NEW PROBLEMS BASED ON THE MAY 2024 HANDOUTS

SINGLE ENTRY SYSTEM

PROBLEM NO. 3
Your audit of Pura Company disclosed that your client kept very limited records. Purchases of merchandise
were paid for by check, but most other items were out of cash receipts. The company’s collections were
deposited weekly. No record was kept of cash in the bank, nor was a record kept of sales. Accounts
receivable were recorded only by keeping a copy of the ticket, and this copy was given to the customer
when he paid his account.

On January 2, 2022 started business and issued ordinary shares, 108,000 shares with ₱100 par, for the
following considerations:

Cash ₱ 900,000
Building (useful life, 15 years) 8,100,000
Land 2,700,000
₱11,700,000

An analysis of the bank statements showed total deposits, including the original cash investment of
₱6,300,000. The balance in the bank statement on December 31, 2022, was ₱450,000, but there were
checks amounting to ₱90,000 dated December but not paid by the bank until January 2023. Cash on hand
on December 31, 2022 was ₱225,000 including customers’ deposit of ₱135,000

During the year, Pura Company borrowed ₱900,000 from the bank and repaid ₱225,000 and ₱45,000
interest.

Disbursements paid in cash during the year were as follows:

Utilities ₱180,000
Salaries 180,000
Supplies 360,000
Dividends 270,000
₱990,000

An inventory of merchandise taken on December 31, 2022 showed ₱1,359,000 of merchandise.

Tickets for accounts receivable totaled ₱1,620,000 but ₱90,000 of that amount may prove uncollectible.

Unpaid suppliers invoices for merchandise amounted to ₱630,000.

Equipment with a cash of ₱720,000 was purchased in early January on a one-year installment basis. During
the year, checks for the down payment and all maturing installments totaled ₱801,000. The equipment has
a useful life of 5 years.

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

1. Payments for merchandise purchases in 2022

a. ₱4,869,000 c. ₱3,654,000
b. ₱3,879,000 d. ₱3,969,000

2. Collections from sales in 2022

a. ₱6,480,000 c. ₱5,580,000
b. ₱7,380,000 d. ₱4,500,000

3. Net income for the year ended December 31, 2022

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 a. ₱2,430,000 c. ₱2,655,000
b. ₱1,440,000 d. ₱2,340,000

4. Stockholders’ equity as of December 31, 2022

a. ₱13,860,000 c. ₱14,085,000
b. ₱12,870,000 d. ₱13,770,000

5. Total assets as of December 31, 2022

a. ₱14,175,000 c. ₱14,374,800
b. ₱14,085,000 d. ₱14,310,000

PROBLEM NO. 6
The following data are obtained from a single entry set of books kept by the proprietor of SHED CIRIACO
Store for 2021.

December 31 January 1
Cash 900,000 600,000
Notes receivable 600,000 200,000
Accounts receivable 1,000,000 800,000
Merchandise inventory 500,000 800,000
Equipment 550,000 600,000
Notes payable 250,000 350,000
Accounts payable 500,000 600,000
Accrued interest payable 20,000 40,000
Unearned rent income 20,000 60,000

The cashbook shows the following information:

Balance, January 1 600,000

Receipts:
Accounts receivable 1,500,000
Notes receivable 500,000
Cash sales 400,000
Purchase returns received from suppliers 20,000
Rent income 80,000
Sale of equipment costing
₱100,000 and with book value of
₱50,000 60,000
Investment 300,000 2,860,000
Total 3,460,000
Payments:
Sale returns refunded to customers 10,000
Accounts payable 750,000
Notes payable 650,000
Cash purchases 300,000
Interest expense 50,000
Expenses 400,000
Equipment 200,000
Withdrawals 200,000 2,560,000
Balance, December 31 900,000

Supplementary information:
a. Sales discounts granted to customers 50,000
b. Sales returns made by customers (including the ₱10,000 refund to the customer) 150,000
c. Accounts receivable written off as uncollectible 30,000

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d. Purchase discounts on accounts payable paid 40,000

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2021:
1. Total gross sales
2. Total gross purchases
3. Cost of sales
4. Interest expense
5. Rent income

CORRECTION OF ERRORS
PROBLEM NO. 8 (COMPREHENSIVE)
You were engaged by SELF-SACRIFICE Company to audit its financial statements for the first time. In
examining the books, you found out that certain adjustments had been overlooked at the end of 2021 and
2022. You also discovered that other items had been improperly recorded. These omissions and other
failures for each year are summarized below:

12/31/2022 12/31/2021
Interest receivable ₱40,000 ₱50,000
Rent payable 240,000 260,000
Prepaid insurance 300,000 342,000
Advances to suppliers 250,000 270,000
(Payment to suppliers had been recorded as
purchases but should have been recognized as
advances to suppliers because goods were not
received until the following year)
Machinery 420,000 500,000
(Capital expenditures had been recorded as repairs
but should have been charged to Machinery; the
depreciation rate is 10% per year, but depreciation in
the year of expenditure is to be recognized at 5%)

QUESTIONS:

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

1. What is the total effect of the errors on the 2021 net income?

2. What is the total effect of the errors on the 2022 net income?

3. What is the total effect of the errors on the company’s working capital at December 31,2022?

4. What is the total effect of the errors on the balance of the company’s retained earnings at December
31, 2022?

PROBLEM NO. 9 (COMPREHENSIVE)

The Daniel Corporation is in the process of negotiating loan for expansion purposes. The books and records
have never been audited and the bank has requested that an audit be performed. Daniel has prepared the
following comparative financial statements for the years ended December 31, 2016 and 2015:
STATEMENT OF FINANCIAL POSITION
As of December 31, 2016 and 2015

