AUDIT OF LIABILITIES

PROBLEM I

In the audit of the Heats Corporation’s financial statements at December 31, 2019, the
chief accountant of the said corporation provided the following information:

Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security,
P400,000 due on June 30, 2020; P100,000 due on
Dec. 31, 2020 500,000
Arising from advances by officers, due June 30, 2020 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2021 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

On March 1, 2020, the P400,000 note payable was replaced by an 18-month note for the same
amount. Heats is considering similar action on the P100,000 note payable due on December 31,
2020. The 2019 financial statements were issued on March 31, 2020.

On December 1, 2019, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal.
Heats’ attorneys believe that the suit is without merit. No court date has beenset.

On January 15, 2020, the BIR assessed Heats an additional income tax of P300,000 for the 2017 tax
year. Heats’ attorneys and tax accountants have stated that it is likely that the BIR will agree to a
P200,000 settlement.

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31,
2019:

1. Total current liabilities

2. Total noncurrent liabilities
3. Total liabilities

PROBLEM II

The following information relates to Sonic Company’s obligations as of December 31, 2019. For
each of the numbered items, determine the amount if any, that should bereported as current liability
in Sonic’s December 31, 2019 balance sheet.
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1. Accounts payable:

Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that not had
been recorded as of December 31, 2019:

a) A Company – P224,000 merchandise shipped on December 31, 2019, FOB

destination; received on January 10, 2020.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2019, FOB shipping point;
received on January 16, 2020.
c) C Super Services – P144,000 janitorial services for the three-month period ending January
31, 2020.
d) MERALCO – P67,200 electric bill covering the period December 16, 2019 to
January 15, 2020.

On December 28, 2019, a supplier authorized Sonic to return goods billed at P160,000and shipped
on December 20, 2019. The goods were returned by Sonic on December28, 2019, but the P160,000
credit memo was not received until January 6, 2020.

2. Payroll:

Items related to Sonic’s payroll as of December 31, 2019 are:

Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000

3. Litigation:

In May, 2019, Sonic became involved in a litigation. The suit is being contested, but Sonic’s lawyer
believes it is possible that Sonic may be held liable for damages estimated in the range between
P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other
amount.

4. Bonus obligation:

Sonic Company’s president gets an annual bonus of 10% of net income after bonus and income tax.
Assume the tax rate of 30% and the correct income before bonus and tax is P9,600,000. (Ignore the
effects of other given items on net income.

5. Note payable:

A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31,
2019. The note is dated October 1, 2018, bears interest at 18%, and is payable in three equal annual
installment of P800,000. The first interest and principal payment was made on October 1, 2019.

6. Purchase commitment:

During 2019, Sonic entered in a noncancellable commitment to purchase 320,000 units of inventory
at fixed price of P5 per unit, delivery to be made in 2020. On December 31, 2019, the purchase price
of this inventory item had fallen to P4.40 per unit. The goods covered by the purchase contract were
delivered on January 28, 2020.

7. Deferred taxes:

On December 31, 2019, Sonic’s deferred income tax account has a 2019 ending credit balance of
P772,800, consisting of the following items:

Caused by temporary differences in accounting Deferred tax

For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr.

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8. Product warranty:

Sonic has a one year product warranty on selected items in its product line. The estimated warranty
liability on sales made during 2018, which was outstanding as of December 31, 2018, amounted to
P416,000. The warranty costs on sales made in 2019 are estimated at P1,504,000. Actual warranty
costs incurred during the current 2019 fiscal year are as follows:

Warranty claims honored on 2018 sales P416,000

Warranty claims honored on 2019 sales 992,000
Total warranty claims honored P1,408,000

9. Premiums:

To increase sales, Sonic Company inaugurated a promotional campaign on June 30, 2019. Sonic
placed a coupon redeemable for a premium in each package of product sold. Each premium costs
P100. A premium is offered to customers who send in 5
coupons and a remittance of P30. The distribution cost per premium is P20. Sonic estimated that only
60% of the coupons issued will be redeemed. For the six months ended December 31, 2019, the
following is available:

Packages of product sold 160,000

Premiums purchased 16,000
Coupons redeemed 64,000

10.Due to Five Six Finance company:

Sonic’s accounting records show that as of December 31, 2019, P1,280,000 was due to Five Six
Finance Company for advances made against P1,600,000 of trade accounts receivable assigned to
the finance company with recourse.

PROBLEM III
On January 2, 2018, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds
will mature on January 1, 2022 and interest is payable annually every January 1. The bond contract
entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each
P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the
conversion option is 10%.

On December 31, 2019, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. In addition, the company reacquired at 110, bonds with a face value of
P500,000.

The balances in the capital accounts as of December 31, 2018 were:

Common stock, P100 par, authorized 50,000 shares, issued

and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000

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

Date Bonds Common stock

December 31, 2018 118 40
December 31, 2019 110 42

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

1. How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
2. How much is the carrying value of the bonds payable as of December 31, 2018?
3. How much is the interest expense for the year 2019?
4. The entry to record the conversion on December 31, 2019 will include a credit to APIC of
5. How much is the loss on bond reacquisition on December 31, 2019?

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PROBLEM IV

In connection with your audit of Ginebra Corporation’s financial statements for the year 2019, you
noted the following liability account balances as of December 31, 2018:

Note payable, bank P5,600,000

Liability under finance lease 430,000
Deferred income taxes 700,000

Transactions during 2019 and other information relating to Ginebra’s liabilities were as follows:

a. The principal amount of the note payable is P5,600,000 and bears interest at 12%. The note is
dated April 1, 2018 and is payable in four equal annual installments of P1,400,000 beginning April 1,
2019. The first principal and interest payment was made on April 1, 2019.

b. The capitalized lease is for a ten-year period beginning December 31, 2016. Equal annual
payments of P100,000 are due on December 31 of each year, and the 14% interest rate implicit in
the lease known by Ginebra. The present value at December 31, 2018 of the seven remaining lease
payments (due December 31, 2019 through December 31, 2025) discounted at 14% was P430,000.

c. Deferred income taxes are provided in recognition of timing differences between financial and
income tax reporting of depreciation. For the year ended December 31, 2019, depreciation per tax
return exceeded book depreciation by P312,500. Ginebra’s effective income tax rate for 2018 was
32%.

d. On July 1, 2019, Ginebra issued for P1,774,000, P2,000,000 face amount of its 10%, P1,000
bonds. The Bonds were issued to yield 12%. The bonds are dated July 1, 2018 and will mature on
July 1, 2014. Interest is payable annually on July 1. Ginebra
uses the interest method to amortize bond discount.

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

1. Liability under finance lease as of December 31, 2019

2. Total noncurrent liabilities as of December 31, 2019
3. Current portion of long-term liabilities as of December 31, 2019
4. Accrued interest payable as of December 31, 2019
5. Total interest expense for the year 2019

PROBLEM V

In the audit process, the following data were obtained from the books of the Spurs Company which
uses a voucher system. All invoices are subject to term 2/10, n/30 and are entered net with the
discount entered in the Purchase Discount column of the voucher register. The accountant in charge
of the books went on leave to attend to his family based in New Jersey. A fresh accounting graduate
has been assigned to record the transactions. At year-end, the substitute accountant finds that the
unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust
the matter. A schedule of unpaid vouchers as of December 31, 2019, all of which are net of discount,
is presented to you:

Date Voucher No. Supplier Amount

Nov. 27 797 Duncan Supply Co. P78,400
Dec. 02 821 Ginobili Distributors 19,600
11 829 Parker Sales 44,100
20 836 Mohamed Dealers 17,150
21 842 Bowen Merchandising 22,050
22 856 Horry Mercantile 80,850
31 865 Jackson Traders 78,400
P340,550

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Based on the above and the result of your audit, compute for the following as of December 31,
2019:

1. Adjusted balance of Vouchers Payable

2. Purchase discounts lost on unpaid vouchers
3. Purchase discounts lost on paid vouchers
4. Adjusting journal entry or entries to correct the accounts will include
a. A debit to Purchase Discounts Lost of P11,250.
b. A debit to Purchase Discounts Lost of P5,050.
c. A credit to Vouchers Payable of P8,000.
d. A credit to Vouchers Payable of P11,250.

