ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 41  May 2021 CPA Licensure Examination  Quizzer
AUDITING (Auditing Problems)
S. Ireneo  C. Espenilla
AP-100Q: QUIZZER ON ACCOUNTING CHANGES, ERROR CORRECTIONS,
CASH/ACCRUAL and SINGLE ENTRY
PROBLEM 1:
Bee Co.’s net income for 2016, 2017 and 2018 were P100,000, P145,000 and P185,000; respectively.
The following items were not handled properly.
a.
Rent of P6,500 for 2019 was received from a lessee on December 23, 2018, and recorded as
outright income in 2018.
b.
Salaries payable at the end of the following years were omitted:
December 31,
December 31,
December 31,
December 31,
c.
2015
2016
2017
2018
2,500
5,500
7,500
4,700
The following unused office supplies were omitted in the accounting records:
December 31,
December 31,
December 31,
December 31,
2015
2016
2017
2018
3,500
6,500
3,700
7,100
d.
On January 1, 2016, the company completed major repairs on the company’s machinery and
equipment totaling P220,000, which was expensed outright. The said equipment is 5 years old as of
January 1, 2016. As of December 31, 2018, the equipment had an original cost of P500,000 and a
carrying value of P250,000.
1.
The correct 2018 depreciation expense is:
a.
31,250
b.
50,000
c.
d.
51,250
70,000
The corrected 2016 net income is:
a.
80,000
b.
234,000
c.
d.
240,000
300,000
The corrected 2017 net income is:
a.
113,700
b.
120,200
c.
d.
126,700
139,300
The corrected 2018 net income is:
a.
184,700
b.
170,900
c.
d.
165,600
164,700
2.
3.
4.
5.
The effect of the above errors on the 2018 beginning retained earnings is:
a.
176,200 understatement
c. 116,200 understatement
b.
136,200 understatement
d. 3,800 overstatement
6.
The effect of the above errors on 2018 working capital is:
a.
4,100 understatement
c. 8,900 understatement
b.
4,100 overstatement
d. 8,900 overstatement
PROBLEM 2:
The following information pertains to Lot Inc.’s depreciable assets:
a. Equipment XYZ was acquired on January 2015 by exchanging an old delivery van originally
costing P225,000 but with a carrying value on the same date at P75,000. The new equipment
had cash purchase price of P450,000 while the old equipment had a market value of P50,000.
The company paid P400,000 on the trade in, which the company had debited to the Equipment
account, the only entry made by the client related to the trade in transaction. The equipment
had been depreciated over its 10 year useful life using the straight-line method. On January 3,
2018, it had been ascertained that the equipment had a 5 year remaining useful life.
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AP-100Q
ReSA – THE REVIEW SCHOOL OF
ACCOUNTANCY
Quizzer:
ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY
b.
Equipment UVW cost P393,750 and was acquired on January 1, 2016. On the date of
acquisition, the expected useful life was 12 years with no residual value. The straight line
depreciation method was used. On January 2, 2018, it was estimated that the remaining life of
the asset would be 6 years and that there would be an P18,750 residual value. In addition,
150% declining balance method will be used to fairly reflect the mode of use of the asset.
c.
A building was purchased on January 3, 2015, for P4,500,000. The building was expected to
have a useful life of 20 years with no residual value. The straight-line depreciation method was
used. On January 1, 2018, a change was made to the sum-of-years’ digits method of
depreciation. Total life of the asset was estimated to be at 15 years with P50,000 residual value.
Requirements:
1.
How much is the adjustment to the accumulated depreciation account and the related
depreciation expense for the current year for the Equipment XYZ?
a. 15,000 and 63,000;
c. 165,000 and 56,000
b. 135,000 and 63,000
d. 135,000 and 56,000
2.
How much is the depreciation expense for the current year for the Equipment UVW?
a. 82,031
b. 77,344
c. 82,813
d. 87,500
3.
What is the book value of the building at December 31, 2018?
a. 3,346,875
b. 3,570,000
c. 3,236,538
d. 3,244,231
PROBLEM 3:
You were engaged by Kuting Corp. to audit its financial statements for the first time. In examining the
company’s books, you discovered that certain adjustments had been overlooked at the end of 2017
and 2018. Moreover, you also discovered that other items had been erroneously recorded. The said
omissions and other failures for each year are noted below:
