customers. The following is a summary of the confirmation
replies of client customers where you noted audit exceptions. Gross profit on sales is at 30% and inventory records
are kept under the perpetual inventory method.
Customer
Asul Inc.
Balance per Books
P30,000
Bughao Corp.
P300,000
Kulay Co.
P288,000
Dilaw Inc.
P265,000
Endigo Corp.
P122,000
Requirements:
1. What is the
a.
b.
c.
d.
2. What is the
a.
b.
Page 5 of 18
Customer’s Comments
Your Credit Memo No. 0978
representing price adjustment
dated December 29, 2021 cancels
this.
P140,000 was for Sales Invoice No.
1190 were for goods returned on
December 30, 2021. Correct
balance is P160,000.
This is for outstanding sales
invoice No. 1280 which should
have been priced at P122 per unit.
You erroneously billed us P144 per
unit.
Our records show a correct balance
of P220,000. The difference is for
Sales Invoice No. 1109 which were
for goods delivered to us but were
subsequently returned to you
because the goods were with
wrong specifications.
This is for Sales Invoice No. 1341.
We received the corresponding
goods only on January 5.
Audit findings
The Credit Memo was taken up
by Colors Inc. in January 2022.
Returned goods were received on
December 31, 2021. Credit
Memo No. 1256 were issued and
recorded on January 5, 2022
The customer complaint is valid.
Colors Inc. recorded the
transaction as a purchase by
crediting accounts payable. The
related inventories were
appropriately taken in the
perpetual records.
The goods were delivered on
December 30, 2021 under term
FOB Shipping Point,
effect to the net income, if there are any, as a result of the customer’s Asul Inc. reply?
Decrease by P30,000
Increase by P30,000
Decrease by P9,000
No effect.
effect to the net income, if there are any, as a result of the customer’s Bughao’s reply?
Decrease by P160,000
Decrease by P140,000
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-703
PREWEEK LECTURES: Audit Problems/Cases
3.
4.
5.
c. Decrease by P42,000
d. No effect.
The accounts receivable from Kulay Co. is:
a. Overstated by P244,000
b. Understated by P44,000
c. Overstated by P44,000
d. Correct.
What is the effect to the net income, if there are any, as a result of the customer’s Dilaw Inc. reply?
a. Decrease by P45,000
b. Increase by P45,000
c. Decrease by P13,500
d. No effect.
The accounts receivable from Endigo Corp. is:
a. Correct
b. Overstated by P122,000
c. Understated by P122,000
d. Overstated by P36,600.
PROBLEM 10: AUDIT OF LOANS RECEIVABLES (FINANCING)
ABC Co., a financing company, extended a loan to XYZ Corp. amounting to P10M on January 1, 2015 receivable 5
years after. The loan bears 10% annual interest collectible at the end of each year starting December 31, 2015.
The company paid direct origination cost amounting to P300,000 and charged XYZ Corp. origination fees at
P1,020,955. The yield on the loan under this arrangement was at 12%.
The 2015 to 2017 interests were collected as scheduled.
By the end of 2018, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual interest as
scheduled and ABC Co. is doubtful as to the collectibility of the remaining interests and the principal.
After due consideration and correspondence with XYZ company, ABC estimated that it will be able to recover the
following amounts at respective estimated dates:
Amount
Expected recovery date
P1,000,000
December 31, 2019
2,000,000
December 31, 2020
2,500,000
December 31, 2021
2,500,000
December 31, 2022
Required:
1. What is the carrying value of the loans receivable as of December 31, 2018, before impairment?
a. 9,519,634
b. 9,392,530
c. 9,821,429
d. 9,661,990
2.
How much is impairment loss on the receivables (including interest receivable) as of Dec. 31, 2018?
a. 4,806,499
b. 6,344,509
c. 4,965,938
d. 6,855,491
3.
What is the correct net book value of the receivables as of December 31, 2018?
a. 6,855,491
b. 6,344,509
c. 5,855,491
d. 5,344,509
4.
Assuming that in December 31, 2019, amounts were received as estimated, what is the balance of the
receivables as of December 31, 2019?
a. 4,225,128
b. 5,558,150
c. 2,232,143
d. 2,500,000
5.
Assuming that in December 31, 2020, amounts were received as estimated, what is the correct interest income
to be recognized in 2020?
a. 267,857
b. 702,659
c. 507,015
d. 666,978
PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING)
In the course of your audit of the Loans receivable account of ABC Financing Corp, a lending company, for the year
ended December 31, 2018, you discovered the balance per the general ledger of its Loans receivable from DEF Corp.
at P5,000,000.
Audit notes:
1. The loan bears an annual interest at 10% collectible semi-annually every December 31.
2. The loan has a three-year term and was made on January 1, 2017 when the prevailing rate of interest was at
12%.
3. The company recorded the loan as a debit to the loans receivable account at the face value of the loan charging
any difference between the loaned amount and the face value of the loan to interest income.
4. Semi-annual interest collection on the loan every June 30 and December 31 has been appropriately recorded.
What is the total amount extended to DEF on January 1, 2017 and the outstanding balance of the loan as of
December 31, 2018.
a. 4,826,745 and 4,952,830
c. 4,754,134 and 4,908,330
b. 4,789,382 and 4,866,349
d. 5,000,000 and 5,000,000
PROBLEM 12: AUDIT OF TRADE RECEIVABLES AND INVENTORIES
You were assigned to audit the receivables of Charleston Merchandising Company. As instructed by your audit
manager, you have performed a cut-off test of sales. The results of the cut-off test revealed the following:
Recorded as Sales in December 2018
Page 6 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
Selling price
P18,000
20,000
8,680
9,000
10,000
7,800
14,000
Cost
Terms
P16,500
14,000
7,240
7,500
7,750
6,100
12,000
FOB shipping point
Shipped to consignee
FOB destination
FOB shipping point
FOB destination
FOB shipping point
Shipped to consignee
Recorded Sales in January 2019
Selling price
Cost
P21,000
10,500
4,500
6,500
Terms
P18,200
8,800
3,200
5,000
FOB
FOB
FOB
FOB
shipping point
shipping point
destination
shipping point
Shipment
Date
12/26/2018
12/26/2018
12/28/2018
12/30/2018
12/31/2018
12/31/2018
12/31/2018
Received by
customers
12/29/2018
12/29/2018
01/02/2019
01/02/2019
01/03/2019
01/02/2019
01/02/2019
Shipment
Date
12/30/2018
12/31/2018
01/02/2019
01/02/2019
Received by
customers
01/03/2019
01/03/2019
01/03/2019
01/05/2019
A count of all inventories within the premises was made on December 30, 2018. The total cost of the count was
recorded as inventories as of December 30, 2018. Half of the goods shipped to consignee on December 26 are still
unsold at December 31. The agreed commission on consignment sales is 20% of the sales price.
The unadjusted ledger balances show the following:
Accounts receivables
Inventories
Sales
Cost of sales
Determine the adjusted balances of the following:
A
1. Accounts receivable
363,320
2. Inventories
506,800
3. Sales
1,522,320
4. Cost of sales
973,560
P376,500
525,000
1,520,000
942,000
B
329,620
524,340
1,504,620
928,360
C
361,120
547,440
1,508,820
917,500
D
389,320
549,500
1,551,500
942,660
PROBLEM 13: AUDIT OF TRADE RECEIVABLES, TRADE PAYABLES AND INVENTORIES
The following information is as a result of your sales and purchases cut-off rendered in relation to your audit of the
financial statements of Baler Corporation as of the period ended December 31, 2021:
Sales Cutoff:
SALE INVOICE
AMOUNT
SALES INVOICE
COST OF MNSE.
DATE
SOLD
DECEMBER 2021
1) P 3,000
2) 7,000
3) 2,000
4) 6,900
5) 1,000
6) 4,500
7) 4,000
8) 10,000
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
21
28
31
26
29
24
31
30
9)
10)
11)
12)
Dec. 31
Dec. 28
Jan. 2
Jan. 3
P 2,000
6,100
800
3,000
600
8,200
2,400
5,600
DATE SHIPPED
Dec. 31
Dec. 28
Dec. 30
Jan. 4
Dec. 30
Dec. 27
Jan. 3
Dec. 28,
(shipped to
consignee)
JANUARY 2022
6,000
3,300
4,000
8,000
4,000
4,400
2,300
5,500
Dec. 30
Jan. 1
Jan. 2
Dec. 31
Purchases Cutoff:
1)
2)
3)
4)
5)
6)
F.O.B. Terms
Destination
Shipping point
Shipping point
Destination
Destination
Destination
7) Destination
8) Shipping point
9) Destination
10) Shipping point
11) Shipping point
Page 7 of 18
Shipped
Dec. 23
Dec. 24
Dec. 24
Dec. 24
Dec. 26
Dec. 26
DECEMBER 2021
Dates Mdse.
Received
Dec. 26
Dec. 30
Dec. 31
Dec. 29
Jan. 2
Dec. 31
Dec. 26
Dec. 27
Dec. 27
Dec. 28
Jan. 1
JANUARY 2022
Jan. 2
Dec. 28
Dec. 29
Jan. 2
Jan. 3
Invoice No.
1401
9176
0010
1307
6609
6610
Amount
P 250
310
180
550
690
420
7611
7711
9001
8345
4678
680
460
770
205
315
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
Audit Notes:
a. Inventory Count date: December 28, 2021. (All goods delivered on or before count date are excluded from
the physical count. All goods received on or before the count date are included in the physical count)
b. All sales were made under FOB Shipping point terms.
Requirements:
1. What is the net
a.
b.
2. What is the net
a.
b.
3. What is the net
a.
b.
