PROBLEM NO

Page 21 of 21

AUDITING PROBLEMS

AUDIT OF CASH AND CASH EQUIVALENTSPROBLEM NO. 1

The following data were taken from your current working papers in connection with your audit of the Rizal Companys financial statements for the year ended December 31, 2006.

Cash account consists of the following items:

Petty cash fundP 25,000

Security Bank checking account(37,500)

Allied Bank current account 344,250

Total per GLP331,750

a. The count of the cashiers accountability on January 2, 2007, revealed total bills and coins of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to January 2007.

b. On December 29, 2006, a check for P87,500 was drawn against Security Bank current account resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2007.

c. Bank reconciliation statement prepared by the cashier for the Allied Bank account follows:

Bank balanceP310,500

Add: Deposit in transitP61,250

Bank service charges 1,250 62,500

Total373,000

Less: Outstanding checks

Check No.Amount

214P 2,500@

21920,750

2256,000

228 8,500 28,750

Book balanceP344,250

@ Check certified by the bank in December 2006.

All reconciling items were traced to the bank statement. Further investigation indicated that the deposits in transit include a customers post-dated check amounting to P40,000. The check represents a collection from account customer for sales made in the middle of October 2006.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following:

1.How much is the adjusted balance of petty cash fund as of December 31, 2006?

a. P12,000

b. P13,000

c. P9,000

d. P16,000

2.How much is the adjusted Allied Bank current account as of December 31, 2006?

a. P336,500

b. P305,500

c. P296,500

d. P330,2503.How much is the cash shortage as of December 31, 2006?

a. P46,500

b. P6,500

c. P9,000

d. P04.How much is the adjusted cash as of December 31, 2006?

a. P355,500

b. P398,500

c. P367,500

d. P358,5005.An auditor would consider a cashiers job description to contain compatible duties if the cashier receives remittance from the mailroom and also prepares the

a. Daily deposit slip.

c. Remittance advices.

b. Prelist of individual checks.

d. Monthly bank reconciliation.

PROBLEM NO. 2 (RPCPA 10.84)You obtained the following information on the current account of Bonifacio Company during your examination of its financial statements for the year ended December 31, 2006.

The bank statement on November 30, 2006 showed a balance of P114,750. Among the bank credits in November was customers note for P37,500 collected for the account of the company which the company recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting to P450 and a P15,000 check which was charged by the bank in error against Bonifacio Co. account. Also in November you ascertained that there were deposits in transit amounting to P30,000 and outstanding checks totaling P63,750.

The bank statement for the month of December showed total credits of P156,000 and total charges of P76,500. The companys books for December showed total receipts of P275,850, disbursements of P152,700 and a balance of P182,100. Bank debit memos for December were: No. 245 for service charges, P600 and No. 246 on a customers returned check marked DAIF for P9,000.

On December 31, 2006 the company placed with the bank a customers promissory note with a face value of P45,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January, 2007.

A check for P1,485 was recorded in the company cash payments books in December as P14,850.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following:

1. How much is the undeposited collections as of December 31, 2006?

a. P127,350

b. P67,350

c. P82,350

d. P52,350

2. How much is the outstanding checks as of December 31, 2006?

a. P71,985

b. P135,735

c. P149,100

d. P136,1853. How much is the adjusted bank receipts for December?

a. P238,350

b. P178,350

c. P163,350 d. P193,3504. How much is the adjusted book disbursements for December?

a. P84,735

b. P148,485

c. P161,850

d. P148,9355. How much is the adjusted cash balance as of December 31, 2006?

a. P234,615

b. P82,500

c. P140,865

d. P73,365PROBLEM NO. 3 (RPCPA 5.80)On January 10, 2007, you started the audit of the financial records of the Del Pilar Company for the year ended December 31, 2006. From your investigation, you discovered the following:

1. The bookkeeper also acts as the cashier. On December 31, 2006, the bookkeepers year-end cash reconciliation contains the following items.

Cash per ledger, 12-31-06P736,800

Cash per bank, 12-31-06778,200

Outstanding checks62,640

Joe Co. check charge by bank in error

12-20-06; corrected by bank on 1-5-071,800

Cash in transit, credited by bank on 1-2-078,640

2. The cash account balances per ledger as of 12-31-06 were: Cash - P736,800; petty cash - P1,800

3. The count of the cash on hand at the close of business on January 10, 2007, including the petty cash, was as follows:

Currency and coinP4,620

Expense vouchers240

Employees IOUs dated 1-5-07660

Customers checks in payment of account 3,480

P9,000

4. From January 2, 2007 to January 10, 2007, the date of your cash count, total cash receipts appearing in the cash records were P103,200. According to the bank statement for the period from January 2, 2007 to January 10, 2007, total deposits were P91,200.

5. On July 5, 2006, cash of P4,800 was received from an account customer; the Allowance for Doubtful Accounts was charged and Accounts Receivable credited.

6. On December 5, 2006, cash of P3,600 was received from an account customer; Inventory was charged and Accounts Receivable credited.

7. Cash of P8,760 received during 2006 was not recorded.

8. Checks received from customers from January 2, 2007 to January 10, 2007, totaling P5,040, were not recorded but were deposited in bank.

9. On July 1, 2006, the bank refunded interest of P240 because a note of the Del Pilar Company was paid before maturity. No entry had been made for the refund.

