Problem no.1
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances P 1,363,000 Trade creditors, debit balances 63,000
Net P 1,300,000
Estimated warranty on products sold 100,000
Customer’s deposits 9,000
Due to officers and shareholders for advances 50,000 Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000 P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates:
Date Items Amount
Miscellaneous debit balances prior to 2007. No information available due to loss
of records in a fire. P 3,000 03/03/07 Manila Co. –Merchandise returned for credit,
but the company is now out of business 8,000 06/10/09 Cebu Corp. – Merchandise returned but Cebu
says “never received” 7,000
07/10/10 Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid 5,000
10/10/10 Bulacan Co – Overpayment of invoice 12,000 12/05/10 Advance to Zambales Co. This company agrees
to supply certain articles on a cost –plus basis 24,000 12/05/10 Goods returned for credit and adjustments on
price after the invoices were paid; credit memos from supplier not yet received 4,000
63,000
Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received.
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011.
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010. These goods are included in your adjusted inventory.
1. The Accounts payable – Trade balance at December 31, 2010 should be A. P 1,471,000 B. P 1,614,000
C. P 1,214,000 D. P 1,477,000 2. The net adjustment to Purchases should include a
A. Net debit of P 51,000 B. Net credit of P 41,000 C. Net debit of P 10,000 D. Net debit of P 73,000
3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A. P 18,000 B. P 23,000
C. P 35,000 D. P 39,000
4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. Miscellaneous losses if P 23,000
B. Advances to suppliers of P 24,000 C. Suppliers to debit balances of P 18,000 D. Purchases of P 21,000
A. There is likely to be other reliable external evidence to support the balances
B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment C. This is a duplication of cutoff test
D. Accounts payable at the end of reporting period may not be paid before the audit is completed. Problem 2
You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010. Accounts payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds Payable 2,000,000
The following additional information pertains to these liabilities:
a. All trade notes payable are due within six months of the balance sheet date. b. Bank notes payable include two separate notes payable Allied Bank.
(1)A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months.
(2)A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on December 31, 2010
c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010, Mavericks is three months behind in paying its required interest payment.
d. The 12% mortgage note was issued may 1, 2001, with a term of 20 years. The current principal amount due is P 1,500,000. Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011. The payment includes interest of P 180,000.
e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2010 is
a. P155,000 b. 143,000 c. 203,000 d. 215,000
2. The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is
3. Total current liabilities as of December 31, 2010 is
a. P 3,950,000 b. 4,138,000 c. 3,938,000 d. 3,998,000
4. Total noncurrent liabilities as of December 31, 2010 is
a. P1,760,000 b. 2,560,000 c. 3,960,000 d. 1,960,000
Problem no. 3
In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher register the information shown in the working paper below.
Ite m no.
Entry
Date VoucherRef. Description Amount ChargedAccount 1 12.18.1
0 12-202 Supplies, purchasedFOB destination, 23.26.20; received
12.17.10
P
20,000 Supplies onhand
2 12.18.1
0 12-204 12.15.10 12.20.11Auto insurance, 24,000 insurancePrepaid 3 12.21.1
0 12-206 received 12.20.10Repairs services; 24,000 maintenanceRepairs and 4 12.21.1
0 12-214 Merchandise, shippedFOB Shipping point, 11.20.10; received 12.04.10 17,000 Inventory 5 12.21.1 0 12-219 12.20.10 (12 workingPayroll, 12.06.10 to days) 69,000 Salaries and wages 6 12.26.1
0 12-221 Reporting Service forSubscription to Tax 2011
5,000 Dues and subscription 7 12.28.1
0 12-230 Utilities for December2010 29,000 expenseUtilities 8 12.28.1 12-234 Merchandise, shipped 111,500 Inventory
0 FOB destination, 12.24.10; received
01.02.11 9 12.28.1
0 12-243 Merchandise, shippedFOB destination, 12.26.10; received
12.29.10
84,000 Inventory
10 01.02.1
1 01-001 received 12.28.10Legal services; 46,000 professionalLegal and expense 11 01.05.1
1 01-002 Medical services foremployees for December 2010
25,000 Medical expense 12 01.05.1
1 01-003 Merchandise, shippedFOB shipping point, 12.29.10; received 01.04.11 55,000 Inventory 13 01.05.1 1 01-004 01.05.11 (12 workingPayroll, 12.21.10 to days in total, 4 working days in Jan.
2011
72,000 Salaries and wages
14 01.10.1
1 01-005 Merchandise, shippedFOB shipping point, 01.02.11; received
01.05.11
64,000 Inventory
15 01.12.1
1 01-006 royalties DecemberManufacturing 2010
39,000 Manufacturing cost 16 01.12.1
1 01-007 Merchandise, shippedFOB destination, 01.03.11; received
01.10.11
38,000 Inventory
17 01.13.1
1 01-008 services; receivedMaintenance e 01.09.11
9,000 Repairs and maintenance 18 01.14.1
021.10.11 19 01.15.1
1 01-010 equipment installedManufacturing on 12.29.10
254,000 Machinery and equipment 20 01.15.1
1 01-011 Dividends declared,12.15.10 160,000 Dividendspayable Accrues liabilities as December 31, 2010 were as follows:
Accrued payroll P 48,000
Accrued interest payable 26,667
Dividends payable 160,000
Accrues royalties payable 39,000
The accrues payroll, accrued interest payable, and accrued royalties payable accounts were reversed on January 1, 2011. REQUIRED:
Prepare adjusting entries as of December 31, 2010 based on your review of the data given above. PROBLEM NO 4
FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of March 31, 2010.
BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize bond
premium or discount
NOTES PAYABLE
Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010
Due Date Amount Due
April 1, 2010 P 400,000 July 1, 2010 600,000 October 1, 2010 300,000 April 1 2011 - March 31, 2012 300,000 April 1, 2012 – March 31, 2013 1,200.000 April 1, 2013 – March 31, 2014 1,000,000 April 1, 2014 – March 31, 2015 800,000 April 1, 2015 – March 31, 2016 1,000,000
P 7,000,000 ESTIMATED WARRANTIES
Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2008-2009 amounted to P180,000. The warranty cost on sales made from April 1 2008-2009, through March 31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows:
Warranty claims honored on 2008-2009 sales P 180,000 Warranty claims honored on 2009-2010 sales 178,000
Total warranty claims honored P 358,000
OTHER INFORMATION 1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010 2. PAYROLL RELATED ITEMS
Merchandise, shipped FOB destination, 12.24.10; received 01.02.11 Accrued Salaries and wages P 300,000
Withholding taxes payable 94,000 Other payroll deductions 10,000 3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2010 4. DIVIDENDS
On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding Feel Na Feel common stock are as follows:
Per Value P 5.00 per share
Number of shares issued and outstanding 6,000,000 shares Market Values of Common Stock:
March 15, 2010 P 22.00 per share March 31, 2010 21.50 per share
1. How much was received by Feel Na Feel from the bonds issued on July 1, 2008? a. P8,852,960 b. 10,000,000 c. 10,500,000 d. 10,647,040
2. On March 31, 2010, Feel Na Feel’s statements of financial position would report total current liabilities of a. P5,286,000 b. 4,386,000 c. 5,336,000 d. 5,642,000
3. On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent liabilities of a. P14,389.350 b. 14,352,217 c. 14,370,783 d. 14,252,960
PROBLEM NO. 5
On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Wizards uses the effective interest method of amortization. On December 31, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.
Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.) 1. The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 is
a. P2,155.500 b. P2,000,000 c. 1,844,400 d. 2,147,800
2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 is
a. 1,898,400 b. 2,129,500 c. 2,000,000 d. 2,121,100
3. The gain on early retirement of bonds on December 31, 2010 is
a. P20,000 b. 112,000 c. 121,200 D. 0
4. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is a. P4,605,800 b. 5,000,000 c. 4,732.875 d. 4,615,400
5. The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by a. P1,485,000 b. 1,374,000 c. 1,415.054 d. P1,377,697
PROBLEM NO. 6
The following data were obtained from the initial audit of BIBI COMPANY: 15%, 10 year, bonds payable, dated January 1, 2009
Debit Credit Balance
Of 1,000, P1,000 bonds. The market rate of
Interest on the date of issue was 12% P 1,172,044 P1,172.044 Bond Interest Expense
Cash paid, 1/2/10 P 75,000 P 75,000
Cash paid, 7/1/10 75,000 150,000
Accrual, 12/31/10 75,000 225,000
Accrued Interest on Bonds
Balance, 1/1/10 P 75,000 P 75,000
Accrual, 12/31/10 75,000 150,000
Treasurer bonds
Redemption price and interest to date on
200 bonds permanently retired on 12/31/10 P 265,000 P 265,000 Based on the preceding information, determine the following:
1. Carrying value of bonds payable at December 31, 2010
a. P831,110 b. 800,000 c. 1,151,583 d. 921,266
2. Loss on Bond redemption
a. P4,683 b. P19,683 c. 15,000 d. 34,683 3. Accrued Interest on Bonds at December 31, 2010
a. P75,000 b. 135,000 c. 60,000 d. 52,500 4. Bond Interest Expense for the year ended December 31, 2010
a. P150,000 b. 1398,174 c. 69,745 d. 160,826
PROBLEM 7
NUGGETS CORPORATION manufactures and sells food products and food processing machinery. Its reporting date is December 31. Relevant extracts from its financial statements at December 31, 2009 are as follows:
Current liabilities Provision
Provision for warranties P270,000 Noncurrent liabilities
Provision
Provision for warranties P180,000 Note 36-Contigent Liabilities
NUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums. NUGGETS strenuously denies the allegation and , as at the same date authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any cost or damages that may be [payable to the plaintiffs.
The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year.
Estimated cost of repairs – Products with minor defects P 1,000,000 Estimated cost of repairs – Products with minor defects P 6,000,000 Expected % of products sold during 2008 having no defects in 2010 80% Expected & of products sold during 2008 having minor defects in 2010 15 % Expected & of products sold during 2008 having Major defects in 2010 5%
-those with minor defects all in 2010
Expected timing of settlement of warranty payments
-those with major defects 40% in 2010
60% in 2010 During the year ended December 31, 2010, the following occurred:
1. In a relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision. Of the amount paid, P150,000 was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2010/
2. In calculating its warranty provision for December 31, 2010, NUGGETS made the following adjustment to the assumptions used for the prior year: Estimated cost of repairs-products with minor defects no change
Estimated cost if repairs – products with major defects P 5,000,000 Expected % of products sold during 209 having no defects in 2011 85% Expected % of products sold during 2009 having minor defects in 2011 13% Expected % of products sold during 2009 having major defects in 2011 2%
-those with minor defects all in one 2011
Expected timing of settlement of warranty payments 20% in 2011
-those with major defects 80% in 2012
3. NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011 at an estimated cost of P250,000. The carrying amount of the conveyor belt at December 31, 2009 was P140,000. Its original cost was P200,000
4. NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs. As at December 31, 2010, NUGGETS had paid P800,000
5. NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above, in October 2010, the court found in favor of NUGGETS. The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue. NUGGETS estimated that it would receive about P425,000.
6. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary, ChapaChocks Ltd. ChapaChocs’ loan with Choko Bank was P3,200,000 as at December 31, 2010. ChapaChocs was in a strong financial position at 31 December 2010
Based on the above and the result of your audit, answer the following:
1. The warranty expense in 2010 is
a. P100,000 b. 400,000 c. 160,000 d. 230,000 2. The provision for warranties as of December 31, 2010 is
a. P580,000 b. 230,000 c. 480,000 d. 410,000
3. The provision for warranties to be reported as current liability as of December 31, 2010 is a. 220,000 b. 150,000 c. 400,000 d, 330,000
4. The provision for warranties to be reported as noncurrent liability as of December 31, 2010 is
a. P. 80,000 b. P260,000 c. 150,000 d. 330,000
5. Total provisions to be reported in the statement of financial position as of December 31, 2010 is a. P480,000 b. 410,000 c. 1,180,000 d. 1,360,000
PROBLEM NO 8
Select the best answer for each of the following:
1. In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of.
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation and allocation
2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consist of all
a. Merchandiser received c. Canceled checks b. Vendor’s invoices d. receiving reports
3. The primary audit test to determine if accounts payable are valued properly is a. Confirmation of accounts payable
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet. 4. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Observation of inventory count. b. Testing of internal control over cash. c. Search for unrecorded liabilities. d. Confirmation of receivables.