4. What is the net
a.
b.
adjustment
(6,900)
12,000
adjustment
(690)
745
adjustment
(2,900)
2,435
adjustment
(9,800)
4,500
to accounts receivable?
c. (14,000)
d. (16,900)
to accounts payable?
c. 540
d. 1,060
to inventories?
c. (465)
d. 565
to net income?
c. 1,690
d. (8,110)
PROBLEM 14: AUDIT OF INVENTORIES
Having been engaged by Portent Corporation to audit its financial statements for the period ended December 31,
2018 on February 2, 2019, you were unable to observe the physical count of the client inventory conducted on
December 31, 2018 in all of the entity’s warehouses. Based on your preliminary understanding of the client internal
control over inventories and as a result of your test of controls you have ascertained that the control risk over
inventories is at below the maximum level thus you simply decided to test the reasonableness of the client inventory
balance through analytical procedure-inventory estimation. The following information were made available as a result
of your decision:
Cost
Retail Price
1,698,735
2,516,130
Inventory, January 1
13,901,265
21,600,000
Purchases
702,000
Freight-in
1,684,800
Purchase discount
1,123,200
Purchase returns and allowances
1,728,000
2,808,000
Departmental transfer in
4,320,000
1,684,800
Departmental transfer out
2,592,000
3,510,000
Mark-up
2,106,000
Mark-down
1,053,000
Mark-up cancellation
365,058
Mark-down cancellation
18,630,000
Sales
1,490,400
Sales discount to customers
745,200
Sales discounts to employees
2,235,600
Sales returns and allowances
1,117,800
Normal spoilages
493,812
894,240
Abnormal spoilages
The inventory as a result of the said count amounted to P2,811,690.
Requirements:
1. What is the estimated inventory as of December 31, 2018 at retail price as a result of the analytical
procedure?
a. 5,680,548
c.
4,645,950
b. 6,574,788
d.
7,170,948
2. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
conservative cost method?
a. 312,612
c.
369,417
b. 804,933
d.
539,832
3. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
average cost method?
a. 1,058,487
c.
596,637
b. 539,832
d.
312,612
4. What is the inventory shortage as a result of your analytical procedures assuming tha the company uses the
FIFO retail cost method?
a. 426,222
c.
539,832
b. 483,027
d.
381,225
PROBLEM 15: AUDIT OF INVENTORIES
Gloria Corporation uses the lower of cost or net realizable value inventory. Data regarding the company’s
inventories are as follows:
The general ledgers showed the following balances:
Cost:
Finished goods
P1,520,000
Work-in-process
748,000
Page 8 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
Raw materials
Allowance: Finished goods
Raw materials
2,875,000
(10,000)
(40,000)
The following information were further furnished to you by the client:
Finished Goods
Item M
Cost
P550,000
Selling price
675,000
Estimated cost to sell, as % of sales
20%
Item P
P540,000
620,000
15%
Item Q
P430,000
820,000
15%
Work-in-process
Cost of raw materials to date
Cost of direct labor to date
Cost of factory overhead to date
Selling price upon completion
Estimated cost to complete
Replacement cost
Normal profit margin as % of selling price
P120,000
70,000
50,000
360,000
48,000
208,000
25%
P88,000
60,000
40,000
289,000
97,650
168,000
35%
P200,000
80,000
40,000
735,000
74,000
375,000
40%
Raw Materials – Item M
Cost
Current purchase price
A
P250,000
250,000
B
P500,000
480,000
C
P400,000
375,000
Raw Materials – Item P
Cost
Current purchase price
X
P400,000
450,000
Y
P300,000
275,000
Z
P200,000
180,000
Raw Materials – Item Q
Cost
Current purchase price
D
P375,000
395,000
E
P450,000
420,000
Required:
1. What is the correct Finished goods inventory to be reported in the statement of financial position as of
December 31?
a.
1,466,00
c.
1,497,000
b.
1,530,750
d.
1,520,000
2. What is the correct Work-in-process inventory to be reported in the statement of financial position as of
December 31?
a.
748,000
c.
650,200
b.
746,420
d.
708,000
3. What is the correct total raw materials to be reported in the statement of financial position as of December
31?
a.
2,765,000
c.
2,785,000
b.
2,875,000
d.
2,775,000
4. What is the total loss on inventory write-down to be reported for the period?
a.
153,000
c.
143,000
b.
113,000
d.
103,000
PROBLEM 16: AUDIT OF TRADE PAYABLES
Tomas Corporation, meat processing company, reported the following balances on the liability portion of its
Statement of Financial Position as of December 31, 2021:
Current Liabilities
Accounts payable – trade
P1,250,000
Estimated Warranties Liability
?
Accrued Compensated Absences
360,000
Deferred Tax Liability
124,000
Additional information:
a. The result of your purchases cut-off revealed the following results:
December, 2021 Purchase Journal Entries
Receiving
Invoice
Receiving
Amount
Remarks
Report Number
date/Shipment
report date
date
100294
12/20
12/23
P20,000
FOB Destination
100295
12/22
12/26
50,000
FOB Destination
100296
12/27
12/30
70,000
On Consignment
100297
12/28
1/2
55,000
FOB Shipping Point
100298
12/29
1/3
60,000
FOB Destination
100299
12/30
1/4
80,000
FOB Shipping point
January, 2022 Purchase Journal
Receiving
Invoice
Report Number
date/Shipment
date
100300
12/29
100301
12/30
100302
12/30
100303
1/2
Page 9 of 18
Entries
Receiving
report date
1/4
1/4
1/5
1/6
Amount
Remarks
P40,000
50,000
70,000
75,000
FOB Destination
FOB Shipping point
On Consignment
FOB Shipping point
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-703
PREWEEK LECTURES: Audit Problems/Cases
Note: Inventory has been correctly set-up based on an inventory count conducted on December 31, 2021
with appropriate reconciliation and adjustments.
b.
The company started a “2-Year Assurance-type” Warranty Program at the beginning of 2020. The company
sales volume in 2020 and in 2021 were 150,000 and 180,000 respectively. The company estimates that
only 30% of the product sold will be returned as a result of the warranty program. The company further
estimates that it will incur P62 in labor and material cost per unit returned. Actual warranty-related labor
and material costs paid were at P1,980,000 and P2,220,000, in 2020 and 2021, respectively. The warranties
liability per books, represented the balance of the warranty’s liability at the end of 2020. Adjustments are
yet to be made for the current year for the said liability account.
c.
Employees are entitled 15-day vacation leaves and 15-day sick leaves every year. At the beginning of 2021,
the liability for compensated absences (as presented per books) was for 1,200 days combined vacation and
sick leaves forwarded from the previous years, as employees are allowed to carry over unused sick leaves
and vacation leaves up to two years, upon which any unused leaves are forfeited. In 2021, additional 900
days unused leaves were forwarded to the subsequent year. From the unused leaves prior to 2021, 450
were used in 2021 and 300 were forfeited. There was a 10% increase in employees’ salaries during the
current year. The unadjusted balance of the accrued liability for compensated absences per books reflected
the beginning balance of the account. Adjustment for accrual at year-end is yet to be made.
d.
The deferred tax liability balance is the net deferred tax consequence of the company’s warranties expense
which is tax deductible when actual warranty costs are paid and prepayments which are tax deductible upon
payment. Prepayments had adjusted balances of P1,120,000 and P970,000 at the end of 2020 and 2021
respectively.
e.
The key officers of the company are given incentives in the form of 10% of net income after bonus and 40%
income tax. The unadjusted net income of the company as reported per books was at P5,450,000.
Requirements:
1. What is the correct balance of the Accounts Payable trade as of December 31, 2021?
a. 1,170,000
b. 1,120,000
c. 1,100,000
2.
3.
d. 1,220,000
What is the balance of the Estimated Warranties Liabilities as of December 31, 2020?
a. 810,000
b. 1,350,000
c. 3,700,000
d. 2,790,000
What is the correct Warranties Expense to be reported in 2021?
a. 3,348,000
b. 2,160,000
c. 990,000
d. 1,800,000
4.
What is the correct Accrued Liability for Compensated Absences as of December 31, 2021?
a. 360,000
b. 445,500
c. 405,000
d. 396,000
5.
What is the correct deferred tax liability as of December 31, 2021?
a. 44,000
b. 362,000
c. 388,000
d. 358,400
What is the correct Accrued Bonus to key officers as of December 31, 2021?
a. 271,901
b. 256,569
c. 244,330
d. 266,773
6.
PROBLEM 17: AUDIT OF INVESTMENTS
Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2018. All the financial asset were
acquired in 2018:
Financial asset
Acquisition Cost
Aye Corp. Stocks, 20,000 shares
P590,000
Bee Inc. Stocks, 40,000 shares
1,100,000
See Co. 10%, P2M bonds
1,973,000
Dee Corp. Stocks, 50,000 shares
2,400,000
Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the share price’s
fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker’s fees and
commissions. The shares were acquired on February 20, 2018. A P2 per share cash dividends were received
on March 30. These dividends were declared by Aye Corp. on January 20, 2018 to stockholders as of record
date March 1, 2018.
b.
The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of Bee Inc. on
March 1, 2018. These shares were acquired for trading purposes. A P3 per share dividends were received
from the said shares on May 3, 2018. These dividends were declared on April 1 to stockholders as of record
date April 20.
c.
See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on October
1, 2018 at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%. The
bonds shall mature on December 31, 2020. The company has a business model of holding debt securities for
short-term profits.
d.
Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and commissions on
June 30, 2018. Dee Corp. had a total of 200,000 shares outstanding on the same date. The company
received P5 dividends per share form Dee on December 20, 2018.
e.