ASSETS

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 Current assets: 2016 2015
Cash ₱ 163,000 ₱ 82,000
Accounts receivable 392,000 296,000
Allowance for doubtful accounts (37,000) (18,000)
Trading securities, at cost 78,000 78,000
Merchandise inventory 207,000 202,000
Total current assets ₱ 803,000 ₱ 640,000
Noncurrent Assets:
Property, plant and equipment ₱ 167,000 ₱ 169,500
Accumulated depreciation (121,600) (106,400)
Total PPE (net) ₱ 45,400 ₱ 63,100
Total Assets ₱ 848,400 ₱ 703,100

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable ₱121,400 ₱196,100
Shareholders’ equity:
Ordinary shares, ₱10 par value, authorized 50,000
shares, issued and outstanding 20,000 shares 260,000 260,000
Retained earnings 467,000 247,000
Total shareholders’ equity ₱727,000 ₱507,000
Total liabilities and shareholders’ equity ₱848,400 ₱703,100

INCOME STATEMENT
For the years ended December 31, 2016 and 2015
2016 2015
Sales ₱1,000,000 ₱900,000
Cost of sales 430,000 395,000
Gross profit 570,000 505,000
Operating expenses 210,000 205,000
Administrative expenses 140,000 105,000
Net income ₱ 220,000 ₱ 195,000

During the course of the audit, the following additional facts were determined:
A. On December 31, 2016, Daniel provided uncollectible accounts based on 2% of its annual sales. Daniel
changed its method of determining its allowance for uncollectible by 10% based on accounts receivable.
B. An analysis of trading securities revealed that this investment portfolio consisted entirely of securities
that were acquired in 2015. The total market valuation for these investments as of the end of each year
was as follows:
December 31, 2015 ₱81,000
December 31, 2016 62,000
C. The merchandise inventory at December 31, 2015 was overstated by ₱4,000, and the merchandise
inventory at December 31, 2016 was overstated by ₱6,100.
D. On January 1, 2015, equipment costing ₱12,000 (estimated useful life of ten years and residual value
of ₱1,000) was incorrectly charged to operating expenses. Daniel records depreciation on straight-line
method.
E. At the beginning of 2016, fully depreciated equipment (with no residual value) that originally cost
₱17,500 was sold at scrap for ₱2,500. Although Daniel credited the proceeds of ₱2,500 to property
and equipment, no depreciation has been provided on this equipment.
F. An analysis of 2015 operating expenses revealed that Daniel charged to expense a three-year
insurance premium of ₱2,700 on January 2, 2015.

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Questions:
Based on the above data, compute for the following:
1. The adjusted net income in 2015.
a. ₱203,700 c. ₱200,700
b. ₱206,700 d. ₱199,700

2. The adjusted net income in 2016.

a. ₱212,400 c. ₱196,400
b. ₱197,200 d. ₱194,700

3. The adjusted current asset in 2015.

a. ₱636,000 c. ₱639,900
b. ₱643,000 d. ₱640,800

4. The adjusted total asset in 2016.

a. ₱836,400 c. ₱855,000
b. ₱837,300 d. ₱852,500

5. The adjusted shareholders’ equity in 2016.

a. ₱715,900 c. ₱749,900
b. ₱753,900 d. ₱748,900

SHAREHOLDERS’ EQUITY
PROBLEM NO. 1 Legal Capital, Contributed Capital, Shareholders’ Equity
The shareholders’ equity section of Kristal Mae Company revealed the following information on
December 31, 2015:

Estimated Premiums payable 200,000

Share premium on preference shares 300,000
Authorized preference shares at ₱50 par value 1,600,000
Gain on sale of treasury shares 120,000
Unrealized increase in value of FVTOCI securities 20,000
Ordinary share warrants outstanding 70,000
Unissued ordinary shares 1,300,000
Unissued preference shares 300,000
Cash dividends payable – preferences 160,000
Donated capital 80,000
Reserve for bond sinking fund 640,000
Reserve for depreciation 200,000
Revaluation surplus 260,000
Subscription receivable – preference 30,000
Subscription receivable – ordinary shares 40,000
Ordinary shares options outstanding 50,000
Accumulated profits – unappropriated 1,000,000
Bonds payable 2,000,000
Subscribed Ordinary shares 400,000
Long term investments in equity securities 800,000
Share Premium on ordinary shares 600,000
Premium on bonds payable 200,000
Share Premium conversion option-bonds payable 80,000
Authorized ordinary shares at ₱10 stated value 2,400,000
Subscribed Preference shares 120,000
Treasury shares-ordinary shares (10,000 shares) 150,000

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Questions:
Based on the above data, compute for the following:
1. Ordinary share issued

2. Preference shares issued

3. Share premium

4. Contributed capital

5. Total legal capital

6. Total shareholders’ equity

PROBLEM NO. 24
LOESCH Corp. has two classes of share capital outstanding: 12%, ₱100 par value preference share and
₱50 par value share. Balances on January 1, 2009 were:

Preference Share Capital-5,000 shares ₱500,000

Ordinary Share Capital-50,000 shares 2,500,000
Share Premium- PS 200,000
Share Premium- OS 2,000,000
Accumulated Profits 4,000,000

The following data summarize the transactions for 2009:

a. Issue of 20,000 shares of ordinary at ₱50 per share on January 20.
b. Purchase of 5,000 of the company’s own ordinary shares from stockholders at ₱60 per share
on February 20.
c. A 2 for 1 share split on the ordinary on April 1.
d. 20% stock dividend to ordinary shares was declared on April 30 and distributed on May 20.
The prevailing fair value of share on this date was ₱60 per share.
e. Reissuance of 3,000 reacquired shares at ₱40 per share on May 3.
f. Donation of 15,000 shares of ordinary by shareholders on June 5.
g. Reissuance of 10,000 donated stocks at ₱40 per share on July.
h. Declaration of ₱12 cash dividends to preference shares and ₱3 per share dividends to
ordinary on November 30 stockholders as of December 20 payable on January 30 of the next
year.
i. The company appropriated 20% of the adjusted unappropriated accumulated profits (after
other appropriations) for plant expansion.

