AUDITING PROBLEMS

PROBLEM NO. 1
(Intermediate Accounting 17th Edition – Stice)

The TOY COMPANY completed the following transactions during 2012:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000
representing property tax for March 1 – June 30 which was prepaid by the
vendor. Of the purchase price, 25% is deemed applicable to land and the
remaining 75% to buildings. The Toy Company assumed a mortgage of
P4,600,000 on the purchase and paid cash for the balance.

30 The building acquired necessitates current reconditioning at a cost of

P342,000 because previous owners had failed to take care of normal
maintenance and repair requirements on it.

May 15 Garages in the rear of the building were demolished. The Toy Company
recovered P66,000 on the lumber salvage. It then proceeded to construct
a warehouse at P1,013,000, which was almost exactly the same as bids
made by construction companies. Upon completion of construction, city
inspectors ordered extensive modifications to the warehouse as a result of
failure on the part of the company to comply with building safety code.
Such modifications, which could have been avoided, cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market
value of P640,000 (par, P40,000) for a patent and new toy-making
machine. The machine has a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the
machinery, a new franchise was acquired from the manufacturer of the
machinery to produce toy robots. Payment was made by issuing the
company’s own ordinary shares (par, P1,000,000). The value of the
franchise is set at P500,000, while the machine’s fair value is P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of
P420,000 and P89,000, respectively. The work was completed and paid
for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During
this time, required redecorating and repairs were completed at a cost of
P64,000.

After considering the preceding transactions, compute the year-end balances of the
following:

1. Buildings
A. P7,289,000 B. P7,511,750 C. P7,413,000 D. P7,635,750

2. Land
A. P2,074,250 B. P2,000,000 C. P2,583,250 D. P2,509,000

3. Machinery
A. P1,070,000 B. P920,000 C. P770,000 D. P931,000

4. Share premium
A. P10,000 B. P500,000 C. P710,000 D. P600,000

5. Intangibles
A. P830,000 B. P500,000 C. P330,000 D. P840,000

Page 1 of 22 Pages
PROBLEM NO. 2
(Intermediate Accounting 17th Edition – Stice)

LAFAYETTE CORPORATION, a client, requests that you compute the appropriate

balance of its estimated liability for product warranty account for a statement as of
June 30, 2012.

Lafayette Corporation manufactures television components and sells them with a 6-

month warranty under which defective components will be replaced without charge.
On December 31, 2011, Estimated Liability for Product warranty had a balance of
P620,000. By June 30, 2012, this balance had been reduced to P120,400 by debits
for estimated net cost of components returned that had been sold in 2011.

The corporation started out in 2012 expecting 7% 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 likely
pattern of sales returns during the 6-month period of the warranty, starting with the
month following the sale of components.

Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth—10% each month 30
100%

Gross sales of components were as follows for the first six months of 2012:

Month Amount Month Amount

January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The corporation’s 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 5% of the sales price of the components returned.
The manufacturing cost of the components is roughly 70% of the sales price, and
the salvage value of returned components averages 10% of their sales price.
Returned components on hand at December 31, 2011, were thus valued in
inventory at 10% of their original sales price.

Based on the given information, determine the following:

1. Total estimated returns from the sales made during the first 6 months of 2012
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500

2. Total estimated returns subsequent to June 30, 2012

A. P678,250 B. P648,850 C. P591,850 D. P615,950

3. Estimated loss on component replacement (in percentage of sales price)

A. 65% B. 75% C. 70% D. 80%

4. Required Estimated Liability for Product Warranty balance at June 30, 2012
A. P301,353 B. P421,753 C. P120,400 D. P77,847

5. Required adjustment to liability account

A. P301,353 debit C. P421,753 debit
B. P301,353 credit D. P421,753 credit

Page 2 of 22 Pages
PROBLEM NO. 3
(Intermediate Accounting 13TH ED - KIESO)

MALOX Specialty Company manufactures three models of gear shift components for
bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since
beginning operations in 1979, Malox has used normal absorption costing and has
assumed a first-in, first-out cost flow in its perpetual inventory system. The
balances of the inventory accounts at the end of Malox’s fiscal year, November 30,
2012, are shown below. The inventories are stated at cost before any year-end
adjustments.

Finished goods P647,000

Work in process 112,500
Raw materials 264,000
Factory supplies 69,000

The following information relates to Malox’s inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost NRV
Down tube shifter
Standard model P 67,500 P 67,000
Click adjustment model 94,500 89,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 266,000

Bar end shifter

Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
Total finished goods P647,000 P650,550

2. One-half of the head tube shifter finished goods inventory is held by catalog
outlets on consignment.

3. Three-quarters of the bar end shifter finished goods inventory had been
pledged as collateral for a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a

contracted price 20 percent above the net realizable value. The net
realizable value of the rest of the raw materials is P127,400.

5. The total net realizable value of the work in process inventory is P108,700.

6. Included in the cost of factory supplies are obsolete items with historical cost
of P4,200. The net realizable value of the remaining factory supplies is
P65,900.

7. Malox applies the lower of cost or net realizable value method to each of the
three types of shifters in finished goods inventory. For each of the other
three inventory accounts, Malox applies the lower of cost or net realizable
value method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Malox’s

financial statements taken as a whole.

Page 3 of 22 Pages
Based on the preceding information, determine the proper values of the following
on November 30, 2012.

1. Finished goods inventory

A. P647,000 B. P643,000 C. P650,550 D. P654,550

2. Work in process inventory

A. P108,300 B. P112,500 C. P108,700 D. P104,500

3. Raw materials inventory

A. P264,000 B. P227,400 C. P242,000 D. P237,400

4. Factory supplies
A. P64,800 B. P65,900 C. P61,700 D. P69,000

5. Which of the following best describes the PAS 2 requirement for applying the
same cost formula to all inventories?
A. When they are purchased from different suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.

PROBLEM NO. 4
(IFRS Practical Implementation Guide and Workbook 2nd edition)

GATAS, INC. produces milk on its farms. It produces 30% of the country’s milk that
is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500
heifers. The farms produce 8 million kilograms of milk a year, and the average
inventory held is 150,000 kilograms of milk. However, the company is currently
holding stocks of 500,000 kilograms of milk in powder form.