The following information were deemed relevant at year-end and no entries had been made yet by the
company to reflect any of the following information:
Aye Corp.
Bee Inc.
See Co.
Dee Corp.
Net income in 2018
P1,200,000
P1,500,000
P2,000,000
P2,240,000
Fair Value
P35/sh
P25/sh
11%
P51/sh
Requirements:
Page 10 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
1.
2.
3.
4.
What is the unrealized holding gain/loss to be reported in the 2018 statement of comprehensive income?
a. 51,948
c. 1,948
b. 121,948
d. 122,750
What is the correct carrying value of investments that should be presented as current asset?
a. 3,664,948
c. 3,665,750
b. 3,543,000
d. 3,765,250
What is the correct carrying value of investment in Dee Corp. shares that should be presented in the 2018
Statement of Financial Position?
a. 2,430,000
c. 2,280,000
b. 2,150,000
d. 2,550,000
Assuming that the company’s business model regarding debt securities has an objective of collecting contractual
cash flows, what is the correct carrying value of investment in See Co. Bonds that should be presented in the
2018 Statement of Financial Position?
a. 1,960,960
c. 1,965,750
b. 1,932,690
d. 1,930,690
PROBLEM 18: AUDIT OF INVESTMENTS
On January 1, 2018 Iffy Corp. acquired 30,000 shares of ABC Corp’s 100,000 shares outstanding for P5,000,000. The
book value of ABC’s identifiable net assets on this date was at P14M. All its assets carrying value approximated their
fair values except for a depreciable assets with a remaining life of 5 years, which was undervalued on this date by
P1.6M.
ABC reported total comprehensive income in 2018 at P4,000,000 which was net of a foreign exchange loss reported
in as other comprehensive loss at P800,000. ABC also paid dividends at P1.5M at the end of the year, P500,000 of
which is from pre-acquisition Retained Earnings. The fair market value of shares on this date was at P210 per share.
Requirements:
1. What is the carrying value of Iffy’s investment in ABC shares as of December 31, 2018 using the appropriate
accounting standards?
a.
5,654,000
c.
5,990,000
b.
5,750,000
d.
5,894,000
2. Assuming that Iffy Corp. is a medium-sized entity and that the company uses the fair value method in
accounting for its investment in ABC, how much in total should be recognized in Iffy Corp.’s profit or loss for
2018?
a.
1,750,000
c.
1,300,000
b.
450,000
d.
300,000
3. Assuming that Iffy Corp. sold 18,000 shares of its ABC shares investment on December 31, 2018 at its
prevailing fair value, how much in total should be recognized in the profit or loss as a result of the
transaction?
a.
387,600
c.
406,000
b.
646,000
d.
243,600
4. Using the information in the previous item, how much shall be the carrying value of any remaining
investments as of December 31, 2018?
a.
2,357,600
c.
2,300,000
b.
2,520,000
d.
2,261,600
5. Assuming that ABC issued 25,000 shares to other stockholders on December 31, 2018 at prevailing fair value
without Iffy Corp’s participation, how much should be recognized in the profit or loss as a result of the
transaction/event?
a.
81,200
c.
129,200
b.
196,200
d.
None
PROBLEM 19: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
The draft balance sheet of Rural Corporation as of December 31, 2018 reported the net property, plant and equipment
at P6,270,000. Details of the amount follow:
Land at cost
Building at cost
Less accumulated depreciation
at 12/31/17
Plant at cost
Less accumulated depreciation
at 12/31/17
P1,000,000
P4,000,000
( 800,000)
5,200,000
3,200,000
(3,130,000)
2,070,000
P6,270,000
Audit notes:
(a) The company policy for all depreciation is that a full year’s charge is made in the year of acquisition or completion
and none in the year of disposal.
(b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30,
2018. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2017.
Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have
been made. All plant is depreciated at 25% per annum on the reducing balance basis.
(c) On September 30, 2018, the company completed the construction of a new warehouse. The construction was
achieved using the company’s own resources as follows:
Purchased materials
P150,000
Direct labor
800,000
Supervision
65,000
Page 11 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
Design and planning costs
20,000
Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due
to the foundations being too close to a neighboring property. All the above costs are included in cost of sales.
The building was brought into immediate use upon completion and has an estimated useful life of 20 years
(straight-line depreciation).
(d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding
the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors
wish these values to be incorporated into the financial statements. The properties had an estimated remaining
life of 20 years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to
retained earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2018 has not yet been accounted for the in the draft financial statements.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the new warehouse as of December 31, 2018 is
a. 987,500
c. 1,000,000
b. 869,250
d. 950,000
2. The carrying amount of plant as of December 31, 2018 is
a. 1,710,000
c. 1,282,500
b. 1,375,310
d. 1,350,000
3. The total depreciation for the year ended December 31, 2018 is
a. 740,000
c. 380,000
b. 735,750
d. 736,250
4. The revaluation surplus as of December 31, 2018 is
a. 1,720,000
c. 1,800,000
b. 1,710,000
d.
960,000
PROBLEM 20: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
You were assigned to audit the Property, Plant and Equipment of Kindness Corporation in line with your firm’s
continuing engagement to audit its financial statements as of and for the period ended December 31, 2016. Your
prior year working papers included the following - analysis of the clients’ property, plant and equipment:
Balances as of 12/31/2015
Land
Cost
2,100,000
Building
Machinery and Equipment
Automotive Equipment
8,100,000
5,400,000
4,600,000
Accumulated
Depreciation
2,785,590
2,160,000
3,322,222
Depreciation Method/
Useful life
Double declining balance, 20
years
Straight-line, 10 years
SYD, 8 years
Audit notes:
a. A four-year old automotive equipment with an original cost of P2,100,000 was traded in for a new
automotive equipment having a cash price of P1,600,000 at the beginning of 2016. The company paid
additional cash of P850,000. The new automotive equipment was recorded by the company at the cash
payment made.
b.
A machinery which was acquired on January of 2012 was totally destroyed by a fire on June 30, 2016. The
machinery was originally acquired at a cost of P1,800,000.
c.
A replacement machinery was acquired on September 1, 2016 on installment basis. The total installment
price is P3,837,054 and is payable five equal annual installments beginning September 1, 2016. The
company issued a non-interest bearing note in lieu of the machinery. There is no established price for the
machinery. The prevailing market rate of interest for similar securities on the transaction date was at 10%.
d.
Major improvements on the building’s electrical wiring system was incurred at the beginning of the year. The
total cost amounting to P1,250,000 was recognized as outright repairs and maintenance expense.
e.
The beginning balance of the automotive equipment would have been depreciated at total of P511,111 for
the year.
f.
Salvage value of the assets are considered immaterial.
Requirements:
1. What is the gain or
a. 266,667
b. 166,667
2. What is the correct
a. 698,108
b. 656,441
3. What is the correct
a. 572,550
b. 577,902
4. What is the correct
a. 455,555
b. 633,333
Page 12 of 18
loss from the trade in transaction in item a?
c.
125,000
d.
1,016,667
depreciation expense on the building for 2016?
c.
687,691
d.
531,441
depreciation expense on machinery and equipment for 2016?
c.
546,970
d.
556,667
depreciation expense on automotive equipment for 2016?
c.
575,000
d.
466,667
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
PROBLEM 21: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
On January 1, 2014, MONICA CORP. acquired a factory equipment at a cost of P450,000. The equipment is being
depreciated using the straight-line method over its projected useful life of 10 years with P50,000 salvage value.
On December 31, 2015, a determination was made that the future net cash flows expected from the continued use
of the asset shall be P40,000 per year. Estimated salvage value remains to be P50,000. The asset also had a fair
value less cost to sell at P220,000 on the same date. You ascertained that this was properly computed and that
recognition of the impairment was warranted. (the prevailing interest rate is 10%)
On December 31, 2017, the asset’s replacement cost was determined to be P555,000 with a total life of 12 years
from date of acquisition. Salvage value is still estimated to be at P50,000. You also ascertained that this valuation is
reasonable in the circumstance.
You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of
assets.
Required:
1. What is the recoverable value of the asset on December 31, 2015?
a. 213,397
b. 236,722
c. 220,000
2.
3.
d. 320,000
How much impairment loss should be recognized on December 31, 2015?
a. 133,278
b. 156,603
c. 150,000
d. 0
What is the asset’s carrying amount on December 31, 2017, before revaluation?
a. 160,050
b. 177,525
c. 190,042
d. 172,548
4.
How much impairment recovery should be reported in the 2017 income statement?
a. 155,475
b. 99,958
c. 142,975
d. 117,450
5.
What is the depreciation expense in 2019, under the cost method?
a. 41,625
b. 36,250
c. 37,875
d. 30,000
6.
What is the depreciation expense in 2019, under the revaluation method?
a. 41,625
b. 36,250
c. 37,875
d. 30,000
7.
What is the balance of any revaluation surplus at the end of 2019, under the piecemeal realization?
a. 47,250
b. 55,125
c. 52,500
d. 63,000
PROBLEM 22: AUDIT OF INTANGIBLES
The Cruz Company acquired several small companies at the end of 2017 and, based on the acquisitions, reported the
following intangibles in its December 31, 2017 statement of financial position:
Patent
P200,000
Copyright
400,000
Tradename
350,000
Computer software
100,000
Goodwill
900,000
The company's accountant determines the patent has an expected life of 10 years and no expected residual value, and
that it will generate approximately equal benefits each year. The company expects to use the copyright and tradename
for the foreseeable future. The accountant knows that the computer software is used in the company's 120 sales
offices. The company has replaced the software in 60 offices in 2018, and expects to replace the software in 40 more
offices in 2019 and the remainder in 2020.