Prepaid insurance
Accrued salaries and wages
Accrued interest income
Advances from customers
Capital expenditures charged as repairs expense
2017
256,000
582,400
172,800
313,600
376,000
2018
205,200
520,000
142,000
374,000
348,000
Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized as
advances from customers because goods were not shipped until the following year.
b.
Capital expenditures had been recorded as repairs but should have been charged to the
Machinery account; the depreciation rate is 10% per year, but depreciation in the year of
expenditures is to be recognized at 5%.
Based on the above and the result of your audit, answer the following:
1.
What is the total effect of the errors on the 2018 net income?
a. Understated by 251,000
c. Understated by 213,400
b. Overstated by 216,200
d. Overstated by 253,800
2.
What is the total effect of the errors on the company’s working capital as of December 31, 2018?
a. Understated by 202,200
c. Understated by 177,200
b. Overstated by 79,600
d. Overstated by 546,800
3.
If remained unadjusted, what will be the effect of the errors to the company’s December 31, 2018
accumulated profits?
a. Understated by 477,400
c. Understated by 177,200
b. Overstated by 620,600
d. Overstated by 570,600
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PROBLEM 4:
The income statement of GHI Inc. showed the following net income:
2017
P1,750,000
2018
2,000,000
An examination of the accounting records for the year ended December 31, 2018 revealed that several
errors were made. The following errors were discovered:
a.
Salary accrued at year-end were consistently omitted:
2017
P100,000
2018
140,000
b.
The footings and extensions showed that the inventory on December 31, 2017 was overstated
by P190,000.
c.
Prepaid insurance of P120,000 applicable to 2019 was expensed in 2018.
d.
Interest receivable of P20,000 was not recorded on December 31, 2018.
e.
On December 26, 2018 an equipment costing P400,000 was sold for P220,000. At the date of
sale, the equipment had an accumulated depreciation of P240,000. The cash received was
recorded as miscellaneous income in 2018.
f.
A building which had a fair value of P1,200,000 was accepted from the city government as a
donation on January 1, 2017. The building that was estimated to be useful for another 10
years was to be used as a factory site as a condition on the grant. Legal fees incurred in
relation to the donation was at P100,000 and was charged to 2017 operating expenses.
Another P200,000 was incurred to remodel and renovate the building prior to use. The
building was capitalized at P200,000 (renovation cost) and was depreciation over remaining
life using straight line.
Requirements:
1. What is the correct net income in 2017?
a.
1,550,000
b.
1,520,000
2.
What is the correct net income in 2018?
a.
2,120,000
b.
2,000,000
c.
d.
1,490,000
1,430,000
c.
d.
1,990,000
1,950,000
3.
What is retroactive adjustment to the 2018 beginning retained earnings?
a.
80,000
c.
(200,000)
b.
(160,000)
d.
320,000
4.
What is the correct carrying value of the building as of December 31, 2018?
a.
240,000
c.
1,120,000
b.
960,000
d.
1,200,000
PROBLEM 5:
The income statements of Roxas Inc. indicate the following net income:
2016 P1,500,000
2017 1,750,000
2018 2,000,000
An examination of the accountin
g records for the year ended December 31, 2018 indicates that
several errors were made. The following errors were discovered:
a. Salary accruals on December 31, were consistently omitted:
2015
P95,000
2016
110,000
2017
100,000
2018
140,000
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a.
The footings and extensions showed that the inventory on December 31, 2017 was overstated
by P190,000.
b.
P150,000 worth of inventories were received on January 4, 2019. Upon investigation you
discovered that these goods were shipped by the supplier on December 30, 2018 FOB Shipping
point. Further investigation revealed that liability on the item were recorded when the goods
were received.
c.
Prepaid insurance were consistently omitted at the end of each year:
2015
P75,000
2016
100,000
2017
115,000
2018
120,000
a. Interest receivable were not recorded on December 31 of the following years:
2016
P20,000
2017
25,000
2018
30,000
a.
On January 1, 2018 an equipment costing P400,000 was sold for P220,000. At the date of sale