At October 31, 2012, the herds are:

• 21,000 cows (3 years old), all purchased on or before November 1, 2011

• 7,500 heifers, average age 1.5 years, purchased on April 1, 2012
• 3,000 heifers, average age 2 years, purchased on November 1, 2011

No animals were born or sold in the year.

The unit fair values less estimated point-of-sale costs were:

1-year-old animal at October 31, 2012 P3,200
2-year-old animal at October 31, 2012 4,500
1.5-year-old animal at October 31, 2012 3,600
3-year-old animal at October 31, 2012 5,000
1-year-old animal at November 1, 2011 and
April 1, 2012 3,000
2-year-old animal at November 1, 2011 4,000

The company has had problems during the year: Contaminated milk was sold to
customers. As a result, milk consumption has gone down. The government has
decided to compensate farmers for potential loss in revenue from the sale of milk.
This fact was published in the national press on September 1, 2012. Gatas received
an official letter on October 10, 2012, stating that P5 million would be paid to it on
January 2, 2013.

The company’s business is spread over different parts of the country. The only
region affected by the contamination was Central Visayas, where the government
curtailed milk production in the region. The cattle were unaffected by the
contamination and were healthy. The company estimates that the future
discounted cash flow income from the cattle in the Central Visayas region amounted
to P4 million, after taking into account the government restriction order. The
company feels that it cannot measure the fair value of the cows in the region
because of the problems created by the contamination. There are 6,000 cows and

Page 4 of 22 Pages
2,000 heifers in the region. All these animals had been purchased on November 1,
2011. A rival company had offered Gatas P3 million for these animals after point-of-
sale costs and further offered P6 million for the farms themselves in that region.
Gatas has no intention of selling the farms at present. The company has been
applying PAS 41 since November 1, 2011.

1. What is the fair value of the cattle (excluding Central Visayas region) at
November 1, 2011?
A. P93 million B. P64 million C. P63 million D. P48 million

2. What is the fair value of the cattle (excluding Central Visayas region) at
October 31, 2012?
A. P106.5 million B. P113.25 million C. P105.6 million D. P105.75
million

3. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to price change?
A. P10.7 million B. P12.8 million C. P9.2 million D. P16.7 million

4. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to physical change?
A. P9.2 million B. P11.8 million C. P18.55 million D. P9.4 million

5. On October 31, 2012, the cattle in the Central Visayas region would be valued
at
A. P39 million B. P3 million C. P4 million D. P5 million

PROBLEM NO. 5
(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining
estimates that the acquired property will yield 120,000 tons of ore with sufficient
mineral content to make mining and processing profitable. It further estimates that
6,000 tons of ore will be mined the first and last year and 12,000 tons every year in
between. (Assume 11 years of mining operations.) The land will have a residual
value of P900,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of
P1,080,000. The company estimates that these structures can be used for 15 years
but, because they must be dismantled if they are to be moved, they have no
residual value. Mina Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of
P1,800,000. The machinery cost the former owner P4,500,000 and was 50%
depreciated when purchased. Mina Mining estimates that about half of this
machinery will still be useful when the present mineral resources have been
exhausted but that dismantling and removal costs will just about offset its value at
that time. The company does not intend to use the machinery elsewhere. The
remaining machinery will last until about one-half the present estimated mineral ore
has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.

1. What are the estimated depletion and depreciation charges for the first year?
Depletion Depreciation
A. P2,610,000 P189,000
B. P1,305,000 P378,000
C. P2,610,000 P234,000
D. P1,305,000 P189,000

2. What are the estimated depletion and depreciation charges for the 5 th year?
Depletion Depreciation
A. P1,305,000 P378,000
B. P2,610,000 P234,000

Page 5 of 22 Pages
 C. P2,610,000 P378,000
D. P1,305,000 P234,000

3. What are the estimated depletion and depreciation charges for the 6 th year?
Depletion Depreciation
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000

4. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion Depreciation
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000
5. What are the depletion and depreciation charges for the first year assuming
actual production of 5,000 tons of mineral ore? (Nothing occurred during the
year to cause the company engineers to change their estimates of either the
mineral resources or the life of the structures and equipment.)
Depletion Depreciation
A. P1,087,500 P157,500
B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500

PROBLEM NO. 6
(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in

the demand for its products over the last several years. This prompted the
company to obtain additional manufacturing facility. A real estate firm located an
available factory near Debby’s production facility, and Debby agreed to purchase
the factory and used machinery from Que Company on October 1, 2011.
Renovations were necessary to convert the factory for Debby’s manufacturing use.

The terms of the agreement required Debby to pay Que P1,500,000 when
renovations started on January 1, 2012, with the balance to be paid as renovations
were completed. The overall purchase price for the factory and machinery was
P12,000,000. The building renovations were contracted to Malibay Construction
Company at P3,000,000. The payments made, as renovations progressed during
2012, are shown below. The factory was placed in service on January 1, 2013.
Que Malibay
January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000
On January 1, 2012, Debby obtained a 2-year, P3 million loan with a 12% interest
rate to finance the renovation of the acquired factory. This is Debby’s only
outstanding loan during 2012.

Debby’s policy regarding purchases of this nature is to use the appraisal value of
the land for book purposes and prorate the balance of the purchase price over the
remaining items. The building had originally cost Que P9,000,000 and had a net
book value of P1,500,000, while the machinery originally cost P3,750,000 and had a
net book value of P1,200,000 on the date of sale. The land was recorded on Que’s
books at P1,200,000.

The following values were determined based on appraisal conducted by

independent appraisers at the time of acquisition.
Land P8,700,000
Building 3,150,000

Page 6 of 22 Pages
 Machinery 1,350,000

Gin G. Neer, Debby’s chief engineer estimated that the renovated plant would be
used for 15 years, with an estimated residual value of P900,000. Neer estimated
that the productive machinery would have a remaining useful life of 5 years and
residual value of P90,000. Debby’s depreciation policy is to apply the 200%
declining balance method for machinery and the 150% declining balance method
for the plant. One-half year’s depreciation is taken in the year the plant is placed in
service and one-half year is allowed when the property is disposed of or retired.