On December 31, 2018, there are no indications of impairment of patent and computer software.
information relate to the other intangible assets:
The following
a)
Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
b)
The tradename is expected to generate cash flows of P15,000 per year.
c)
The goodwill is associated with Cruz Company’s Jade Production reporting unit. The cash flows expected to be
generated by the Jade Production reporting unit is P200,000 per year for the next 25 years. The reporting unit
has a carrying amount of P2,100,000 excluding goodwill.
Requirements:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate
for all items is 5%)
1. Total amortization of intangible assets in 2018
a. 107,500
c. 88,750
b.
70,000
d. 20,000
2. Total loss on impairment in 2018
a. 452,470
c. 471,211
b. 530,280
d. 433,720
3. Carrying amount of goodwill on December 31, 2018
a. 659,720
c. 855,000
b. 900,000
d. 718,789
4. Carrying amount of other intangible assets on December 31, 2018
a. 640,000
c. 980,000
b. 690,000
d. 706,667
PROBLEM 23: AUDIT OF INTANGIBLES
Doha Corporation was organized in 2017. Its accounting records include only one account for all intangible assets.
The following is a summary of the entries that have been recorded and posted during the years 2017 and 2018:
Intangibles
Page 13 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
7/1/17
10/1
12/31
1/2/18
3/1
4/1
7/1
10/1
Franchise expiring on June 30, 2025
Advance payment on lease expiring on October 1, 2019
Net loss for 2017 including incorporation fee, P6,000, and
related legal fees of organizing the business, P30,000 (all
incurred in 2017)
Acquired patent with a useful life of 10 years
Cost of developing a secret formula
Goodwill purchased
Legal fees for successful defense of patent purchased on 1/2
Research and development costs on a new project
P252,000
168,000
96,000
444,000
450,000
1,670,400
75,900
960,000
Required: Ignoring income tax effects, determine the following:
1.
2.
3.
4.
The unamortized patent cost at December 31, 2018:
a. 399,600
c. 444,000
b. 470,880
d. 394,980
The unamortized franchise cost at December 31, 2018:
a. 204,750
c. 189,000
b. 220,500
d. 236,250
The adjusting entries on December 31, 2018, should include a retroactive adjustement to the beginning retained
earnings account at:
a. 120,750
c. 132,750
b. 84,000
d. 1,778,550
As a result of the adjustments at December 31, 2018, the total charges against income of 2018 should be:
a. 1,195,800
c. 1,645,800
b. 1,681,800
d. 1,682,550
PROBLEM 24: AUDIT OF INTANGIBLES
Sabrina Manufacturing Corporation was incorporated on January 3, 2017. The corporation’s financial statements for
its first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for
the year ended December 31, 2018, and your work is substantially completed. A partial trial balance of the company’s
accounts follows:
Account Title
Cash
Accounts receivable
Allowance for doubtful accounts
Inventories
Machinery
Equipment
Accumulated depreciation
Patents (Item 1)
Leasehold improvements (Item 6)
Prepaid expenses
Organization expenses (Item 7)
Goodwill (Item 5)
Licensing Agreement – A*
(Item 2 & 3)
Licensing Agreement – B*
(Item 2 & 4)
Debit
P11,000
42,500
Credit
P
500
38,500
75,000
29,000
10,000
85,000
26,000
10,500
29,000
24,000
50,000
49,000
The following information relate to accounts that may yet require adjustment:
Item 1:
Patents for Sabrina’s manufacturing process were purchased January 2, 2018, at a cost of P68,000. An additional
P17,000 was spent in December 2018 to improve machinery covered by the patents and charged to the Patents
account. The patents had a remaining legal term of 17 years.
Item 2:
On January 3, 2017, Sabrina purchased two licensing agreements; at that time they were believed to have unlimited
useful lives. The balance in the Licensing Agreement – A account included its purchase price of P48,000 and P2,000
in acquisition expenses. Licensing agreement – B also was purchased on January 3, 2017, for P50,000 but it has been
reduced by credit of P1,000 for the advance collection of revenue from the agreement.
Item 3:
In December 2017, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value
of Licensing Agreement – A, and in January 2019, a flood caused additional damage, which rendered the agreement
worthless.
Item 4:
A study of Licensing Agreement – B made by Sabrina in January 2018 revealed that its estimated remaining life
expectancy was only 10 years as of January 1, 2018.
Items 5:
The balance in the Goodwill account includes P24,000 paid December 30, 2017, for an advertising program, which it
is estimated will assist in increasing Sabrina’s sales over a period of four years following the disbursement.
Item 6:
The Leasehold Improvement account includes (a) the P15,000 cost of improvements with a total estimated useful life
of 12 years, which Sabrina, as tenant made to leased premises in January 2017; (b) movable assembly-line equipment
Page 14 of 18
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-703
PREWEEK LECTURES: Audit Problems/Cases
with a 5-year useful life and with a cost of P8,500, which was installed in the leased premises in December 2018; and
(c) real estate taxes of P2,500 paid by Sabrina, which under the terms of the lease, should have been paid by the
landlord. Sabrina paid its rent in full during 2018. A 10-year nonrenewable lease was signed January 3, 2017, for the
leased building that Sabrina used in manufacturing operations.
Item 7:
The balance in the Organization Expenses account includes pre-operating costs incurred during the organizational
period.
Questions:
1. Patents will have an audited balance as of December 31, 2018 of
a. 85,000
c. 66,000
b. 64,000
d. 46,000
2. The adjusted balance of Licensing Agreement – A as of December 31, 2018 is
a. 20,000
c. 10,000
b. 0
d. 50,000
3. The adjusted balance of Licensing Agreement – B as of December 31, 2018 is
a. 66,000
c. 45,000
b. 85,000
d. 64,000
4. Leasehold improvements, net of amortization, audited balance as of December 31, 2018 is
a. 12,000
c. 13,500
b. 15,000
d. 26,000
PROBLEM 25: AUDIT OF NON-TRADE PAYABLES
YZ Corporation, reported the following balances on the liability portion of its Statement of Financial Position as of
December 31, 2018:
Noncurrent Liabilities
Note Payable, Bank 10%
Bonds Payable, 12%
Finance Lease Liability
4,500,000
3,231,652
2,200,000
Additional information:
a. The note payable to the bank was originated on September 1, 2017 and is due annually at the rate of P1.5M
every August 31 starting 2018. Interest which is based on the outstanding balance of the loan is also
payable every August 31. Interest is yet to be accrued on the note by the balance sheet date. Payments on
the note and interest during the current year had been recorded appropriately.
b.
The 5 year, 12% bonds payable (with a face value of P3M) were issued on January 1, 2018 at the prevailing
market rate of interest which is 10%. Interest on the bonds are payable semi-annually every June 30 and
December 31. The entry made by the client to record the issuance was to debit cash and credit bonds
payable for the total cash consideration received.
c.
The Lease Liability is in relation to XYZ’s purchase of a machine on December 31, 2017. The machine was
delivered the same day to the company. The lease stipulates that annual payments will be made for 5 years
starting December 31, 2017. At the end of the 5-year term, the company may purchase the machine. The
estimated economic life of the machine is 12 years. Your further investigation revealed the following terms
of the transaction:
Annual lease payments
P550,000
Purchase option price
250,000
Estimated fair value after 5 years 750,000
Implicit rate
10%
Borrowing rate
12%
Entry made:
Equipment
P2,750,000
Cash
550,000
Finance Lease Liability
2,200,000
Payment on December 31, 2018 is yet to be recorded.
Requirements:
1. What is the amount to be capitalized as an asset for the lease of the machinery?
a. 2,759,130
b. 2,240,170
c. 2,293,450
2.
What is the carrying value of the leased asset as of December 31, 2018?
a. 2,040,547
b. 1,958,925
c. 2,448,656
d. 2,448,656
d. 2,244,601
3.
What is the correct total noncurrent liabilities to be presented in the 2018 Statement of Financial Position?
a. 5,842,069
b. 6,193,897
c. 7,336,271
d. 6,049,341
4.
What is the correct total current portion of long-term debts to be presented in the 2018 Statement of
Financial Position?
a. 1,500,000
b. 1,896,148
c. 1,860,134
d. 2,005,457
5.
What is the total interest expense to be reported in the 2018 income statement?
a. 1,026,097
b. 1,009,211
c. 1,062,111
d. 662,111
PROBLEM 26: AUDIT OF EQUITY ACCOUNTS
Nevada Square Company has the following selected accounts in its shareholders’ equity section as of December 31,
2017:
Page 15 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
Preference shares, P100 par, 10 percent cumulative,
100,000 shares issued and outstanding
Ordinary shares, P20 par, 1,000,000 shares authorized,
700,000 shares issued and outstanding
Share premium
Accumulated profits
P10,000,000
14,000,000
8,000,000
30,000,000
There are no dividends in arrears on the preference shares. During 2018, the following transactions occurred:
a.
The board of directors declared a cash dividend totaling to P2,800,000 to be paid to preference and ordinary
shareholders. Later, a share dividend of 100,000 ordinary shares were declared on ordinary shares. The
market value of ordinary shares is P68 per share on the date the share dividends were declared.
b.
Sometime after the above dividends were declared and settled, the board of directors declared as property
dividends one shares of its investment in Bingo Corp. stocks being held by the company as financial asset at
fair market value through profit or losses for every two ordinary share outstanding. Bingo Corp. stocks were
originally purchased by the company at P12 per share and have a carrying value based on their fair value as
per the last balance sheet date, at P20 per share. Bingo Corp. shares were selling at P24 when the property
dividends were declared and were selling at P25 when the property dividends were settled. The company
had a total of 600,000 shares of Bingo Corp. shares.
c.