10. In the cashiers petty cash, there were receipts for collections from customers on January 9, 2007, totaling P10,200; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P600 made payable to a trade creditor; investigation shows that this check had been returned by the creditor on June 14, 2006 and a new check for P1,200 was issued in its place; the original check for P600 was made in error as to amount.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1.The correct bank balance as of December 31, 2006 is

a. P726,600

b. P754,800

c. P726,000

d. P724,800

2.The cash shortage as of December 31, 2006 is

a. P28,800

b. P28,200

c. P27,600

d. P 0

3.The cash shortage for the period January 1 to 10, 2007 is

a. P20,040

b. P30,480

c. P15,240

d. P 0

4.Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from improper write-off of a trade account receivable?

a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

b. Write-offs must be supported by an aging schedule showing that only receivables overdue for several months have been written off.

c. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.

d. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

5.As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement procedures. Which of the following deficiencies alone should cause you the least concern?

a. Checks are signed by only one person.

b. Signed checks are distributed by the controller to approved payees.

c. The treasurer fails to establish bona fide names and addresses of check payees.

d. Cash disbursements are made directly out of cash receipts.AUDIT OF RECEIVABLES

PROBLEM NO. 4 (RPCPA 5.90)The December 31, 2005 adjusted trial balance of Aguinaldo Company shows the following:

Debit Credit

Accounts receivableP50,000

Allowance for bad debtsP 2,000

Additional information:

Cash sales of the company represents 10% of gross sales.

90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.

It is expected that cash discount of P300 will be taken on accounts receivable outstanding at December 31, 2006.

Sales returns in 2006 amounted to P20,000. All returns were from charge sales.

During 2006, accounts totaling to P2,200 were written off as uncollectible; bad debt recoveries during the year amounted to P150.

The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate used on December 31, 2005.

QUESTIONS:

Based on the above and the result of your audit, determine the following: 1. The accounts receivable as of December 31, 2006 is

a. P150,000

b. P16,667

c. P15,000

d. P122,200

2. The allowance for doubtful accounts as of December 31, 2006 is

a. P1,000

b. P9,000

c. P6,000

d. P7,332

3. The net realizable value of accounts receivable as of December 31, 2006 is

a. P15,367

b. P143,700

c. P140,700

d. P114,568

4. The doubtful account expense for the year 2006 is

a. P9,050

b. P1,050

c. P6,050

d. P7,382

5. A company uses the allowance method for recognizing doubtful accounts. The entry to record the writeoff of a specific uncollectible account

a. Affects neither net income nor working capital

b. Affects neither net income nor accounts receivable

c. Decreases both net income and working capital

d. Decreases both net income and accounts receivable

PROBLEM NO. 5 (RPCPA 10.79)During your examination of the 2006 financial statements of the Mabini Company you find that the company does not provide allowance for doubtful accounts ever since it started operations in 2002. The companys practice is to directly write-off as expense doubtful accounts and credit recoveries to income. The companys contracts are generally for two years.

Upon your recommendation, the company agreed to change its accounts for 2006 to give effect to doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from the experience of prior years. Statistics for 2002 to 2006 are shown as follows:

Year of Sale20022003200420052006

Charge SalesP600,000P1,500,000P1,800,000P1,950,000P1,650,000

Accounts Written off & Year of Sale

20023,300

20039,0006,000

20043,00024,0007,800

20057,20027,0009,000

200616,20030,0008,400

Recoveries & Year of Sale

2002

2003600

20042,400

20053,000

20063,600

Accounts receivable at December 31, 2005 were as follows:

From 2005 salesP90,000

From 2006 sales 810,000

TotalP900,000

REQUIRED:

Based on the above and the result of your audit, you are to provide the answers to the following:

1. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2006 allowance is

a. 2.50%

b. 2.05%

c. 1.90%

d. 1.77%

2. How much is the doubtful accounts expense for 2006?

a. P32,850

b. P54,600

c. P41,250

d. P43,800

3. The doubtful accounts expense for 2006 is over(under) stated by

a. P55,950

b. P13,350

c. (P32,850)d. (P41,250)

4. The net realizable value of accounts receivable that should be presented on the December 31, 2006 balance sheet is

a. P831,600

b. P853,800 c. P868,650

d. P810,000

5. Which account balance is most likely to be misstated if an aging of accounts receivable is not performed?

a. Allowance for bad debts.

c. Accounts receivable.

b. Sales returns and allowances.

d. Sales revenue.

PROBLEM NO. 6 (Stice, Stice and Skousen 15th edition)Presented below are independent situations related to the notes receivable of GOMBURZA Company. Answer the following questions relating to each of the independent situations as requested. (Round-off present value factors to four decimal places)1. GOMBURZA Company has P6,000,000 note receivable from sale of plant bearing interest at 12% per annum. The note is dated April 1, 2005. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2006.

How much is the interest receivable as of December 31, 2006?a. P360,000

b. P540,000

c. P180,000

d. P120,0002. GOMBURZA Company sold a tract of land to RI Co. on July 1, 2006, for P4,000,000 under an installment sale contract. RI Co. signed a 4-year 11% note for P2,800,000 on July 1, 2006, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2007, 2008, 2009,and 2010. The land had an established cash price of P4,000,000, and its cost to the company was P3,000,000. The collection of the installments on this note is reasonably assured.