Determine the amounts to be recorded on the books of Debby Corp. as of December

31, 2012, for each of the following properties.

1. Land
A. P7,909,000 B. P8,700,000 C. P9,060,000 D. P10,909,000
2. Building
A. P5,670,000 B. P6,223,600 C. P3,223,600 D. P5,310,000
3. Machinery
A. P1,227,300 B. P1,098,000 C. P1,335,300 D. P990,000

Calculate the 2013 depreciation expense for each of the following properties.

4. Building
A. P238,500 B. P311,180 C. P283,500 D. P265,500
5. Machinery
A. P180,000 B. P198,000 C. P219,600 D. P227,460

PROBLEM NO. 7
(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

During the course of your audit of the financial statements of FISHING

CORPORATION for the year ended December 31, 2012, you found a new account,
“Investment in Equity Securities.” Your audit revealed that during 2012, Fishing
began a program of investments, and all investment-related transactions were
entered in this account. Your analysis of this account for 2012 follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2012

Debit Credit
(a)
Salmon Company Ordinary Shares
Feb.14 Purchased 12,000 shares @ P55 per share P660,000
July 26 Received 1,200 ordinary shares of
Salmon Company as a share dividend.
(Memorandum entry in general ledger.)
Sept.28 Sold the 1,200 ordinary shares of
Salmon Company received July 26 @
P70 per share. P84,000
(b)
Debit Credit
Tamban, Inc. Ordinary Shares
April30 Purchased 60,000 shares @ P40 per share P2,400,000
Oct.28 Received dividend of P1.20 per share. P72,000

Additional information:

a. The fair value for each security as of the 2012 date of each transaction follow:

Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31

Page 7 of 22 Pages
 Salmon Company P55 P62 P70 P74
Tamban, Inc. P40 32
Fishing Corp. 25 28 30 33 35

b. All of the investments of Fishing Corporation are nominal in respect to

percentage of ownership (5% or less).

c. Each investment is considered by Fishing Corporation to be non-trading. Fishing

Corporation designates its investment in these non-trading securities as
available-for-sale.

1. What amount should be reported as gain on sale of non-trading equity

securities?
A. P18,000 B. P6,000 C. P24,000 D. P 0

2. The receipt of 1,200 share dividend would cause the investment balance to
increase by
A. P74,400 B. P84,000 C. P66,000 D. P 0

3. What entry is necessary to correct the recording of the cash dividend received
from Tamban, Inc.?
A. Cash 72,000
Dividend income 72,000
B. Cash 72,000
Investment in equity securities 72,000
C. Investment in equity securities 72,000
Dividend income 72,000
D. Dividend income 72,000
Investment in equity securities 72,000

4. What amount of unrealized gain or loss should be reported in the 2012

statement of comprehensive income as component of other comprehensive
income?
A. P192,000 gain B. P192,000 loss C. P480,000 gain D. P480,000
loss

5. What amount should be reported as Investment in Equity Securities in the

statement of financial position on December 31, 2012?
A. P2,808,000 B. P3,000,000 C. P2,520,000 D. P3,288,000

PROBLEM NO. 8
(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

Presented below are two independent situations. Answer the questions at the end
of each situation.

GARLA HOME IMPROVEMENTS installs replacement siding, windows, and louvered

glass doors for single family homes and condominium complexes in Quezon City.
The company is in the process of preparing its annual financial statements for the
fiscal year ended May 31, 2012, and Jimmy Lansang, controller for GARLA, has
gathered the following data concerning inventory.

At May 31, 2012, the balance in GARLA’s Raw Material Inventory account was
P1,224,000, and the Allowance to Reduce Inventory to NRV had a credit balance of
P82,500. Lansang summarized the relevant inventory cost and market data at May
31, 2012, in the schedule below.
Cost Sales Price Net Realizable Value
Aluminum siding P 210,000 P 192,000 P 168,000
Cedar shake siding 258,000 282,000 254,400
Louvered glass doors 336,000 559,200 504,900
Thermal windows 420,000 464,400 420,000
P1,224,000 P1,497,600 P1,347,300

Page 8 of 22 Pages
 1. What amount should be reported as Allowance to Reduce Inventory to Net
Realizable Value at May 31, 2012?
A. P168,900 B. P45,600 C. P273,600 D. P123,300

2. What amount of gain or loss should be recorded for the year ended May 31,
2012, due to the change in the Allowance to Reduce Inventory to Net
Realizable Value?
A. P36,900 gain B. P86,400 loss C. P40,800 loss D. P82,500
gain

MANGO BANGGO purchased a mango farm in August 2012 for P2,250,000. The
purchase was risky because the growing season was coming to an end, the
mangoes must be harvested in the next few weeks, and Mango has limited
experience in carrying off a mango harvest.

At the end of the first quarter of operations, Mango is feeling pretty good about his
early results. The first harvest was a success; 30,000 kilos of mangoes were
harvested with a value of P90,000 (based on current local commodity prices at the
time of harvest). The fair value of Mango’s mango farm has increased by P45,000
at the end of the quarter. After storing the mangoes for a short period of time,
Mango was able to sell the entire harvest for P105,000.

3. What amount of gain should be recognized on the change in fair value of

Mango’s mango farm?
A. P150,000 B. P45,000 C. P90,000 D. P135,000

4. At what amount should the mangoes harvested be initially recorded on

Mango’s books?
A. P90,000 B. P105,000 C. P60,000 D. P150,000

5. What is the total effect on income for the quarter related to Mango’s biological
asset and agricultural produce?
A. P150,000 B. P45,000 C. P15,000 D. P60,000

PROBLEM NO. 9
(IFRS for SMEs Training Modules – Modules 14, 18 and 21)

The following independent cases relate to different SMALL AND MEDIUM-SIZED

ENTITIES (SMEs):

Case 1

On January 1, 20X4, SME A acquired a trademark for a line of products in a separate

acquisition from a competitor for P300,000. SME A expected to continue marketing
the line of products using the trademark indefinitely. An analysis of (i) product life
cycle studies, (ii) market, competitive and environmental trends, and (iii) brand
extension opportunities provides evidence that the line of trademarked products
may generate net cash inflows for the acquiring entity for an indefinite period.
Because management is unable to estimate the useful life of the trademark, SME A
amortizes the cost of the trademark over 10 years (i.e., its presumed useful life)
using the straight-line method.