The net income for the year after adjustments was ₱1,200,000 and accumulated balance of the
unrealized loss from remeasurement of the company’s fair value through comprehensive income
securities was at ₱200,000.

Required:

1. What is the adjusted balance of the ordinary share account on December 31,2009?
a. 4,150,000 b. 3,850,000 c. 7,700,000 d. 8,300,000

2. What is the total additional Paid in Capital as of December 31,2009?

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 a. 2,630,000 b. 2,660,000 c. 2,690,000 d. 2,600,000

3. What is the balance of the accumulated profits, unappropriated account at the end of 2009?
a. 1,998,000 b. 2.334,500 c. 2,534,400 d. d. 3,054,400

4. How much is the total accumulated profits, appropriation?

a. 973,600 b. 773,600 c. 633, 600 d. 210,000

5. What is the total stockholders equity as of December 31,2009?

a. 10,458,000 b. 10,898,000 c. 10,868,000 d. 11, 318,000

CASH
PROBLEM NO. 14
Data regarding the cash in bank for the current year of Initiate Retreat Company follow:
Jan. 31 Feb. 28
Cash per ledger 200,000 290,000
Cash receipts for February 300,000
Unadjusted bank statement 197,500 280,700
Bank disbursements 218,100
NSF recorded as reduction of cash receipts:
a. returned in January recorded in February, ₱1,800
b. returned in February recorded also in February, ₱10,400
c. returned in February recorded also in March, ₱8,600
Check of the company issued in January was mutilated and returned by the payee.
A replacement check was issued. Both checks were entered in the Check register
but no entry was made to cancel the mutilated check, ₱700.
The company issued a stop payment order to the bank in February for check issued
in February which was not received by the payee. A new check was written and
recorded in the Check register in February. The old check was written off by a
journal entry also in February, ₱1,200.
Paid out of collection in February, ₱12,100
Compute for the adjusted balance of the following:
a. Cash in bank, January 31
b. Cash receipts
c. Cash disbursements
d. Cash in bank, February 28

RECEIVABLES
PROBLEM NO. 1
In 2022, Fiona Company wrote-off ₱184,000 in receivables and recovered ₱48,000 that had been written-
off in prior years. The company recorded an interim provision of bad debts expense of 2% of Net Credit
sales. Fiona’s December 31, 2021 allowance for doubtful accounts was ₱120,000.

The trial balance as of December 31, 2022 showed the following:

Debit Credit
Accounts receivable ₱2,680,000
Allowance for doubtful accounts, 12/31/2022 ₱144,000
Sales (on account) ?
Sales returns (all on credit) 100,000

The adjusted balance at December 31, 2021 of the accounts receivable was ₱2,000,000. Using the aging
method, Fiona’s trade accounts receivable revealed the following:

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 Days outstanding Estimated amount % Uncollectible
(Expected credit
loss)
0-60 ₱ 960,000 2%
61-120 720,000 4%
Over 120 1,000,000 6%

Questions:
Based on the above data, compute for the following:
1. The adjusted allowance for doubtful accounts at December 31, 2022 should be:
a. ₱108,000 c. ₱124,000
b. ₱120,000 d. ₱144,000

2. The correct provision for doubtful accounts for year 2022 is:
a. ₱108,000 c. ₱124,000
b. ₱120,000 d. ₱144,000

3. During 2022, doubtful accounts expense already recorded amounted to:

a. ₱208,000 c. ₱120,000
b. ₱160,000 d. ₱108,000

4. The Gross Sales for year 2022 is:

a. ₱8,000,000 c. ₱8,200,000
b. ₱8,100,000 d. ₱8,300,000

5. The total collection from customers during the year 2022 is:
a. ₱7,320,000 c. ₱7,184,000
b. ₱7,136,000 d. ₱7,232,000

PROBLEM NO. 7

1. What is the primary assertion being addressed by confirmation of receivables?

a. Completeness c. Gross valuation
b. Existence d. Accuracy

2. During the process of confirming receivables as of December 31, 2018, a positive confirmation was
returned indicating the “balance owed as of December 31 was paid on January 9, 2019.” The
auditor would most likely
a. Determine whether there were any changes in the account between January 1 and January
9, 2019.
b. Determine whether a customary trade discount was taken by the customer.
c. Reconfirm the zero balance as of January 10, 2019.
d. Verify that the amount was received.

3. Which of the following is least likely to be typically considered to be an alternate procedure for
handling nonreplies to positive accounts receivable confirmations?
a. Examine bills of lading.
b. Physically examine items sold.
c. Examine correspondence.
d. Examine subsequent cash receipts.

4. An auditor confirms a representative number of open accounts receivable as of December 31, and
investigates respondents’ exceptions and comments. By this procedure the auditor would be most
likely to learn of which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping.

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 b. One of the sales clerks has not been preparing charge slips for credit sales to family and
friends.
c. One of the computer control clerks has been removing all sales invoices applicable to his
account from the data file.
d. The credit manager has misappropriated remittances from customers whose accounts
have been written off.

5. Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally
provide evidence concerning the
a. Collectability of the balances confirmed
b. Ownership of the balances confirmed
c. Validity of the balances confirmed
d. Internal control over balances confirmed

6. Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable
balances represent resident’s delinquent real estate taxes. The internal control structure at the
municipality is weak. To determine the existence of the accounts receivable balances at the
statement of financial position date, Cooper would most likely
a. Send positive confirmation requests
b. Send negative confirmation requests
c. Examine evidence of subsequent cash receipts
d. Inspect the internal records such as copies of the tax invoices that were mailed to the
residents.

7. The use of positive (as opposed to negative) form of receivables confirmation is indicated when
a. Internal control surrounding accounts receivable is considered effective.
b. There is reason to believe that a substantial number of accounts may be in dispute.
c. A large number of small balances are involved.
d. There is a reason to believe a significant portion of the request will most be answered.

8. In auditing accounts receivable the negative form of confirmation request most likely would be used
when
a. Recipients are likely to return positive confirmation requests without verifying the accuracy
of the information
b. The combined assessed level of inherent and control risk relative to accounts receivable
is low.
c. A small number of accounts receivable are involved but a relatively large number of errors
are expected.
d. The auditor performs dual-purpose test that assesses control risk and obtains substantive
evidence.

9. The negative request form of accounts receivable confirmation is useful particularly when the
Combine Assessed level Number of small Consideration
of Inherent &Control Risk is of the recipient
balances is is
a. Low Many likely
b. Low Few Unlikely
c. High Few likely
d. High Many likely

10. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified their account information.
d. Negative confirmation do not produce evidential matter that is statistically quantifiable.

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11. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
a. The cost-per response is excessively high.
b. There is no way of knowing if the intended recipients received them.
c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
d. The inference drawn from receiving no reply may not be correct.

12. Which of the following is correct concerning the use of negative confirmation request?
a. Unreturned negative confirmation request rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
d. Negative confirmation requests are effective when understatements of account balances
are suspected.

13. In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely be justified?
a. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
b. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
c. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.
d. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.

14. When there are a large number of relatively small account balances, negative confirmation of
accounts receivable is feasible if internal accounting control is
a. Strong, and the individual receiving the confirmation request are unlikely to give them
adequate consideration.
b. Weak, and the individuals receiving the confirmation request are likely to give them
adequate consideration.
c. Weak, and the individual receiving the confirmation request are unlikely to give them
adequate consideration.
d. Strong, and the individual receiving the confirmation request are likely to give them
adequate consideration.

15. Smith is engaged in the audit of a cable TV firm which services a rural community. All receivable
balances are small, customers are billed monthly, and internal control is effective. To determine
the validity of the accounts receivable balances at the statement of financial position date, Smith
would most likely
a. Send positive confirmation requests
b. Send negative confirmation requests
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation requests.

16. An auditor would least likely to use a negative accounts receivable confirmation form when
a. Internal control surrounding accounts receivable is effective.
b. A large number of small balances are involved.
c. The number of requests mailed will be minimal.
d. Customers are unlikely to confirm the information.

17. An auditor may use positive and/or negative forms of confirmation requests for accounts receivable.
An auditor most likely will use
a. The positive form to confirm all balances regardless of size.

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 b. A combination of the two forms with the positive form used for large balances and the
negative form for the small balances.
c. A combination of the two forms, with the positive form used for trade receivables and the
negative form for the other receivables.
d. A positive form when controls related to receivables are satisfactory, and the negative form
when controls related to receivables are unsatisfactory.

18. An auditor usually perform alternative procedures to substantiate the existence of accounts
receivable when
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectability of the receivables is in doubt.
d. Pledging of the receivables is probable.

19. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable
confirmation procedures. In such situations the best alternative procedure that auditor might resort
to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedules prepared at the statement of financial
position date and at a subsequent date.
c. Requesting that the management increase the allowance for uncollectible accounts by an
amount equal to some percentage of the balance in those accounts that cannot be
confirmed.
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year
basis.

20. An aged trial balance of accounts receivable is usually used by the auditor to
a. Verify the validity of recorded receivables.
b. Ensure that all accounts are promptly credited.
c. Evaluate the results of compliance tests.
d. Evaluate the provision for bad debts expense.

21. To conceal defalcation involving receivables, the auditor would expect an experienced bookkeeper
to charge which of the following accounts?
a. Miscellaneous income
b. Miscellaneous expense
c. Petty cash
d. Sales returns

22. Tracing bills of lading to sales invoices provides evidence that

a. Shipments to customers were recorded as sales.
b. Recorded sales were shipped.
c. Invoiced sales were shipped.
d. Shipments to customers were invoiced.

23. To verify that all sales transactions have been recorded a test of transactions should be completed
on a representative sample drawn from
a. Entries in the sales journal.
b. The billing clerk’s file of sales orders.
c. A file of duplicate copies of sales invoices for which all prenumbered forms in the series
have been accounted for.
d. The shipping clerk’s file of duplicate copies of bills of lading.

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 24. Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at
the statement of financial position date?
a. Compare shipping documents with sales records.
b. Apply gross profit rates to inventory disposed of during the period.
c. Trace payments received subsequent to the statement of financial position date.
d. Send accounts receivable confirmation requests.

25. If the objective of a test of details is to detect overstatement of sales, the auditor should trace
transactions from the
a. Cash receipts journal to the sales journal.
b. Sales journal to the cash receipts journal.
c. Source documents to the accounting records.
d. Accounting records to the source documents.

26. Which of the following most likely would be detected by an auditor’s review of a client’s sales cut-
off?
a. Unrecorded sales for the year
b. Lapping of year-end accounts receivable.
c. Excessive sales documents
d. Unauthorized goods returned for credit.