5. An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should.
a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception
b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often.
c. Disagree with the assistant because two problems have an equal risk of loss associated with them
d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.
6. When using confirmation to provide evidence about completeness assertion for account payable, the appropriate population most likely is a. Vendors with whom the entity has previously done business
b. Amounts recorded in the accounts payable subsidiary ledger c. Payees of checks drawn in the month after the year end. d. Invoices filed in the entity’s open invoice file.
7. Which of the following is a substantive test than an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for.
b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
d. Confirming accounts payable balances with know suppliers who have zero balances.
8. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false. The false statements is that
a. Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers
b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ]
c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date.
d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date.
9. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the
a. Quantity C. Price
b. Quality d. Terms
10. Which of the following audit procedures is least likely to detect an unrecorded liability? a. Analysis and recomputation of interest expense
b. Analysis and recomputation of depreciation expense. c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meetings of the board of directors
11. Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. Unpaid bills c. bills of lading
b. Shipping records d. Unmatched sales invoice
12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
c. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
d. Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date,
13. In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase
a. Journal c. Order
b. Requisitions d. Invoices.
14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees
a. Test footings in the accounts payable ledger b. Reconcile unpaid invoices to vendors statements c. Prepare a schedule of accounts payable
15. An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation
16. An auditors program to audit long-term debt should include steps that require a. Examining bond trust indentures
b. Inspecting the accounts payable subsidiary ledger
c. Investigating credits to the bond interest income account d. Verifying the existence of the bondholders.
17. In an audit of bonds payable, an auditor expects the trust indenture to include the a. Auditee’s debt-to-equity ratio at the same time of issuance
b. Effective yield of the bonds issued c. Subscription list
d. Description on the collateral
18. In auditing long-term bonds payable, an auditor most likely will
a. Perform analytical procedures on the bond premium and discount accounts b. Examine documentation of assets purchased with the bond proceeds or liens c. Com[pare interest with the bond payable amount for reasonableness
d. Confirm the existence of individual bondholders at year-end
19. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because a. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction b. Accrued liability balances are less material than account payable balances.
c. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available d. Accrued liabilities at year end will become account payable during the following year
20. The auditor is most likely to verify accrued commissions payable in conjunction with the a. Sales cutoff test.
b. Verification of contingent liabilities.
c. Review of post-balance sheet date disbursements. d. Examination of trade accounts payable
Suggested Answers Problem 1 Problem 8 1. D 1. C 2. C 2. B 3. A 3. C 4. B 4. C 5. A 5. D Problem 2 6. A 1. B 7. C 2. A 8. B 3. C 9. B 4. D 10. B Problem 3 11. A Adjusting entries 12. A 13. D Problem 4 14. C 1. A 15. D 2. A 16. A 3. C 17. D 18. C Problem 5 19. A 1. A 20. A 2. B 3. C
4. A 5. B Problem 6 1. D 2. B 3. C 4. C 5. D 6. A 7. C Problem 7 1. C 2. D 3. 4. A 5. B Accountancy Department
College of Business and Accountancy Notre Dame University
Cotabato City, Philippines CPA – MOCK BOARD EXAMINATION AUDITING PROBLEMS MR. RONALD GERMO MAMARIL
INSTRUCTION: Select the correct answer for each of the following questions. Mark only one answer for each item by shading the box corresponding to the letter of your choice on the sheet provided. STRICLY NO ERASURES ALLOWED. Use pencil no. 1 only.
CASE 1: STOCK INVESTMENT IN SAN MIGUEL
1. The Stock Investment showed the following details during year 2008 STOCK INVESTMENT IN SAN MIGUEL
Debit Credit Jan. 1 Audited balance 4,000shares P80,000
Feb. 28 Cash dividend 2,000
Mar. 31 Bought shares 9,000
Apr. 1Sale of rights 6,000
June 30 Sale of shares 10,000
1. A cash dividend of P0.50 per share were received on Feb. 28. The adjusting entry (assuming the use of the cost method) is:
a. Stock Investment 2,000 Dividend income 2,000 b. Retained earnings 2,000 Dividend income 2,000 c. Dividend Income 2,000 Stock investment 2,000 d. Cash 2,000 Dividend income 2,000
2. On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share. Market values on this date were: shares, P20; rights, P5. The adjusting entry to recognize the cost allocated to the rights is:
a. Stock rights 16,000 Stock investment 16,000 b. Stock rights 20,000 Stock investment 20,000 c. Stock rights 10,000 Stock investment 10,000 d. Stock rights 30,000 Stock investment 30,000
3. On March 31, 600 shares were purchased with the partial exercise of these rights. The adjusting entry, after the adjustment in No. 7 above has been given effect, is a. Stock investment 18,000 Stock rights 18,000 b. Stock investment 12,000 Stock rights 12,000 c. Stock rights 12,000 Stock investment 12,000 d. Stock rights 15,000 Stock investment 15,000
4. On April 1, the remaining rights were sold for P6, 000. The adjusting entry is: a. Stock investment 6,000
Gain on sale of rights 6,000 b. Stock investment 6,000
Stock rights 4,000
Gain on sale of rights 2,000 c. Stock investment 4,000
Loss on sale of rights 2,000
Stock rights 6,000
d. Stock investment 4,000
Gain on sale of rights 4,000
5. On June 30, 460 shares were sold for P10, 000. Using the average cost method, the adjusting entry is:
a. Cash 10,000
Stock investment 7,500
Gain on sale of stock 2,500 b. Stock investment 10,000
c. Stock investment 2,500
Gain on sale of stock 2,500 d. None of the above
CASE 2: HOME OFFICE AND ESPERANZA BRANCH
The following were found in your examination of the interplant accounts between the Home Office and Esperanza Branch. a. Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the branch.
b. P10,000 covering marketing expenses of another branch was charged by Home Office to Esperanza. c. Esperanza recorded a debit note on inventory transfers from Home Office of P75,000 twice.
d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from Upi Branch.
e. Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500. Home Office debited that this charge is appropriately Upi Branch’s cost.
f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650.