In 20X7, a competitor unexpectedly revealed a technological breakthrough that is

expected to result in a product, that when launched by the competitor, will
extinguish for SME A’s patented product-line. Demand for SME A’s patented
product-line is expected to remain strong until December 20X9, when the
competitor is expected to launch its new product.

On December 31, 20X7, SME A assessed the recoverable amount of the trademark
at P50,000. SME A intends to continue manufacturing the patented products until
December 31, 20X9. SME A has a December 31 financial year-end.

Page 9 of 22 Pages
Case 2

SME B gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract of sale, SME B undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from
the date of sale. On the basis of experience, it is probable (i.e., more likely than
not) that there will be some claims under the warranties.

At December 31, 20X1, SME B appropriately recognized P50,000 warranty provision.

SME B incurred and charged P140,000 against the warranty provision in 20X2.
P80,000 of this related to warranties for sales made in 20X2. The increase during
20X2 in the discounted amount recognized as a provision at December 31, 20X2
arising from the passage of time is P2,000.

At December 31, 20X2, SME B estimated that it would incur expenditures in 20X3 to
meet its warranty obligations at December 31, 20X2, as follows:

• 5 percent probability of P400,000

• 20 percent probability of P200,000
• 50 percent probability of P80,000
• 25 percent probability of P20,000

Assume for simplicity that the 20X3 cash flows for warranty repairs and
replacements take place, on average, on June 30, 20X3.

An appropriate discount rate is 10 percent per year. An appropriate risk adjustment

factor to reflect the uncertainties in the cash flow estimates is an increment of 6
percent to the probability-weighted expected cash flows.

SME B is also the defendant in a breach of patent lawsuit. Its lawyers believe there
is a 70 percent chance that SME B will successfully defend the case. However, if the
court rules in favor of the claimant, the lawyers believe that there is a 60 percent
chance that the entity will be required to pay damages of P2 million (the amount
sought by the claimant) and a 40 percent chance that the entity will be required to
pay damages of P1 million (the amount that was recently awarded by the same
judge in a similar case). Other amounts of damages are unlikely.

The court is expected to rule in late December 20X3. There is no indication that the
claimant will settle out of court.

A 7 percent risk adjustment factor to the cash flows is considered appropriate to

reflect the uncertainties in the cash flow estimates. An appropriate discount rate is
10 percent per year.

Case 3

On January 1, 20X1, SME AA acquired 25 percent of the equity of each of entities

BB, CC and DD for P10,000, P15,000 and P28,000, respectively. SME AA has
significant influence over entities BB, CC and DD. Transaction costs of 1 percent of
the purchase price of the shares were incurred by SME AA.

On January 2, 20X1, entity BB declared and paid dividends of P1,000 for the year
ended 20X0. On December 31, 20X1, entity CC declared a dividend of P8,000 for
the year ended 20X1. The dividend declared by entity CC was paid in 20X2.

For the year ended December 31, 20X1, entities BB and CC recognized profit of
respectively P5,000 and P18,000. However, entity DD recognized a loss of P20,000
for that year.

Published price quotations do not exist for the shares of entities BB, CC and DD.
Using appropriate valuation techniques, SME AA determined the fair value of its
investment in entities BB, CC and DD at December 31, 20X1 as P13,000, P29,000

Page 10 of 22 Pages
and P15,000, respectively. Costs to sell are estimated at 5 percent of the fair value
of the investments.

Based on the above information, calculate the following:

1. Trademark amortization for the year ended December 31, 20X7

A. P90,000 B. P70,000 C. P30,000 D. P 0

2. Impairment loss to be recognized for the trademark at December 31, 20X7

A. P90,000 B. P50,000 C. P130,000 D. P60,000

3. The carrying amount of the warranties provision at December 31, 20X2

A. P88,000 B. P50,000 C. P52,000 D. P106,000

4. The amount of loss on litigation that should be reported by SME B at December

31, 20X2
A. P1,000,000 B. P1,070,000 C. P1,019,050 D. P 0

Assume SME AA measures all its investments in associates using the

cost model.

5. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

6. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P11,780 B. P14,030 C. P2,000 D. P2,250

Assume SME AA measures all its investments in associates using the

equity method. Assume that there is neither implicit goodwill nor fair
value adjustments.

7. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

8. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P8,280 B. P6,030 C. P6,780 D. P2,250

Assume SME AA measures all its investments in associates after initial

recognition using the fair value model.

9. The increase in fair value that SME AA should recognize in profit or loss for the
year ended December 31, 20X1
A. P4,000 B. P3,470 C. P1,150 D. P620

10. The carrying amount of the investment in associates under each of the
following assumptions
Cost Equity Fair Value
Model Method Model
A. P38,970 P43,000 P57,000
B. 38,970 52,030 54,150
C. 39,500 43,000 57,000
D. 39,500 52,030 54,150

PROBLEM NO. 10
(Intermediate Accounting 17Th Edition – Stice)
Page 11 of 22 Pages
HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The
bank has requested audited financial statements. Hiatt’s financial statements have
never been audited before. It has prepared the following comparative financial
statements for the years ended December 31, 2012 and 2011.