How much is the noncurrent portion of the note receivable as of December 31, 2006?a. P2,800,000

b. P1,897,500c. P2,205,500d. P2,051,5003. On January 1, 2006, GOMBURZA Company sold a tract of land to three doctors as an investment. The land, purchased 10 years ago, was carried on GOMBURZA Companys books at a value of P125,000. GOMBURZA received a noninterest-bearing note for P220,000 from the doctors. The note is due on December 31, 2007. There is no readily available market value for the land, but the current market rate of interest for comparable notes is 10%.

The carrying amount of the note receivable on December 31, 2006 isa. P220,000

b. P199,989

c. P181,819

d. P186,2194. On December 31, 2005, GOMBURZA Company finished consultation services and accepted in exchange a promissory note with a face value of P300,000, a due date of December 31, 2008, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

How much is the interest income in 2006?a. P26,269

b. P15,000

c. P22,539

d. P26,6245. On January 1, 2006, GOMBURZA Company sold land that originally cost P400,000 to X Company. As payment, X gave GOMBURZA Company a P600,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2006. The market price of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14%.

The gain on sale of land isa. P5,000

b. P64,320

c. P103,105

d. P82,893

AUDIT OF INVENTORIES

PROBLEM NO. 7 (Kieso, Weygandt and Warfield 10th edition)Luna Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2006:

Inventory at December 31, 2006 (based on physical count on December 31, 2006)P1,520,000

Accounts payable at December 31, 20061,200,000

Net sales (sales less sales returns)8,150,000

Additional information follows:a. Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2006. These tools had a cost of P31,000 and were billed at P40,000. The shipment was on Lunas loading dock waiting to be picked up by the common carrier.

b. Goods were in transit from a vendor to Luna on December 31, 2006. The invoice cost was P71,000, and the goods were shipped FOB shipping point on December 29, 2006.

c. Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30, 2006.

d. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2006, were not included in the physical count. On January 8, 2007, the tools costing P32,000 were inspected and returned to inventory. Credit memos totaling P47,000 were issued to the customers on the same date.

e. Tools shipped to a customer FOB destination on December 26, 2006, were in transit at December 31, 2006, and had a cost of P21,000. Upon notification of receipt by the customer on January 2, 2007, Luna issued a sales invoice for P42,000.

f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2006, were recorded on a receiving report dated January 2, 2007. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2006.

g. Goods received from a vendor on December 26, 2006, were included in the physical count. However, the related P56,000 vendor invoice was not included in accounts payable at December 31, 2006, because the accounts payable copy of the receiving report was lost.

h. On January 3, 2007, a monthly freight bill in the amount of P6,000 was received. The bill specifically related to merchandise purchased in December 2006, one-half of which was still in the inventory at December 31, 2006. The freight charges were not included in either the inventory or accounts payable at December 31, 2006.

QUESTIONS:

Based on the above and the result of your audit, answer the following: 1.The adjusted balance of Inventory as of December 31, 2006 is a. P1,673,000

b. P1,672,000c. P1,704,000d. P1,670,0002.The adjusted balance of Accounts Payable as of December 31, 2006 is a. P1,333,000

b. P1,262,000c. P1,327,000d. P1,330,0003.The adjusted Net Sales fro the year ended December 31, 2006 is a. P8,103,000

b. P8,110,000c. P8,150,000d. P8,063,0004.When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence thata. All goods purchased before year end are received before the physical inventory count.b. All goods owned at year end are included in the inventory balance.

c. No goods held on consignment for customers are included in the inventory balance.d. No goods observed during the physical count are pledged or sold.5.Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?

a. Confirmation of inventories at locations outside the client's facilities.b. Observation of physical inventory counts.c. Examination of paid vendors' invoices.

d. Analytical review of inventory balances compared to purchasing and sales activities.

PROBLEM NO. 8 (Stice, Stice and Skousen 15th edition)Jaena Sales Company uses the first-in, first-out method in calculating cost of goods sold for the three products that the company handles. Inventories and purchase information concerning the three products are given for the month of December.

Product GProduct LProduct J

Dec. 1Inventory100,000 units at P6.0060,000 units at P10.00130,000 units at P0.90

Dec. 1-15Purchases140,000 units at P6.5090,000 units at P10.5060,000 units at P1.25

Dec. 16-31Purchases60,000 units at P8.00

Dec. 1-31Sales210,000 units100,000 units90,000 units

Dec. 31Sales priceP8.00/unitP11.00/unitP2.00/unit

On December 31, the companys suppliers reduced their prices from the most recent purchase prices by the following percentages: product G, 20%; product L, 10%; product J, 8%. Accordingly, Jaena decided to reduce its sales prices on all items by 10%, effective November 1. Jaenas selling cost is 10% of sales price. Products G and L have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on product J (after selling cost) is 15% of sales price.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Total cost of Inventory at December 31 is

a. P1,130,000b. P1,114,620c. P1,311,000d. P1,235,000

2. The amount of Inventory to be reported on the companys balance sheet at December 31 is

a. P1,139,700b. P1,118,700c. P1,087,620d. P1,190,700

3. The Allowance for inventory write down at December 31 is

a. P11,300

b. P171,300

c. P27,000

d. P120,300

4. The cost of sales, before loss on inventory writedown, for the month of December is

a. P2,597,000b. P2,044,520c. P2,587,300d. P2,416,0005. If the perpetual inventory records show lower quantities of inventory that the physical count an explanation of the difference might be unrecorded

a. Sales.

c. Purchases.b. Purchase returns.

d. Purchase discounts.