6. The net adjustment in the Home Office books related to the Esperanza Branch current amount is: a. P75,700
b. 65,700 c. 86,200 d. 94,820
7. The net adjustment in Esperanza’s books related to the Home Office account is: a. P33,335
b. 31,450 c. 20,950 d. 10,450
8. Before the above discrepancies were given effect, the balance in the Home Office books of its Esperanza Branch Current account was debit balance of P165, 920. The unadjusted balance in the Esperanza Branch books of its Home Office Current account must be:
a. P92,336 b. 98,230 c. 104,500 d. 111,170
page 2
9. The adjusted balance of the reciprocal account is: a. P84, 807
b. 90, 220 c. 99, 200 d. 109, 120
CASE 3: LEILA MAE’S FLOWER SHOP (ACCRUAL)
The following information pertains to Leila Ma’s Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year.
Leila Ma’s Flower Shop TRIAL BALANCE December 31, 2008 Debit Credit Cash P 102, 400 Accounts receivable 64, 800 Inventory, 12/31/2007 248, 000 Furniture & fixtures 472, 800
Land improvements 180, 000
Accumulated depreciation, 12/31/2007 P129, 600 Accounts payable, 12/31/2007 68, 000 Leila Mae’s, Drawings
Leila Mae’s, Capital, 12/31/2007 498, 400
Sales 2, 612, 000
Purchases 1, 220, 400
Payroll taxes 49, 600 Insurance 34, 800 Rent 136, 800 Utilities 50, 400 Living expenses 52, 000 P3, 308, 000 P3, 309, 000
Leila Mae’s has developed plans to extend into wholesale flower market and is in the process of negotiating a bank loan to finance the expansion. The bank is requesting 2008 financial statements prepared on the accrual basis of accounting from Leila Mae’s. During the course of a review engagement, Marion, Leila Mae’s accountant, obtained the following additional information.
1. Amounts due from customers totaled P128, 000 at December 31, 2008.
2. An analysis of the above receivables revealed that an allowance for uncollectible accounts of P15, 200 should be provided.
3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at December 31, 2008, and December 31, 2007, respectively.
4. The inventory totaled P291, 200 based on a physical count of the goods at December 31, 2008. The inventory was priced at cost, which approximates market value.
5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive insurance coverage for 1 year. The premium on the previous policy, which expired on April 30, 2008, was P31, 200.
6. On January 2, 2008, Leila Mae entered into 25-year operating lease for the vacant lot adjacent to Baron’s retail store for use as a parking lot. As agreed in the lease, Leila Mae paved and fenced in the lot at a cost P180, 000. The improvements were completed on April 1, 2008, and have an estimated useful life of 15 years. No provision for depreciation or amortization has been recorded. Depreciation on furniture and fixtures was P48, 000 for 2008. 7. Accrued expenses at December 31, 2007 and 2008, were as follows:
2 0 0 0 2 0 0 1
Utilities P3, 600 P 6, 000
Payroll taxes 4, 400 6, 400
P8, 000 P12, 400
page 3
8. Leila Mae is being sued for P16, 000. The coverage under the comprehensive insurance policy is limited to P1, 000, 000. Leila Mae’s attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000.
Required: You are to convert the balances of the nine (9) accounts below to the accrual basis. MULTIPLE CHOICE QUESTIONS:
a b c d 10. Accounts receivableP64, 800 P63, 200 P128, 000 P192, 800 11. Inventory 291, 200 248, 000 43, 200 334, 400 12. Accounts payable 54, 000 68, 000 122, 000 176, 000 13. Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200 14. Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 000 15. Salaries 888, 000 696, 000 600, 000 504, 000 16. Payroll taxes 51, 600 47, 600 49, 600 50, 000 17. Insurance 34, 800 33, 600 36, 000 35, 000 18. Utilities 50, 400 48, 000 50, 000 52, 800
CASE 4: J& M CO. (BONDS)
The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus accrued interest. The bonds were dated July 1, 2001; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows.
Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond.
From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000 bond. After June 30, 2009, at the rate of 4 shares for each P1, 000 bond.
The bonds mature 10 years from their issue date. The company adjusts its books monthly and closes its books as of December 31 each year. The following transactions occur in connection with the bonds:
2007
July 1 P2, 000, 000 of bonds were converted into stock. 2008
Dec. 31 P1, 000, 000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were
2009
July 1 The remaining bonds were called for redemption
and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2009, and are due in 20 years.
19. What are the carrying value of bonds payable at December 31, 2001? a. P5, 747, 280 c. P5, 753, 760
b. P6, 000, 000 d. P5, 749, 440 20. What is the total interest expense for 2001?
a. P128, 520 c. P141, 480
b. P 47, 160 d. P135, 000
21. In recording the bond conversion on July 1, 200, how much should be credited to the additional paid-in capital account? a. P1, 796, 320 c. P1, 845, 440
b. P1, 965, 440 d. P1, 865, 440
page 4
22. What is the gain or loss on bond conversion on July 1, 2007?
a. P0 c. P1, 865, 440
b. P1, 796, 320 d. P 34, 560
23. What is the carrying value of the bonds reacquired on December 31, 2008? a. P989, 200 c. P1, 010, 800
b. P957, 880 d. P 981, 700
24. What is the gain (loss) on bond reacquisition on December 31, 2008?
a. P3, 300 c. P34, 620
25. What is the carrying value of the bonds retired on July 1, 2009? a. P3, 000, 000 c. P2, 873, 640
b. P2, 974, 080 d. P3, 025, 920
26. What is the gain (loss) on bond retirement on July1, 2009? a. (P25, 920) c. (P12, 960)
b. P25, 920 d. P0
CASE 5: BLUE ICE CO. (R/E)
BLUE ICE COMPANY’S stockholders’ equity account balance at December 31, 2008 were as follows:
Common Stock 800, 000
Additional Paid-in capital 1, 600, 000
Retained Earnings 1, 845, 000
The following 2009 transactions and other information relate to the stockholders’ equity accounts:
a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares were issued and outstanding.
b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to hold as treasury stock. The shares were originally issued at P15 per share. BLUE ICE uses the cost method to account for treasury stock. Treasury stock is permitted in BLUE ICE’s state of incorporation.
c. On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory. The inventory had a P75, 000 carrying value and a P60, 000 fair market value.
d. On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of BLUE ICE’s common stock at P18 per share, which was the market on that date. The option may be exercised all 20, 000 options when the market value of the stock was P25 per share. BLUE ICE issued new shares to settle the transaction.
e. BLUE ICE’s net income for 2009 was P240, 000.