HIATT TEXTILE CORPORATION

COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2012 and 2011
2012 2011
Assets
Current assets:
Cash and cash equivalents P1,205,000 P 800,000
Accounts receivable 1,960,000 1,480,000
Allowance for bad debts (185,000) (90,000)
Inventory 1,035,000 1,010,000
Total current assets 4,015,000 3,200,000
Noncurrent assets:
Property, plant, and equipment 835,000 847,500
Accumulated depreciation (608,000) (532,000)
Total noncurrent assets 227,000 315,500
Total assets P4,242,000 P3,515,500

Liabilities and Shareholders’ Equity

Liabilities:
Accounts payable P 607,000 P 980,500
Shareholders’ equity:
Ordinary shares, P20 par value;
150,000 shares authorized;
65,000 shares issued and outstanding 1,300,000 1,300,000
Retained earnings 2,335,000 1,235,000
Total shareholders’ equity 3,635,000 2,535,000
Total liabilities and shareholders’ equity P4,242,000 P3,515,500

HIATT TEXTILE CORPORATION

COMPARATIVE INCOME STATEMENTS
For the Years Ended December 31, 2012 and 2011

2012 2011
Sales P5,000,000 P4,500,000
Cost of goods sold 2,150,000 1,975,000
Gross income 2,850,000 2,525,000
Operating expenses:
Selling expenses 1,150,000 1,025,000
Administrative expenses 600,000 525,000
Total operating expenses 1,750,000 1,550,000
Net income P1,100,000 P 975,000

The 2012 audit revealed the following facts:

a. On January 5, 2011, Hiatt Textile Corporation had charged a 5-year insurance

premium to expense. The premium totaled P31,000.

Page 12 of 22 Pages
b. The amount of loss due to bad debts has steadily decreased over the last 2
years. Hiatt Textile Corporation has decided to reduce the amount of bad debt
expense from 2% to 1½ % of sales, beginning with 2012. (A charge of 2% has
already been made for 2012.)

c. Hiatt Textile Corporation uses the periodic inventory system. The following are
the inventory errors for the last 2 years.
2011 - Ending inventory overstated by P75,500
2012 - Ending inventory overstated by P99,000

d. An equipment costing P150,000 was acquired on January 3, 2011. The purchase

was recorded by a charge to operating expense. The equipment has a useful life
of 10 years and a residual value of P25,000. Hiatt Textile Corporation uses the
straight-line method in depreciating its assets.

e. Assume that the books for 2012 have not yet been closed. Ignore tax
implications.

Based on the above information, answer the following:

1. The December 31, 2012 adjusting entry to correct the expensing of insurance
premium paid is
A. Prepaid insurance 18,600
Insurance expense 6,200
Retained earnings 24,800
B. Prepaid insurance 18,600
Retained earnings 18,600
C. Insurance expense 18,600
Retained earnings 18,600
D. Insurance expense 6,200
Retained earnings 6,200

2. The December 31, 2012 adjusting entry to correct the expensing of the
equipment purchased on January 3, 2012 should include a credit to
A. Accumulated depreciation—P12,500.
B. Retained earnings—P137,500.
C. Equipment—P12,500.
D. Depreciation expense—P12,500.

3. The December 31, 2012 adjusting entry to correct the inventory errors should
include a debit to
A. Cost of goods sold—P99,000.
B. Inventory—P23,500.
C. Retained earnings—P75,500.
D. Cost of goods sold—P75,500.

4. What is Hiatt’s corrected net income for the year ended December 31, 2011?
A. P1,012,200 B. P1,212,800 C. P786,800 D. P1,061,800

5. What is Hiatt’s corrected net income for the year ended December 31, 2012?
A. P1,095,200 B. P1,129,800 C. P1,082,800 D. P1,107,800

PROBLEM NO. 11
(Intermediate Accounting 16th Edition – Stice)

The schedule below shows the account balances of BENEFICIO CORPORATION at the
beginning and end of the year ended December 31, 2012:

DEBITS Dec. 31, 2012 Dec. 31, 2011

Cash and cash equivalents P222,000 P 50,000
Investment in trading securities 10,000 40,000
Accounts receivable 148,000 100,000
Inventories 291,000 300,000

Page 13 of 22 Pages
Prepaid insurance 2,500 2,000
Land and building 195,000 195,000
Equipment 305,000 170,000
Discount on bonds payable 8,500 9,000
Treasury stock (at cost) 5,000 10,000
Cost of goods sold 539,000
Selling and general expenses 287,000
Income taxes 35,000
Unrealized loss on trading securities 4,000
Loss on sale of equipment 1,000
Total debits P2,053,000 P 876,000

CREDITS
Allowance for bad debts P 8,000 P 5,000
Accumulated depreciation – Building 26,250 22,500
Accumulated depreciation – Equipment 39,750 27,500
Accounts payable 55,000 60,000
Notes payable – current 70,000 20,000
Miscellaneous expenses payable 18,000 8,700
Taxes payable 35,000 10,000
Unearned revenue 1,000 9,000
Notes payable – long-term 40,000 60,000
Bonds payable – long-term 250,000 250,000
Deferred income tax liability 47,000 53,300
Common stock, P2 par 359,400 200,000
Retained earnings appropriated for
treasury shares 5,000 10,000
Retained earnings appropriated for
possible building expansion 38,000 23,000
Unappropriated retained earnings 34,600 112,000
Paid-in capital in excess of par value 116,000 5,000
Sales 898,000
Gain on sale of investment securities 12,000
Total credits P2,053,000 P 876,000

Additional information:

a) All purchases and sales were on account.

b) Equipment with an original cost of P15,000 was sold for P7,000.

c) Selling and general expenses include the following:
Building depreciation P 3,750
Equipment depreciation 25,250
Bad debt expense 4,000
Interest expense 18,000

d) A six-month note payable for P50,000 was issued toward the purchase of new
equipment.

e) The long-term note payable requires the payment of P20,000 per year plus
interest until paid.

f) Treasury stock was sold for P1,000 more than their cost.

g) During the year, a 30% stock dividend was declared and issued. At that time,
there were 100,000 shares of P2 par common stock outstanding. However,
1,000 of these shares were held as treasury stock at the time and were
prohibited from participating in the stock dividend. Market price was P10 per
share when the stock dividend was declared.

h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The
cost was debited to Accumulated Depreciation—Equipment.

Page 14 of 22 Pages
i) Beneficio has determined that its purchases and sales of trading securities are
operating activities.