27. Cut off test designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management’s assertion of

A. Rights and Obligation B. Completeness C. Existence D. Valuation and

Allocation

28. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and Obligations
C. Valuation and allocation
D. Completeness

INVENTORIES
PROBLEM NO. 2
You were engaged by Psalms Corporation for the audit of the company’s financial statements for the year
ended December 31, 2021. The company is engaged in the wholesale business and makes all sales at
25% over cost.
The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded ₱2,600,000- Balance forwarded ₱1,400,000-
Dec. 27 Dec. 28 RR No. 1059
SI No. 965 20,000- 14,000-
Dec. 28 Dec. 30 RR No. 1061
SI No. 966 75,000- 35,000-
Dec. 28 Dec. 31 RR No. 1062
SI No. 967 5,000- 21,000-
Dec. 31 Dec. 31 RR No. 1063
SI No. 969 23,000- 30,000-
Dec. 31 Dec. 31 Closing entry (1,500,000)

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 SI No. 970 34,000-
Dec. 31 ₱ -
SI No. 971 8,000-
Dec. 31 Closing entry (2,765,000)
₱ -

Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable ₱ 400,000

Inventory 550,000
Accounts payable 350,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it
was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving
Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices
whose number is larger than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased
and received on Receiving Report No. 1060 but for which the invoice was not received until the following
year. Cost was ₱9,000.

b) On the evening of December 31, there were two trucks in the company siding:
. Truck No. AYN 555 was unloaded on January 2 of the following year and received on Receiving
Report No. 1063. The freight was paid by the vendor.
a. Truck No. BCF 665 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for ₱50,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
Proverbs Trading Corporation. Proverbs received the goods, which were sold on Sales Invoice No.
966 terms FOB Destination, the next day.

d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving
Report No. 1064. The goods were shipped FOB Destination, and freight of ₱1,000 was paid by the
client. However, the freight was deducted from the purchase price of ₱400,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2021
2. Purchases for the year ended December 31, 2021
3. Inventory as of December 31, 2021
4. Accounts receivable as of December 31, 2021
5. Accounts payable as of December 31, 2021

PROBLEM NO. 8
On April 25, 2018 fire damaged the office and warehouse of Gilas Wholesale Corporation. The only
accounting record saved was the general ledger from which the following trial balance was prepared:
GILAS Wholesale Corporation
TRIAL BALANCE
March 31, 2018
Cash ₱ 1,400,000
Accounts receivable 5,400,000
Inventory, December 31, 2017 9,000,000

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 Land 4,800,000
Building and equipment 24,000,000
Allowance for depreciation ₱ 5,440,000
Other assets 720,000
Accounts payable 4,740,000
Other expense accruals 1,440,000
Ordinary shares 20,000,000
Retained earnings 8,540,000
Sales 18,080,000
Purchases 8,400,000
Other expenses
4,520,000 -
₱58,240,000 ₱58,240,000

The following data and information have been gathered:

1) Fiscal year of the Corporation ends on December 31.

2) An examination of the April bank statement and cancelled checks revealed that checks written during
the period April 1-25 totaled ₱1,590,000: ₱600,000 paid to accounts payable as of March 31, ₱400,000
for April merchandise shipments, ₱200,000 cash refund to customers for goods returned and ₱390,000
paid for other expenses. Deposits during the same period amounted to ₱2,000,000, which consisted of
receipts on account from customers with the exception of a ₱24,000 refund from a vendor for
merchandise returned in April and advances from customers to be delivered next year amounting to
₱100,000.

3) Correspondence with suppliers revealed total gross purchases in April amounting to ₱1,200,000
including ₱80,000 for shipments in transit on that date for which the company has a legal title. Also, the
total purchase returns in April including the ₱24,000 refund from a vendor amounted to ₱30,000.

4) Customers acknowledged indebtedness of ₱6,000,000 on April 25, 2018. It was also estimated that
customers owed another ₱500,000 which will never be acknowledged or recovered. Of the
acknowledged indebtedness, ₱60,000 will probably be uncollectible. Total sales returns in April
including the ₱200,000 cash refund to customers amounted to ₱350,000.

5) The Corporation’s audited financial statements disclosed the following:

Year Ended
2017 2016
Net sales ₱36,000,000 ₱24,000,000
Net purchases 23,000,000 20,000,000
Beginning inventory 4,000,000 800,000
Ending inventory 9,000,000 4,000,000

6) 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.

7) Salvaged undamaged merchandise was marked to sell at ₱400,000 while damaged merchandise was
marked to sell at ₱300,000 had an estimated realizable value of ₱50,000.

Questions:
Based on the above data, answer the following:
1. How much is the adjusted balance of Accounts Payable as of April 25, 2018?

2. How much is the adjusted balance of Net purchases as of April 25, 2018?

Page 14 of 22
3. How much is the adjusted balance of Net Sales as of April 25, 2018?

