ACCOUNTING 502 FINALS – QUIZ I
2018
THEORY PART
Use the choices below for items 1-4 (Letters only)
P – Presentation and Disclosure
C – Completeness
E – Existence/Occurrence
V – Valuation/Measurement
1. During an audit of an entity’s stockholder’s equity
accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans,
agreements or laws.
2. Confirming from a trustee the number of shares
issued.
3. Recomputation of the valuation of property dividends
declared.
4. Vouching a sample of cash disbursements recorded
just after the year-end to receiving reports and vendor
invoices.
5. Examining cancelled stock certificates.
True or False
For items 8-10, write T if the statement is correct and F if
the statement is wrong. FTFTF
6. For effective internal control, the Accounts Payable
clerk should be responsible in mailing signed checks.
7. Under properly designed internal control, the same
employee most likely would match vendor’s invoices
with receiving reports and also recompute the
calculations on vendors’ invoices.
8. A feature common to both stock splits and share
dividends is that it increases the total equity.
9. The Board of Directors of the company should
normally approve changes in capital stock accounts.
10. With regard to the valuation of stocks that are
publicly traded, the auditor would usually confirm
the fair value of the stocks from the transfer agent
and registrar.
Multiple Choice
11. When no independent stock transfer agent is
employed and the corporation issues its own stocks
and maintains stock record, cancelled stock
certificates should
A. Be defaced and sent to the secretary of the state
B. Not be defaced but segregated from other stock
C. Be destroyed to prevent fraudulent reissuance
D. Be defaced to prevent reissuance and attached to
their corresponding stubs
12. In performing tests concerning the granting of stock
options, an auditor should
A. Trace the authorization for the transaction to a
vote of the board of directors
B. Confirm the transaction with the Secretary in the
state of Corporation.
C. Verify the existence of option holders in the
entity’s payroll records or stock ledgers
D. Determine that sufficient treasury stock is
available to cover any new stock issued.
April,
13. Which of the following is not a typical procedure for
auditing dividends?
A. Confirming the amount disbursed for dividends
with the stock certificate registrar.
B. Review of client’s compliance with contracts
restricting the distribution of dividends
C. Recomputing the amount of the dividends
D. Testing payee names and amounts on canceled
checks with the share capital register or share
certificate
14. Which of the following is not a shareholder’sequity
transaction?
A. Declaration dividends
B. Issue of share capital
C. Purchase of treasury shares
D. Payment of dividends
15. Which of the following procedures would be
considered least effective in the audit of contingent
liabilities?
A. Examining BIR tax assessments
B. Examining legal correspondence
C. Examining accounts payable confirmation replies
D. Reading the minutes of the meetings of the
boardof directors and other committees
MULTIPLE CHOICE PROBLEMS
Letters only, write E if the answer is not given in the
choices
Use the problem below to answer items 16-18
The balance sheet of Mahaldot Company reported the
following bonds payable as of December 31, 2013:
A Bonds, 12% P4,500,000
B Bonds, 10% P1,200,000
In connection with your audit, you were able to gather the
following transactions during 2014 and other information
pertaining to the company’s bonds payable:
 A Bonds is payable in 3 annual instalments of
P1,500,000 plus interest on the unpaid balance every
April 1. The initial principal and interest payment was
made on April 1, 2014.
 B Bonds is dated December 31, 2013 and is due on
December 31, 2016. The 2014 interest was paid at
year end.
 On April 1, 2014, the Company acquired a piece of
equipment in exchange for a P600,000 non-interest
bearing note due on April 1, 2016. The prevailing
interest rate for a note payable of this type at April 1,
2014 was 12%.
 On July 1, 2014, a tract of land was acquired in
exchange of a 4-year, 11% notes payable for
P2,100,000 and P900,000 down payment. The equal
annual payments of principal and interest on the note
will be P676,875 payable for 4 years starting July 1,
2015.
16. The total carrying value of non-current portion of the
payables as of December 31, 2014 is
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17. Total current portion of the payables as of December The following information has been taken from the ledger
31, 2014 is accounts of F Corp.
Total income since incorporation P342,000
18. Correct interest income for the year 2014. Total cash dividends declared of which 60,000
P50% is paid
19. Luha Company granted an employee an option to Total value of property dividend at 25,000
buy 20,000 shares for P40 per share, the option declaration date
exercisable for three years from January 1, 2019. *The property’s fair value increased by
The service period is for two years beginning 20% upon distribution date, such is
January 1, 2017. already distributed
Using a fair value option pricing model, total Revaluation Surplus 30,000
compensation expense is determined to be Proceeds from sale of donated stock 40,000
P480,000. The employee exercised the option on Total fair value of small stock 5,000
dividends at declaration date
September 1, 2019, and sold the 20,000 shares on
*The fair value increased by 20% upon
December 1, 2019.
distribution
Gains on treasury stock transactions 18,000
What amount should be recognized as compensation
Bond conversion privilege 15,000
expense for 2017? Unamortized discount on bonds 25,000
A. 400,000 C. 800,000 payable
B. 240,000 D. 160,000 Treasury stock 20,000
Appropriated for plant expansion 70,000
Use the problem below to answer items 20-21 Total proceeds from Subscribed 150,000
Pokemon sells 500 computers in 2014 for P100,000 each. Capital
Each one has a one-year warranty. It estimated that the *issuance cost is 50% more than the
warranty Cost will be P8,000 for each computer. par of stocks
Moreover, the company estimates that 20% of the Share warrants 15,000
computers sold will never be given back to the company Share Premium from original issuance 183,000
for repairs. In 2014 Pokemon actually incurred warranty of stocks
cost of P1,250,000
The incompetent accountant prepared the following 24. Determine the current balance of unappropriated
entries: retained earnings.
Debit: Accounts receivable 50M a) 162,000 C. 137,000
Credit: Sales 50M
b) 157,000 D. 156,000
Debit: Warranty Expense 1.25M
Credit: Cash 1.25M 25. Determine the current balance of share premium in
total
Requirements: A. 301,000 C. 271,000
20. Compute for the adjusted estimated liability for B. 231,000 D. 256,000
warranties at year end
Use the problem below to answer items 26-28
21. Prepare the compound Adjusting Journal Entry At the beginning of year 1, an entity grants to a senior
executive 3,000 share options, conditional upon the
Use the problem below to answer items 22-23 executive remaining in the entity’s employ until the end of
To increase sales, Cinderella Company launched a year 3. The exercise price is P40. However, the exercise
promotional campaign on June 30, 2015. Cinderella price drops to P30 if the entity’s earnings increase by at
placed a coupon redeemable for a premium in each least an average of 10% per year over the thee-year
package of product sold. Each premium costs P100. A period.
premium is offered to customers who send in 5 coupons
and a remittance of P30. The distribution cost per On grant date, the entity estimates that the fair value of
premium is P20. Marysville estimated that only 55% of the share options, with an exercise price of P30, is P15
the coupons issued will be redeemed. For the six months per option. If the exercise price is P40, the entity
ended December 31, 2015, the following is available: estimates that the share options have a fair value of P12
Packages of product sold P160,000 per option.
Premiums purchased 20,000
Coupons redeemed 65,000 During year 1, the entity’s earnings increased by 12% and
the entity expects that earnings will continue to increase
22. How much will be credited at year end as estimated at this rate over the next 2 years. The entity therefore
premium liability? expects that the earnings target will be achieved, and
23. How much is the total premium expense for the hence the share options will have an exercise price of
period? P30.