PROBLEM VI

In your initial audit of Bulls Finance Co., you find the following ledger account balances.
2015 issue
01/01/2015

10/01/2019

01/01/2015

07/01/2019

01/01/2019
07/01/2019
07/01/2019

The bonds were redeemed for permanent cancellation on October 1, 2019 at 105 plus accrued
interest.

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

1. The adjusted balance of bonds payable as of December 31, 2019 is

2. The unamortized bond premium on December 31, 2019 is
3. The total bond interest expense for the year 2019 is
4. The gain or loss on partial bond redemption is

PROBLEM VII

Cavaliers Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates to the obligations of the company as of March 31, 2019:

Notes payable

Cavaliers has signed several long-term notes with financial institutions. The maturities ofthese notes
are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31,
2019.
Due date Amount
April 31, 2019 P600,000
July 31, 2019 900,000
September 1, 2019 450,000
February 1, 2020 450,000
April 1, 2020 – March 31, 2021 2,700,000
P5,100,000

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Estimated warranties

Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability
on sales made during the 2017 – 2018 fiscal year and still outstanding as of March 31, 2018,
amounted to P252,000. The warranty costs on sales made from April 1, 2018 to March 31, 2019, are
estimated at P630,000. The actual warranty costs incurred during 2018 – 2019 fiscal year are as
follows:

Warranty claims honored on 2017 – 2018 sales P 252,000

Warranty claims honored on 2018 – 2019 sales 285,000
Total P 537,000

Trade payables

Accounts payable for supplies, goods, and services purchases on open account amount to P560,000
as of March 31, 2019.

Dividends

On March 10, 2019, Cavaliers’ board of directors declared a cash dividend of P0.30 per common
share and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2019 to
common stockholders on record at the close of business on March 31, 2019. As of March 31, 2019,
Cavaliers has 5 million, P2 par value, common shares issued and outstanding.
Bonds payable

Cavaliers issued P5,000,000, 12% bonds, on October 1, 2013 at 96. The bonds will mature on
October 1, 2023. Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight
line method to amortize bond discount.

Based on the foregoing information, determine the adjusted balances of the following as of March
31, 2019:

1. Estimated warranty payable

2. Unamortized bond discount
3. Bond interest payable
4. Total current liabilities
5. Total noncurrent liabilities

PROBLEM VIII

You were able to obtain the following from the accountant for Mavericks Corp. related to the
company’s liabilities as of December 31, 2019.

Accounts payable P 650,000

Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000

The following additional information pertains to these liabilities.

a. All trade notes payable are due within six months of the balance sheet date.

b. Bank notes-payable include two separate notes payable to Allied Bank.

(1) A P300,000, 8% note issued March 1, 2017, payable on demand. Interest is payable every
six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2019. On December 30, 2019,
Mavericks negotiated a written agreement with Allied Bank to replace the note with a 2-year,
P500,000, 10% note to be issued January 2, 2020. The interest was paid on December 31,
2019.

c. The 10% mortgage note was issued October 1, 2016, with a term of 10 years. Terms of the note
give the holder the right to demand immediate payment if the company fails to make a monthly interest
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payment within 10 days of the date the payment is due. As of December 31, 2019, Mavericks is three
months behind in paying its required interest
payment.

d. The 12% mortgage note was issued May 1, 2013, with a term of 20 years. The current principal
amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of
P220,000 is due April 30, 2020. The payment includes interest of P180,000.

e. The bonds payable is 10-year, 8% bonds, issued June 30, 2010. Interest is payable semi-annually
every June 30 and December 31.

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

1. Interest payable as of December 31, 2019 is

2. The portion of the Note Payable-bank to be reported under current liabilities as of
December 31, 2019 is
3. Total current liabilities as of December 31, 2019 is
4. Total noncurrent liabilities as of December 31, 2019 is
5. Which of the following is correct regarding the classification of financial liabilities?
a. An entity classifies financial liabilities as noncurrent when they are due to be
settled within 12 months after the balance sheet date.
b. If the entity expects, and has the discretion, to refinance or roll over an obligation for at
least 12 months after the balance sheet date under an existing loan facility, it classifies
obligation as current.
c. When refinancing or rolling over is not at the discretion of the entity, the potential to
refinance is not considered and the obligation is classified as current.
d. When an entity breaches an undertaking under a long-term loan agreement on or before
the BS date with the effect that the liability becomes payable on demand, the liability is
classified as non-current, if, after the BS date, and before the FS are authorized for issue,
the lender has agreed not to demand payment as a consequence of the breach.

PROBLEM IX

On January 1, 2019, Lian Sheng Corporation issued 2,000 of its 5-year, P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Lian Sheng uses the effective interest method of amortization. On December 31, 2020,
the 2,000 bonds were extinguished early through acquisition in the open market by Lian Sheng for
P1,980,000 plus accrued interest.

On July 1, 2019, Lian Sheng issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at
par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 12%. On July 1, 2020, an investor in Lian
Sheng’s convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Lian Sheng’s
common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.

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

1. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31,
2019 is
2. The gain on early retirement of bonds on December 31, 2020 is
3. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31,
2019 is
4. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2020 will
increase equity by
5. During the audit of a publicly held company, the auditor could obtain written
confirmation regarding long-term bond transactions from the
a. Bond holders. c. Client's attorney.
b. Trustee. d. Internal auditors.

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 AUDIT OF EQUITY
PROBLEM I

The following data were compiled prior to preparing the balance sheet of the Conviction
Corporation as of December 31, 2019:

Authorized common stock, P100 par value P4,000,000

Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000
Stock warrants outstanding 200,000
Treasury stock, at cost 144,000
Unissued common stock 800,000

Compute for the following:

1. Common stock issued

2. Additional paid-in capital (APIC)
3. Appropriated retained earnings
4. Total stockholders’ equity
5. Legal capital

PROBLEM II

Following is the stockholders’ equity section of Tenacity Corporation’s balance sheet at December
31, 2018:
Common stock, P10 par value; authorized 1,500,000
shares; issued and outstanding 900,000 shares P9,000,000
Additional paid-in capital 750,000
Retained earnings 2,700,000
Total stockholders’ equity P12,450,000

Transactions during 2019 and other information relating to the stockholders’ equity
accounts were as follows:
• On January 26, Tenacity reacquired 75,000 shares of its common stock for P11 per share.
• On April 4, Tenacity sold 45,000 shares of its treasury stock for P14 per share.
• On June 1, Tenacity declared a cash dividend of P1 per share, payable on July 15, 2019 to
stockholders of record on July 1, 2019.
• On August 15, each stockholder was issued one stock right for each share held to purchase two
additional shares of stock for P12 per share. The rights expire on October 31, 2019.
• On September 30, 150,000 stock rights were exercised when the market value of the stock was
P12.50 per share.
• On November 2, Tenacity declared a two for one stock split-up and charged the par value of the
stock from P10 to P5 per share. On November 20, shares were issued for the stock split.
• On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It originally
cost P600,000, was carried by the previous owner at a book value of P300,000, and was recently
appraised at P390,000.
• Net income for 2019 was P720,000.

Based on the above and the result of your audit, determine the following as of December
31, 2019:

1. Common stock
2. Additional paid-in capital
3. Unapproriated retained earnings
4. Total stockholders’ equity
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PROBLEM III
The stockholders’ equity section of the Determination Inc. showed the following data on December
31, 2018: Common stock, P3 par, 450,000 shares authorized, 375,000 shares issued and
outstanding, P1,125,000; Paid-in capital in excess of par, P10,575,000; Additional paid-in capital from
stock options, P225,000; Retained earnings, P720,000. The stock options were granted to key
executives and provided them the right to acquire 45,000 shares of common stock at P35 per share.
Each option has a fair value of P5 at the time the options were granted.