Instruction: Based on the information above and other analysis as necessary, answer the following question. 27. BLUE ICE’s Common Stock balance at December 31, 2009 is;
a. P1, 160, 000 c. P800, 000 b. P900, 000 d. P1, 300, 000
28. BLUE ICE’s Additional Paid-in capital balance at December 31, 2009 is; a. P1, 860, 000 c. P2, 000, 000
b. P1, 960, 000 d. P2, 100, 000
29. BLUE ICE’s Retained Earnings balance at December 31, 2009 is; a. P2, 085, 000 c. P2, 025, 000
b. P2, 010, 000 d. P1, 770, 000
30. BLUE ICE’s Treasury Stock balance at December 31, 2009 is;
a. P50, 000 c. P0
b. P75, 000 d. P125, 000
page 5
31. BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is; a. P4, 910, 000 c. P4, 720, 000
b. P4, 820, 000 d. P4, 735, 000
CASE 6: LETICIA’S CO. (PPE)
Information pertaining to LETICIA COMPANY’S property, plant and equipment for 2009 is presented below. Account balances at January 1, 2009:
Debit Credit
Land 6, 000, 000
Buildings 48, 000, 000
Accum. Depreciation – Bldg. 10, 524, 000 Machinery and equipment 36, 000, 000
Accum. Depreciation – Mach/Equip. 10, 000, 000 Automotive equipment 4, 600, 000
Depreciation data:
Depreciation Useful Method Life
Building 150% declining balance 25 years
Machinery/Equip. SLM 10 years
Automotive Equip. SYD 4 years
Leasehold improvements SLM -
Depreciation is computed to the nearest month.
Transactions during 2009 and other information are as follows:
• On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-old car with a cost of P720, 000 and a book value of P216, 000. The new car has a cash price of P960, 000; market value of the trade-in is not known.
• On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2008.
• On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000, 000 for installation were incurred.
• LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at January 1, 2009, would have been depreciated at a total amount of P720, 000 for the year ended December 31, 2009.
Instruction: Based on the information above and other analysis as necessary, answer the following question:
32. What is the depreciation on building for 2009? a. P1, 499, 040 c. P2, 998, 080 b. P2, 880, 000 d. P2, 248, 557
33. What is the book value of the building at December 31, 2009? a. P34, 596, 000 c. P34, 477, 920
b. P35, 976, 960 d. P35, 227, 393
34. What is the depreciation on machinery and equipment for 2009? a. P4, 128, 000 c. P4, 220, 000
b. P4, 151, 000 d. P4, 197, 000
35. What is the gain on machine destroyed by fire?
a. P620, 000 c. P160, 000
b. P300, 000 d. P460, 000
page 6
36. What is the balance of the accumulated depreciation – machinery and equipment at December 31, 2009? a. P13, 231, 000 c. P13, 760, 000
b. P13, 777, 000 d. P13, 691, 000
37. What is the depreciation on automotive equipment for 2009? a. P1, 104, 000 c. P720, 000
b. P816, 000 d. P960, 000 38. What is the gain (loss) on car traded in?
a. P (240, 000) c. P (56, 000)
b. P240, 000 d. P56, 000
39. What is the depreciation on leasehold improvement for 2009?
a. P756, 000 c. P560, 000
b. P672, 000 d. P630, 000
40. What is the book value of leasehold improvements at December 31, 2009? a. P6, 160, 000 c. P6, 090, 000
b. P6, 048, 000 d. P5, 964, 000
Financial Statements for St. John and St. Therese on December 31, 2009 follows: Income Statements for the year ended 12/31/02
St. John St. Therese
Sales 750, 000 420, 000
Cost of sales 581, 000 266, 000
Gross Margin 169, 000 154, 000
Depreciation and interest expense 28, 400 16, 200 Other operating expenses 117, 000 128, 400 Net income from operations 23, 600 9, 400 Gain on sale of equipment 3, 000
Gain on bonds
Equity in subsidiary’s income 8, 460 . Net income 35, 060 9, 400
======== ========
Statement of Retained Earnings for the year ended 12/31/02 01/01/02 Retained Earnings 48, 000 41, 000 Net Income (from above) 35, 060 9, 400
Total 83, 060 50, 400
Dividends (15, 000) (4, 000)
12/31/02 Balance 68, 060 46, 400
========= ========
Balance Sheet as of December 31, 2009
Cash 45, 300 6, 400
Accounts receivable (net) 43, 700 12, 100 Inventories 38, 300 20, 750
Equipment 195, 000 57, 000
Accumulated depreciation (35, 200) (18, 900) Investment in stock of St. John 125, 460
Investment in bonds of St. Therese 44, 000 Patents . 9, 000
412, 560 130, 350
========= ========
Bonds payable 100, 000
Capital Stock 154, 000 50, 000
Additional paid-capital 81, 600 15, 000 Retained earnings (from above) 68, 060 46, 400 412, 560 130, 350
======== =========
page 7
St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009. The following additional information is available in the first year after the acquisition.
1. During 2009, St. John sold merchandise to St. Therese that originally cost St. John P15, 000, and the sale was made for P20, 000. On December 31, 2008, St. Therese’s inventory included merchandise purchased from St. John at a cost to St. Therese of P12, 000.
2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese. St. Therese uses normal markup of 25% above cost. St. John’s ending inventory includes P10, 000 of the merchandise acquired from St. Therese.
3. St. Therese reduced its intercompany account payable to St. John to a balance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on December 30. This P1, 000 payment was still in transit on December 31, 2009.
4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000. The equipment was originally purchased by St. John for P5, 000 and had a book value of P4, 000 at the date of sale to ST. Therese. The equipment had an estimated remaining life of 4 years as of January 2, 2009.
5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the outstanding bonds issued by St. John. The bonds mature on December 31, 2005, and were originally issued at par. The bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately before St. Therese’s purchase of bonds.
QUESTION:
Assume that the combination is accounted for as PURCHASE.
