SOLUTION - AUDITING PROBLEMS TEST BANK 2
PROBLEM 1 – AYALA MERCHANTS CORPORATIONADJUSTING JOURNAL ENRIES December 31, 2017
1. Operating expenses 27,740
Petty cash fund 27,740
(P37,250 – P9,510)
2. Accounts receivable (P107,400 + P63,000) 170,400
Notes payable 700,000
Finance cost (Interest expense) 10,000 Other charges (Bank service charges) 2,750
Accounts payable 72,000
Cash in bank 811,150
3. Allowance for doubtful accounts 152,640
Accounts receivable (write-off) 152,640
4. Other charges (Unrealized loss – Trading securities) 10,940
Trading securities 10,940 Bacnotan Cement (P16, 7,000) P112,000 Fil-Estate (P19.75 x 10,000) 197,500 Ionics (P24 x 2,400) 57,600 La Tondena (P26 x 2,000) 52,000 Selecta (P1.20 x 8,000) 9,600 Union Bank (P27.50 x 1,600) 44,000 Total market value, Dec. 21, 2017 P472,700 Carrying value, Dec. 31, 2017 483,640 Unrealized loss – trading securities P 10,940
5. Interest receivable 32,500
Other income (Interest income) 32,500
(P1,300,000 x 15% 2/12)
6. Operating expenses (Advertising expense) 325,000
Prepaid advertising 325,000
Christmas promotion P100,000
Regular promotion (P640,000 – P100,000 = P540,000 x 5/12) 225,000
Total P325,000
7. Operating expenses (Rent expense) 280,000
Prepaid rent 280,000
(P420,000 x 2/3 or P140,000 x 2)
8. Operating expenses (Insurance expense) 81,667
Prepaid insurance 81,667
(P490,000 x 2/12)
9. Operating expenses (Office supplies expense) 258,500
Office supplies inventory 258,500
(P361,000 – P102,500)
10. Accounts receivable 146,940
Sales 146,940
11. Cost of goods sold 356,000
Inventories 356,000
12. Cost of goods sold 138,500
Inventories 138,500
13. Inventories 153,800
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14. Delivery equipment 43,400
Operating expenses 43,400
15. Operating expenses (Depreciation expense) 2,170
Accumulated depreciation 2,170
(P43,400/10 x 6/12)
16. Accumulated depreciation 10,480
Operating expenses (Depreciation expense) 10,480 17. Accumulated depreciation (P138,620 – P10,480) 128,140
Other charges (Loss) 37,380
Delivery equipment 165,520
18. Operating expenses 213,000
Accrued expenses 213,000
19. Finance cost (Interest expense) 104,000
Interest payable 104,000
(P2.6 million x 16% 3/12)
20. Retained earnings 540,000
Dividends payable 540,000
(P5,400,000 x 10%)
21. Operating expenses (Doubtful accounts expense) 130,317
Allowance for doubtful accounts 130,317
Required Per Books Adjustments Per Audit % Allowance Less than 3 months P2,500,960 P146,940
107,400 P2,755,300 1 P27,553
3 to 6 months 843,200 843,200 5 42,160
Over 6 months 274,500 63,000
(152,460) 185,040 10 18,504
P3,618,660 P3,783,540 P88,217
Allowance before adjustment (P110,360 – P152,460) P 42,100 debit
Required allowance 88,217
Adjustment P130,317
1. D Petty cash fund
Per books P60,000 AJE 1 (27,740) Per audit P32,260 2. D Cash in bank Per books P1,056,000 AJE 2 (811,150) Per audit P 244,850 3. D Trading securities Per books P483,640 AJE 4 (10,940) Per audit P472,700 4. C Accounts receivable Per books P3,618,660 AJE 2 170,400 3 (152,460) 10 146,940 Per audit P3,783,540
Page 3 5. D Allowance for doubtful accounts
Per books P110,360
AJE 3 (152,460)