The following transactions occurred during 2019:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31, 2018. The market price
per share was P44 at this time.
Apr. 1 The company issued bonds of P3,000,000 at par, giving each P1,000 bond a detachable
warrant enabling the holder to purchase two shares of stock at P40 each for a 1-year period.
The bonds would sell at P996 per P1,000 bond without the warrant.
July 1 The company issued rights to stockholders (one right on each share, exercisable within a 30-
day period) permitting holders to acquire one share at P40 with every 10 rights submitted. All
but 9,000 rights were exercised on July 31, and the additional stock was issued.
Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised.
Dec. 1 The market price per share dropped to P33 and options came due. Because the market price
was below the option price, no remaining options were exercised.
Dec. 31 Net income for 2019 was P375,750.

Based on the above and the result of your audit, determine the following as of December
31, 2019:

1. Common stock
2. Total additional paid-in capital
3. Retained earnings
4. Total stockholders’ equity

PROBLEM IV
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was engaged in the
audit of the Fortitude Company at the close of the company’s first year of operations on December
31, 2019. The company closed its books prior to the time you began your year-end fieldwork. Your
audit and review showed the following stockholders’ equity accounts in the general ledger:

08/30/19 01/02/19
12/29/19

12/29/19 12/01/19
12/31/19

12/31/19 12/31/19
12/31/19

Based on the other working papers submitted by your audit staff, the following additional information
was forwarded:

From the Articles of Incorporation of Fortitude Company:

• Authorized capital stock – 150,000 shares
• Par value per share – P100

From the board of directors’ minutes of meetings, the following resolutions were extracted:
• 01/02/19 – authorized the issuance of 50,000 shares at P120 per share.
• 08/30/19 – authorized the acquisition of 5,000 shares at P110 per share.
• 12/01/19 – authorized the re-issuance of 2,500 treasury shares at P115 per share.

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• 12/29/19 – Declared a 10% stock dividend, payable January 31, 2020, to stockholders on record as
of January 15, 2020. The market value of the stock on December 29, 2019 was P130 per share.

Based on the above and the result of your audit, determine the adjusted balances of the following as
of December 31, 2019.

1. Capital stock
2. APIC
3. Total retained earnings
4. Treasury stock
5. Total stockholders’ equity

PROBLEM V

The Retained Earnings account of Endurance Company shows the following debits and credits for
the year 2019:

Determine the correct amount of Retained Earnings account.

PROBLEM VI

In connection with your audit of the balance sheet of the Guts Company on December 31, 2019, the
Liability side of the Balance Sheet shows following items:

Current liabilities P571,000

Bonds payable 600,000
Reserve for bond retirement 320,000
6% Cumulative preferred stock, P100 par value (liquidation
value, P115 per share); Authorized, 6,000 shares; issued,
4,000 shares; in treasury, 600 shares 400,000
Common stock, P100 par value, authorized, 20,000 shares;
issued and outstanding, 8,000 shares 800,000
Premium on preferred stock 150,000
Premium on common stock 165,000
Retained earnings 458,600
Treasury preferred stock, at cost 84,000
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1. Compute for the total stockholders’ equity as of December 31, 2019.
2. Compute for the book value per share of each class of stock as of December 31, 2019.
3. Assuming the preferred stock is participating, compute for the book value per share of
each class of stock as of December 31, 2019.

PROBLEM VII

The year-end audit of the records of Stamina Farms disclosed a shortage in cash amounting to
P600,000. The treasurer had concealed the fraud by increasing inventories by P300,000, land by
P100,000 and accounts receivable by P200,000.

Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares owned by
him. The board of directors accepted the offer, with the agreement that the treasurer would pay any
deficiency between the shortage and the book value of the shares, after adjusting for the fraud. The
corporation would in turn pay the excess, if any, of the book value over the shortage.

As of December 31, 2019, there were 40,000 common shares issued and outstanding with a par
value of P100; Retained earnings as of January 1, 2019 was P1,600,000 and net income from 2019
operations was P1,400,000.

Considering the above information, answer the following:

1. What would be the book value per share for purposes of the agreement?
2. How much would the company pay the treasurer, if any?
3. Assuming further the company distributes the 6,000 shares as dividend to the remaining
stockholders, what would be the balance of the Retained earnings as of December 31, 2019?

PROBLEM VIII

Grit Corp., organized on June 1, 2018, was authorized to issue stock as follows: • 800,000 shares
of 9% preferred stock, convertible, P100 par • 2,500,000 shares of common stock, P2.50 stated value

During the remainder of the fiscal year ended May 31, 2019, the following transactions were
completed in the order given:
• 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares of
common stock were subscribed for at P26. Both subscriptions were payable 30% upon
subscription, the balance in one payment.
• The second subscription payment was received, except one subscriber for 60,000 shares of
common stock defaulted on payment. The full amount paid by this subscriber was returned,
and all of the fully paid stock was issued.
• 150,000 shares of common stock were reacquired by purchase at P28.
• Each share of preferred was converted into four shares of common stock.
• The treasury stock was exchanged for machinery with a fair market value of P4,300,000.
• There was a 2-for-1 stock split, and the stated value of the new common stock is
P1.25.
• Net income was P830,000.

Based on the above and the result of your audit, determine the following as of December
31, 2019:

1. Common stock
2. Total additional paid-in capital
3. Total contributed capital
4. Total stockholders’ equity

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 AUDIT OF INVESTMENTS
PROBLEM I

The following transactions of the Angat Company were completed during the year 2019:

Jan. 2
Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of
P4,500. These shares were classified as trading securities.
Feb. 1
Purchased 20,000 shares of Malolos Company common stock at P125 per share plus
brokerage fees of P19,000. Angat classifies this stock as and available-for-sale security.
Apr. 1
Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of
P35,000. In addition, the company paid brokerage fees of P18,000. Angat classified these
bonds as a trading security.
Jul. 1
Received semiannual interest on the RP Treasury Bonds.
Aug. 1
Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest.
Oct. 1
Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2019, are as follows:

Bulacan Auto Co. P45 per share

Malolos Company P130 per share
RP Treasury 7% bonds 102

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

1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2019

2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2019
3. What amount of unrealized gain should be shown as component of income in 2019?
4. What amount of unrealized gain should be shown as component of equity as of December 31,
2019?

PROBLEM II

You were able to obtain the following ledger details of Trading Securities in connection with your audit
of the Bocaue Corporation for the year ended December 31, 2019:

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:

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At December 31, 2019, GOOD and LUCK shares were selling at P210 and P240 per share,
respectively.

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

1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2019

2. Gain on sale of 3,200 GOOD shares on August 15, 2019
3. Gain or loss on sale of 800 GOOD shares on October 1, 2019
4. Dividend income for the year 2019
5. Carrying value of Trading Securities as of December 31, 2019

PROBLEM III

In connection with your audit of Hogonoy Company’s financial statements, you were able to gather
the following subsidiary account which reflect the marketable securities of the company for the year
2019:

Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January 1, 2018 for P5,000,000.
During 2018, Pugo earned P2,000,000 and paid dividends of P1,250,000. Hogonoy’s 30% interest in
Pugo gives Hogonoy the ability to exercise significant influence over Pugo’s operating and financial
policies. During 2019, Pugo earned P2,500,000 and paid dividends of P750,000 on April 1 and
P750,000 on October 1. On July 1, 2019, Hogonoy sold half of its investment in Pugo for P3,300,000
cash.

