PROBLEM NO.

12
Sigay Company has been using the cash method to account for income since its first year of
operation in 2005. All sales are made on credit with notes receivable given by the customers. The
income statements for 2005 and 2006 included the following amounts:
2005 2006
Revenues – collection on principal P1,600,000 P2,500,000
Revenues – interest 180,000 275,000
Cost of goods purchased* 2,260,000 2,601,000
* Includes increase in inventory of goods on hand of P100,000 in 2005 and P400,000 in 2006.

The balances due on the notes at the end of each year were as follows:
2005 2006
Notes receivable (gross) - 2005 P3,100,000 P1,800,000
Notes receivable (gross) – 2006 - 3,000,000
Unearned interest income – 2005 358,350 278,950
Unearned interest income – 2006 - 402,150

QUESTIONS:
Your client requested you to compute for the following using the installment sales method:
1. Installment sales for the year 2005
a. P4,700,000 c. P4,521,650
b. P4,341,650 d. P4,062,700
2. Realized gross profit in 2005
a. P804,000 c. P835,680
b. P864,640 d. P749,280
3. Installment sales for the year 2006
a. P4,200,000 c. P3,877,250
b. P3,797,850 d. P4,152,250
4. Realized gross profit in 2006 on 2005 installment sales
a. P853,265 c. P637,519
b. P440,975 d. P613,352
5. Realized gross profit in 2006 on 2006 installment sales
a. P504,600 c. P653,250
b. P730,413 d. P553,085

Suggested Solution:

Question No. 1
Principal amount collected on 2005 note P1,600,000
Add uncollected 2005 note, net – 12/31/05
(P3,100,000-P358,350) 2,741,650
Installment sales for 2005 P4,341,650
Note: Installment sales is equal to the original amount of notes receivable, net of unearned
interest income.

Question No. 2
Principal amount collected on 2005 note P1,600,000
Multiply by gross profit rate in 2005 50.25%
Realized gross profit in 2005 on 2005 inst. sales P 804,000

Computation of gross profit rate in 2005:

 Installment sales for 2005 P4,341,650
Less cost of installment sales (P2,260,000 - P100,000) 2,160,000
Gross profit for 2005 2,181,650
Divide by installment sales for 2005 4,341,650
Gross profit rate in 2005 50.25%

Question No. 3
Total principal amount collected in 2006 P2,500,000
Principal amount collected in 2006 on 2005
note:
Uncollected 2005 note, net - 12/31/05 P2,741,650
Less uncollected 2005 note, net -
12/31/06 (P1,800,000-P278,950) 1,521,050 1,220,600
Principal amount collected on 2006 note 1,279,400
Uncollected 2006 note, net – 12/31/06
(P3,000,000-P402,150) 2,597,850
Installment sales for 2006 P3,877,250

Question No. 4
Principal amount collected in 2006 on 2005 note P1,220,600
Multiply by gross profit rate in 2005 50.25%
Realized gross profit in 2006 on 2005 inst. sales P 613,352
Question No. 5
Principal amount collected in 2006 on 2006 note P1,279,400
Multiply by gross profit rate in 2006 43.23%
Realized gross profit in 2006 on 2006 inst. sales P 553,085
Computation of gross profit rate in 2006:
Installment sales for 2006 P3,877,250
Less cost of installment sales (P2,601,000 - P400,000) 2,201,000
Gross profit for 2006 1,676,250
Divide by installment sales for 2006 3,877,250
Gross profit rate in 2006 43.23%
Answers: 1) B; 2) A; 3) C; 4) D, 5) D

PROBLEM NO. 5
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 2006.

In 2005, 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:
Research and development laboratory expenses P1,000,000
Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 480,000
 Wages paid for the employees’ work on the research, development, and
building of the machine (60% of the time was spent in actually building
the machine) 1,200,000
Expense of drawing required by the patent office to be submitted with the
patent application 68,000
Fees paid to the government patent office to process application 100,000

During 2006, Lady Han paid P150,000 in legal fees to successfully defend the patent
against an infringement suit by Cookie Monster Corporation.

It is the company’s policy to take full year amortization in the year of acquisition.

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

1. Cost of patent
a. P580,000 b. P1,128,000 c. P648,000 d. P 798,000

2. Cost of machine
a. P1,236,000 b. P1,040,000 c. P1,648,000 d. P1,168,000
3. Amount that should charged to expense when incurred in connection with the
development of the patented machine
a. P1,480,000 b. P1,608,000 c. P1,000,000 d. P 0
4. Carrying amount of patent as of December 31, 2006
a. P522,000 b. P1,015,200 c. P583,200 d. P 837,900
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 NO. 4
In your initial audit of Bulls Finance Co., you find the following ledger account
balances.
12%, 25-year Bonds Payable, 2001 issue
01/01/2001 CR P 1,600,000
 Treasury Bonds
10/01/2005 CD P 216,000

Bond Premium
01/01/2001 CR P 80,000

Bond Interest Expense

01/01/2005 CD P 96,000
07/01/2005 CD 96,000

The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus
accrued interest.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. The adjusted balance of bonds payable as of December 31, 2005 is
a. P1,400,000 b. P1,600,000 c. P1,000,000 d. P1,384,000
2. The unamortized bond premium on December 31, 2005 is
a. P80,000 b. P64,000 c. P56,000 d. P58,800
3. The total bond interest expense for the year 2005 is
a. P189,100 b. P182,900 c. P188,800 d. P182,800
4. The gain or loss on partial bond redemption is
a. P1,900 loss b. P1,900 gain c. P18,100 loss d. P18,100 gain