21 130,317
Per audit P 88,217
6. C Notes and interest receivable
Per books P1,300,000 AJE 5 32,500 Per audit P1,332,500 7. A Inventories Per books P7,274,900 AJE 11 (356,000) 12 (138,500) 13 153,800 Per audit P6,934,200 8. B Prepaid insurance Per books P490,000 AJE 8 (81,667) Per audit P408,333 9. A Prepaid rent Per books P420,000 AJE 7 (280,000) Per audit P140,000 10. D Prepaid advertising Per books P640,000 AJE 6 (325,000) Per audit P315,000
11. D Office supplies inventory
Per books P361,000
AJE 9 (258,500)
Per audit P102,500
12. C Petty cash fund P 32,260
Cash in bank 244,850
Trading securities 472,700
Accounts receivable (P3,783,540 – P88,217) 3,695,323
Notes and interest receivable 1,332,500
Inventories 6,934,200
Prepaid insurance 408,333
Prepaid rent 140,000
Prepaid advertising 315,000
Office supplies inventory 102,500
Total current assets P13,677,666
13. C Property, plant, and equipment (PPE)
Per books P4,068,400 AJE 14 43,400 17 (165,520) Per audit P3,946,280 14. B Accumulated depreciation Per books P1,177,500 AJE 15 2,170 16 (10,480) 17 (128,140) Per audit P1,041,050 15. B Accounts payable Per books P2,356,320
AJE 2 72,000 Per audit P2,428,320 Page 4 16. A Interest payable Per books P 0 AJE 19 104,000 Per audit P104,000
17. C Accounts payable – trade P2,428,320
Notes payable 2,600,000
Accrued expenses 382,040
Interest payable 104,000
Dividends payable 540,000
Total current liabilities P6,054,360
18. C Sales
Per books P13,078,000
AJE 10 146,940
Per audit P13,224,940
19. C Cost of goods sold
Per books P8,034,000 AJE 11 356,000 12 138,500 13, (153,800) Per audit P8,374,700 20. D Operating expenses Per books P3,357,000 AJE 1 27,740 6 325,000 7 280,000 8 81,667 9 258,500 14 (43,400) 15 2,170 16 (10,480) 18 213,000 21 130,317 Per audit P4,621,514
PROBLEM 2 – LUKAS COMPANY
21. A Sales returns and allowance 90,000
Accounts receivable 90,000
Inventory 72,000
Cost of sales 72,000
(P90,000 x 80%)
Net decrease in income (P90,000 – P72,000) P18,000
22. A Sales 30,000
Accounts receivable 30,000
Income overstated by P30,000
23. D Overstatement of receivable Lazaro (P150 x 320 units) P48,000 24. A Correctly stated because the goods are considered sold in 2017.
25. D Accounts payable 135,000
Accounts receivable 135,000
26. B 27. C 28. B 29. B 30. D
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PROBLEM 4 – SPARK COMPANY
31. B Cash balance, Dec. 31, 2016 P100,000
Sales (SQUEEZE) 920,000
Cash paid for operating expenses (220,000)
Cash paid on accounts payable (471,700)
Collections on notes receivable 25,000
Cash balance, Dec. 31, 2017 P353,300
Units sold (P920,000/P50) 18,400
32. D Accounts payable:
Balance, Dec. 31, 2016 P75,000
Purchases 596,700*
Cash payments on accounts payable (471,700)
Balance, Dec. 31, 2017 P200,000
*Purchases:
Month Unit Cost Units Total Cost
January P32.60 1,500 P48,900 February 32.70 1,500 49,050 March 32.80 1,500 49,200 April 32.90 1,500 49,350 May 33.00 1,500 49,500 June 33.10 1,500 49,650 July 33.20 1,500 49,800 August 33.30 1,500 49,950 September 33.40 1,500 50,100 October 33.50 1,500 50,250 November 33.60 1,500 50,400 December 33.70 1,500 50,550 Total purchases 18,000 P596,700 Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700 33. A Inventory, Dec. 31, 2016 (P199,875/P32.50) 6,150 Purchases 18,000 Units sold (18,400) Inventory, Dec. 31, 2017 5,750