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

1. The gain on sale of 40,000 shares of Hugo Corp. on October 15 is

2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is
3. The carrying value of the Company’s investment in Hugo Corp. on December 31, 2019 is
4. The gain on sale of investment in Pugo Corp. is
5. The carrying value of the Company’s investment in Pugo Corp. on December 31, 2019 is

PROBLEM IV

The Marilao Company has the following transactions in the stocks of the Sta. Maria Corp.

a) On January 2, 2013, Marilao purchased 4,000 shares of P100 par value common stock at P110
per share.

b) The Sta. Maria Corp. was expanding and on March 2, 2014, it issued stock rights to its
stockholders. The holder needs four rights to purchase one share of common stock at par. The market
value of the stock on that date was P140 per share. There was no quoted price for the rights. No
journal entry was made to record the receipt of the rights.
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c) On April 2, 2014, Marilao exercised all its stock rights. The Investment in Stock account was
charged for the amount paid.

d) Robinson, Marilao’s accountant, felt that the cash paid for the new shares was merely an
assessment since Marilao’s proportionate share in Sta. Maria was not changed. Hence, he credited
all dividends (5% in December of each year) to the Investment in Stock account until the debit was
fully offset.

e) Marilao received a 50% stock dividend from Sta. Maria in December 2018. Because the shares
received were expected to be sold, the company’s president instructed Robinson not to make any
entry for this dividend. The company did sell the dividend shares in January 2019 for P150 per share.
The proceeds from the sale were credited to income.

f) In December 2019, Sta. Maria’ stocks were split on a two-for-one basis and the new shares were
issued as no par shares. Marilao found that each new share was worth P10 more than the P110 per
share original acquisition cost. For this reason, Marilao decided to debit the Investment in Stock
account with the additional shares received at P110 per share and credited revenue for it.

g) In August 2020, Marilao sold one half (½) of its holdings in Sta. Maria at P120 per share. The
proceeds were credited to the Investment in Stock account.

Marilao uses the average method in recording the sale of its investment in stock.

1. The cost of investment to be allocated to stock rights received on March 2, 2014 is

2. The unadjusted balance of Investment in Sta. Maria stock on December 31, 2020 is
3. The adjusted balance of Investment in Sta. Maria stock on December 31, 2020 is
4. The gain on the sale of stock dividend received in December 2018 is
5. The gain on sale of the shares sold in August 2020 is

PROBLEM V

On January 2, 2018, Norzagaray Company acquired 20% of the 400,000 shares of outstanding
common stock of Imaw Corporation for P30 per share. The purchase price was equal to Imaw’s
underlying book value. Norzagaray plans to hold this stock to influence the activities of Imaw.

The following data are applicable for 2018 and 2019:

2018 2019

On January 2, 2020, Norzagaray Company sold 20,000 shares of Imaw stock for P31 per share.
During 2020, Imaw reported net income of P120,000, and on October 31, 2020, Imaw paid dividends
of P20,000. At December 31, 2020, after a significant stock decline, which is expected to be
temporary, Imaw’s stock was selling for P22 per share. After selling the 20,000 shares, Norzagaray
does not expect to exercise significant influence over Imaw, and the shares are classified as available
for sale.

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

1. Carrying value of Investment in Imaw as of December 31, 2018

2. Carrying value of Investment in Imaw as of December 31, 2019
3. Gain or loss on sale of Investment in Imaw on January 2, 2020
4. The income from investment in BBB, Inc. in 2019 is
5. Net unrealized loss on available for sale securities as of December 31, 2020

PROBLEM VI

Paombong Corporation purchased P200,000 8% bonds for P184,557 on January 1, 2018. Paombong
classified the bonds as FA @ Amortized Cost. The bonds were purchased to yield 10% interest.
Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2023.
Paombong uses the effective interest method to amortize premium or discount. On January 2, 2020,
Paombong sold the bonds for P185,000 after receiving interest to meet its liquidity needs.

The market values of the bonds are as follows:

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 December 31, 2018 P190,449
December 31, 2019 186,363

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

1. Interest income for the year 2018

2. Unrealized gain on FA @ Amortized Cost as of December 31, 2018
3. Interest income for the year 2019
4. Unrealized gain or loss on FA @ Amortized Cost as of December 31, 2019
5. Realized gain or loss on sale of FA @ Amortized Cost on January 2, 2020

PROBLEM VII

On June 1, 2019, Pandi Corporation purchased as a long term investment 4,000 of the P1,000 face
value, 8% bonds of Violet Corporation. The bonds were purchased to yield 10% interest. Interest is
payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2025. Pandi uses
the effective interest method of amortization. On November 1, 2020, Pandi sold the bonds for a total
consideration of P3,925,000. Pandi intended to hold these bonds until they matured, so year-to-year
market fluctuations were ignored in accounting for bonds.

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

1. The purchase price of the bonds on June 1, 2019 is

2. The interest income for the year 2019 is
3. The carrying value of the investment in bonds as of December 31, 2019 is
4. The interest income for the year 2020 is
5. The gain on sale of investment in bonds on November 1, 2020 is

PROBLEM VIII

On July 1, 2019, Pir Carding Company acquired 25% of the outstanding shares of common stock
of Cinderela Corporation at a total cost of P7,000,000. The underlying equity of the stock acquired by
Pir Carding was only P6,000,000. Pir Carding is willing to pay more than the book value for the
following reasons:

a) Cinderela owned depreciable plant assets (10-year remaining economic life) with a current fair
value of P600,000 more than their carrying amount.

b) Cinderela owned land with current fair value of P3,000,000 more than its carrying amount.

c) There are no other identifiable tangible or intangible assets with fair value in excess of book value.
Accordingly, the remaining excess, if any, is to be allocated to goodwill.

Cinderela earned net income of P5,400,000 evenly over the year ended December 31, 2019. On
December 31, Cinderela declared and paid a cash dividend of P1,050,000 to common stockholders.
Market value of Pir Carding’s share of the stock at December 31, 2019 is P7,500,000. Both
companies close their accounting records on December 31.

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

1. Total amount of goodwill of Cinderela Corporation based on the price paid by Pir
Carding
2. Net investment income from Investment in Cinderela Corporation
3. Carrying value of Investment in Cinderela Corporation as of December 31, 2019

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 AUDIT OF PPE & INTANGIBLES
PROBLEM I

The following independent situations describe facts concerning the ownership of various assets. In
each case, compute the amount of depreciation or depletion for 2019.

1. Suns Company purchased a tooling machine in 2009 for P600,000. The machine was being
depreciated on the straight-line method over an estimated useful life of 20 years with no salvage
value. At the beginning of 2019, when the machine had been in use for 10 years, Suns paid P120,000
to overhaul the machine. As a result of this improvement, Suns estimated that the useful life of the
machine would be extended an additional 5 years.

2. Phoenix Manufacturing Co., a calendar-year company, purchased a machine for P650,000 on

January 1, 2017. At the date of purchase, Phoenix incurred the following
additional costs:

Loss on sale of old machinery P15,000

Freight cost 5,000
Installation cost 20,000
Testing costs prior to regular operation 4,000

The estimated salvage value of the machine was P50,000, and Phoenix estimated that the machine
would have a useful life of 20 years, with depreciation being computed using the straight-line method.
In January 2019, accessories costing P48,600 were added to the machine to reduce its operating
costs. These accessories neither prolonged the machine's life nor did they provide any additional
salvage value.

3. On July 1, 2019, Nash Corporation purchased equipment at a cost of P340,000. The equipment
has an estimated salvage value of P30,000 and is being depreciated over an estimated life of 8 years
under the double-declining-balance method of depreciation.

4. In January 2019, Marion Corporation entered into a contract to acquire a new machine for its
factory. The machine, which had a cash price of P2,000,000, was paid for as follows:
Down payment P 300,000
5,000 shares of Marion common stock with an
agreed-upon value of P370 per share 1,850,000
P2,150,000
Prior to the machine's use, installation costs of P70,000 were incurred. The machine has an estimated
useful life of 10 years and an estimated salvage value of P100,000. The straight-line method of
depreciation is used.