4. How much is the adjusted balance of Cost of Sales as of April 25, 2018?

5. How much is the total inventory fire loss as of April 25, 2018?

PROBLEM NO. 12
NCPAR Company has a herd of 15, one-year old animals on January 1, 2021. Two animals aged 1.5
years were purchased on July 1, 2021 for ₱5,000 and three animals were born on July 1, 2021. No
animals were sold or disposed of during the period. Fair values per unit less costs to sell are summarized
below:
One-year old animal at January 1, 2021 ₱ 4,500
1.5 year-old animal at July 1, 2021 5,000
Newborn animal at July 1, 2021 3,000
One-year old animal at December 31, 2021 4,600
1.5 year-old animal at December 31, 2021 5,200
Newborn animal at December 31, 2021 3,300
Two-year old animal at December 31, 2021 5,500
0.5 year-old animal at December 31 , 2021 3,400
On January 1, 2022, four (4) animals were sold at ₱5,700 each. These animals are part of the entity’s
herd on January 1, 2021.
I. Compute for the following:
1. Gain or loss due to physical change.
2. Gain or loss due to price change.
3. Carrying amount of the biological asset as of December 31 , 2021 to be presented in the
noncurrent section of the statement of financial position.
4. Gain or loss on sale of biological asset in 2022.
II. Prepare journal entries to record the acquisition, change in value and sale of the biological
assets.

INVESTMENT IN EQUITY SECURITIES

PROBLEM NO. 1 Purchase: Trade Date vs. Settlement Date Accounting
On December 29, 2018, Bifurcation Company commits itself to purchase a financial asset to be classified
as held for trading for ₱600,000, its fair value on commitment (trade) date. This security has a fair value of
₱601,000 and ₱602,000 on December 31, 2018 (Bifurcation's financial year-end), and January 5, 2019
(settlement date), respectively.

Questions:
Based on the above data, answer the following:
1. If Bifurcation applies the trade date accounting method to account for regular-way purchases of its
securities, how much should be recognized as trading securities on December 31, 2018?
a. ₱600,000 c. ₱602,000
b. ₱601,000 d. ₱ 0

2. If Bifurcation applies the settlement date accounting method to account for regular-way purchases of
its securities, how much should be recognized as trading securities on December 31, 2018?
a. ₱600,000 c. ₱602,000
b. ₱601,000 d. ₱ 0

PROBLEM NO. 2 Sale: Trade Date vs. Settlement Date Accounting

On December 29, 2018 (trade date), Subterfuge Corp. enters into a contract to sell an equity security
classified as Fair Value through Other Comprehensive Income (FVTOCI) for its current fair value of
₱506,000. The asset was acquired a year ago and its cost was ₱500,000. On December 31, 2018

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(financial year-end), the fair value of the asset is ₱510,000. On January 5, 2019 (settlement date), the
asset's fair value is ₱513,000.

Questions:
Based on the above data, answer the following:
1. If Subterfuge uses the trade date method to account for regular-way sales of its securities, how much
is the carrying amount of FVTOCI at December 31, 2018?
a. ₱506,000 c. ₱513,000
b. ₱510,000 d. ₱ 0

2. If Subterfuge uses the settlement date method to account for regular-way sales of its securities, how
much is the carrying amount of FVTOCI at December 31, 2018?
a. ₱506,000 c. ₱ 5,000
b. ₱510,000 d. ₱ 0

PROPERTY, PLANT AND EQUIPMENT

PROBLEM NO. 24 Depletion with Change in Estimate
On January 1, 2018, Jacqueline Co. acquired a property containing mineral resources at a cost of
₱8,000,000. Exploration cost on the property amounted to ₱12,000,000. As part of the company policy, all
exploration cost and evaluation of mineral resources are capitalized. Intangible development costs incurred
amounted to ₱10,000,000. At the end of the economic life of the wasting asset, Jacqueline Co. expects to
sell the land for ₱1,000,000 after incurring cost of ₱100,000. Geologists estimate that the mine will provide
approximately 4,000,000 units.

Actual units extracted from 2018 to 2020 totaled to 400,000. At the beginning of 2021, geologists estimate
that only 500,000 units will be extracted. Also, Jacqueline estimates that after reserves are depleted, the
land will be sold for ₱800,000 after incurring cost of ₱200,000. Actual units extracted in 2021 totaled
200,000.

Questions:
Based on the above data, answer the following:
1. How much is the depletion in 2021?
1. ₱10,596,000 c. ₱10,560,000
2. ₱6,960,000 d. ₱5,916,000

2. What is the carrying amount of the wasting asset on December 31, 2021?
1. ₱16,494,000 c. ₱16,440,000
2. ₱11,040,000 d. ₱9,474,000

INTANGIBLES
PROBLEM NO. 13
Gilead Enterprises has been in business for several years. A trial balance prepared by the company’s staff
accountant for December 31, 2018 is presented below:
Gilead Enterprises
Unadjusted Trial Balance
December 31, 2018
Cash ₱ 20,000
Accounts receivable 50,000
Inventory 120,000
Equipment 800,000
Accumulated depreciation-Equipment ₱ 250,000
Buildings 1,200,000
Accumulated depreciation-Buildings 400,000
Patents 550,000

Page 16 of 22
 Franchise agreements 95,000
Intangible asset-Software cost 1,160,000
Goodwill 345,000
Accounts payable 12,000
Accrued wages payable 5,000
Accrued taxes payable 60,000
Bonds payable 500,000
Premiums on bonds payable 35,000
Preference shares (₱100 par value) 100,000
Ordinary shares (₱25 par value) 1,100,000
Share premium 220,000
Accumulated profits (as of January 1) 1,458,000
Sales revenue 900,000
Cost of goods sold 400,000
Selling and administrative expenses 300,000
₱5,040,000 ₱5,040,000

Before 2018, Gilead Enterprises prepared financial statements internally. The company has not been
audited because the ownership is held completely by one family and is not actively sold. As of 2018,
however, in anticipation of bank loans and possible public offering of common stock, the company needs
audited financial statements prepared in conformity with generally accepted accounting principles.