PROBLEM NO. 9 (AICPA/Kieso, Weygandt and Warfield 10th edition)On April 21, 2006, a fire damaged the office and warehouse of Jacinto Company. The only accounting record saved was the general ledger, from which the trial balance below was prepared.

Jacinto Company

Trial Balance

March 31, 2006 DEBIT CREDIT

Cash P 324,000

Accounts receivable720,000

Inventory, December 31, 20051,350,000

Land630,000

Building1,980,000

Accumulated depreciationP 743,400

Other assets100,800

Accounts payable426,600

Accrued expenses324,000

Common stock, P100 par1,800,000

Retained earnings936,000

Sales2,430,000

Purchases936,000

Operating expenses 619,200 .

TotalsP6,660,000P6,660,000

The following data and information have been gathered:

a. The companys year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed that checks written during the period April 1 to 21 totaled P234,000: P102,600 paid to accounts payable as of March 31, P61,200 for April merchandise purchases, and P70,200 paid for other expenses. Deposits during the same period amounted to P233,100, which consisted of receipts on account from customers with the exception of a P17,100 refund from a vendor for merchandise returned in April.

c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P190,800 for April merchandise purchases, including P41,400 for shipments in transit on that date.

d. Customers acknowledged indebtedness of P648,000 at April 21, 2006. It was also estimated that customers owed another P144,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, P10,800 will probably be uncollectible.

e. The insurance company agreed that the fire loss claim should be based on the assumption that the overall gross profit ratio for the past two years was in effect during the current year. The companys audited financial statements disclosed the following information:

20052004

Net salesP9,540,000P7,020,000

Net purchases5,040,0004,230,000

Beginning inventory900,0001,188,000

Ending inventory1,350,000900,000

f. Inventory with a cost of P126,000 was salvaged and sold for P63,000. The balance of the inventory was a total loss.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much is the sales for the period January 1 to April 21, 2006?

a. P2,574,000b. P2,735,100c. P2,710,800d. P2,718,0002. How much is the net purchases for the period January 1 to April 21, 2006?

a. P1,188,000b. P1,212,300c. P1,170,900d. P1,229,400

3. How much is the cost of sales for the period January 1 to April 21, 2006?

a. P1,494,900b. P1,415,700c. P1,504,305d. P1,490,940

4. How much is the estimated inventory on April 21, 2006?

a. P1,026,000b. P1,122,300c. P1,057,995d. P1,043,100

5. How much is the estimated inventory fire loss?

a. P1,043,100b. P963,000

c. P921,600

d. P858,600

AUDIT OF INVESTMENTS

PROBLEM NO. 10 (Stice, Stice and Skousen 15th edition)On December 31, 2005, Dagohoy Companys balance sheet showed the following balances related to its securities accounts:

Trading securitiesP1,773,000

Available-for-sale securities (AFS)1,416,000

Interest receivable-Balicasag water bonds15,000

Unrealized gain AFS120,000

Dagohoys securities portfolio on December 31, 2005, was made up of the following securities:

Security ClassificationCost Market

12,000 shares Bohol Corp. stockTradingP900,000P915,000

9,600 shares Panglao Inc. stockTrading 660,000 633,900

10% Balicasag water bonds (interest payable semiannually on Jan. 1 and Jul. 1)Trading 300,000 224,100

12,000 shares Pamilacan Inc. stockAvailable for sale 708,000 756,000

24,000 shares Loboc Unlimited Inc. stockAvailable for sale 588,000 660,000

During 2006, the following transactions took place:

Jan. 2Receive interest on the Balicasag water bonds.

Mar. 1Purchased 3,600 additional shares of Bohol Corp. stock for P275,400, classified as a trading security.

Apr. 15Sold 4,800 shares of the Panglao Inc. stock for P69 per share.

May 4Sold 4,800 shares of the Pamilacan Inc. stock for P62 per share.

July 1Received interest on the Balicasag water bonds.

Oct. 30Purchased 18,000 shares of Dauis Co. stock for P999,000, classified as a trading security.

The market values of the stocks and bonds on December 31, 2006, are as follows:

Bohol Corp. stockP76.60 per share

Panglao Inc. stockP68.50 per share

Dauis Co. stockP55.25 per share

Balicasag water bondsP246,660

Pamilacan Inc. stockP61.00 per share

Loboc Unlimited Inc. stockP27.00 per share

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of 4,800 Panglao Inc. shares on April 15, 2006a. P14,250 loss b. P1,200 gainc. P1,200 lossd. P14,250 gain2. Net realized gain or loss on sale of 4,000 Pamilacan Inc. shares on May 4, 2006a. P14,400 lossb. P4,800 gainc. P14,400 gain d. P4,800 loss

3. Carrying value of Trading Securities as of December 31, 2006a. P2,764,920b. P2,804,400c. P2,745,360d. P2,756,880

4. Carrying value of Available for Sale Securities as of December 31, 2006a. P1,012,800b. P967,200

c. P1,087,200d. P1,132,800

5. In 2006, what amount of unrealized gain or loss should be shown as component of income and stockholders equity?

Income

Stockholders equity

a. P39,480 loss

P146,400 loss

b. P34,470 gain

P74,400 gain

c. P34,470 gain

P26,400 loss

d. P47,520 gain

P93,600 gain

PROBLEM NO. 11 (Stice, Stice and Skousen 15th edition)Your audit of the Diego Silang Corporation disclosed that the company owned the following securities on December 31, 2005:

Trading securities:

Security SharesCost Market

Vigan, Inc.9,600P144,000P184,000

Laoag, Inc.16,000432,000288,000

10% , P200,000 face value , Santiago bonds (interest payable every Jan. 1 and Jul. 1) 158,400 163,440

TotalP734,400P635,440

Available-for-sale securities:

Security SharesCost Market

Candon Products32,000P1,376,000P1,440,000

Pagudpud, Inc.240,0006,240,0005,840,000

Batac, Inc.80,000 960,000 1,280,000

TotalP8,576,000P8,560,000

Held to maturity:

CostBook value

12%, 2,000,000 face value, Ilocos bonds (interest payable annually every Dec. 31)P1,900,000P1,926,000

During 2006, the following transactions occurred:

Jan. 1Receive interest on the Santiago bonds.

Mar. 1Sold 8,000 shares of Laoag Inc. stock for P152,000.

May 15Sold 3,200 shares of Batac, Inc. for P15 per share.

July 1Received interest on the Santiago bonds.

Dec. 31Received interest on the Ilocos bonds.

31Transferred the Ilocos bonds to the available-for-sale portfolio. The bonds were selling at 101 on this date. The bonds were purchased on January 2, 2005. The discount was amortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2006, are as follows:

Vigan, Inc.P22 per share

Laoag, Inc.P15 per share

10% Santiago bondsP151,200

Candon ProductsP42 per share

Pagudpud, Inc.P28 per share

Batac, Inc.P18 per share

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of 8,000 Laoag, Inc. shares on March 1, 2006

a. P8,000 gain b. P8,000 lossc. P64,000 lossd. P64,000 gain

2. Realized gain or loss on sale of 3,200 Batac, Inc. shares on May 15, 2006

a. P9,600 lossb. P3,200 lossc. P9,600 gaind. P3,200 gain

3. Total interest income for the year 2006?

a. P260,000

b. P289,640

c. P251,120

d. P286,000

4. The amount that should be reported as unrealized gain in the statement of changes in equity regarding transfer of Ilocos bonds to available-for-sale?

a. P94,000

b. P123,640

c. P64,360

d. P 0

5. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2006 should be

Trading securitiesAvailable-for-sale securities

a. P602,400

P 9,446,400

b. P482,400

P11,524,000

c. P602,400

P11,441,600

d. P482,400

P11,466,400

PROBLEM NO. 12 (Stice, Stice and Skousen 15th edition)On June 1, 2005, Panday Corporation purchased as a long term investment 6,000 of the P1,000 face value, 8% bonds of Pira Corporation. Panday Corporation has the positive intention and ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2011. On November 1, 2006, Panday Corporation sold the bonds for a total consideration of P5,887,500.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places)

1. The purchase price of the bonds on June 1, 2005 is

a. P5,467,992b. P5,545,104c. P5,536,698d. P5,436,8942. The carrying value of the investment in bonds as of December 31, 2005 is

a. P5,588,878b. P5,579,979c. P5,474,311d. P5,507,2373. The interest income for the year 2006 is

a. P459,911

b. P466,827

c. P466,073

d. P457,1224. The gain on sale of investment in bonds on November 1, 2006 is

a. P31,794

b. P41,448

c. P120,352

d. P156,0685. An auditor most likely to verify the interest earned on bond investment by

a. Verifying the receipt and deposit of interest checks.

b. Confirming the bond interest rate with the issuer of the bonds.

c. Recomputing the interest earned on the basis of face amount, interest rate, and period held.

d. Testing controls relevant to cash receipts.

AUDIT OF PROPERTY, PLANT & EQUIPMENTPROBLEM NO. 13 (Kieso, Weygandt and Warfield 10th edition)You requested a depreciation schedule for Semitrucks of Tandang Sora Manufacturing Company showing the additions, retirements, depreciation and other data affecting the income of the Company in the 4-year period 2003 to 2006, inclusive. The Semitrucks account consists of the following as of January 1, 2003:

Truck No. 1 purchased Jan. 1, 2000, costP 216,000

Truck No. 2 purchased July 1, 2000, cost 264,000

Truck No. 3 purchased Jan. 1, 2002, cost 360,000

Truck No. 4 purchased July 1, 2002, cost 288,000

P1,128,000

The Semitrucks Accumulated Depreciation account previously adjusted to January 1, 2003, and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of purchase, based on five-year life, no salvage value). No charges have been made against the account before January 1, 2003.

Transactions between January 1, 2003, and December 31, 2006, and their record in the ledger were as follows:

July 1, 2003Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was P408,000. Tandang Sora Mfg. Co. paid the automobile dealer P180,000 cash on the transaction. The entry was debit to Semitrucks and a credit to cash, P180,000.

Jan. 1, 2004Truck No. 1 was sold for P42,000 cash; entry debited Cash and credited Semitrucks, P42,000.

July 1, 2005A new truck (No. 6) was acquired for P432,000 cash and was charged at that amount to Semitrucks account. (Assume truck No. 2 was not retired.)