41. What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary? a. Equity in subsidiary’s income 8, 460
Investment in stock of St. Therese 8, 460 b. Equity in subsidiary’s income 8, 460
Dividends declared – St. Therese 3, 600 Investment in stock of St. Therese 4, 860 c. Equity in subsidiary’s income 12, 060
Investment in stock of St. Therese 12, 060 d. No Eliminating Entry
42. What is the eliminating entry for St. Therese’s stockholders’ equity? a. Capital stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600 b. Capital; stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000
Additional paid-in capital 15, 000 Retained earnings – St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Investment in stock of St. Therese 111, 400 43. To eliminate the sales made by St. John to St. Therese, the entry is:
a. Sales 20, 000
Inventory – St. Therese (B/S) 3, 000
Purchases 20, 000
Inventory – St. Therese (I/S) 3, 000
b. Sales 20, 000 Cost of sales 17, 000 Inventory – St. Therese 3, 000 c. Sales 20, 000 Inventory – St. Therese 3, 000 Cost of sales 23, 000 Page 8 d. Retained Earnings 3, 000 Sales 20, 000
Inventory – St. Therese 3, 000
Cost of sales 20, 000
44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume that Equity in subsidiary income has not been recorded by parent)
a. Sales 18, 000
Inventory 2, 000
Cost of sales 16, 000
b. Sales 18, 000
Investment in stock of St. Therese 1, 600 Retained earnings – St. Therese 400
Cost of sales 18, 000 Inventory 2, 000 c. Sales 18, 000 Retained earnings 2, 000 Cost of sales 18, 000 Inventory 2, 000 d. Sales 18, 000 Inventory 2, 000 Cost of sales 20, 000
45. To record the items in transit and to eliminate the inter-company’s payable/receivable, the entry is:
a. Accounts payable 4, 000 Accounts receivable 4, 000 b. Accounts receivable 4, 000 Cash 1, 000 Accounts payable 5, 000 c. Cash 1, 000 Accounts payable 3, 000 Accounts receivable 4, 000 d. Cash 1, 000 Accounts payable 4, 000 Accounts receivable 5, 000
46. To eliminate the acquisition made by St. Therese from St. John, the entry is:
a. Equipment 2, 000
Accumulate depreciation 1, 000
Gain on sale of equipment 3, 000
b. Gain on sales of equipment 3, 000
Accumulated depreciation 250
Depreciation expense 750
c. Gain on sale of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 1, 000
d. Gain on sale of equipment 3, 000
Equipment 2, 000
Depreciation expense 1, 000
47. The depreciation recorded by St. John at December 31, 2009 is: a. Overstated by P750 c. Overstated by P1, 750 b. Overstated by P250 d. Understated by P1, 000
48. The entry to eliminate the bonds purchased by St. Therese from St. John is:
a. Bonds payable 50, 000
Investment in bonds of St. John 44, 000 Gain on extinguishments of debt 6, 000 b. Investment of St. John 44, 000
Loss on extinguishments of debt 6, 000
Bonds payable 50, 000
c. Bonds payable 44, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
d. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
page 9
For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST.
49. What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary? a. Equity in subsidiary’s income 8, 460
Investment in stock of St. Therese 8, 460 b. Equity in subsidiary’s income 8, 460
Dividends declared – St. Therese 3, 600 Investment in stock of St. Therese 4, 860 c. Equity in subsidiary’s income 12, 060
Investment in stock of St. Therese 12, 060 e. No eliminating Entry
50. What is the eliminating entry for St. Therese’s stockholders’ equity? a. Capital stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600 b. Capital stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Page 10
Punongbayan & Araullo’s Auditing Problems Quiz EASY
1. On July 01, 2007, one of FLOYD INC.'S delivery trucks was destroyed in an accident. On that date, the truck's book value was P900,000. On July 15, 2007, FLOYD INC. received and recorded a P42,000 invoice for a new engine installed in the truck in May 2007 and another P6,000 invoice for various repairs.
What amount should FLOYD INC. use to determine the gain or loss on disposal of the truck? a.P900,000 b.P942,000 c.P948,000 d.P936,000
2. Henry Company had the following bank reconciliation at March 31:
Balance per bank statement, March 31 P 93,000
Add deposit in transit 20,600
P 113,600
Balance per books, March 31 P 88,400 Data per bank statement for the month of April follow:
Deposits P 116,800
Disbursements P 99,400
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled P15,000. What is the amount of cash disbursements per books in April?
a.P 89,200 b.P 99,400 c.P109,600 d.P114,400
3. BRAND CO. reported P9,000 of net income for 2007. The correct net income however was P11,000. It was determined that the ending inventory was overstated by P1,000.
The only other error was with the beginning inventory which must have been: a. Understated by P1,000 b. Understated by P3,000
c. Overstated by P1,000 d. Overstated by P3,000
4.* On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500; terms net 30, FOB Shipping Point. The sale which is 125% of cost was recorded in January 2007 when the check was received from the customer. Ending inventory was determined by physical count on December 31, 2007.
As a result of the above transactions, SWIFT CO.’s cost of goods sold for the year ended December 31, 2007 was: a. Understated by P3,000 b. Overstated by P30,000
c. Overstated by P37,500 d. Correctly stated
5. BART Company started operations on January 01, 2008. The following are available as of June 30, 2008:
Purchase of merchandise P 450,000
Inventory, June 30, 2008 75,000
Goods were sold at 50% above cost; 75% ofsales were on account
Estimated bad debts 1% of credit sales
Collections from charge customers 315,000
Allowance for doubtful accounts, June 30,2008
after write off of uncollectible accounts 3,903.75 The outstanding accounts receivable as of June 30, 2008 were:
a.P110,000 b.P106,875 c.P106,560 d.P285,000
6. PRIME Co. received from a customer a one year, P500,000 note bearing annual interest of 8%. After holding the note for six months, PRIME discounted the note at Asian Bank at an effective interest rate of 10%.
At the date of discounting, PRIME should recognize
a. P 40,000 interest revenue b. P23,810 interest revenue c.
P13,000 interest revenue d. P 4,762 interest expense
7. Information pertaining to Trace Company for the month of August appears below:
Balance per bank statement P 310,000
Balance per books 187,500
Deposit in transit 70,000
Service charges 2,500
Note collected by bank 75,000
Outstanding checks ?