5. On January 2, 2018, Diaw Corporation purchased land with valuable natural ore deposits for P10
million. The estimated residual value of the land was P2 million. At the time of purchase, a geological
survey estimated 2 million tons of removable ore were under the ground. Early in 2018, roads were
constructed on the land to aid in the extraction and transportation of the mined ore at a cost of
P750,000. In 2018, 50,000 tons were mined. In 2019, Diaw fired its mining engineer and hired a new
expert. A new survey made at the end of 2019 estimated 3 million tons of ore were available for
mining. In 2019, 150,000 tons were mined. All the ore mined was sold.

PROBLEM II

On January 1, 2019, Nuggets Company entered into a lease contract with Denver Company for a
new equipment that had a selling price of P2,120,000. The lease contract provides that annual
payments of P420,000 will be made for 6 years. Nuggets made the first payment on January 1, 2019,
subsequent payments are made on January 1 of each year. Nuggets guarantees a residual value of
P367,122 at the end of the lease term. After considering the guaranteed residual value, the rate
implicit in the lease is determined to be 12%. Nuggets has an incremental borrowing rate of 15%. The
economic life of the equipment is 9 years. Nuggets depreciates its equipment using straight line
method.

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

1. Cost of the leased equipment to be recognized by Nuggets Company

2. Annual depreciation expense
3. Interest expense in 2019
4. Liability under finance lease as of December 31, 2020
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5. Current portion of the liability under finance lease as of December 31, 2020

PROBLEM III

The property, plant and equipment section of Warfield Corporation’s balance sheet at December
31, 2019 included the following items:
Land P600,000
Land improvements 280,000
Buildings 2,200,000
Machinery and equipment 1,920,000

The following transactions occurred during 2020:

a) A tract of land was acquired for P300,000. As of December 31, the company has not determined
its future use.

b) A plant facility consisting of land and building was acquired from Heneral Company in exchange
for 40,000 shares of Warfield’s common stock. On the date of acquisition, Warfield’s stock had a
closing market price of P37 per share on the Philippine Stock Exchange. The plant facility was carried
on Heneral’s books at P220,000 for land and P640,000 for the building on the date of exchange.
Current appraised values for land and building, respectively, are P460,000 and P1,380,000.

c) On May 1, 2020, items of machinery and equipment were purchased at a total cost of P896,000,
inclusive of 12% VAT. Additional costs of P26,000 for freight and P52,000 for installation were
incurred.

d) Expenditures totaling P190,000 were made for new parking lots, streets and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated life of 15 years.

e) A machine costing P160,000 on January 1, 2012, was scrapped on June 30, 2020. Double-
declining-balance depreciation has been recorded on the basis of a 10-year useful life.

f) A machine was sold for P40,000 on July 1, 2020. Original cost of the machine was P88,000 on
January 1, 2017, and it was depreciated on a straight-line basis over an estimated useful life of 7
years and a salvage value of P4,000.

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

1. Adjusted balance of Land as of December 31, 2020

2. Adjusted balance of Buildings as of December 31, 2020
3. Adjusted balance of Machinery and Equipment as of December 31, 2020
4. Loss on scrapping of machine on June 30, 2020
5. Loss on sale of machine on July 1, 2020

PROBLEM IV

In 2015, Kieso Corporation acquired a silver mine in Benguet. Because the mine is located deep in
the Benguet mountains, Kieso was able to acquire the mine for the low price of P50,000. In 2016,
Kieso constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in
2016 cost P750,000. Because of the improvements to the mine and the surrounding land, it is
estimated that the mine can be sold for P600,000 when the mining activities are complete.

During 2017, five buildings were constructed near the mine site to house the mine workers and their
families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000.
In 2015, geologists estimated 4 million tons of silver ore could be removed from the mine for refining.
During 2018, the first year of operations, only 5,000 tons of silver ore were removed from the mine.
However, in 2019, workers mined 1 million tons of silver. During that same year, geologists
discovered that the mine contained 3 million tons of silver ore in addition to the original 4 million tons.
Improvements of P275,000 were made to the mine early in 2019 to facilitate the removal of the
additional silver. Early in 2019, an additional building was constructed at a cost of P225,000 to house
the additional workers needed to excavate the added silver. This building is not
expected to have any residual value.

In 2020, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at the beginning
of the year for improvements to the mine.

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Based on the above and the result of your audit, determine the following: (Round off depletion and
depreciation rates to two decimal places)

1. Depletion for 2018

2. Depletion for 2019
3. Depreciation for 2019
4. Depletion for 2020
5. Depreciation for 2020

PROBLEM V

You gathered the following information related to the Patents account of the Lady Han Cookie
Corporation in connection with your audit of the company’s financial statements for the year 2020.

In 2019, Lady Han developed a new machine that reduces the time required to insert the fortunes
into its fortune cookies. Because the process is considered very valuable to the fortune cookie
industry, Lady Han patented the machine. The following expenses were incurred in developing and
patenting the machine:

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

1. Cost of patent
2. Cost of machine
3. Amount that should charged to expense when incurred in connection with the
development of the patented machine
4. Carrying amount of patent as of December 31, 2020
5. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is to
a. Analyze research and development expenditures to determine that only those
expenditures possessing future economic benefit have been capitalized.
b. Vouch the purchase by reference to underlying documentation.
c. Inquire as to the status of patent applications.
d. Evaluate the future revenue-producing capacity of the intangible asset.

PROBLEM VI

The following items relate to the acquisition of a new machine by Bongabon Corporation in 2019:

Invoice price of machinery P2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 150,000
Gratuity paid to operator of the old machine who was
laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the process
of installation 8,000
Testing costs before machine was put into regular operation 15,000
Salary of engineer for the duration of the trial run 40,000
Operating cost during first month of regular use 250,000
Cash allowance granted because the new machine proved
to be of inferior quality 100,000

How much should be recognized as cost of the new machine?

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PROBLEM VII

In connection with your audit of the Talavera Mining Corporation for the year ended December 31,
2019, you noted that the company purchased for P10,400,000 mining property estimated to contain
8,000,000 tons of ore. The residual value of the property is P800,000.

Building used in mine operations costs P800,000 and have estimated life of fifteen years with no
residual value. Mine machinery costs P1,600,000 with an estimated residual value P320,000 after its
physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.

Tons mined 800,000 tons

Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000

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

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

1. How much is the depletion for 2019?

2. Total inventoriable depreciation for 2019?
3. How much is the Inventory as of December 31, 2019?
4. How much is the cost of sales for the year ended December 31, 2019?

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 AUDIT OF INVENTORIES

PROBLEM I

Presented below is a list of items that may or may not reported as inventory in a company’s December
31 balance sheet.

1. Goods out on consignment at another company’s store P800,000

2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit at
December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at
December 31 200,000
5. Goods sold to another company, for which our company has
signed an agreement to repurchase at a set price that covers all costs
related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started production,
but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at December 31 40,000
19. Temporary investment in stocks and bonds that will be resold in the
near future 500,000

How much of these items would typically be reported as inventory in the financial statements?

PROBLEM II

In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of
December 31, 2019 and found the following items:

(a) A packing case containing a product costing P100,000 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was marked “Hold
for shipping instructions.” The customer’s order was dated December 18, but the case was shipped
and the costumer billed on January 10, 2020.

(b) Merchandise costing P600,000 was received on December 28, 2019, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”.

(c) Merchandise received on January 6, 2020, costing P700,000 was entered in purchase register on
January 7. The invoice showed shipment was made FOB shipping point on December 31, 2019.
Because it was not on hand during the inventory count, it was not included.

(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in
the shipping room on December 30. The customer was billed for P300,000 on that date and the
machine was excluded from inventory although it was shipped January 4, 2020.