At the end of 2018, the board declares a four-for-one share split. With the split, the number of ordinary
shares authorized to be issued increased to 4,000,000. At the date of the share split, the market value of
ordinary share is P75 per share.
d.
Net earnings during 2018 total P6,000,000.
Required:
1. What is the correct debit to the accumulated profits as a result of the stock dividends declared in item a?
a. 6,800,000
c. 4,800,000
b. 1,000,000
d. 2,000,000
2. What is the total debit to the accumulated profits account as a result of the declaration and distribution of the
property dividends in item b?
a. 10,000,000
c. 8,000,000
b. 12,500,000
d. 12,000,000
3. What is the adjusted balance of the company’s Accumulated profit account at the end of year?
a. 21,600,000
c. 16,400,000
b. 18,400,000
d. 26,400,000
4. What is the balance of the ordinary shares account as of December 31, 2018?
a. 20,800,000
c. 18,000,000
b. 14,000,000
d. 16,000,000
PROBLEM 27: AUDIT OF EQUITY ACCOUNTS
In your audit of Spurs Inc. for the calendar year ended December 31, 2018, you discovered the following charges to
the company’s Retained Earnings account:
Balance, January 1
Unrealized holding loss on financial assets at fair value through other
comprehensive income or loss
Inventory fire loss
Impairment loss on Property Plant and Equipment
15% Stock dividends declared (100,000 shares outstanding at P100 par)
Loss on sale of equipment
Correction of a prior period error
Loss on retirement of ordinary shares as treasury
Gain on sale of ordinary shares as excess over par
Gain on premature retirement of bonds
Unrealized holding gain on financial asset held at fair value through
profit/loss
Proceeds from sale of donated shares
Net income for the year
Reserve for plant expansion
P7,800,000
(400,000)
(150,000)
(750,000)
(1,500,000)
(200,000)
(1,500,000)
(1,050,000)
1,000,000
300,000
800,000
800,000
9,000,000
(3,000,000)
a.
Audit Notes
The 15% stock dividends were declared on November 1, 2018 distributable to stockholders as of December
1, 2018 distributable on January 15, 2019. Spur’s stocks were selling at P110 on November 1
b.
The company’s Share premium from treasury stock transaction account amounted to P850,000.
c.
The company’s management decided to change its inventory costing method from the weighted average to
the FIFO approach during the current year. The inventory balances under the two methods are as follows:
AVERAGE
FIFO
Beginning
2,500,000
2,600,000
Ending
1,900,000
2,200,000
The company, however, is yet to effect the said change in its current financial statements.
Using the information above, answer the following:
Page 16 of 18
0915-2303213/0908-6567516  www.resacpareview.com
AP-703
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Audit Problems/Cases
1.
2.
3.
4.
What is the net adjustment to the retained earnings account for the declaration of the stock dividends?
a. 100,000
c. 150,000
b. 50,000
d. no adjustement
What is the correct net income for the year 2018?
a. 9,100,000
c. 9,200,000
b. 9,000,000
d. 9,300,000
What is the retroactive adjustment to the retained earnings beginning in 2018 as a result of the change in the
inventory cost formula from the weighted average to the FIFO approach?
a. 100,000 debit
c. 300,000 credit
b. 200,000 credit
d. 100,000 credit
What is the correct retained earnings at the end of 2018?
a. 11,200,000
c. 10,900,000
b. 10,6s50,000
d. 10,750,000
PROBLEM 28: AUDIT OF EQUITY ACCOUNTS
Ekkans Corporation was incorporated in 2017. During 2017, the company issued 100,000 shares of P1 par value
ordinary shares for P27 per share. During 2017, Ekkans Corporation had a profit of P250,000 and paid dividends of
P28,000.
During 2018, the company had the following transactions.
1/2
Issued 10,000 shares of P100 par value cumulative preference shares at par. The preference
shares are convertible into five ordinary shares and had a dividend rate of 6%.
3/1
Issued 3,000 ordinary shares for legal service performed. The value of the legal services was
P100,000. The shares are actively traded on a stock exchange and valued on 3/1 at P32 per
share.
7/1
Issued 40,000 ordinary shares for P42 per share.
10/1
Repurchased 16,000 treasury shares for P34 per share.
12/1
Sold 3,000 treasury shares for P29 per share.
12/30
Declared and paid a dividend of P0.20 per share on ordinary shares and a 6% dividend on the
preference shares.
During 2018 Ekkans Corporation had a profit of P380,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.
Total share premium as of December 31, 2018
a. 4,333,000
c. 4,337,000
b. 1,733,000
d. 4,348,000
2.
Total retained earnings as of December 31, 2018
a. 501,000
c. 602,000
b. 516,000
d. 279,000
3.
Total equity as of December 31, 2018
a. 5,535,000
c. 5,621,000
b. 5,539,000
d. 5,550,000
4.
Basic earnings per share for the year 2018
a. 3.20
c. 2.69
b. 1.60
d. 2.11
5.
Diluted earnings per share for the year 2018
a. 2.11
c. 2.25
b. 1.48
d. 1.90
PROBLEM 29: AUDIT OF EQUITY ACCOUNTS
Presented below is the statement of financial position of Diesel Corporation prepared by the chief accountant for the
current year, 2018.
Diesel Corporation
Statement of Financial Position
December 31, 2018
Current assets
P 435,000
Investments
640,000
Property plant, and equipment
1,720,000
Intangible assets
305,000
P3,100,000
Current liabilities
Long-term liabilities
Shareholders’ equity
P
330,000
1,000,000
1,770,000
P3,100,000
Consider the following information:
Page 17 of 18
0915-2303213/0908-6567516  www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-703
PREWEEK LECTURES: Audit Problems/Cases
1.
The current assets section includes: cash P100,000, accounts receivable P170,000 less P10,000 for allowance for
doubtful accounts, inventories P180,000, and unearned revenue P5,000. The cash balance is composed of
P114,000, less a bank overdraft of P14,000. Inventories are stated on the lower of FIFO cost or market.
2.
The investments section includes: the cash surrender value of a life insurance contract P40,000; investment in
ordinary shares, short-term (trading) P80,000 and long-term (available-for-sale) P270,000; and bond sinking fund
P250,000. The cost and fair value of investments in ordinary shares are the same.
3.
Property, plant, and equipment includes: buildings P1,040,000 less accumulated depreciation P360,000;
equipment P450,000 less accumulated depreciation P180,000; land P500,000; and land held for future use
P270,000.
4.
Intangible assets include: a franchise P165,000: goodwill P100,000; and discount on bonds payable P40,000.
5.
Current liabilities include: accounts payable P90,000; notes payable - short term P80,000 and long - term
P120,000: and taxes payable P40,000.
6.
Long - term liabilities are compose solely of 10% bonds payable due 2025.
7.
Shareholders' equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares for
P450,000; and ordinary shares, P1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average
price of P10. In addition, the corporation has retained earnings of P320,000.
8.
The company's management does not elect to use the fair value option for any of its financial assets or liabilities.
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following to be reported on the
company’s statement of financial position as of December 31, 2018:
1.
2.
3.
4.
5.
Current assets
a. 588,000
b. 574,000
Noncurrent investments
a. 560,000
b. 520,000
Property, plant and equipment
a. 1,615,000
b. 1,885,000
Total assets
a. 3,079,000
b. 2,979,000
Current liabilities
a. 229,000
b. 224,000
Page 18 of 18
c. 534,000
d. 548,000
c. 830,000
d. 790,000
c. 1,450,000
d. 1,720,000
c. 2,814,000
d. 3,093,000
c. 210,000
d. 215,000
0915-2303213/0908-6567516  www.resacpareview.com
ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 43  May 2022 CPA Licensure Examination  Preweek Lectures
AUDITING (Auditing Problems)
S. IRENEO  C. ESPENILLA
AP-703S: SOLUTIONS TO AUDIT CASES/PROBLEMS
PROBLEM 1: TINDIG CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 2: AUDIT OF CASH: JADE CORPORATION
Bank Reconciliation
Unadjusted balance
Deposit in transit, excluding NSF
Outstanding check, excluding certified check
Bank error
Correct cash balance (1. Ans. A)
BANK
792,285
10,500
(75,975)
2,250
729,060
Unadjusted balance per books
Correct cash balance
Net adjustment to cash (12/31)
BOOK
726,600
20,000
(5,000)
31,500
773,100
Unadjusted balance
Unrecorded credit
Unrecorded debit
Book errors (note a.)