34. C FIFO cost of inventory, Dec. 31, 2017:
December purchases 1,500 x P33.70 P 50,550 November purchase 1,500 x P33.60 50,400 October purchase 1,500 x P33.50 50,250 September purchase 1,250 x P33.40 41,750 5,750 P192,950 35. D Inventory, Jan. 1, 2017 P199,875 Purchases 596,700
Goods available for sale 796,575
Inventory, Dec. 31, 2017 (192,950)
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PROBLEM 5 – ISIDRO MANUFACTURING COMPANY 36. B Depreciation expense for 2014:
Truck #1 (P180,000/5) P 36,000 Truck #2 (P220,000/5) 44,000 Truck #3 (P300,000/5 x ½) 30,000 Truck #4 (P240,000/5) 48,000 Truck #5 (P400,000/5 x ½) 40,000 Total P198,000
37. A Trade-in value of Truck #3 (P400,000-P220,000) P180,000 Book value of Truck #3:
Cost P300,000 A/D, 1/1/2013 -0 7/1/2014 (P300,000/5 x1.5) (90,000) 210,000 Loss on trade-in P 30,000 38.A Truck #2 P220,000 Truck #5 400,000 Truck #6 420,000 P1,040,000 Accumulated depreciation:
Truck #2 (fully depreciated 7/1/2016) P220,000 Truck #5, 7/1/2014 – 12/31/2017 (P400,000/5 x 3.5) 280,000 Truck #6, 7/1/2016 – 12/31/2017 (P420,000/5 x 1.5) 126,000 626,000 Book value, 12/31/2017 P414,000 39. C 2014 2015 2016 2017 Total Truck #1 P36,000 -- -- -- P 36,000 Truck #2 44,000 P44,000 P22,000 -- 110,000 Truck #3 30,000 -- -- -- 30,000 Truck #4 48,000 48,000 24,000 -- 120,000 Truck #5 40,000 80,000 80,000 P80,000 280,000 Truck #6 -- -- 42,000 84,000 126,000 Correct P198,000 P172,000 P168,000 P164,000 P702,000 Per client 210,000 225,000 250,500 304,000 989,500 Over P 12,000 P 53,000 P82,500 P140,000 P287,500 40. B
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PROBLEM 6 – NUNAL COMPANY
41. B Outstanding checks, November 30:
Check no. 792 P 7,500
799 21,150
Total P28,650
42. A Outstanding checks, December 31:
Check no. 806 P 57,000 807 78,000 810 21,000 812 48,000 817 33,000 819 21,000 822 36,000 823 39,000 824 87,000 825 6,000 826 33,000 Total P459,000
43. D Deposit in transit, November 30 P25,500
44. A Deposit in transit, November 30 P 25,500
Collections 2,121,900
Total 2,147,400
Deposits 2,033,400
Deposit in transit, December 31 P 114,000
Nov. 30 Receipts Disbursements Dec. 31 Unadjusted book balances P345,000 P2,297,400 P1,228,230 P1,414,170 Bank service charges:
November 30 (150) (150)
December 31 360 (360)
Notes collected by bank:
November 30 30,000 (30,000)
December 31 36,000 36,000
Unrecorded disbursement (815) 18,000 (18,000) Adjusted book balances P374,850 P2,303,400 P1,246,400 P1,431,810
Nov. 30 Receipts Disbursements Dec. 31 Unadjusted bank balances P342,000 P2,493,900 P1,059,090 P1,776,810 Outstanding checks: November 30 (28,650) (28,650) December 31 459,000 (459,000) Deposits in transit: November 30 25,500 (25,500) December 31 114,000 114,000 Error corrected (243,000) (243,000)
Erroneous bank charge 36,000 (36,000) Adjusted bank balances P374,850 P2,303,400 P1,246,440 P1,431,810
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PROBLEM 7 – MINA MINING CO.