Use the problem below to answer items 24-25


During year 2, the entity’s earnings increased by 13%,
and the entity continues to expect that the earnings
target will be achieved.
During year 3, the entity’s earnings increased by only 3%
and therefore the earnings target was not achieved. The
executive completes three years’ service, and therefore
satisfies the service condition. Because the earnings
target was not achieved, the 3,000 vested share options
have an exercise price of P40.
26. What is the compensation expense in year 3
A. 12,000 C. 60,000
B. 15,000 D. 6,000
27. At the end of year 2, the entity should report share
options outstanding of
A. 60,000 C. 30,000
B. 80,000 D. 24,000
28. What is the cumulative compensation expense for
years 1, 2 and 3?
A. 60,000 C. 40,000
B. 36,000 D. 114,000
Use the problem below to answer items 29-30
On December 31, 2014, the bookkeeper of Baranggay 65
provided the following information:
Accounts payable,(net of P20,000 debit balance in
creditors’ account) P640,000; Trade Notes payable
expected to be paid by the Company after 2 years,
P2,000,000; SSS Payable, P30,000; Pag-ibig Payable,
P5,000; Medicare Payable, P15,000; Withholding tax
payable, P60,000; VAT Payable, P120,000; Customers’
accounts with credit balances, P50,000; Stocks of Jollibee
declared as dividends not yet paid , P2,000,000; Serial
bonds (payable quarterly installments of P1,000,000)
P10,000,000; Accrued interest on bonds payable
P300,000; Estimated warranty payable, P420,000;
Estimated liability for environmental damages, P50,000;
Contingent liability, P1,000,000; Unearned rent income,
for 3 years starting January 1, 2015, P150,000; Loans
from shareholders, P200,000.
29. Current liability is
A. 5,060,000 C. 7,515,000
B. 6,515,000 D. 8,515,000
30. Non-current liability is
A. 6,300,000 C. 8,300,000
B. 11,300,000 D. 8,100,000
LONG PROBLEMS
Solve the problems with complete solution.
PROBLEM I
Your audit client, Zion Inc., is a public enterprise whose
share is traded in the over-the-counter market. At
December 31, 2017, Reyes had 3,000,000 authorized
shares of P10 par value ordinary stock, of which
1,000,000 shares were issued and outstanding. The
3
stockholders’ equity accounts at December 31, 2017 had
the following balances.
Ordinary Stock P10,000,000
Additional Paid In Capital 3,750,000
Retained Earnings 3,250,000
Transactions during 2018 and other information relating
to the stockholders’ equity accounts were as follows:
 On January 1, 2018, Zion issued 3-year, 4000 convertible
bonds at P1,000 per bond. Interest is to be paid annually
in arrears at the stated coupon rate 6%. Each bond is
convertible, within 9 months only, into 30 ordinary
shares. On the date of issuance, the prevailing market
interest rate for a similar debt without the conversion
privilege was 9%. On the same date, the market price of
one ordinary share was P3.