As a member of the team of independent auditors responsible for Gilead Enterprises, you have been
assigned the intangible assets. You have observed that four intangible asset accounts appear on the
unadjusted trial balance. Additional investigation reveals the following:

Patents: All patents were purchased from another company when Gilead Enterprises began operations on
January 2, 2011. These patents are being amortized over an expected useful life of 14 years. Improvements
made to equipment covered by the patent costing ₱75,000 was debited to the account in January 2015.
Amortization in 2015-2017 included amortization on the ₱75,000 for the remaining life of the relevant patent.
It is determined that the ₱75,000 should have been expensed in 2015. It is further determined on January
1, 2018, that one of the patents has a remaining life of only 2 years. This patent was originally assigned a
cost of ₱210,000.

Franchise agreements: A franchise agreement was signed on January 1, 2018. A ₱50,000 fee was paid,
covering a 5-year period, at the end of which the company may renew the agreement by paying ₱50,000.
A decision on renewal has not been made as of December 31, 2018. The agreement calls for an annual
payment of 5% of its sales revenue. An entry debiting the account for ₱45,000 was made at the time of the
cash payment for 2018.

Software costs: During 2018, Gilead incurred costs to develop and produce a routine, low-risk computer
software product, as follows:
Completion of detailed program design ₱ 130,000
Costs incurred for coding and testing to establish
technological feasibility 100,000
Other coding costs after establishment of technological
feasibility 240,000
Other testing costs after establishment of technological
feasibility 200,000
Costs of producing master for training materials 150,000
Duplication of computer software and training materials from
product masters (1,000 units) 250,000

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 Packaging product (500 units) 90,000
Total ₱1,160,000

Goodwill: The Goodwill includes three items:

• Legal expenses relative to incorporation. These were
assigned to the account in January 2011. ₱ 45,000
• Excess of cost over assigned net asset values of an
enterprise acquired in early 2016, expected to have value
for an indefinite period. 200,000
• Paid to an advertising consulting firm in early 2017 for a
major advertising effort expected to be beneficial for an
indefinite period. 100,000
No amortization has been taken on any amount in the Goodwill account.
Questions:
Based on the above and the result of your audit, compute the following:
1. Carrying amount of Patent, 12/31/2018.
a. ₱388,929 c. ₱441,429
b. ₱445,000 d. ₱510,714

2. Carrying amount of Franchise agreement, 12/31/2018.

a. ₱40,000 c. ₱76,000
b. ₱50,000 d. ₱95,000

3. Carrying amount of Goodwill, 12/31/2018

a. ₱200,000 c. ₱345,000
b. ₱300,000 d. Nil

4. Correct software cost in 2018

a. ₱590,000 c. ₱680,000
b. ₱1,100,000 d. ₱930,000

5. The total costs incurred in the software that should be charged to expense in 2018
a. ₱230,000 c. ₱470,000
b. ₱320,000 d. ₱670,000

6. Total amortization in 2018

a. ₱56,071 c. ₱118,571
b. ₱108,571 d. Nil

REVALUATION AND IMPAIRMENT

PROBLEM NO. 1 Revaluation, With Change in Useful Life and Residual Value
On January 1, 2018, Janine Co. revalued its machinery with a cost of ₱4,550,000, acquired 5 years ago
with an estimated useful life of 20 years and estimated residual value of ₱50,000. The machinery has been
estimated to have a replacement cost of ₱9,100,000. On the same date, based on objective evidence,
Janine Co. revised the estimated remaining useful life and residual value of the machinery to 25 years and
₱100,000, respectively.

On January 2, 2020, the machinery was sold at net proceeds of ₱7,000,000.

Questions:
Based on the above data, answer the following:
1. How much is the revaluation surplus on January 1, 2018?
a. ₱1,125,000 c. ₱3,425,000
b. ₱2,250,000 d. ₱4,550,000

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2. How much is the depreciation expense in 2018?
a. ₱171,250 c. ₱342,500
b. ₱270,000 d. ₱456,667

3. How much is the revaluation surplus at the end of 2018?

a. ₱2,740,000 c. ₱3,425,000
b. ₱3,288,000 d. ₱4,378,750

4. How much is the gain (or loss) on sale of machinery in 2020?

a. (₱150,000) c. ₱690,000
b. (₱2,100,000) d. ₱5,155,000

5. How much is the total revaluation surplus to be closed to retained earnings in 2020?
a. Nil c. ₱3,425,000
b. ₱3,151,000 d. ₱4,246,667

PROBLEM NO. 3 Impairment and Revaluation of PPE

On January 1, 2018, Jude Co. acquired machinery with a cost of ₱2,300,000 with an estimated useful life
of 10 years and estimated salvage value of ₱200,000. On January 1, 2019, based on objective, the
machinery was found to have been impaired. The machinery has a recoverable amount (fair value) of
₱1,847,000 with an estimated useful residual value of ₱200,000.

On January 1, 2021, the machinery now has a recoverable amount (fair value) of ₱1,694,000 with nil
residual value.