July 1, 2005Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P8,400 cash. Tandang Sora Mfg. Co. received P30,000 from the insurance company. The entry made by the bookkeeper was a debit to cash, P38,400, and credits to Miscellaneous Income, P8,400 and Semitrucks P 30,000.

Entries for depreciation had been made for the close of each year as follows: 2003, P243,600; 2004, P253,200; 2005, P293,400; 2006, P333,600.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Disregard tax implications)

1. The 2006 depreciation expense is overstated bya. P165,600

b. P108,300

c. P208,800

d. P168,000

2. The carrying amount of Semitrucks as of December 31, 2006 is

a. P1,062,480

b. P340,800

c. P604,800

d. P424,800

3. The 2003 net income is overstated by

a. P10,800

b. P24,000

c. P37,200

d. P04. The 2004 net income is understated by

a. P19,200

b. P60,000

c. P61,200

d. P0

5. Assuming the errors were not discovered and corrected, the December 31, 2006 retained earnings would have been understated by

a. P77,400

b. P243,000

c. P77,400

d. P0

PROBLEM NO. 14 (Stice, Stice and Skousen 15th edition)In connection with your audit of the Ponce Mining Corporation for the year ended December 31, 2006, you noted that the company purchased for P16,640,000 mining property estimated to contain 12,800,000 tons of ore. The residual value of the property is P1,280,000.

Building used in mine operations costs P1,280,000 and have estimated life of fifteen years with no residual value. Mine machinery costs P2,560,000 with an estimated residual value P512,000 after its physical life of 4 years.

Following is the summary of the companys operations for first year of operations.

Tons mined1,280,000 tons

Tons sold 1,024,000 tons

Unit selling price per ton P4.40

Direct labor1,024,000

Miscellaneous mining overhead204,800

Operating expenses (excluding depreciation)921,600

Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is chargeable to production.

QUESTIONS:

Based on the above and the result of your audit, answer the following: (Disregard tax implications)

1. How much is the depletion for 2006?

a. P1,228,800b. P1,536,000c. P307,200

d. P1,664,000

2. Total inventoriable depreciation for 2006?

a. P640,000

b. P580,267

c. P614,400

d. P0

3. How much is the Inventory as of December 31, 2006?

a. P701,440

b. P675,840

c. P680,960

d. P669,013

4. How much is the cost of sales for the year ended December 31, 2006?

a. P2,703,360b. P2,805,760c. P2,723,840d. P2,676,053

5. How much is the maximum amount that may be declared as dividends at the end of the companys first year of operations?

a. P2,391,040b. P2,063,360c. P2,083,840d. P2,111,147

AUDIT OF INTANGIBLE ASSETS

PROBLEM NO. 15 (Stice, Stice and Skousen 15th edition)Transactions during 2006 of the newly organized Agoncillo Corporation included the following:

Jan. 2Paid legal fees of P270,000 and stock certificate costs of P149,400 to complete organization of the corporation.

15Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and candy to create goodwill for the new enterprise. Clown cost, P18,000; pamphlets and candy, P9,000.

Apr. 1Patented a newly developed process with costs as follows:

Legal fees to obtain patentP 772,200

Patent application and licensing fees 114,300

TotalP 886,500

It is estimated that in 6 years other companies will have developed improved processes, making the Agoncillo Corporation process obsolete.

May 1Acquired both a license to use a special type of container and a distinctive trademark to be printed on the container in exchange for 10,800 shares of Agoncillos no-par common stock selling for P50 per share. The license is worth twice as much as the trademark, both of which may be used for 6 years.

July 1Constructed a shed for P2,358,000 to house prototypes of experimental models to be developed in future research projects.

Dec. 31Incurred salaries for an engineer and chemist involved in product development totaling P3,150,000 in 2006.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of patent

a. P886,500

b. P772,200

c. P114,300

d. P0

2. Cost of licenses

a. P270,000

b. P360,000

c. P180,000

d. P0

3. Cost of trademark

a. P270,000

b. P360,000

c. P180,000

d. P0

4. Carrying amount of Intangible Assets as of December 31, 2006

a. P1,282,688b. P4,459,688c. P1,255,688d. P0

5. Total amount resulting from the foregoing transactions that should be expensed when incurred

a. P7,380,900b. P3,569,400c. P3,596,400d. P0

PROBLEM NO. 16 (Stice, Stice and Skousen 15th edition)On December 31, 2005, Gregoria Corporation acquired the following three intangible assets:

A trademark for P540,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.

Goodwill for P2,700,000. The goodwill is associated with Gregorias De Jesus Manufacturing reporting unit.

A customer list for P396,000. By contract, Gregoria has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2006, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P18,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the De Jesus Manufacturing reporting unit is P450,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the De Jesus Manufacturing reporting unit are as follows:

Book valuesFair values

Identifiable assetsP4,860,000P5,400,000

Goodwill2,700,000?

Liabilities3,240,0003,240,000

c) The cash flows expected to be generated by the customer list are P216,000 in 2007 and P144,000 in 2008.