 On February 1, 2018, Zion reacquired 10,000 shares of
its ordinary stock for P16 per share.

 On April 30, 2018, Zion sold 250,000 shares (previously
unissued) of P10 par value ordinary stock to the public at
P17 per share.

On March 1, 2018, 50% of the bonds were converted and
on April 1, 2018, the conversion privilege of the remaining
bonds are not exercised and, therefore, retired since
conversion period is expired.

 On June 18, 2018, Zion declared the stocks of stock
dividend of P1 per share of ordinary stock, payable on
July 12, 2018 to stockholders of record on July 1, 2018.

 On November 10, 2018, Zion sold 5,000 shares of
treasury stock for P21 per share.

 On December 14, 2018, Zion declared the yearly cash
dividend on preferred stock, payable on January 14, 2019
to stockholders of record on December 31, 2018.
Due to the good standing of the Company, Land property
dividends are also declared. Date of declaration’s Fair
value is P100,000 and on December 31, 2018 the fair
value increased by P30,000 since the location is declared
as city.

 On January 20, 2019, before the books were closed for
2018. Zion became aware that the ending inventories at
December 31, 2017 were overstated by P150,000 (after
tax effect on 2017 net income was P90,000). The
appropriate correction entry was recorded the same day.
 After correcting the beginning inventory, net income for
2018 was P2,250,000
Requirements:
Compute for the following
1. Ordinary Share Capital
2. Share premium
3. Unapproriated Retained Earnings
4. Total Shareholder’s Equity
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PROBLEM II
Munkatuk, Inc. hired Nabongang to audit his financial statements for the calendar year ended December 31, 2012. The
following information were provided:
Accounts payable P590,000
Salaries payable 72,000
Interest payable 40,000
Dividends payable 240,000
Accrued royalties payable 58,500
Deferred tax liability 76,000
Loans payable 5,550,000
 On November 25, 2012, the Company was being sued, the lawyer advised that there’s a high probability that the
Company will win the case, therefore, the Company did not recognize any liability with regard to the case but disclosed a
contingent liability amounting to P212,000. On April 10, 2013 after the authori zation of the issuance of financial
statements but before the issuance of financial statements, the case was settled and the Company was ordered to pay
P450,000.
 It was estimated that 50% of the deferred tax liability will be reversed within 1 year.
 At the end of the year, Munkatuk has a 12%, P2,000,000 and 10% P3,550,000, loans payable due on June 30, 2013.
Interest on the loan is due every December 31. The financial statements were authorized for issue on March 16, 2013.
With regard to the 12% loan, on January 5, 2013, the bank and Munkatuk agreed to refinance the loan on a long-term
basis. In addition, on March 17, 2013, the bank agreed to extend the maturity date of the 10% loan for 2 years.
 The voucher register dated December 12, 2012 to January 15, 2013 contains the following:

Item Entry Date Voucher Description Amount Account Debited

No. Ref.
B 12/18/12 12-204 Fire insurance, 12.16.12 to 12.15.14; 36,000 Prepaid Insurance
C 12/21/12 12-206 Repairs services; received 12.20.13 20,000 Repairs and maintenance
D 12/21/12 12-214 Merchandise shipped FOB shipping point, 25,500 Inventory
11.20.12 received 01.04.12
E 12/21/12 12-219 Payroll, 12.01.12 to 01.30.13 150,000 Advances to employees
F 12/26/12 12-221 Subscription to Tax Reporting Service for 7,500 Dues and subscription
2013
G 12/28/12 12-230 Utilities for December 2012 43,500 Utilities expense
H 01/02/13 01-001 Audit services for 2012 financial 500,000 Professional fees expense
statements installment payment
J 01/05/13 01-003 Merchandise shipped FOB shipping point 18,000 Inventory
12.29.12 received 01.04.13
K 01/10/13 01-004 Payroll, 12.21.12 to 01.09.13; including 108,000 Salaries and Wages
12.21.12
O 01/15/13 01-009 Dividends declared 12.15.12 240,000 Dividends payable

Requirements:
5. Prepare individual journal entries to adjust items A-O recorded in the voucher register (1point each item)
6. Compute for the total current liability
7. Compute for the total non-current liability