Based on the given data, calculate the following:

1. Net income for 2012

A. P45,000 B. P50,300 C. P43,500 D. P44,000

2. Cash dividends declared and paid during 2012

A. P8,000 B. P52,000 C. P7,400 D. P 0

3. Proceeds from issuance of common stock in 2012

A. P100,000 B. P110,000 C. P210,000 D. P269,400

4. Proceeds from sale of trading securities

A. P26,000 B. P38,000 C. P42,000 D. P14,000

5. Accumulated depreciation of equipment sold

A. P7,000 B. P15,000 C. P8,000 D. P9,000

6. Cash paid for purchase of equipment

A. P50,000 B. P106,000 C. P150,000 D. P100,000

7. Proceeds from sale of treasury stock

A. P6,000 B. P5,000 C. P4,000 D. P10,000

8. Net cash provided by operating activities

A. P45,000 B. P87,000 C. P83,000 D. P89,300

9. Net cash used in investing activities

A. P106,000 B. P99,000 C. P61,000 D. P93,000

10. Net cash provided by financing activities

A. P188,000 B. P187,000 C. P182,000 D. P106,000

PROBLEM 12
(Applying International Accounting Standards – Alfredson)

CORNETTE MANUFACTURING COMPANY’s accounts at December 31, 2011 included

the following balances:

Machinery (at cost) P273,000

Accumulated depreciation - machinery 144,600
Vehicles (at cost; purchased November 21, 2010) 140,400
Accumulated depreciation – vehicles 58,968
Land (at cost; purchased October 25, 2008) 243,000
Building (at cost; purchased October 25, 2008) 557,160
Accumulated depreciation – building 85,842

Details of machines owned at December 31, 2011 are as follows:

Machine Purchase Date Cost Useful Life Residual Value

1 Oct. 7, 2008 P129,000 5 years P7,500
2 Feb. 4, 2009 144,000 6 years 9,000

Additional information:

• Cornette calculates depreciation to the nearest month and uses straight-line

depreciation for all depreciable assets except vehicles, which are depreciated on
the diminishing balance at 40% per annum.

Page 15 of 22 Pages
• Cornette’s financial year-end is December 31.

• The vehicles account balance reflects the total paid for two identical delivery
vehicles, each of which cost P70,200.

• On acquiring the land and building, Cornette estimated the building’s useful life
and residual value at 20 years and P15,000, respectively.

The following transactions occurred from January 1, 2012:

2012
Jan. 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight
charges of P1,326 and installation costs of P5,274 were paid in cash. The
useful life and residual value were estimated at five years and P12,000,
respectively.

June22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965
and four new tires costing P1,035 were paid for in cash.

Aug.28 Exchanged machine 1 for office furniture that had a fair value of P37,500 at
the date of exchange. The fair value of machine 1 at the date of exchange
was P34,500. The office furniture originally cost P108,000 and, to the date
of exchange, had been depreciated by P72,300 in the previous owner’s
books. Cornette estimated the office furniture’s useful life and residual
value at eight years and P1,620, respectively.

Dec.31 Recorded depreciation.

2013
April30 Paid for repairs and maintenance on the machinery amounting to P2,784.

May25 Sold one of the vechicles bought on November 21, 2010 for P19,800 cash.

June26 Installed a fence around the property at cost of P16,500. The fence has an
estimated useful life of 10 years and zero residual value. (Debit the cost to
a Land Improvements asset account.)

Dec.31 Recorded depreciation.

2014
Jan. 5 Overhauled machine 2 at cost of P36,000, after which Cornette estimated
its remaining life at one additional year and revised its residual value to
P15,000.

June20 Traded in the remaining vehicle bought on November 21, 2010 for a new
vehicle. A trade-in allowance of P11,100 was received and P69,900 was
paid in cash.

Oct. 4 Scrapped the vehicle bought on June 22, 2012, as it had been so badly
damaged in a traffic accident that it was not worthwhile repairing it.

Dec.31 Recorded depreciation.

Required:

1. Machine 3, purchased on January 3, 2012, should be recorded at

A. P171,000 B. P177,600 C. P165,600 C. P159,000

2. The second-hand vehicle purchased on June 22, 2012, should be recorded at

A. P45,600 B. P46,635 C. P47,565 D. P48,600

Page 16 of 22 Pages
 3. The office furniture acquired on August 28, 2012, should be recorded at
A. P34,500 B. P37,500 C. P35,700 D. P33,825

4. The gain to be recognized on the exchange of machine 1 for office furniture on

August 28, 2012, should be
A. P1,875 B. P 0 C. P3,675 D. P675

5. The total depreciation expense for 2012 is

A. P142,198 B. P126,391 C. P142,716 D. P142,591

6. The gain (loss) to be recognized on the sale of vehicle on May 25, 2013, is
A. P(558) B. P(4,630) C. P558 D. P4,630

7. The total depreciation expense for 2013, is

A. P112,987 B. P117,059 C. P117,434 D. P116,430

8. After the overhaul, machine 2’s revised annual depreciation is

A. P22,560 B. P50,192 C. P26,100 D. P33,300

9. What is the cost of the new vehicle acquired on June 20, 2014?
A. P81,000 B. P69,900 C. P58,800 D. P91,398

10. The total depreciation expense for 2014 is

A. P114,678 B. P118,593 C. P118,218 D. P108,288

PROBLEM 13
(AUDITING An Integrated Approach 7th Edition – Arens and Loebbeck)

The following information was obtained in an audit of the cash account of CHELSEE
COMPANY as of December 31, 2012. Assume that the CPA has satisfied himself as
to the propriety of the cash book, the bank statements, and the returned checks,
except as noted:

1. The bookkeeper’s bank reconciliation at November 30, 2012.

Balance per bank statement P194,000

Add: Deposit in transit 11,000
Total P205,000
Less: Outstanding checks
No. 1434 P1,400
1562 7,500
1571 5,800
1584 8,000
1591 300 23,000
Balance per books P182,000

2. A summary of the bank statement for December 2012.

Balance brought forward P 194,000

Deposits 1,487,000
Total P1,681,000
Charges (1,325,000)
Balance, December 31, 2012 P 356,000

3. Included with cancelled checks returned with the December bank statement
were the checks listed below.

4. The Chelsee Company discounted its own 60-day note for P90,000 with the
bank on December 1, 2012. The discount rate was 6 percent. The accountant
recorded the proceeds as a cash receipt at the face value of the note.