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%):

1. Total amortization for the year 2006a. P132,000

b. P254,727

c. P209,142

d. P156,3432. Impairment loss for the year 2006a. P162,857

b. P240,000

c. P323,251

d. P0

3. Carrying value of Trademark as of December 31, 2006a. P540,000

b. P462,857

c. P300,000

d. P216,7494. Carrying value of Goodwill as of December 31, 2006a. P2,700,000b. P2,577,272c. P2,565,000d. P2,632,500

5. Carrying value of Customer list as of December 31, 2006a. P396,000

b. P264,000

c. P316,800

d. P0

AUDIT OF LIABILITIES

PROBLEM NO. 17 (Stice, Stice and Skousen 15th edition)You were able to obtain the following from the accountant for Paterno Corp. related to the companys liabilities as of December 31, 2006.Accounts payableP 650,000

Notes payable trade190,000

Notes payable bank800,000

Wages and salaries payable15,000

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 to Allied Bank.

(1) A P300,000, 8% note issued March 1, 2004, payable on demand. Interest is payable every six months.

(2) A 1-year, P500,000, 11 % note issued January 2, 2006. On December 30, 2006, Paterno negotiated a written agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2007. The interest was paid on December 31, 2006.c. The 10% mortgage note was issued October 1, 2003, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2006, Paterno is three months behind in paying its required interest payment.

d. The 12% mortgage note was issued May 1, 2000, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30, 2007. The payment includes interest of P180,000.

e. The bonds payable is 10-year, 8% bonds, issued June 30, 1997. Interest is payable semi-annually every June 30 and December 31.QUESTIONS:

Based on the above and the result of your audit, answer the following: 1. Interest payable as of December 31, 2006 is a. P155,000

b. P143,000

c. P203,000

d. P215,0002. The portion of the Note Payable-bank to be reported under current liabilities as of December 31, 2006 is a. P300,000

b. P500,000

c. P800,000

d. P03. Total current liabilities as of December 31, 2006 is a. P3,950,000b. P4,138,000c. P3,938,000d. P3,998,0004. Total noncurrent liabilities as of December 31, 2006 is a. P1,760,000b. P2,560,000c. P3,960,000d. P1,960,0005. Which of the following is incorrect regarding the classification of financial liabilities?

a. An entity classifies financial liabilities as current when they are due to be settled within 12 months after the balance sheet date.

b. If the entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the balance sheet date under an existing loan facility, it classifies obligation as non-current, even if it would be otherwise due within a shorter period.

c. When refinancing or rolling over is not at the discretion of the entity, the potential to refinance is not considered and the obligation is classified as current.

d. When an entity breaches an undertaking under a long-term loan agreement on or before the BS date with the effect that the liability becomes payable on demand, the liability is classified as non-current, if, after the BS date, and before the FS are authorized for issue, the lender has agreed not to demand payment as a consequence of the breach.PROBLEM NO. 18 (Stice, Stice and Skousen 15th edition)Ricarte Corporation manufactures television components and sells them with 6-month warranty under which defective components will be replaced without charge. On December 31, 2005, Estimated Liability for Product Warranty had a balance of P918,000. By June 30, 2006, this balance had been reduced to P144,450 by debits for estimated net cost of components returned that had been sold in 2005.

The company started out in 2006 expecting 8% of the peso volume of sales to be returned. However, due to the introduction of new models during the year, this estimated percentage of returns was increased to 10% on May 1. It is assumed that no components sold during a given month are returned in that month. Each component is stamped with a date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the like pattern of sales return during the 6-month period of the warranty, starting with the month following the sale of components.

Month Following SalePercentage of Total Returns Expected

First 20%

Second30

Third20

Fourth through sixth 10% each month 30

100%

Gross sales of components were as follows for the first 6 months of 2006:

Month Amount

JanuaryP6,480,000

February5,940,000

March7,380,000

April5,130,000

May3,600,000

June3,240,000

The companys warranty also covers the payment of freight cost on defective components returned and on the new components sent out as replacements. This freight cost runs approximately 10% of the sales price of the components returned. The manufacturing cost of the components is roughly 80% of the sales price, and the salvage value of returned components averages 15% of their sales price. Returned components on hand at December 31, 2005, were thus valued in inventory at 15% of their original sales price.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The total estimated returns for the six-month period ended June 30, 2006 is

a. P2,678,400b. P2,541,600c. P3,177,000d. P2,859,3002. The warranty expense for the six-month period ended June 30, 2006 is

a. P2,382,750b. P2,468,880c. P2,008,800d. P1,906,2003. The Estimated Liability for Product Warranty as of June 30, 2006 should have a balance of

a. P1,147,680b. P855,900

c. P955,126

d. P764,1004. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of

a. P711,450

b. P810,676

c. P888,462

d. P619,6505. In evaluating an entitys accounting estimates, one of an auditors objectives is to determine whether the estimates are

a. Not subject to bias.

b. Based on objective assumptions.c. Consistent with industry guidelines.

d. Reasonable in the circumstances.PROBLEM NO. 19 (Stice, Stice and Skousen 15th edition)On January 2, 2005, the Delos Santos, Inc. issued P3,000,000 of 8% convertible bonds at par. The bonds will mature on January 1, 2009 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 10%.

On December 31, 2006, the holders of the bonds with total face value of P1,500,000 exercised their conversion privilege. In addition, the company reacquired at 110, bonds with a face value of P750,000.