(e) Merchandise costing P200,000 was received on January 6, 2020, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2019,
FOB destination.

(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Alcala still holds legal title. Historical experience suggests that full payment on installment sale is
received approximately 99% of the time.
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(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy
back the inventory in February 2020.

Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2019?

PROBLEM III

The Anda Company is on a calendar year basis. The following data were found during your audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final inventory.
The sale was properly recorded in 2018.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase order set
forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived
as yet. However, these materials costing P170,000 had been included in the inventory count, but no
entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.

Further inspection of the client’s records revealed the following December 31, 2019 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

Based on the above and the result of your audit, determine the adjusted balances of following as of
December 31, 2019:

1. Inventory
2. Accounts payable
3. Net sales
4. Net purchases
5. Net income

PROBLEM IV

You were engaged by Asingan Corporation for the audit of the company’s financial statements for the
year ended December 31, 2019. 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:

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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 P27,000.

b) On the evening of December 31, there were two trucks in the company siding:
Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving
Report No. 1063. The freight was paid by the vendor.
Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for P150,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
ABC Trading Corporation. ABC 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 P2,000 was paid by the
client. However, the freight was deducted from the purchase price of P800,000.

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

1. Sales for the year ended December 31, 2019

2. Purchases for the year ended December 31, 2019
3. Accounts receivable as of December 31, 2019
4. Inventory as of December 31, 2019
5. Accounts payable as of December 31, 2019

PROBLEM V

The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV).
The inventory accounts at December 31, 2018, had the following balances.

Raw materials P650,000

Work in process 1,200,000
Finished goods 1,640,000

The following are some of the transactions that affected the inventory of the Bolinao Company during
2019.

Jan. 8
Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of 20%
and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price
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Feb. 14
Bolinao repossessed an inventory item from a customer who was overdue in making payment. The
unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed
on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of
P6,800. The normal profit for this item is considered to be P3,200.

Mar. 1
Refinishing costs of P6,400 were incurred on the repossessed item.

Apr. 3
The repossessed item was resold for P24,000 on account, 20% down.

Aug. 30
A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400.
A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be
priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.

Based on the above and the result of your audit, answer the following: (Assume the client is using
perpetual inventory system)

1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of

2. The repossessed inventory on Feb. 14 is most likely to be valued at
3. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
4. The trade-in inventory on Aug. 30 is most likely to be valued at
5. How much will be recorded as Sales on Aug. 30?

PROBLEM VI

Calasiao Construction Corporation engaged you to advise it regarding the proper accounting for a
series of long-term contracts. Calasiao commenced doing business on January 2, 2019. Construction
activities for the first year of operations are shown below. All contract costs are with different
customers, and any work remaining at December 31, 2019, is expected to be completed in 2020.

12/31/2019 12/31/2019 12/31/2019

Based on the above and the result of your engagement, determine the following using the percentage-
of-completion method:

1. Net realized gross profit for the year 2019

2. Balance of Construction in Progress account as of December 31, 2019
3. Amount to be reported in the current assets section of the balance sheet as Inventories as of
December 31, 2019
4. Amount to be reported in the current liabilities section of the balance sheet as of December 31,
2019
5. Net realized gross profit for the year 2019 assuming the company used the completed-contract
method

PROBLEM VII

Dasol Factory started operations in 2019. Dasol manufactures bath towels. 60% of the production
are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250 per dozen.

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During 2019, 6,000 dozens were produced at an average cost of P360 per dozen. The inventory at
the end of the year was as follows:

220 dozens “Class A” @ P360 P 79,200

300 dozens “Class B” @ P360 108,000
P187,200

Using the relative sales value method, which management considers as a more equitable basis of
cost distribution, answer the following:

1. How much of the total cost should be allocated to “Class A”?

2. How much of the total cost should be allocated to “Class B”?
3. How much is the value of inventory as of December 31, 2019?
4. How much is the cost of sales for the year 2019?
5. How much is the gross profit for the year 2019?

PROBLEM VIII

In conducting your audit of Mangatarem Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2019, you determined that its internal control system was
good. Accordingly, you observed the physical inventory at an interim date, May 31, 2019 instead of
at June 30, 2019.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2019 P1,344,000

Sales for the fiscal year ended June 30, 2019 1,536,000
Purchases for eleven months ended May 31, 2019
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2019 1,280,000
Inventory, July 1, 2018 140,000
Physical inventory, May 31, 2019 220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2019. Product was shipped
in July 2019.
(3) A shipment in June was damaged through the carelessness of the receiving department. This
shipment was later sold in June at its cost of P16,000.

In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit
ratio. Based on the above and the result of your audit, you are to provide the answers to the following:

1. The gross profit ratio for eleven months ended May 31, 2019 is
2. The cost of goods sold during the month of June, 2019 using the gross profit ratio method is
3. The June 30, 2019 inventory using the gross profit method is

PROBLEM IX

On March 31, 2019 San Fabian Company had a fire which completely destroyed the factory building
and inventory of goods in process; some of the equipment was saved. After the fire, a physical
inventory was taken. The material was valued at P750,000 and the finished goods at P620,000.

The inventories on January 1, 2019 consisted of:

Materials P 310,000
Goods in process 1,215,000
Finished goods 1,700,000
Total P3,225,000

A review of the accounting records disclosed that the sales and gross profit on sales for the last three
years were:
Sales Gross profit
2016 P8,000,000 P2,400,000
2017 7,600,000 2,215,000
2018 5,000,000 1,776,000
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The sales for the first three months of 2019 were P3,000,000. Material purchases were P1,250,000,
transportation on purchases was P100,000 and direct labor cost for the three months was
P1,000,000. For the past two years, factory overhead cost has been 80% of direct labor cost.

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

1. The most likely gross profit rate to be used in estimating the inventory of goods in process
destroyed by fire
2. Total cost of goods placed in process
3. Total cost of goods manufactured
4. Inventory of goods in process lost

PROBLEM X

You obtained the following information in connection with your audit of Villasis Corporation:
Cost Retail

Beginning inventory P1,987,200 P2,760,000

Sales 7,812,000
Purchases 4,688,640 6,512,000
Freight in 94,560
Mark ups 720,000
Mark up cancellations 120,000
Markdown 240,000
Markdown cancellations 40,000

Villasis Corp. uses the retail inventory method in estimating the values of its inventories and costs.

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

1. The cost ratio to be used considering the provisions of PAS 2 is

2. The estimated ending inventory at retail is
3. The estimated ending inventory at cost is
4. The estimated cost of goods sold is

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 AUDIT OF RECEIVABLES

PROBLEM I

In connection with your examination of the financial statements of Cavaliers, Inc. for the year ended
December 31, 2019, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.

 The December 31, 2019 balance in the Accounts Receivable control accounts is
P558,600.
 An aging schedule of the accounts receivable as of December 31, 2019 is presented below:

 Two entries were made in the Doubtful Accounts Expense account were:
1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
2. A credit for P4,110 on November 30, 2019, and a debit to Allowance for Doubtful Accounts
because of a bankruptcy. The related sales took place on October 1, 2019.

 The Allowance for Doubtful Accounts schedule is presented below:

2019
2019
2019

 There is a credit balance in one account receivable (61 to 90 days) of P7,260; it

represents an advance on a sales contract.

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

1. How much is the adjusted balance of Accounts Receivable as of December 31, 2019?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2019?
3. How much is the Doubtful Accounts expense for the year 2019?
4. How much is the net adjustment to the Doubtful Accounts expense account?
5. Authorization for the write-off of accounts receivable should be the responsibility of the
a. Credit Manager. c. Accounts receivable clerk.
b. Controller. d. Treasurer.