An analysis of the cancelled checks returned with the bank statement reveals the following:
a. Check for the purchase of merchandise was drawn for P155,000 but was recorded as P150,000.
b. The management wrote a check for traveling expenses of P25,000 while out of town. The check was not recorded. What is the amount of outstanding checks on August 31, 2006?
a.P150,000 b.P140,000 c.P125,000 d.P230,000
8. The inventory on hand on December 31, 2006 of LEISA CORP. is valued at a cost of P300,000. The following items were not included in the inventory: a. Purchased goods in transit shipped FOB Destination, with price of P30,000 which included freight charge of P5,000.
b. Goods held on consignment by LEISA CORP. at a sales price of P10,000, excluding a 20% commission on the sales price. Freight paid by LEISA CORP. was P1,000.
c. Goods sold in transit FOB Destination with invoice price of P49,000 which included freight charge of P4,000 to deliver the goods. d. Purchased goods in transit FOB Shipping Point with invoice price of P60,000. Freight costs amount to P6,000.
Goods out on consignment with sales price of P30,000. Shipping costs amounts to P3,000.
What is the correct inventory on December 31, 2006 assuming LEISA’s selling price is 150% of costs? a.P419,000 b.P416,000 c.P410,000 d.P 17,500
9. In analyzing the shareholders’ equity section of the PEARSON CORP. The following information was abstracted from the accounts at December 31, 2007:
Total income since incorporation P 7,875,000
Total cash dividends paid 2,437,500
Proceeds from sale of donated stock 843,750
Total value of stock dividends distributed 562,500
Excess of proceeds over cost of treasury stock sold 131,250
What should be the balance of the Retained earnings account as of December 31, 2007? a.P 4,875,000 b. P 6,218,750 c. P 7,031,250 d. P 10,031,250
10. Still Trading made investments in available for sale securities. The Unrealized gain or loss account has a debit balance of P38,700 at December 31, 2006. An analysis of the investment account on December 31, 2006 showed the following:
No. of shares Cost Market A common 600 shares P922,500 P810,000 B common 225 shares 229,500 270,000 C common 2,000 shares 808,500 841,800
On July 01, 2007, the shares of B common were sold for P210,000. On December 31, 2007, A shares were quoted at P1,320 per share and C common shares were quoted at P414 per share.
How much is the required increase in the Unrealized gain or loss account at the end of 2007? a.P130,500 b.P111,000 c.P 91,800 d.P 31,800
AVERAGE
1. While preparing its 2008 financial statements, Dell Corp. discovered computational errors in its 2007 and 2006 depreciation expenses. These errors resulted in the overstatement of each year’s income by P25,000 net of income taxes. The following amount were reported in the previously issued financial statements.
2007 2006
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000 Dell Corp. net income is correctly reported at P180,000.
Which of the following amounts should be reported as prior period adjustments and net income in Dell Corp.’s 2008 and 2007 comparative financial statements?
Year Prior period Adj. Net Income
a. 2007 - 150,000 2008 ( 50,000) 180,000 b. 2007 ( 50,000) 150,000 2008 - 180,000 c. 2007 ( 25,000) 125,000 2008 - 180,000 d. 2007 - 125,000 2008 - 180,000
2. Henri Company purchased for cash on January 01, 2003, three machines which cost a total of P1,800,000. Estimated selling prices of the machines were:
Machine 2 750,000
Machine 3 900,000
The machines were believed to have a useful life of 10 years without residual value. The company records depreciation annually on a monthly basis. On January 01, 2006, Machine 1 was sold for P375,000 cash. The proceeds were credited to the Machinery account.
On July 01, 2007, Machine 3 was traded in for a new machine (No. 4) which had a cash price of P750,000, Henri paying P300,000 for the difference with the trade in value of the old machine.
What should be the balance of the Accumulated depreciation – Machinery on December 31, 2007 after adjustment of the books?
a.P805,500 b.P481,500 c.P337,500 d.P387,500
3.The following data are taken from the shareholders’ equity section of the balance sheet of FLOOD CORP. 12.31.6 12.41.07
Ordinary shares (P100 par value) 625,000 637,500 Share premium in excess of par 312,500 362,500
Retained earnings 625,000 653,750
During 2007, the company declared and paid cash dividend of P93,750 and also declared and issued a stock dividend. There were no other changes in stock issued and outstanding during 2007.
Net income for 2006 is:
a. P 28,750 b. P 122,500 c. P 135,000 d. P 185,000
4. During 2007, Pen Corporation acquired common stock of Rap Company as follows: LOT DATE NO. OF SHARES COST PER SHARE TOTAL COST
A January 25 800 560 448,000
B April 5 600 600 360,000
Rap Company issued a 20% stock dividend on February 14, 2007. Common stock rights were issued on October 30, 2007 entitling holders to purchase one new common share at P450 for each ten shares held. On this date, the rights were being traded at P20 each and the stock ex-rights were being traded at P620 per share.
On November 8, 2007, Pen sold 500 rights that pertained to Lot A. Sales price was P25 per right. The corporation paid a brokerage fee of P500 on the sale of the stock rights. Pen exercised the remaining rights on November 11, 2007.
The gain on the sale of right is:
5. Use the same information used in Number 4. How many new shares of RPP common were acquired by Peninsula through the exercise of the stock rights?
a.168 shares b.140 shares c.118 shares d.106 shares
6. On July 1, 2007, Marcus Company purchased 4,000 of the P1,000 face amount , 8% bonds of Olay Corporation for P3,692,000 to yield 10% per annum. The bonds which mature on July 1, 2010, pay interest semiannually on January 1 and July 1. Marcus Company classifies the securities as held to maturity.
What is the investment carrying value at December 31, 2007?
a.P3,975,400 b.P3,741,200 c.P3,716,600 d.P3,667,400
7. Use the same information in number 6 above. How much is the interest revenue reported by Marcus Company’s income statement for year ended December 31, 2007?
a.P200,000 b.P190,800 c.P184,600 d.P160,000
Use the following information for questions 8 and 9.
Cline Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2007 Dec. 31, 2008_________
Ending inventory P3,000 understated P4,400 overstated Depreciation expense P 800 understated
An insurance premium of P7,200 was prepaid in 2007 covering the years 2007, 2008, and 2009. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2008, fully depreciated machinery was sold for P3,800 cash, but the sale was not recorded until 2009. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors. Ignore income tax considerations.
8. What is the total net effect of the errors on the amount of Cline's working capital at December 31, 2008? a.Working capital overstated by P2,000. b.Working capital overstated by P600.
c.Working capital understated by P1,800. d.Working capital understated by P4,800.