5. The accountant records customers’ dishonored checks as a reduction of cash

receipts. When the dishonored checks are redeposited they are recorded as a
regular cash receipt. Two NSF checks for P1,800 and P2,200 were returned by
Page 17 of 22 Pages
 the bank during December. Both checks were redeposited and were recorded
by the accountant.

6. Cancellations of Chelsee Company checks are recorded by a reduction of cash

disbursements.

7. December bank charges were P200. In addition, a P100 service charge was
made in December for the collection of a note receivable in November. These
charges were not recorded on the books.

8. Check no. 1434 listed in the November outstanding checks was drawn in 2010.
Since the payee cannot be located, the President of Chelsee Company agreed
to the CPA’s suggestion that the check be written back into the accounts by a
journal entry.

9. Outstanding checks at December 31, 2012, totaled P49,400, including checks

1434 and 1584.

10. The cutoff bank statement disclosed that the bank had recorded a deposit of
P24,000 on January 2, 2013. The accountant had recorded this deposit on the
books on December 31, 2012, and then mailed the deposit to the bank.

Cancelled Checks Returned with the December Bank Statement

Date Amount
Number of Checkof Check Comments

1562 11/28/12 P 750 This check was in payment of an invoice for P7,500 and
was recorded in the cash book as P7,500.

1571 11/28/12 5,800 This check was in payment of an invoice for P5,800 and
was recorded in the cash book as P5,800.

1583 12/04/12 1,500 Examination of this check revealed that it was

unsigned. A discussion with the client disclosed that
it had been mailed inadvertently before it was
signed. The check was endorsed and deposited by
the payee and processed by the bank even though it
was a legal nullity. The check was recorded in the
cash disbursements journal.

1588 12/12/12 8,000 This check replaced 1584, which was returned by the
payee because it was mutilated. Check 1584 was
not cancelled on the books.

----- 12/19/12 2,000 This was a counter check drawn at the bank by the
President of the company as a cash advance for
travel expense. The President overlooked informing
the bookkeeper about the check.

----- 12/20/12 3,000 The drawer of this check was the Chelsea Company.

1595 12/20/12 3,500 This check had been labeled NSF and returned to the
payee because the bank had erroneously believed
that the check was drawn by the Chelseen Company.
Subsequently, the payee was advised to redeposit
the check.

1599 01/05/13100,000 This check was given to the payee on December 30,
2012, as a postdated check with the understanding
that it would not be deposited until January 5. The
check was not recorded on the books in December.
Required:

Page 18 of 22 Pages
 1. What is the correct amount of outstanding checks on December 31?
A. P41,400 B. P33,250 C. P48,000 D. P40,000

2. What is the amount of cash receipts per book in December?

A. P1,496,900 B. P1,504,900 C. P1,495,100 D. P1,487,000

3. What is the amount of cash disbursements per book in December?

A. P1,254,850 B. P1,252,850 C. P1,256,850 D. P1,248,850

4. What is the cash in bank balance per book as of December 31?

A. P426,050 B. P428,250 C. P430,050 D. P343,050

5. What is the adjusted cash balance as of December 31?

A. P343,000 B. P340,200 C. P347,000 D. P344,200

PROBLEM 14
(Auditing Standards and Procedures 9th Edition – Holmes and Burns)

The following information is based on a first audit of SABILA COMPANY. The client
has not prepared financial statements for 2010, 2011, or 2012. During these years,
no accounts have been written off as uncollectible, and the rate of gross income on
sales has remained constant for each of the three years.

Prior to January 1, 2010, the client used the accrual method of accounting. From
January 1, 2010, to December 31, 2012, only cash receipts and disbursements
records were maintained. When sales on account were made, they were entered in
the subsidiary accounts receivable ledger. No general ledger postings have been
made since December 31, 2009.

As a result of your examination, the correct data shown in the table below are
available:

12/31/09 12/31/12
Accounts receivable balances:
Less than one year old P15,400 P28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P16,600 P33,000

Inventories P11,600 P18,800

Accounts payable for inventory purchased P 5,000 P11,000

Cash received on accounts receivable in:

2010 2011 2012

Applied to:
Current year collections P148,800 P161,800 P208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total P162,800 P177,200 P227,600

Cash sales P17,000 P26,000 P31,200

Cash disbursements for

inventory purchased P125,000 P141,200 P173,800

Required:

1. The company’s sales revenue for the three-year period amounted to

A. P658,200 B. P74,200 C. P625,400 D. P415,300

Page 19 of 22 Pages
 2. What is the company’s total sales revenue for 2011?
A. P206,400 B. P183,600 C. P268,200 D. P180,400

3. The aggregate amount of purchases for the three-year period is

A. P131,000 B. P440,000 C. P434,000 D. P446,000

4. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33% B. 28.35% C. 35.16% D. 31.15%

5. What is the company’s gross profit for each of the three-year period?
2010 2011 2012
A. P 60,933 P 68,200 P 80,000
B. 55,533 60,133 79,000
C. 122,400 137,600 178,800
D. 61,200 68,800 89,400

PROBLEM 15
(Intermediate Accounting 17th Edition – Stice)

On December 31, 2011, MABUHAY COMPANY’s statement of financial position

showed the following balances related to its securities accounts:

Trading securities P1,477,500

Available-for-sale securities (AFS) 1,180,000
Interest receivable – Manila Water bonds 12,500
Unrealized gain – AFS 100,000

Mabuhay’s securities portfolio on December 31, 2011, was made up of the following
securities:

Security Classification Cost Market

10,000 shares Yemen Corp. stock Trading P750,000 P762,500
8,000 shares Toronto, Inc. stock Trading 550,000 528,250
10% Manila Water bonds (interest
payable semiannually on Jan. 1 and July 1) Trading 250,000 186,750
10,000 shares Bulacan, Inc. stock Available-for-sale590,000 630,000
20,000 shares Jumbo Unlimited, Inc. stock Available-for-sale490,000 550,000

During 2012, the following transactions took place:

Jan. 3 Received interest on the Manila Water bonds.