PROBLEM II

Wizards Enterprises loaned P1,000,000 to Washington Inc. on January 1, 2018. The terms of the
loan require principal payments of P200,000 each year for 5 years plus interest at 8%. The first
principal and interest payment is due on January 1, 2019. Washington made the required payments
during 2019 and 2020. However, during 2020 Washington began to experience financial difficulties,
requiring Wizards to reassess the collectibility of the loan. On December 31, 2020, Wizards
determines that the remaining principal payments will be collected, but the collection of interest is
unlikely. The prevailing interest rate for similar type of note as of December 31, 2020 is 10%.

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

1. The present value of the expected future cash flows as of December 31, 2020 is
2. The loan impairment for the year 2020 is
3. How much is the interest income for the year 2021, assuming that Wizards' assessment of the
collectibility of the loan has not changed.

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4. Which of the following audit procedures provides the best evidence about the collectibility of notes
receivable?
a. Confirmation of note receivable balances with the debtors.
b. Examination of notes for appropriate debtors' signatures.
c. Examination of cash receipts records to determine promptness of interest and
principal payments.
d. Reconciliation of the detail of notes receivable and the provision for uncollectible amounts
to the general ledger control.
5. When auditing the allowance for uncollectible accounts, the least reliance should be placed on
which of the following?
a. The credit manager's opinion.
b. An aging of past due accounts.
c. Collection experience of the client's collection agency.
d. Ratios that show the past relationship of the allowance to net credit sales.

PROBLEM III
Your audit disclosed that on December 31, 2019, the accounts receivable control account of Alilem
Company had a balance of P2,865,000. An analysis of the accounts receivable account showed the
following:

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

1. The trade accounts receivable as of December 31, 2019 is

2. The current trade and other receivables net as of December 31, 2019 is
3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2019?

PROBLEM IV
Your audit of Banayoyo Corporation for the year ended December 31, 2019 revealed that the
Accounts Receivable account consists of the following:

2020

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It
is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount
due from the consignee who is bonded. The company has not provided yet for the 2019 bad debt
expense.

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

1. Trade accounts receivable

2. Allowance for doubtful accounts
3. Doubtful accounts expense

PROBLEM V

The adjusted trial balance of Galimuyod Company as of December 31, 2018 shows the following:
Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
Cash sales of the company represents 10% of gross sales.
90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2019.
Sales returns in 2019 amounted to P400,000. All returns were from charge sales.
During 2019, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P3,000.
The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2019 is 150% of the rate
used on December 31, 2018.

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

1. The accounts receivable as of December 31, 2019 is

2. The allowance for doubtful accounts as of December 31, 2019 is
3. The net realizable value of accounts receivable as of December 31, 2019 is
4. The doubtful account expense for the year 2019 is

PROBLEM VI

In connection with your audit of the Salcedo Corporation, you noted that the company’s Notes
Receivable consists of the following:

a. A 4-month note dated November 30, 2019, from AA Company, P200,000; interest rate, 16%;
discounted on November 30, 2019 at 16%.

b. A draft drawn payable 30 days after for P900,000 by the BB Company on the Charlie Company in
favor of the Delta Company, endorsed to Salcedo Corp. on December 2, 2019 and accepted on
December 4, 2019.

c. A 90-day note dated November 1, 2019 from E. Dy, P500,000; interest at 16%; the note is for
subscription to 5,000 shares of the preferred stock of Salcedo Corp. at P100 per share.

d. A 60-day note dated May 3, 2019, from CC Company, P600,000; interest rate, 16%; dishonored
at maturity; judgment obtained on October 10, 2019. Collection within the next twelve months is
doubtful.

e. A 90-day note dated January 4, 2019, from Apol Bobads, president of Salcedo, P160,000; no
interest; note not renewed; president confirmed.

f. A 120-day note dated September 14, 2019, from DD Company, P120,000; interest rate, 16%; note
is held by bank as collateral.

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

1. The adjusted balance of Notes Receivable as of December 31, 2019 is

2. How much of foregoing notes receivable will be reported in the current assets section of the balance
sheet?
3. How much is the net interest income from the foregoing notes receivable for 2019?
4. The adjusted balance of Interest Receivable as of December 31, 2019 is

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PROBLEM VII

The balance sheet of Santiago Corporation reported the following long-term receivables as of
December 31, 2019:

Note receivable from sale of plant P9,000,000

Note receivable from officer 2,400,000

In connection with your audit, you were able to gather the following transactions during 2020 and
other information pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3
annual installments of P3,000,000 plus interest on the unpaid balance every April 1. The initial
principal and interest payment was made on April 1, 2020.

b. The note receivable from officer is dated December 31, 2019, earns interest at 10% per annum,
and is due on December 31, 2022. The 2020 interest was received on December 31, 2020.

c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2020, in exchange for an
P1,200,000 non-interest bearing note due on April 1, 2022. The note had no ready market, and there
was no established exchange price for the equipment. The prevailing interest rate for a note of this
type at April 1, 2020, was 12%. The present value factor of 1 for two periods at 12% is 0.797 while
the present value factor of ordinary annuity of 1 for two periods at 12% is 1.690.

d. A tract of land was sold by the corporation to No Co. on July 1, 2020, for P6,000,000 under an
installment sale contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1, 2020, in addition
to the down payment of P1,800,000. The equal annual payments of principal and interest on the note
will be P1,353,750 payable on July 1, 2021, 2022, 2023,and 2024. The land had an established cash
price of P6,000,000, and its cost to the corporation was P4,500,000. The collection of the installments
on this note is reasonably assured.

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

1. Noncurrent notes receivable as of December 31, 2020

2. Current portion of long-term notes receivable as of December 31, 2020
3. Accrued interest receivable as of December 31, 2020
4. Interest income for the year 2020

PROBLEM VIII

On January 1, 2018, Sinait Company loaned P3,000,000 to Ilocos Company. The terms of the loan
were payment in full on January 1, 2023, plus annual interest payments at 11%. The interest payment
was made as scheduled on January 1, 2019; however, due to financial setbacks, Ilocos was unable
to make its 2020 interest payment. Sinait considers the loan impaired and projects the following cash
flows from the loan as of December 31, 2020 and 2021. Assume that Sinait accrued the interest at
December 31, 2019, but did not continue to accrue interest due to the impairment of the loan.

Amount projected as of
Date of Flow Dec. 31, 2020 Dec. 31, 2021
December 31, 2021 P 200,000 P 200,000
December 31, 2022 400,000 600,000
December 31, 2023 800,000 1,200,000
December 31, 2024 1,200,000 1,000,000
December 31, 2025 400,000

Your client requested you to determine the following: (Round-off present value factors to four decimal
places)

1. Loan impairment (bad debt expense) for the year 2020

2. Interest income for 2021 assuming the P200,000 was collected on December 31, 2021 as
scheduled
3. Allowance for loan impairment as of December 31, 2021
4. Interest income for 2022 assuming the P600,000 was collected on December 31, 2022
as scheduled
5. Carrying amount of loan receivable as of December 31, 2022

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 AUDIT OF CASH

PROBLEM I

The following accounts were included in the unadjusted trial balance of Pistons Company as of
December 31, 2019:

Cash P481,600
Accounts receivable 1,127,000
Merchandise inventory 3,025,000
Accounts payable 2,100,500
Other current liabilities 215,500

During your audit, you noted that Pistons held its cash books open after year-end so that a more
favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for
the first 10 days of January were recorded as December transactions. The following information is
given:

1. January cash receipts recorded in December cash book totaled P327,300, of which P180,050
represents cash sales and P147,250 represents collections on account for which cash discounts of
P7,750 were given.

2. January cash disbursements recorded in the December check register liquidated accounts payable
of P186,200 on which discounts of P6,200 were taken.