9. What is the total effect of the errors on the balance of Cline's retained earnings at December 31, 2008? a.Retained earnings understated by P4,000. b.Retained earnings understated by P1,800.
c.Retained earnings understated by P1,000. d.Retained earnings overstated by P1,400.
10. In your examination of the books and accounts of PLUM Company for the year 2008, you have noted that the entire past due accounts of the company amounting to P200,000 should be set up as Allowance for Doubtful accounts. On these past due accounts, management with proper recommendation from the company’s legal counsel, has decided to write off accounts with balance totaling P40,000. As of December 31, 2008, the balance of Allowance for Doubtful Accounts was P125,000.
The additional provision required for the company’s doubtful accounts is:
a.P 35,000 b.P 75,000 c.P160,000 d.P200,000
DIFFICULT
Items 1 and 2 are based on the following:
CONCORD CO. purchased real property for P3,225,000 which included P67,500 for realty tax arrears for prior years. A mortgage of P1,500,000 was assumed by CONCORD CO. on the purchase. Twenty percent of the purchase price should be allocated to the land and the balance to the building.
In order to make the building suitable for the use of CONCORD CO., remodeling costs had to be incurred in the amount of P337,500. This however necessitated the demolition of a portion of the building, which resulted in recovery of salvage material sold for P11,250 cash.
Landscaping and parking lot cost the company a total of P120,000 while repairs in the main hall were P16,875. 1. The cost of the land was:
a.P631,500 b.P645,000 c.P765,000 d.P945,000 2. The cost of the building was:
a.P2,467,500 b.P2,923,125 c.P2,906,250 d.P4,123,125
3. On June 30, 2007, COLT INC. had outstanding 10% P250,000 face amount 15 year bonds maturing on June 30, 2017. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2007 of bond discount and bond issue costs were P13,750 and P5,000 respectively. COLT INC. reacquired all of these bonds at 96 on June 30, 2007 and retired them.
Ignoring income taxes, compute for the gain or loss on bond retirement.
a. Loss of P3,750 b. Loss of P8,750 c. Gain of P1,250 d. Gain of P10,000 Items 4 to 6 are based on the following:
You are conducting an audit of the MART CORPORATION for the year ended December 31, 2008. The internal control procedures surrounding cash transactions were not adequate. Jane Quipit, the bookkeeper-cashier handles cash receipts, maintains accounting records and prepares the monthly reconciliations of the bank account. She prepared the following reconciliation at the end of the year:
Balance per bank statement P 315,000
Add : Deposit in transit P 157,725
Note collected by bank 13,500 171,225
Balance P 486,225
Less : Outstanding checks 222,075
Balance per general ledger P 264,150
a. At December 31, 2008, the bank statement and the general ledger showed balances of P315,000 and P264,150 respectively.
b. The cut off bank statement showed a bank charge on January 02, 2009 for P35,250 representing a correction of an erroneous bank credit. c. Included in the list of outstanding checks were the following:
1. A check payable to a supplier, dated December 29, 2008, in the amount of P13,275, released on January 05, 2009.
2. A check representing advance payment to a supplier in the amount of P33,489, the date of which is January 04, 2009, and released in December 2008.
d. On December 31, 2008, the company received and recorded customer’s postdated check amounting to P45,000.
4. Compute the adjusted deposit in transit as of December 31, 2008. a.P157,725 b.P112,725 c.P202,725 d.P112,500 5. Compute the adjusted outstanding checks as of December 31, 2008.
a.P222,075 b.P235,350 c.P255,564 d.P175,311
6. Compute the adjusted cash to be presented in the balance sheet as at Dec. 31, 2008. a.P211,914 b.P225,414 c.P238,914 d.P279,414
7. You are reviewing the notes payable and interest expense accounts of Cole Manufacturing Co. as of December 31, 2007 and noted that the company regularly borrows from the bank in order to finance working capital. The following schedule shows loans with 12% interest rate, with interest payable at maturity. All loans are repaid at its scheduled maturity date and interest expense is 7recorded when the loans are repaid.
DATE OF LOAN AMOUNT MATURITY DATE TERM OF LOAN Nov. 01, 2006 P 500,000 Oct. 31, 2007 1 year Feb. 01, 2007 1,500,000 July 31, 2007 6 months May 01, 2007 800,000 Jan. 31, 2008 9 months
The client recorded interest expense of P150,000 for 2007. Compute for the correct amount of interest expense that should be reported in the 2007 income statement.
a. P204,000 b. P212,000 c. P222,000 d. P214,000 Use the following information for questions 8 to 9.
The balance sheet for the Dixie Corporation on December 31, 2007 includes the following receivables balances:
Notes Receivable P365,000
Accounts Receivable P856,000
Less allowance for doubtful accounts 41,500 814,500 Selected ransactions during 2008 included the following:
a. Notes received in settlement of accounts totaled P825,000.
b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of one P30,000 note on which the company had to pay the bank P30,900, which included interest and protest fees. It is expected that recovery will be made on this note early 2009.
c. Customers’ notes of P600,000 were discounted with recourse during the year, proceeds from their transfer being P585,000. Of this total, P480,000 matured during the year without notice of protest.
h. Notes receivable collected during the year totaled P270,000 and interest collected was P24,500.
Determine the adjusted balances of the following accounts as of December 31, 2008:
8. Notes Receivable (including notes receivable discounted).
a. P320,000 b. P365,000 c. P165,000 d. P285,000 9. Notes Receivable Discounted
a. P155,000 b. P600,000 c. P120,000 d. P105,000
10. Voltron Inc. reported inventory of P360,000 at December 31, 2006. The following data were gathered to confirm the reported inventory figure.
Inventory, December 31, 2005 P 320,00
Purchases during 2006 1,410,000
Cash sales during 2006 350,000
Shipment received on December 26, 2006 included
in physical inventory but not recorded as purchases 10,000 Deposit made with suppliers, entered as purchased.
goods were not received during 2006 20,000 Collections on accounts receivable during 2006 1,800,000 Accounts receivable, December 31, 2005 250,000 Accounts receivable, December 31, 2006 300,000 Gross profit percentage on sales 40%
What is the estimated inventory shortage at December 31, 2006?