(44,040)
729,060
Shortage 3. Ans. C
Adjusted balance
726,600
729,060
(2,460)
Accountability as of January 15
Unrecorded credit as of 12/31
Book errors in January (audit note b & c)
Adjusted accountability
January deposits from January collections
January bank credits
Correction of Dec. bank charge error
Dec. deposit in transit
Cash on hand
Expense vouchers
Cash shortage from Jan. 2 - Jan. 15
Add: Cash shortage as of Dec. 31
Total cash short as of Jan. 15, 2019
2. Ans. B
180,500
(20,000)
19,500
180,000
143,895
(2,250)
(10,500)
131,145
10,125
1,125
37,605
44,040
81,645
4. Ans. A
PROBLEM 3: ROSAS INC (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 4: AUDIT OF CASH; CASH/ACCRUAL: BURBERRY CORPORATION
1. Ans. A.
Cash collection from customers
Add: Sales discounts
Sales returns, excluding refunds
Write-off of receivables
Decrease in advances from customers
Increase in accounts receivables
Total
Less: Recoveries of previous write-off
Accrual basis gross sales
2. Ans. D.
Cash payments to suppliers of inventory
Add: Purchase discounts
Purchase returns, excluding refunds
Increase in accounts payable
Total
Less: Increase in advances to suppliers
Accrual basis gross purchases
45,780,000
1,580,000
1,590,000
1,120,000
1,900,000
4,200,000
56,170,000
(420,000)
55,750,000
24,490,000
1,290,000
1,320,000
3,780,000
30,880,000
(1,512,000)
29,368,000
3. Ans. C.
Accrual basis gross purchases
Less: Purchase discount
Purchase returns (total)
29,368,000
(1,290,000)
(1,960,000)
Net Purchases
Less: Increase in Inventories
Cost of Sales
26,118,000
(2,690,000)
23,428,000
4. Ans. A.
Increase in allowance for bad debt
Add: Write-off of AR
Less: Recovery of previous write-off
Bad debt expense
840,000
1,120,000
(420,000)
1,540,000
5. Ans. A.
Increase in accumulated depreciation
Decrease in accum depr from equpment sold*
Depreciation expense for the year
1,000,000
1,400,000
2,400,000
Increase in Equipment account
Purchase of Equipment during the year
Cost of Equipment sold during the year
Carrying value of equipment sold
Accum Depr. of equipment sold during the year
Page 1 of 66
2,000,000
5,000,000
3,000,000
1,600,000
1,400,000
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
PROBLEM 5: AUDIT OF CASH; CASH/ACCRUAL: FORD CORP.
1. Ans. C.
Accounts receivable, beginning balance
Add: Sales, accrual basis
Less: Accounts receivable, ending bal.
Collections from customers
2. Ans. A.
Inventory, ending balance
Add: Cost of goods sold for the year
Less: Inventory, beginning balance
Purchases, accrual basis
Add: Trade accounts payable, beg. bal.
Less: Trade accounts payable, end bal.
Cash payments made to suppliers
30,000
538,800
(33,000)
535,800
31,000
250,000
(47,000)
234,000
17,500
(25,000)
226,500
3. Ans. C.
Interest expense, accrual basis
Amortization of discount on bonds
Interest expense paid
4. Ans. B.
Income tax expense, accrual basis
Add: Income tax payable, beg. bal.
Deferred tax liability, beg. bal.
Less: Income tax payable, end. bal.
Deferred tax liability, end bal.
Income tax expense paid
20,400
27,100
4,600
(21,000)
(5,300)
25,800
5. Ans. D.
Selling expenses, accrual basis
Depr. expense - selling (1,500 * 1/3)
Selling expenses paid
141,500
(500)
141,000
4,300
(500)
3,800
PROBLEM 6: AUDIT OF CASH; CASH/ACCRUAL: JOURNEY CORPORATION (ANS. D)
Cash sales
Collections from accounts receivable
Collections from trade notes receivable
Add: Sales returns and allowances (no refund)
Increase in Accounts receivable
Total
Less: Decrease in Notes receivable
Gross Sales
Less: Sales returns (total)
Net sales, per audit
3,000,000
30,000,000
2,400,000
35,400,000
800,000
1,400,000
37,600,000
(600,000)
P37,000,000
(1,200,000)
P35,800,000
PROBLEM 7: AUDIT OF CASH; CASH/ACCRUAL: CLARKE CORPORATION (ANS. C)
Cash collected from customers
Add: AR, ending
9,890,000
835,000
Deduct: AR, beginning
(536,000)
Advances from customers, ending
(125,000)
Sales Accrual basis
10,064,000
PROBLEM 8: AUDIT OF RECEIVABLES: GENEROSITY INC.
Customer
Grace Inc.
Truth Corp.
Gusto Co.
National Co.
Nano Inc.
Bruce Inc.
Privacy Corp.
Invoice
date
9/12/18
12/12/18
12/2/18
11/17/18
10/8/18
12/8/18
10/25/18
8/20/18
9/27/18
8/20/18
12/6/18
11/29/18
Total
Amount
139,200
153,600
99,200
185,120
176,000
160,000
144,800
40,000
96,000
71,360
112,000
169,440
1,546,720
Dec.
0-30
days
Nov.
31-60
days
Oct.
61-90
days
Sept.
91-120
days
139,200
Aug. and
prior
>120
days
153,600
99,200
185,120
176,000
160,000
144,800
40,000
96,000
71,360
112,000
524,800
169,440
354,560
320,800
235,200
0-30
days
524,800
31-60
days
354,560
61-90
days
320,800
(99,200)
425,600
99,200
453,760
2%
8,512
111,360
Reconciliation between GL and SL with Aging of AR analysis
Unadjusted balances
(a) Write-off of AR-Bruce
(b) Pricing error
(c) Posting error
Adjusted balances
Unreconciled difference
Adjusted balance
Required allowance for
BD in %
Required allowance for
Bad Debt
2. Ans. B.
Allowance for BD, ending
Page 2 of 9
Per GL
1,566,720
(71,360)
(30,000)
1,465,360
(20,000)
1,445,360
Per SL
1,546,720
(71,360)
(30,000)
1,445,360
91-120
days
235,200
>120
days
111,360
(71,360)
290,800
235,200
40,000
5%
10%
20%
50%
22,688
29,080
47,040
20,000
(30,000)
127,320
1.Ans. D.
127,320
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Less: Allowance for BD, unadjusted
Add: Write off of AR-Bruce
Bad Debt Expense
3. Ans. A.
Gross Accounts Receivable
Allowance for Bad Debts
Amortized cost/Carrying value
4. Ans. B.
AJE to record unreconciled difference:
Sales
Accounts receivable
(46,720)
71,360
151,960
1,445,360
(127,320)
1,318,040
20,000
20,000
PROBLEM 9: COLORS INC (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 10: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC CO.
Amortization table:
Correct Interest Nominal Interest Amortization Balance
(CV*12%)
(Princ*10%)
1/2015 (Initial amount recognized)
P9,279,045
12/2015
1,113,485
1,000,000 113,485
9,392,530
12/2016
1,127,104
1,000,000 127,104
9,519,634
12/2017
1,142,356
1,000,000 142,356
9,661,990
12/2018
1,159,439
1,000,000159,439
9,821,429
1. Ans. C.
Loans and receivable, including interest (9,821,429+1,000,000)
PV of future cash flows using the original effective rate %: 12%
(1,000,000*0.8929) = P892,857
(2,000,000*0.7972) = 1,594,388
(2,500,000*0.7118) = 1,779,451
(2,500,000*0.6355) = 1,588,795
Impairment loss
Date
12/2018
12/2019
12/2020
12/2021
12/2022
10,821,429
(5,855,491)
P4,965,938
3. Ans. C.
2. Ans. C.
Amortization/
(CV*12%)
702,659
666,978
507,015
267,857
Principal
Collection
Balance
P5,855,491
(1,000,000) 5,558,150 4. Ans. B.
(2,000,000) 4,225,128 5. Ans. D.
(2,500,000) 2,232,143
(2,500,000)
-
PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC FINANCING CORP. (Ans. C)
DEF Corp, 10% - Trade receivable, Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2017:
Cash
4,754,134
Loans receivable
4,754,134
Fair value = Loan proceeds (PV of cash flows at 6%
Principal: (5,000,000*0.704961)
3,524,803
Interest: (250,000*4.917324)
1,229,331
Total
4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int.
Nominal Int.
January 1, 2017:
June 30, 2017:
285,248
250,000
December 31, 2017:
287,363
250,000
June 30, 2018:
289,605
250,000
December 31, 2018:
291,981
250,000
June 30, 2019:
294,500
250,000
December 31, 2019:
297,170
250,000
semi-annual eff. rate for 6 semi-annual pds)
Amort.
35,248
37,363
39,605
41,981
44,500
47,170
PROBLEM 12: AUDIT OF TRADE RECEIVABLES AND INVENTORIES:
AR
Inventories
376,500
525,000
December recorded sales:
Shipment to consignee
(Half has been sold)
(10,000)
7,000
Commission of consignee
(2,000)
In-tansit FOB, Dest.
(8,680)
7,240
In-tansit FOB, Dest.
(10,000)
In-transit FOB, SP
(6,100)
Sipment to consignee
(14,000)
January recorded sales:
In-transit FOB, SP
21,000
In-transit FOB, SP
10,500
(8,800)
Page 3 of 9
Balance
4,754,134
4,789,382
4,826,745
4,866,349
4,908,330
4,952,830
5,000,000
Sales
1,520,000
COS
942,000
(10,000)
(7,000)
(8,680)
(7,240)
(10,000)
6,100
(14,000)
21,000
10,500
8,800
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Adjusted balance
363,320
1. Ans A.
524,340
2. Ans. B.
1,508,820
3. Ans. C.
942,660
4. Ans. D.
PROBLEM 13: BALER CORP. (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 14: AUDIT OF INVENTORIES: PORTENT CORP.