The balances in the capital accounts as of December 31, 2005 were:

Common stock, P100 par, authorized 75,000 shares, issued and outstanding, 45,000 sharesP4,500,000

Premium on common stock750,000

Market values of the common stock and bonds were as follows:

DateBondsCommon stock

December 31, 200511840

December 31, 200611042

QUESTIONS:

Based on the above and the result of your audit, answer the following: (Round-off present value factors to four decimal places)1. How much of the proceeds from the issuance of convertible bonds should be allocated to equity?

a. P951,000

b. P190,224

c. P332,496

d. P0

2. How much is the carrying value of the bonds payable as of December 31, 2005?

a. P3,000,000

b. P2,084,100c. P2,694,255d. P2,850,7543. How much is the interest expense for the year 2006?

a. P240,000

b. P208,410

c. P269,426

d. P285,0754. The entry to record the conversion on December 31, 2006 will increase APIC bya. P547,915

b. P600,000

c. P461,840

d. P0

5. How much is the loss on bond reacquisition on December 31, 2006?

a. P75,000

b. P144,080

c. P101,043

d. P0

AUDIT OF STOCKHOLDERS EQUITY

PROBLEM NO. 20 (Stice, Stice and Skousen 15th edition)Baltazar Inc. was organized on January 2, 2005, with authorized capital stock of 50,000 shares of 10%, P200 par value preferred, and 200,000 shares of no-par, no stated value common. During the first 2 years of the company's existence, the following selected transactions took place:

2005

Jan. 2Sold 10,000 shares of common stock at P16.

2Sold 3,000 shares of preferred stock at P216.

Mar. 2Sold common stock as follows: 10,800 shares at P22; 2,700 shares at P25.

Jul. 10Acquired a nearby piece of land, appraised at P400,000, for 600 shares of preferred stock and 27,000 shares of common. (Preferred stock was recorded at P216, the balance being assigned to common.)

Dec. 16Declared the regular preferred dividend and a P1.50 common dividend.

28Paid dividends declared on December 16.

31The Income Summary account showed a credit balance of P450,000.2006Feb. 27Reacquired 12,000 shares of common stock at P19.

Jun. 17Resold 10,000 shares of the treasury stock at P23.

Jul. 31Resold all of the remaining treasury stock at P18.

Sep. 30Sold 11,000 additional shares of common stock at P21.

Dec. 16Declared the regular preferred dividend and a P0.80 common dividend.

28Dividends declared on December 16 were paid.

31The income summary account showed a credit balance of P425,000.QUESTIONS:

Based on the above and the result of your audit, determine the balances of the following as of December 31, 2006:

1. Preferred stock

a. P777,600

b. P600,000

c. P720,000

d. P729,6002. Common stock

a. P615,000

b. P966,500

c. P735,500

d. P696,1003. Additional paid in capital

a. P38,000

b. P93,600

c. P57,600

d. P95,6004. Total stockholders equitya. P2,498,150b. P2,388,150c. P1,892,100d. P2,376,6305. An auditor usually obtains evidence of shareholders equity transactions by reviewing the entitys

a. Minutes of board of directors meetings.c. Canceled stock certificates.

b. Transfer agents records.

d. Treasury stock certificate book.

PROBLEM NO. 21 (RPCPA 11.84)Lapu-Lapu Corporation was authorized at the beginning of 2004 with 300,000 authorized shares of P100, par value common stock. At December 31, 2004, the stockholders equity section of Lapu-Lapu was as follows:

Common stock, par value P100 per share; authorized 300,000 shares; issued 30,000 sharesP3,000,000

Additional paid-in capital 300,000

Retained earnings 450,000

Total stockholders equityP3,750,000

On June 15, 2005, Lapu-Lapu issued 50,000 shares of its common stock for P6,000,000. A 5% stock dividend was declared on September 30, 2005 and issued on November 10, 2005 to stockholders of record on October 31, 2005. Market value of common stock was P110 per share on declaration date. The net income of Lapu-Lapu for the year ended December 31, 2005 was P475,000.

During 2006, Lapu-Lapu had the following transactions;

March 1Lapu-Lapu reacquired 3,000 shares of its common stock for P95 per share.

May 31Lapu-Lapu sold 1,500 shares of its treasury stock for P120 per share.

August 10Issued to stockholders one stock right for each share held to purchase two additional shares of common stock for P125 per share. The rights expire on December 31, 2006.

September 1525,000 stock rights were exercised when the market value of common stock was P130 per share.

October 3140,000 stock rights were exercised when the market value of the common stock was P140 per share.

December 10Lapu-Lapu declared a cash dividend of P2 per share payable on January 5, 2007 to stockholders of record on December 31, 2006.

December 20Lapu-Lapu retired 1,000 shares of its treasury stock and reverted them to an unused basis. On this date, the market value of the common stock was P150 per share.

December 31Net income for 2006 was P500,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2006:

1. Common stock

a. P21,400,000b. P21,300,000c. P14,800,000d. P21,250,000

2. Additional paid-in capital

a. P4,627,500b. P3,007,500c. P4,632,500d. P4,592,500

3. Retained earnings

a. P600,000

b. P565,000

c. P557,000

d. P560,0004. Treasury stock

a. P10,000

b. P47,500

c. P50,000

d. P0

5. When a corporate client maintains its own stock records, the auditor primarily will rely upon

a. Confirmation with the company secretary of shares outstanding at year-end.

b. Review of the corporate minutes for data as to shares outstanding.

c. Confirmation of the number of shares outstanding at year-end with the appropriate state official.

d. Inspection of the stock book at year-end and accounting for all certificate numbers.