Depletable/Depreciable Cost Estimated Reserves Depletion/Depreciation Mineral property P48,450,0001 150,000 P323 Building 12,000,000 150,000 80 Machinery (1/2) 1,800,000 150,000 12 Machinery (1/2) 1,800,000 150,000 24 2 1P50,000,000 – P1,550,000 2(P1,800,000/150,000) x 2 51. C Year 1 Depletion Depreciation Mineral property (P323 x 7,500) P2,422,500 Building (P80 x 7,500) P600,000 Machinery (1/2) (P12 x 7,500) 90,000 Machinery (1/2) (P24 x 7,500) 180,000 P2,422,500 P870,000 52. D Year 5 Depletion Depreciation Mineral property (P323 x 15,000) P4,845,000 Building (P80 x 15,000) P1,200,000 Machinery (1/2) (P12 x 15,000) 180,000 Machinery (1/2) (P24 x 15,000) 360,000 P4,845,000 P1,740,000 53. C Year 6 Depletion Depreciation Mineral property (P323 x 15,000) P4,845,000 Building (P80 x 15,000) P1,200,000 Machinery (1/2) (P12 x 15,000) 180,000 Machinery (1/2) (P24 x 7,500) 180,000 P4,845,000 P1,560,000 54. C Year 7 Depletion Depreciation Mineral property (P323 x 15,000) P4,845,000 Building (P80 x 15,000) P1,200,000 Machinery (1/2) (P12 x 15,000) 180,000 Machinery (1/2) --P4,845,000 P1,380,000 55. D Year 11 Depletion Depreciation Mineral property (P323 x 7,500) P2,422,500 Building (P80 x 7,500) P600,000 Machinery (1/2) (P12 x 7,500) 90,000 Machinery (1/2) ---P2,422,500 P690,000
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PROBLEM 8 – HVR Company
56. D Present value of principal (P3,600,000 x 0.7514) P2,705,040 Present value of interest (P3,600,000 x 5% x 2.4860) 447,480 Consultation service fee revenue P3,152,520 57. D Interest Principal Total PVF Present Value
12/31/2017 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914 12/31/2018 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544 12/31/2019 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 1,684,800
Present value of note P6,037,258
Carrying amount of equipment 4,800,000
Gain on sale of equipment P1,237,258
Note receivable from sale of land:
Date Interest Income Carrying Amount
1/1/2017 --- P2,181,960*
12/31/2017 P218,196 2,400,156 12/31/2018 239,844** 2,640,000 * P2,640,000 principal x 0.8265 PVF at 10% for 2 periods.
** P2,640,000 - P2,400,156
Note receivable from consultation:
Effective Nominal Discount Carrying Date Interest Interest Amortization Amount
1/1/2017 --- --- --- P3,152,520 12/31/2017 P315,252 P180,000 P135,252 3,287,772 12/31/2018 328,777 180,000 148,777 3,436,549 12/31/2019 343,451** 180,000 163,451* 3,600,000 * P3,600,000 – P3,436,549 = P163,451 ** P163,451 + P180,000 = P343,451 Note receivable from sale of equipment:
Effective Nominal Principal Carrying Date Interest Interest Amortization Collection Amount
1/1/2017 --- --- --- ---- P6,037,258
12/31/2017 P845,216 P288,000 P557,216 P2,400,000 4,194,474 12/31/2018 587,226 192,000 395,226 2,400,000 2,189,700 12/31/2019 306,300* 96,000 210,300 2,400,000 ---* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300
58. C Note receivable from consultation P3,287,772 Note receivable from sale of equipment 2,189,700 Noncurrent notes receivable, Dec. 31, 2017 P5,477,472 59. C Note receivable from sale of land P2,400,156 Note receivable from sale of equipment (P4,194,474 – P2,189,700) 2,004,774 Total current notes receivable, Dec. 31, 2017 P4,404,930 60. C Note receivable from sale of land P218,196
Note receivable from consultation 315,252
Note receivable from sale of equipment 845,216 Total interest income on notes receivable for 2017 P1,378,664