Inventory, January 1
Purchases
Freight in
Purchase discount
Purchase returns and allowances
Departmental tranfer in
Departmental transfer out
Abnormal spoilages
Mark-up
Mark-up cancellation
COGAS (Net Marked-up)
Mark-down
Mark-down cancellation
COGAS (Marked-up and Marked-down)
Less: Beginning inventories
COGAS excluding beg. inventories
Cost
1,698,735
13,901,265
702,000
(1,684,800)
(1,123,200)
2,808,000
(1,684,800)
(493,812)
-
14,123,388
(1,728,000)
4,320,000
(2,592,000)
(894,240)
3,510,000
(1,053,000)
25,678,889
55.00%
14,123,388
(2,106,000)
365,058
23,937,947
59.00%
Average
(1,698,735)
12,424,653
(2,516,129)
21,421,818
58.00%
FIFO Retail
1. Ans. A.
COGAS at retail (marked-up and marked-down)
Less: Cost of Sales at Ret./Gross sales
Sales
Sales discounts to employees
Sales returns and allowances
Normal spoilages
Ending Inventory at Retail Price
Retail Price
2,516,129
21,600,000
18,630,000
745,200
(2,235,600)
1,117,800
Conservative
23,937,947
18,257,400
5,680,547
2. Ans. A.
Ending Inventory at Retail Price
Multiply by: Cost rate under Conservative Approach
Ending Inventory at Cost
Ending Inventory per books/count
Inventory Shortage
5,680,547
55%
3,124,302
2,811,690
312,612
3. Ans. B.
Ending Inventory at Retail Price
Multiply by: Cost rate under Average Approach
Ending Inventory at Cost
Ending Inventory per books/count
Inventory Shortage
5,680,547
59%
3,351,522
2,811,690
539,832
4. Ans. B.
Ending Inventory at Retail Price
Multiply by: Cost rate under Conservative Approach
Ending Inventory at Cost
Ending Inventory per books/count
Inventory Shortage
5,680,547
58%
3,294,717
2,811,690
483,027
PROBLEM 15: GLORIA CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 16: TOMAS CORPORATION (DISCUSSED DURING PREWEEK LECTURES)
PROBLEM 17: AUDIT OF INVESTMENTS: BENSHOPPE INC.
1. Ans. B.
2. Ans. A.
Aye Corp. Shares
Bee Inc. Shares
See Co. 10%, 2M Bonds**
FMV 12/18
700,000
1,000,000
1,964,948
3,664,948
Unrealized holding gain - IS
Financial assets at FMVPL
CV/Cost
540,000
1,080,000
1,923,000
3,543,000
121,948
3,664,948
(29.50-2-0.50)*20,000sh
(27.50-.50)*40,000sh
(1,973,000-50,000)
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual effective rate)
Principal (2M*0.8072)
1,614,433
1
Interest (100,000*3.5052)
350,515
** 1,964,948
3. Ans. A.
Investment in Dee Shares (Associate)
Intial cost (6/30/18)
Share from dividends
Share from net income
Investment in Assoc Balance
2,400,000
(250,000)
280,000
2,430,000
(2,240,000*6/12)*25%
4. Ans. D.
Page 4 of 9
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct
Nominal
Int.
Int.
Amortization
Balance
October 1, 2018:
1,923,000
December 31, 2018:
57,690
50,000
7,690
1,930,690
PROBLEM 18: AUDIT OF INVESTMENTS: IFFY CORP.
Acquisition price
Share from net income (4.8M*30%)
Understatement depr. (1.6M/5)*30%
Share from other comp. loss (800,000*30%)
Share from dividends (1,500,000*30%)
Carrying Value, 12/31/18
If SME using the FMV Method:
Acquisition price
Fair market value, 12/31/18 (30,000*210)
Unrealized holding gain - IS
Dividend Income (1.5M*30%)
Total Investment Income
*excluding accrued interest
5,000,000
1,440,000
(96,000)
5,000,000
6,300,000
1,300,000
450,000
1,750,000
1,344,000
(240,000)
(450,000)
5,654,000
1. A.
2. A.
CESSATION:
Proceeds from sale (18,000*210)
Fair Value of remaining share to be reclassified
to FA at FMV (12,000*210)
Total
Less: Carrying Value of Investment in Assoc. before
cessation
Gain before recycling of OCLoss
Recycling of OCloss
Total cessation loss - IS
DILUTION:
# shares held
# shares outstanding
% of interest
3,780,000
2,520,000
6,300,000
5,654,000
646,000
(240,000)
406,000
Before
30,000
100,000
30%
Share from increase in Assoc.'s net assets
(25,000*210)*24%
Carrying value of Investment as if given up
(5,654,000*6/30)
Gain on dilution before recycling of OCLoss
Recycling of Ocloss (240,000*6/30)
Total cessation loss - IS
4. B.
3. C.
After
30,000
125,000
24%
1,260,000
(1,130,800)
129,200
(48,000)
81,200
5. A.
PROBLEM 19: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: RURAL CORPORATION
1. Ans. D.
Initial cost of Warehouse:
Materials (P150,000 - 10,000)
Direct Labor (P800,000 - 25,000)
Supervision
Design and planning costs
Depreciation for the year: (1,000,000 / 20 years)
Carrying value as of December 31, 2018
140,000
775,000
65,000
20,000
2. Ans. D.
Plant, Carrying Value as of December 31, 2017
CV as of 12/31/17 of the plant sold in 2018
CV as of 12/31/17 of the remaining plant
Less: Depreciation for the year (P1.8M*25%)
Plant, Carrying Value as of December 31, 2018
1,000,000
(50,000)
950,000
2,070,000
(270,000)
1,800,000
(450,000)
1,350,000
3. Ans. A
Depreciation
Remaing Plant
New Warehouse
Building at revalued amount (P4.8M/20yrs)
Total depreciation for the year
450,000
50,000
240,000
740,000
4. Ans. A.
Fair market value of the building 1/1/18
Carrying value of the building 1/1/18
Revaluation surplus on building, 1/1/18
Piecemeal transfer of RS as of 12/31 (1.6M/20yrs)
Revaluation surplus on building as of 12/31/18
Revaluation surplus on land (1.2M - 1M)
Total Revaluation Surplus as of December 31, 2018
4,800,000
3,200,000
1,600,000
(80,000)
1,520,000
200,000
1,720,000
PROBLEM 20: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: KINDNESS CORPORATION
1. Ans. B.
Cash price of new automotive equipment
Less: Cash payment made
Trade in allowance/Fair value of old eqpt.
Page 5 of 9
1,600,000
(850,000)
750,000
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Carrying value of old equipment
P2,100,000 - (2,100,000*26/36)
583,333
Gain on trade-in
166,667
2. Ans. C.
Depreciation - Building
Beginning Balance, CV
Multiply by: Double declining rate:
Building Improvement
Cost
Multiply by: Double declining rate based
on Bldg's remaining life (16yrs*)
5,314,410
10%
531,441
1,250,000
12.50%
156,250
Total depreciation expense
687,691
*Note: Through trial and error, one can figure out based on the Accum Depr.-Bldg balance that the
building has already been depreciated for 4 year as of December 31, 2015. Thus the building's
remaining life as of January 1, 2016 is 16 years.
3. Ans. D.
Depreciation - Machinery and equipment
Beginning Balance (5.4M - 1.8M)
Divide by: useful life
3,600,000
10
Machinery destroyed by fire
Divide by: useful life
Multiply by: 6mos/12mos
1,800,000
10
6/12
Replacement machinery
Divide by: useful life
Multiply by: 4mos/12mos
3,200,000
10
4/12
Total depreciation expense
*
360,000
90,000
*
106,667
556,667
PV of installment payments:
Installment price
Divide by: 5 years
Installment payment, in advance
Multiply by: PV of 1 at 10% for 5 periods in advance
Cash price equivalent/Initial cost of the new machine
3,837,054
5
767,411
4.169865
3,200,000
0.68301
4. Ans. B.
Depreciation - Automotive equipment
Beginning Balance
Less: Depreciation on old equipment traded out
P2,100,000*4/36
Add: Depreciation on new equipment traded in
P1,600,000*8/36
511,111
(233,333)
355,556
Total depreciation expense
633,333
PROBLEM 21: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: MONICA CORP.
Value in use: P40,000*5.33493
P213,397
50,000*0.46651
23,325
P236,722
(higher than fair value less cost to sell, P220,000)
Carrying value (12/31/15) (400,000*8/10)+50,000
Recoverable value
Impairment loss
P370,000
(236,722)
P133,278
Carrying value (12/31/17) ((236,722-50,000)*6/8)+50,000
1. Ans. B.
2. Ans. A.
P190,042
Carrying value had there been no impairment: (400,000*6/10)+50,000
Carrying value (with impairment):
Gain on impairment recovery
3. Ans. C.
P290,000
190,042
P99,958 4. Ans. B.
FMV = (555,000-50,000)*60% = 303,000 + 50,000 = P353,000
Depreciation 2019: (P290,000-50,000)/8 (revised remaining life) P30,000
Depreciation 2019: (P353,000-50,000)/8 (revised remaining life) P37,875
5. Ans. D.
6. Ans. C.
Revaluation surplus 12/31/2019
Multiply by:
7. Ans. A.
(353,000-290,000)
P63,000
6/8
P47,250
PROBLEM 22: AUDIT OF INTANGIBLES: CRUZ COMPANY
1. Ans. B.
Amortization:
Patent (P200,000 / 10 years)
Computer software (P100,000 * 60/120)
Total Amortization
2. Ans. C.
Impairment loss:
Copyright:
Carrying value
Recoverable value/Value in use (P8,000 / 5%)
Tradename
Carrying value
Recoverable value/Value in use (P15,000 / 5%)
Page 6 of 9
20,000
50,000
70,000
400,000
160,000
240,000
350,000
300,000
50,000
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Goodwill
Carrying value of the CGU including Goodwill
Recoverable value/Value in use (P200,000 * 14.09394)
(present value at 5% for 25 periods with annuity)