3. The amount shown as inventory was determined by physical count on December 31, 2019.

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

1. The adjusted cash balance as of December 31, 2019 is

2. The adjusted working capital as of December 31, 2019 is
3. The adjusted current ratio as of December 31, 2019 is
4. During your examination of a cut-off bank statement, you noticed that the majority of checks listed
as outstanding at December 31 had not cleared the bank. This would indicate
a. A high possibility of kiting.
b. A high possibility of lapping.
c. That the cash disbursement journal had been held open past December 31.
d. That the cash disbursement journal had been closed prior to December 31.

5. Making the financial statements indicate a more favorable position by giving effect to transactions
in a period other than that in which these actually occurred is called
a. Pro-forma balance sheet. c. Lapping.
b. Financial projections. d. Window dressing.

PROBLEM II

On January 10, 2020, you started the audit of the financial records of the Heats Company
for the year ended December 31, 2019. From your investigation, you discovered the
following:

1. The bookkeeper also acts as the cashier. On December 31, 2019, the bookkeeper’s
year-end cash reconciliation contains the following items.
19
19

12-20-19 20
20

2. The cash account balances per ledger as of 12-31-19 were: Cash - P491,200; petty cash - P1,200

3. The count of the cash on hand at the close of business on January 10, 2020,
including the petty cash, was as follows:
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 20

4. From January 2, 2020 to January 10, 2020, the date of your cash count, total cash receipts
appearing in the cash records were P68,800. According to the bank statement for the period from
January 2, 2020 to January 10, 2020, total credits were P60,800.

5. On July 5, 2019, cash of P3,200 was received from an account customer; the Allowance for
Doubtful Accounts was charged and Accounts Receivable credited.

6. On December 5, 2019, cash of P2,400 was received from an account customer; Inventory was
charged and Accounts Receivable credited.

7. Cash of P5,840 received during 2019 was not recorded.

8. Checks received from customers from January 2, 2020 to January 10, 2020, totaling P3,360, were
not recorded but were deposited in bank.

9. On July 1, 2019, the bank refunded interest of P160 because a note of the Heats Company was
paid before maturity. No entry had been made for the refund.

10. In the cashier’s petty cash, there were receipts for collections from customers on January 9, 2020,
totaling P6,800; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P400 made payable to a trade creditor; investigation
shows that this check had been returned by the creditor on June 14, 2019 and a new check for P800
was issued in its place; the original check for P400 was made in error as to amount.

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

1. Correct bank balance as of December 31, 2019 is

2. Cash shortage as of December 31, 2019 is
3. Cash shortage for the period January 1 to 10, 2020 is
4. From the standpoint of good internal control, the monthly bank statements should be
reconciled by someone under the direction of the
a. Controller. b. Treasurer. c. Cashier. d. Credit manager.

5. An auditor would consider a cashier’s job description to contain compatible duties if

the cashier receives remittance from the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.
b. Prelist of individual checks. d. Monthly bank reconciliation.

PROBLEM III

In connection with your audit of Caloocan Corporation for the year ended December 31, 2019, you
gathered the following:

3-31-20 12-31-19
1-31-20 01-01-19

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Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported on the December 31, 2019 balance sheet.

PROBLEM IV

In the course of your audit of the Las Piñas Corporation, its controller is attempting to determine the
amount of cash to be reported on its December 31, 2019 balance sheet. The following information is
provided:

1. Commercial savings account of P1,200,000 and a commercial checking account balance of

P1,800,000 are held at PS Bank.

2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to
reimburse through salary deduction).

3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term
debt.

4. Petty cash fund of P10,000.

5. An I.O.U. from a company officer in the amount of P40,000.

6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.

7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.

8. Las Piñas has received a check dated January 2, 2020 in the amount of P150,000.

9. Las Piñas has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure
future credit availability.

10. Currency and coin on hand amounted to P15,000.

Based on the above and the result of your audit, how much will be reported as cash and cash
equivalent at December 31, 2019?

PROBLEM V

You were able to gather the following from the December 31, 2019 trial balance of Mandaluyong
Corporation in connection with your audit of the company:

Cash on hand P 500,000

Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P40,000 returned by bank on December 26, 2019 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 8, 2020.
b. Customer’s check for P20,000 dated January 2, 2020, received on December 29, 2019.
c. Postal money orders received from customers, P30,000.

The petty cash fund consisted of the following items as of December 31, 2019.

Currency and coins P 2,000

Employees’ vales 1,600
Currency in an envelope marked
“collections for charity” with names attached 1,200
Unreplenished petty cash vouchers 1,300
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Check drawn by Mandaluyong Corporation,
payable to the petty cashier 4,000
P10,100

Included among the checks drawn by Mandaluyong Corporation against the BPI current account and
recorded in December 2019 are the following:

a. Check written and dated December 29, 2019 and delivered to payee on January 2, 2020, P80,000.
b. Check written on December 27, 2019, dated January 2, 2020, delivered to payee on December
29, 2019, P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2019.
The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance
sheet date.

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

1. Cash on hand
2. Petty cash fund
3. BPI current account
4. Cash and cash equivalents

PROBLEM VI

The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2019.
The bank statement as of December 31 showed a balance of P547,800. Additional information that
might be useful in reconciling the two balances follows:

(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.

(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored
on December 29 (maturity date). The bank charged Manila's account for P142,650, including a protest
fee of P2,650.

(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit
of P27,000.

(d) Outstanding checks totaled P98,850 as of December 31.

(e) There were bank service charges for December of P2,100 not yet recorded on the books.

(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.

(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.

(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.

(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been collected
on December 27, and the bank charged a P360 collection fee.

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

1. Adjusted cash in bank balance

2. Net adjustment to cash as of December 31, 2019

PROBLEM VII

You obtained the following information on the current account of Parañaque Company during your
examination of its financial statements for the year ended December 31, 2019.

The bank statement on November 30, 2019 showed a balance of P306,000. Among the bank credits
in November was customer’s note for P100,000 collected for the account of the company which the
company recognized in December among its receipts. Included in the bank debits were cost of
checkbooks amounting to P1,200 and a P40,000 check which was charged by the bank in error
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against Parañaque Co. account. Also in November you ascertained that there were deposits in transit
amounting to P80,000 and outstanding checks totaling P170,000.

The bank statement for the month of December showed total credits of P416,000 and total charges
of P204,000. The company’s books for December showed total debits of P735,600, total credits of
P407,200 and a balance of P485,600. Bank debit memos for December were: No. 121 for service
charges, P1,600 and No. 122 on a customer’s returned check marked “Refer to Drawer” for P24,000.

On December 31, 2019 the company placed with the bank a customer’s promissory note with a face
value of P120,000 for collection. The company treated this note as part of its receipts although the
bank was able to collect on the note only in January, 2020.
A check for P3,960 was recorded in the company cash payments books in December as P39,600.

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

1. How much is the undeposited collections as of December 31, 2019?

2. How much is the outstanding checks as of December 31, 2019?
3. How much is the adjusted cash balance as of November 30, 2019?
4. How much is the adjusted bank receipts for December?
5. How much is the adjusted book disbursements for December?
6. How much is the adjusted cash balance as of December 31, 2019?

PROBLEM VIII

The Valenzuela Corporation was organized on January 15, 2019 and started operation soon
thereafter. The Company cashier who acted also as the bookkeeper had kept the accounting records
very haphazardly. The manager suspects him of defalcation and engaged you to audit his account to
find out the extent of the fraud, if there is any.

On November 15, when you started the examination of the accounts, you find the cash on hand to
be P25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s bank
deposit in current account on the same date was P131,640. Verification revealed that the check
issued for P9,260 is not yet paid by the bank. The corporation sells at 40% above cost.

Your examination of the available records disclosed the following information:

Capital stock issued at par for cash P1,600,000

Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on
which there is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 1 60,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780

Based on the above and the result of your audit, compute for the following as of November 15,
2019:

1. Collections from sales

2. Payments for purchases
3. Total cash disbursements
4. Unadjusted cash balance
5. Cash shortage

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