Mar. 1 Purchased 3,000 additional shares of Yemen Corp. stock for P229,500,
classified as a trading security.
Apr. 15 Sold 4,000 shares of the Toronto, Inc. stock for P69 per share.
May 4 Sold 4,000 shares of the Bulacan, Inc. stock for P62 per share.
July 1 Received interest on the Manila Water bonds.
Oct. 30 Purchased 15,000 shares of Pasay Co. stock for P832,500, classified as a
trading security.

The market values of the stocks and bonds on December 31, 2012, are as follows:

Yemen Corp. stock P76.60 per share

Toronto, Inc. stock P68.50 per share
Pasay Co. stock P55.25 per share
Manila Water bonds P205,550
Bulacan, Inc. stock P61.00 per share
Jumbo Unlimited, Inc. stock P27.00 per share

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

1. Gain or loss on sale of 4,000 Toronto, Inc. shares on April 15, 2012
A. P1,000 gain B. P1,000 loss C. P11,875 gain D. P11,875 loss

Page 20 of 22 Pages
 2. Net realized gain or loss on sale of 4,000 Bulacan, Inc. shares on May 4, 2012
A. P12,000 gain B. P12,000 loss C. P4,000 gain D. P4,000 loss

3. Carrying amount of Trading Securities as of December 31, 2012

A. P2,337,000 B. P2,287,800 C. P2,304,100 D. P2,297,400

4. Carrying amount of Available-for-Sale Securities as of December 31, 2012

A. P844,000 B. P806,000 C. P906,000 D. P944,000

5. In 2012, what amount of unrealized gain or loss should be shown as

component of income and shareholders’ equity?
Income Shareholders’ Equity
A. P28,725 gain P62,000 gain
B. P28,725 gain P22,000 loss
C. P32,900 loss P122,000 loss
D. P39,600 gain P78,000 gain

PROBLEM 16
(CPA Coaching Course 2nd Edition – Chamberlaine and Meier)

You have been asked by a client to review the records of BABOLS COMPANY, a small
manufacturer of precision tools and machines. Your client is interested in buying
the business, and arrangements have been made for you to review the accounting
records.

Your examination reveals the following:

1. BABOLS commenced business on April 1, 2009, and has been reporting on a

fiscal year ending March 31. The company has never been audited, but the
annual statements prepared by the bookkeeper reflect the following income
before closing and before deducting income taxes:
Year Ended Income
March 31 Before Taxes
2010 P 143,200
2011 222,800
2012 207,160

2. A relatively small number of machines have been shipped on consignment.

These transactions have been recorded as ordinary sales and billed as such. On
March 31 of each year, machines billed and in the hands of consignees
amounted to:
2010 P 13,000
2011 None
2012 11,180
Sales price was determined by adding 30% to cost. Assume the consigned
machines are sold the following year.

3. On March 30, 2011, two machines were shipped to a customer on a C.O.D. basis.
The sale was not entered until April 5, 2011, when cash was received for
P12,200. The machines were not included in the inventory at March 31, 2011.
(Title passed on March 30, 2011.)

4. All machines are sold subject to a five-year warranty. It is estimated that the
expense ultimately to be incurred in connection with the warranty will amount to
½ of 1% of sales. The company has charged an expense account for warranty
costs incurred.
Sales per books and warranty costs were:
Warranty Expense
Year Ended For Sales Made In
March 31 Sales 2010 2011 2012 Total
2010 P 1,880,000 P 1,520 P 1,520
2011 2,020,000 720 P 2,620 3,340
Page 21 of 22 Pages
 2012 3,590,000 640 3,240 P 3,820 7,700

5. Bad debts have been recorded on a direct writeoff basis. Experience of similar
enterprises indicates that losses will approximate ¼ of 1% of sales. Bad debts
written off were:
Bad Debts Incurred on Sales Made In
2010 2011 2012 Total
2010 P 1,500 P 1,500
2011 1,600 P 1,040 2,640
2012 700 3,600 P 3,400 7,700

6. Commissions on sales have been entered when paid. Commissions payable on

March 31 of each year were:
2010 P 2,800
2011 1,600
2012 2,240

7. A review of the corporate minutes reveals the manager is entitled to a bonus of

½ of 1% of the income before deducting income taxes and the bonus. The
bonuses have never been recorded or paid.

Based on the preceding information, determine the following:

1. Correct sales for the year ended March 31, 2010.

A. P1,867,000 B. P1,880,000 C. P1,870,000 D. P1,873,000

2. Correct sales for the year ended March 31, 2011.

A. P2,035,200 B. P2,032,200 C. P2,042,200 D. P2,045,200

3. Correct sales for the year ended March 31, 2012.

A. P3,569,200 B. P3,566,620 C. P3,578,820 D. P3,590,000
4. Additional warranty expense for the year ended March 31, 2012.
A. P10,133 B. P24,834 C. P6,886 D. P17,833

5. Additional bad debt expense for the year ended March 31, 2011.
A. P2,473 B. P1,217 C. P8,917 D. P6,858

6. Additional commission expense for the year ended March 31, 2012.
A. P1,600 B. P2,240 C. P4,640 D. P640

7. Manager’s bonus expense for the year ended March 31, 2012.
A. P902 B. P1,781 C. P2,683 D. P1,149

8. Correct income before income tax for the year ended March 31, 2010.
A. P229,841 B. P228,692 C. P125,785 D. P126,417

9. Correct income before income tax for the year ended March 31, 2011.
A. P228,692 B. P179,488 C. P125,785 D. P126,417

10. Correct income before income tax for the year ended March 31, 2012.
A. P179,488 B. P229,841 C. P180,390 D. P126,417

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