Total Impairment Loss
3. Ans. D.
Goodwill before impairment loss
Impairment of the CGU entirely attributed to Goodwill
Carrying value of Goodwill after impairment loss
4. Ans. B.
Patent, 12/31/18 (P200,000 - P20,000)
Computer software (P100,000 - P50,000)
Copyright
Tradename
Carrying Value of Intangibles as of 12/31/18
3,000,000
2,818,789
181,211
471,211
900,000
(181,211)
718,789
180,000
50,000
160,000
300,000
690,000
PROBLEM 23: AUDIT OF INTANGIBLES: DOHA CORPORATION
1. Ans. A.
CV, Patent, 12/31/15: P444,000*9yrs/10yrs
399,600
2. Ans. A.
CV, Franchise, 12/31/15: P252,000*6.5yrs/8yrs
204,750
3. Ans. C.
Amortization of franchise, 2017 (P252,000/8yrs)*6/12
15,750
Rent expense, 2017 (P168,000/2yrs)*3/12
21,000
Net loss including organization expense in 2017
Retroactive adjustment to RE,beg. 2018
96,000
132,750
4. Ans. C.
Amortization of franchise, 2018 (P252,000/8yrs)
31,500
Rent expense, 2018 (P168,000/2yrs)
84,000
Amortization of patent, 2018 (P444,000/10yrs)
44,400
Cost to develop a secret formula
450,000
Legal fees - successful defense
75,900
Research and development expense, 2018
Total expense in 2018
960,000
1,645,800
PROBLEM 24: AUDIT OF INTANGIBLES: SABRINA MANUFACTURING CORPORATION
1. Ans. B.
Patent per books
Cost to improve the machinery charged to the patent
Correct cost of the Patent
Amortization for the year: (68,000 / 17 years)
Correct Carrying Value of the Patent as of 12/31/18
85,000
(17,000)
68,000
(4,000)
64,000
2. Ans. A.
Correct Initial Cost of Lic. Agreement A
50,000
Impairment loss in 2017 (P50,000*60%)
(30,000)
Carrying Value of Lic. Agreement A as of 12/31/18
20,000
*Note that the flood happening on January 2019 is a Type 2 (Non-adjusting subsequent event)
3. Ans. C.
Correct Iniital Cost of Lic. Agreement B
Amortization for 2018 (P50,000/10yrs)
Carrying Value of Lic. Agreement B as of 12/31/18
50,000
(5,000)
45,000
4. Ans. A.
Correct cost of Leasehold Improvement 1/1/17
Accumulated Depreciation: (15,000/10yrs)*2yrs
Carrying Value as of December 31, 2018
15,000
(3,000)
12,000
*
**
*The initial cost excluded the movable equipment which shall be recognized separately and the
real property taxes paid by Sabrina which shall be recognized as an advances to the lessor.
**Depreciation is over the lease term since it is shorter that the life
PROBLEM 25: AUDIT OF NON-TRADE PAYABLES: YZ CORPORATION
1. Ans. D.
Present value of periodic payments: (550,000*4.1699)
Present value of BPO: (250,000*0.6209)
Total
2,293,426
155,230
2,448,656
2. Ans. D.
Capitalized cost of the asset: 12/31/17
Accumulated depreciation (2018) (2,488,656/12) (over useful life)
Carrying value (12/31/2018)
2,488,656
(408,109)
2,244,601
Page 7 of 9
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
Long Term
a. Note Payable
Interest: (6M*10%*8/12)
(4.5M*10%*4/12)
b. Bonds Payable**
c. Lease Liability***
Total
**(Amortization Table – 12% Bonds Payable)
Date
Nom. Int.
Eff. Int
Amort.
1/1/18
6/30
180,000
161,583
(18,417)
12/31
180,000
160,662
(19,338)
Total
322,245
Short Term
P3,000,000
P1,500,000
3,193,897
1,142,374
7,336,271
3. Ans. C
396,148
1,896,148
4. Ans. B
Interest
Expense
P400,000
150,000
322,245
189,866
1,062,111
5. Ans. C.
Balance
3,231,652
3,213,235
3,193,897
***(Amortization Table -10% Lease Liability
Date
Periodic
Effective
Principal
payments
Interest
12/31/17
12/31/17
550,000
0
550,000
12/31/18
550,000
189,866
360,134
12/31/19
550,000
153,852
396,148
Balance
2,488,656
1,898,656
1,538,522
1,142,374
PROBLEM 26: AUDIT OF EQUITY ACCOUNTS: NEVADA SQUARE COMPANY
1. Ans. A.; 2. Ans. A.; 3. Ans. C.
Retained earnings, Jan. 1, 2015
P30,000,000
Cash dividends
(2,800,000)
Stock dividends (100,000*P68) (a)
(6,800,000)
Property dividends (800,000/2)*P25 (b)
(10,000,000)
Net income for the year
60,000,000
Retained earnings, Dec. 31, 2015
P16,400,000
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.
4. Ans. D.
Ordinary shares, January 1, 2014
P14,000,000
Stock dividends issuance (100,000*20)
2,000,000
Ordinary shares, December 31, 2014
P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.
PROBLEM 27: AUDIT OF EQUITY ACCOUNTS: SPURS INC.
1. Ans. C.
Debit to RE, per books
Debit to RE, per audit (15%*100,000sh)*P110
Adjustment to RE (additional debit)
1,500,000
1,650,000
(150,000)
2. Ans. C.
Unadjusted Net Income, per books
Inventory fire loss
Impairment loss on PPE
Loss on sale of Equipment
Gain on retirement of bonds
Unrealized holding gain on FA
Increase in beg. Inventory under FIFO
Increase in end. Inventory under FIFO
Adjusted Net Income, per audit
9,000,000
(150,000)
(750,000)
(200,000)
300,000
800,000
(100,000)
300,000
9,200,000
3. Ans. D.
Inventory beg, under FIFO
Inventory beg, under weighted average
Adjustment to RE, beg (credit)
2,600,000
2,500,000
100,000
4. Ans. D.
Retained earnings, beginning
Correction of prior period error
Change in policy (Ave to FIFO)
Retained earnings, beg. as restated
15% stock dividend declaration
Loss on retirement of Treasury (P1,050,000-P850,000)
Reserve for plant expansion
Adjusted Net Income
Retained earnings, ending balance
7,800,000
(1,500,000)
100,000
6,400,000
(1,650,000)
(200,000)
(3,000,000)
9,200,000
10,750,000
PROBLEM 28: AUDIT OF EQUITY ACCOUNTS: EKKANS CORPORATION
Captial blances as of December 31, 2017
1/2 Issue of Preference shares
3/1 Ordinary shares issue for services
7/1 Ordinary shares issue for cash
10/1 Reacquisition of Treasury
12/1 Reissue of Treasury shares for cash
12/30 Cash dividends declaration
Ordinary shares: (P0.20*130,000)
Preference shares: (6%*P100*10,000sh)
Page 8 of 9
Ordinary
Sh.
100,000
Preference
Sh.
Sh.
Premium
2,600,000
Accum.
Profits
222,000
Treasury
Sh.
1,000,000
3,000
40,000
93,000
1,640,000
(15,000)
(544,000)
102,000
(26,000)
(60,000)
0915-2303213/0908-6567516  www.resacpareview.com
AP-703S
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PREWEEK LECTURES: Solutions to Audit Problems/Cases
12/31 Net income for 2018
380,000
Capital balances as of December 31, 2018
143,000
1. Ans. A.
2. Ans. A.
3. Ans. A.
Paid-in Capital
Ordinary shares
Preference shares
Additional paid-in capital/Share premium
Contributed Capital
Accumulated profits - appropriated for treasury
Accumulated profits - unappropriated
Treasury shares
Total Stockholders' Equity
1,000,000
4,333,000
143,000
1,000,000
442,000
59,000
4. Ans. C.
Net income
Less: PS Dividends
Net income to ordinary shares
Divide by: Weighted average ordinary shares outstanding*
Basic Earnings Per Share
501,000
(442,000)
1,143,000
4,333,000
5,476,000
501,000
(442,000)
5,535,000
380,000
(60,000)
320,000
118,750
2.69
1/1 Beginning balance (100,000*12/12)
3/1 OS issue for services (3,000 * 10/12)
7/1 OS Share issue for cash (40,000 * 6/12)
10/1 Reacquisition of TS (16,000 * 3/12)
12/1 Reissue of Treasury shares (3,000 * 1/12)
Weighted average ordinary shares oustanding
100,000
2,500
20,000
(4,000)
250
118,750
5. Ans. C.
Net income
Divide by: Weighted average ordinary shares outstanding**
Diluted Earnings per Share
*
380,000
168,750
2.25
Weighted average ordinary shares oustanding
Additional OS from assumed PS conversion on 1/2
Weighted average ordinary shares oustanding
118,750
50,000
168,750
**
PROBLEM 29: AUDIT OF EQUITY ACCOUNTS: DIESEL CORPORATION
1. Ans. C.
Cash
Trading securities
Receivables, net
Inventories
Total Current Assets
2. Ans. C.
3. Ans. C.
Property, Plant and Equipment
Land
Building, net
Equipment, net
Investments
Available for sale securities
Land held for future use*
Cash Surrender Value
Bond Sinking Fund
Franchise
Goodwill
Total Non Current Assets
4. Ans. A.
Total Current Assets
Total Noncurrent Assets
Total Assets
114,000
80,000
160,000
180,000
534,000
500,000
680,000
270,000
270,000
270,000
40,000
250,000
1,450,000
5. Ans. A.
Unearned revenues
Bank Overdraft
Accounts payable
Notes payable - short term
Taxes payable
Total current liabilities
534,000
2,545,000
3,079,000
5,000
14,000
90,000
80,000
40,000
229,000
830,000
165,000
100,000
2,545,000
*note that the land held for future use was classified as LT investment instead of PPE. Had it been a land held as a future
plant site, it would have been appropriately included in PPE instead.
Page 9 of 9
0915-2303213/0908-6567516  www.resacpareview.com