the equipment had accumulated depreciation of P240,000. The cash received was recorded by
the company as miscellaneous income.
b.
You also discovered that on July 1, 2016, the company completed the construction of the left
wing of its factory building incurring a total cost of P750,000, which it had charged to repairs
expense. The said building has been used in operations for 5 years as of July 1, 2016 and its life
was unaffected by the extension. The building which had an original cost of P3,000,000 had an
accumulated depreciation of P1,125,000 as of December 31, 2018.
Required:
1.
What is the correct depreciation expense in 2018?
a.
150,000
c. 200,000
b.
175,000
d. 187,500
2.
What is the correct net income in 2016?
a.
2,365,000
b.
2,235,000
c.
d.
2,255,000
2,230,000
What is the correct net income in 2017?
a.
1,540,000
b.
1,590,000
c.
d.
1,640,000
1,690,000
What is the correct net income in 2018?
a.
2,100,000
b.
2,000,000
c.
d.
2,050,000
1,950,000
3.
4.
PROBLEM 6:
You are auditing the financial statements of WWEE Company. The company’s accountant provided you
with the following comparative statements of income and accumulated profits for the years 2018 and
2017:
2018
2017
Sales
6,000,000
4,500,000
Cost of goods sold
(2,800,000)
(2,400,000)
Gross income
3,200,000
2,100,000
Operating expenses
(1,500,000)
(1,800,000)
Net profit
1,700,000
300,000
Accumulated profits, beg
Net profit
Dividends paid
Accumulated profits, end
1,150,000
1,700,000
(500,000)
2,350,000
1,000,000
300,000
(150,000)
1,150,000
Audit notes:
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a.
The management, with your concurrence, opined that changing the company’s inventory
costing from FIFO to Weighted Average is justified as it will present a more relevant and reliable
financial information given the prevailing current circumstance. The following summarizes the
inventory costs at year end under both methods:
2018
2017
FIFO
625,000
727,500
Weighted Average
715,000
827,500
The said change has not been implemented by the accountant as of the audit period.
b.
The company decided to change its method of depreciation from the double declining balance
method to the straight line. The depreciable assets had a 10 year useful life and has been
depreciated for five years at the end of 2017. The salvage value of the said assets was
estimated to be P50,000. Expenses in the income statements included P350,000 and P437,500
depreciation expenses in 2018 and 2017, respectively, computed based on double declining
balance method.
c.
On August 31, 2017, the company started the construction of a building it plans to use as a
second factory. As of the current balance sheet date, the construction is yet to be done. Total
accumulated costs incurred on the construction and recorded in its Construction-in-progress
account, amounted to P1,250,000, which excluded a P25,000 borrowing cost in 2017 which has
been charged to expense. You have ascertained that such borrowing cost should have been
capitalized following the PAS 23. Actual borrowing cost in 2018 amounted to P75,000 which
have been charged to expense.
Answer the following questions based on the above information:
1.
What is the restated net income in 2017 to be presented in the comparative income statements?
a. 425,000
b. 400,000
c. 300,000
d. 275,000
2.
What is the correct net income in 2018?
a. 1,700,000
b. 1,685,000
c. 1,775,000
d. 1,610,000
3.
What is the adjusted accumulated profits balance at the beginning of 2018?
a. 1,025,000
b. 1,075,000
c. 1,225,000
d. 1,275,000
4.
What is the adjusted accumulated profits at the end of 2018?
a. 2,425,000
b. 2,385,000
c. 2,550,000
5.
d. 2,885,000
What is the necessary adjusting entry a result of the change described in item c?
a. No adjustment necessary
b. Interest expense
Retained earnings
25,000
c. Building
Retained earnings
Interest expense
100,000
d. Building
Interest expense
100,000
25,000
25,000
75,000
100,000
PROBLEM 7:
Kris Company presented to you the following income statement in line with the same company’s audit
of the financial statements:
KRIS COMPANY
INCOME STATEMENT
For the Year Ended December 31, 2018
Sales
Cost of Goods Sold
Gross profit
Operating expenses:
Selling
Administrative
Net income
P10,350,000
7,050,000
P3,300,000
P675,000
1,050,000
1,725,000
P1,575,000
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Your audit disclosed the following information:

Accounts receivable decreased P540,000 during the year.

Prepaid expenses increased P255,000 during the year.

Accounts payable to suppliers of merchandise decreased P412,500 during the year.

Accrued expenses payable decreased P150,000 during the year.

Administrative expenses include depreciation expense of P90,000.

Inventories decreased by P450,000.
Requirements:
1.
What is the total amount of cash received form customers during the year?
a.
10,890,000
c. 9,810,000
b.
10,350,000
d. 10,477,500
2.
What is the total amount of cash paid to suppliers during the year?
a.
6,600,000
c. 7,012,500
b.
7,912,500
d. 6,187,500
3.
What is the total amount of cash paid for operating expenses during the year?
a.
1,740,000
c. 2,130,000
b.
1,530,000
d. 2,040,000
4.
What is the net amount of cash provided by operating activities?
a.
1,492,500
c. 1,747,500
b.
1,837,500
d. 1,575,000
PROBLEM 8:
You are auditing the financial statements of UKG INC. for the year ended December 31, 2018. The
company maintains its books on a semi-accrual and semi-cash basis. Purchases and sales are
recognized on an accrual basis while other operating expenses are kept on cash basis. The company
bookkeeper presented to you a draft of its income statements for the year under audit:
Sales
Cost of sales
Gross profit
Depreciation expense
Other expenses
Interest expense
Net income
P600,000
360,000
P240,000
(29,000)
(166,000)
(20,000)
P25,000
Your investigation revealed the following information:
a. On January 1, 2018, UKG issued P200,000, 10%, 10 year bonds when the market rate of
interest was 8%. Interest is payable on June 30 and December 31.
b.
All purchases of inventory are on account and other expenses reflect those expenses paid in
cash during the period.
c.
The company had open invoice (unpaid invoices) from suppliers amounting to P120,000 on
December 31, 2018 and P116,000 on January 1, 2018.
d.
The company had outstanding invoices (uncollected invoices) to customers amounting to
P96,000 on January 1, 2018 and P110,000 on December 31, 2018.
e.
Inventory taking at the end of each year revealed that inventory on hand on December 31,
2003 amounted to 186,000 while inventory on December 31, 2018 was at P174,000.
f.
Accrued utilities at the beginning and at the end of the year amounted to P5,000 and 7,000,
respectively while prepaid rentals at the beginning and at the end of the year amounted to
P10,000 and 14,000, respectively.
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Based on the information available and as a result of your audit, determine the following:
1.
2.
How much was paid for inventory purchases?
a. 344,000
b. 348,000
c. 368,000
d. 372,000
How much was received from customers in 2018?
a. 490,000
b. 566,000
c. 586,000
d. 614,000
3.
What is the carrying value of the bonds payable on December 31, 2018?
a. 225,318
b. 226,267
c. 226,840
d. 227,180
4.
What is the correct interest expense in 2018?
a. 21,862
b. 20,000
c. 19,087
d. 18,138
What is the correct net income in 2018?
a. 26,862
b. 28,862
d. 46,000
5.
c. 29,718
PROBLEM 9:
You were able to gather the following in connection with our audit of the Wowie Corp. for the year
ended December 31, 2018:
December 31, 2017
December 31, 2018
Accounts receivable
P6,400,000
P4,000,000
Unpaid merchandise invoices
?
2,621,000
Accrued wages
85,000
125,000
Advertising supplies inventory
35,000
75,000
Accrued advertising expense
14,250
40,000
Prepaid insurance
25,000
0
Unexpired insurance
0
41,000
During the year:

Amount collected from customers, P10,000,000

Total payments to suppliers of merchandise, P13,618,000

Total payments to suppliers of merchandise of prior years, P4,632,000

Wages paid, P3,050,000

Advertising paid which includes, P300,000

Insurance premium paid, P125,000
Requirements:
1. Total sales for 2018 under accrual basis a.
6,400,000
b. 12,400,000
c. 7,600,000
d. 14,000,000
2. Total purchases for 2018 under accrual basis
a. 11,607,000
b. 15,629,000
c. 13,618,000
d. 16,239,000
3. Accrual wages expense for 2018
a. 3,010,000
b. 3,090,000
c. 3,100,000
d. 3,140,000
4. Accrual advertising expense in 2018 a.
245,750
b. 285,750
c. 260,000
d. 300,000
c. 100,000
d. 141,000
5.
Accrual insurance expense in 2018
a. 84,000
b. 109,000
PROBLEM 10:
An analysis of incomplete records of Journey Corporation produced the following information applicable
to 2018:
ACCOUNT INCREASES
Cash
Accounts receivable
Accounts payable
Prepaid insurance
4,200,000
1,400,000
400,000
200,000
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ACCOUNT DECREASES
Inventory
Equipment
Notes receivable
Accrued salaries payable
1,000,000
100,000
600,000
300,000
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
Insurance
Salaries
Equipment
Other expenses
Dividends
1,000,000
16,500,000
400,000
700,000
10,000,000
800,000
1,500,000
1,000,000
Additional information:
a. Total purchase returns and allowances amounted to P800,000
b.
Total sales returns and allowances amounted to P1,200,000.
Required: Determine the audited balances of the following:
1.
2.
3.
4.
5.
Net sales
a. 35,800,000
b. 36,200,000
c. 36,600,000
d. 37,000,000
Net purchases
a. 17,900,000
b. 17,700,000
c. 17,400,000
d. 17,000,000
Cost of sales
a. 18,000,000
b. 18,400,000
c. 18,700,000
d. 18,900,000
Depreciation expense
a. 100,000
b. 800,000
c. 900,000
d. 1,000,000
Net income
a. 5,000,000
b. 5,150,000
c. 5,200,000
d. 5,900,000
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