Questions:
Based on the above data, answer the following:
Case No. 1: Assuming the company is using cost model, answer the following:
1. How much is the depreciation in 2018?
a. Nil c. ₱210,000
b. ₱185,000 d. ₱230,000

2. How much is the impairment loss in 2019?

a. Nil c. ₱240,000
b. ₱210,000 d. ₱243,000

3. How much is the depreciation in 2019?

a. ₱185,000 c. ₱210,000
b. ₱200,000 d. ₱183,000

4. How much is the revaluation surplus on January 1, 2021?

a. Nil c. ₱24,000
b. ₱49,400 d. ₱380,600

5. How much is the depreciation in 2021?

a. ₱242,000 c. ₱210,000
b. ₱238,571 d. ₱214,200

Case No. 2: Assuming the company is using revaluation model, answer the above questions:

EMPLOYEE BENEFITS
PROBLEM NO. 8 Net benefit Asset-No Asset Ceiling
On January 1, 2018, Lopez Co. has the following data relating to its defined benefit plan:

Fair value of plan assets 2,000,000

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 Defined benefit obligation 1,400,000
Surplus 600,000

During the year 2018, Lopez Co. recognized the following:

Past service cost 350,000
Current service cost 600,000
Benefits paid during the period 230,000
Actual return on plan assets 300,000
Contributions to the fund 600,000
Actuarial loss due to increase in DBO 80,000
Discount rate 12%

Questions:
Based on the above data, answer the following:
1. How much is the fair value of plan assets as of December 31, 2018?
a. ₱2,670,000 c. ₱2,610,000
b. ₱ 2,900,000 d. ₱2,370,000

2. How much is the defined benefit obligation as of December 31, 2018?

a. ₱2,598,000 c. ₱1,858,000
b. ₱2,368,000 d. ₱2,358,000

3. How much is the net interest expense (or income)-P&L during 2018?
a. Nil c. ₱168,000
b. ₱240,000 d. ₱(72,000)

4. How much is the defined benefit cost to be recognized in the profit or loss in 2018?
a. ₱878,000 c. ₱950,000
b. ₱898,000 d. ₱1,118,000

5. How much is the defined benefit cost to be recognized in the other comprehensive income in 2018?
a. Nil c. ₱20,000
b. ₱60,000 d. ₱898,000

FINANCIAL STATEMENTS
PROBLEM NO. 5
The following data are presented in connection with your audit of Narciso Manufacturing Corporation as of
December 31, 2021:

Narciso Manufacturing Corporation

Statement of Financial Position
For the year December 31, 2021

Assets
Cash ₱225,000
Receivable, net 345,700
Inventories 560,000
Prepaid income taxes 40,000
Investments 57,700
Land 450,000
Building 1,750,000
Machinery and Equipment 1,964,000
Goodwill 37,000

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 Total assets ₱5,429,400

Liabilities and Equity

Accounts payable ₱133,800
Mortgage payable, 10% 900,000
Notes payable 500,000
Lawsuit liability 80,000
Income taxes payable 61,200
Deferred tax liability 28,000
Accumulated depreciation 420,000
Total liabilities 2,123,000

Share capital, ₱50 par, 40,000 shares

issued 2,231,000
Retained earnings 1,075,400
Total equity 3,306,400
Total liabilities and equity ₱5,429,400

Your firm has been engaged to perform an audit, during which time the following data are found:

• Checks totaling ₱10,000 in payment of accounts payable were mailed on December 30, 2021 but were
not recorded until 2022. Late in December 2021, the bank returned a customer’s ₱5,000 check, marked
DAIF, but no entry was made. Cash includes ₱100,000 restricted for building purposes and was net of
bank overdraft amounting to ₱25,000.
• Included in accounts receivable is a ₱20,000 note due on December 31, 2024 from the company’s
president. Also, the accounts receivable is net of a 6-months, 12% ₱100,000 notes payable due on
March 31, 2022 to which a ₱150,000 of the receivables were assigned. Accrual of the interest was
incorrectly credited to the accounts payable account.
• On December 26, 2021, a supplier authorized the company to return goods shipped and billed at
₱40,000 on December 3, 2021. The goods were returned on December 28, 2021. The supplier’s credit
memo was received and recorded on January 5, 2022.
• During 2021, the company purchased 500 ordinary shares of a major corporation that supplies the
company with raw materials. The cost of these shares was ₱51,300, and the fair value on December
31, 2021 was ₱47,000. The designated the shares to be financial assets at fair value through
comprehensive income.
• Treasury shares were recorded at cost when the company purchased 200 of its own shares for ₱32
per share in May 2021. This amount is own share in May 2021. This amount is included in investments.
• On December 30, 2021, the company borrowed ₱400,000 from a bank in exchange for a 10% note
payable, maturing on December 30, 2025. Equal principal payments are due December 30 of each
year, beginning in 2022. This note is collateralized by a ₱250,000 tract of land acquired as a potential
future building site, which is included in land.
• The balance of this mortgage payable is due on June 30, 2022. On December 25, 2021, the company
consummated a noncancelable agreement with the lender to refinance this mortgage. The new terms
require ₱100,000 annual principal payments, plus interest, on February 28 of each year, beginning in
2023. The final payment is due February 28, 2030.
• The lawsuit liability will be paid in 2022.
• The following is an analysis of the deferred tax liability at December 31, 2021:
Deferred taxes related to depreciation ₱48,000
Deferred taxes related to lawsuit liability (20,000)
Net deferred tax liability ₱28,000
₱25,000 of the deferred taxes related to depreciation that will reverse in 2022.

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• The current income tax expense reported in the company’s 2021 income statement was ₱61,200.
• The company is authorized to issue 100,000 shares of ₱50 par value ordinary shares.

QUESTIONS:

Based on the above and the result of your audit, compute for the adjusted balances of following as of
December 31, 2021:
1. Current assets
a. 1,100,700 c. 1,225,700
b. 1,125,700 d. 1,135,700
2. Total Assets
a. 3,968,000 c. 5,073,700
b. 5,093,700 d. 5,087,300
3. Current liabilities
a. 410,000 c. 520,000
b. 507,000 d. 510,000
4. Noncurrent liabilities
a. 1,248,000 c. 348,000
b. 1,348,000 d. 948,000
5. Shareholders’ equity
a. 2,210,000 c. 3,435,700
b. 3,335,700 d. 3,295,700

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