SUGGESTED ANSWERS: A, C, B, A

PROBLEM NO. 4
You were engaged by Asingan Corporation for the audit of the company’s financial statements for
the year ended December 31, 2006. The company is engaged in the wholesale business and makes
all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry
(4,500,000)
12/31 SI No. 971 24,000 P -
 12/31 Closing entry
(8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

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

When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 1063 and that no shipments had been made on any
Sales Invoices whose number is larger than No. 968. You also obtained the following additional
information:
a) Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not received
until the following year. Cost was 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.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2006
a. P8,100,000 c. P7,875,000
b. P7,725,000 d. P8,025,000

2. Purchases for the year ended December 31, 2006

a. P4,500,000 c. P5,631,000
b. P5,727,000 d. P4,527,000
3. Accounts receivable as of December 31, 2006
a. P330,000 c. P525,000
b. P555,000 d. P180,000
4. Inventory as of December 31, 2006
a. P1,452,000 c. P1,200,000
b. P1,221,000 d. P1,296,000
5. Accounts payable as of December 31, 2006
a. P600,000 c. P 531,000
b. P627,000 d. P1,827,000

Suggested Solution:

Questions No. 1 to 5
 Sales Purchases AR Inventory AP
Unadjuste
d P8,295,000 P4,500,00 P750,000 P900,000 P600,000
balances 0
AJE No. 1 (195,000) - (195,000) - -
AJE No. 2 - 27,000 - - 27,000
AJE No. 3 - - - 96,000 -
AJE No. 4 - - - 120,000 -
AJE No. 5 (225,000) - (225,000) - -
AJE No. 6 - - - 180,000 -
Adjusted
balances P7,875,000 P4,527,00 P330,000 P1,296,000 P627,000
0
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000) P195,000
Accounts receivable P195,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases P27,000
Accounts payable P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory P96,000
Cost of sales P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25) P120,000
Cost of sales P120,000
To take up unshipped goods under SI No. 968
5) Sales P225,000
Accounts receivable P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) P180,000
Cost of sales P180,000
To take up goods under SI No. 966

Answers: 1) C; 2) D; 3) A; 4) D, 5) B

PROBLEM NO. 9
In the audit of Pasig Company’s cash account, you obtained the following information:
The company’s bookkeeper prepared the following bank reconciliation as of November 30, 2006:
Bank balance – November 30, 2006 P90,800
Undeposited collections 5,000
Bank service charges 100
Bank collection of customer’s note (8,000)
Outstanding checks:
Number Amount
7159 P3,000
7767 5,000
7915 2,000 (10,000)
Book balance – November 30, 2006 P77,900
Additional data are given as follows:
a. Company recordings for December:
 Total collections from customers P165,000
Total checks drawn 98,000
b. Bank statement totals for December :
Charges P123,800
Credits 169,000
c. Check no. 7159 dated November 25, 2006, was entered as P3,000 in payment of a voucher for
P30,000. Upon examination of the checks returned by the bank, the actual amount of the
check was P30,000.
d. Check no. 8113 dated December 20, 2006 was issued to replace a mutilated check (no.7767),
which was returned by the payee. Both checks were recorded in the amount drawn, P5,000, but
no entry was made to cancel check no. 7767.
e. The December bank statement included a check drawn by Sipag Company for P1,500.
f. Undeposited collections on December 31, 2006 - P8,000.
g. The service charge for December was P150 which was charged by the bank to another client.
h. The bank collected a note receivable of P7,000 on December 28, 2006, but the collection was not
received on time to be recorded by Pasig.
i. The outstanding checks on December 31, 2006, were:
Check No. Amount Check No. Amount
7767 P5,000 8910 P2,300
8856 1,300 8925 4,100
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Unadjusted cash balance per books as of December 31, 2006
a. P152,800 c. P144,900
b. P152,750 d. P165,700
2. Adjusted cash balance as of November 30, 2006
a. P85,800 c. P63,800
b. P58,800 d. P90,800
3. Adjusted book receipts for December 2006
a. P170,500 c. P172,000
b. P182,000 d. P173,000
4. Adjusted bank disbursement for December 2006
a. P120,150 c. P125,150
b. P 76,150 d. P 98,150
5. Adjusted cash balance as of December 31, 2006
a. P132,650 c. P137,800
b. P137,650 d. P134,650

Suggested Solution:
Question No. 1
Unadjusted book balance, 11/30/06 P77,900
Add unadjusted book receipts:
Collection from customers P165,000
Note collected by bank in Nov.
presumed recorded in Dec. 8,000 173,000
Total 250,900
Less unadjusted book disbursements:
Checks drawn 98,000
 BSC for Nov. presumed recorded in Dec. 100 98,100
Unadjusted book balance, 12/31/06 P152,800

Question Nos. 2 to 5
Pasig Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P90,800 P169,000 P123,800 P136,000a
Deposits in transit:
November 30 5,000 (5,000)
December 31 8,000 8,000
Outstanding checks:
November 30 (32,000) (32,000)
December 31 7,700 (7,700)
Bank errors – Dec.
Check of Sipag Co. (1,500) 1,500
BSC charged to
another client                     150 (150)
Adjusted bank
balance P63,800 P172,000 P 98,150 P137,650

Balance per books P77,900 P173,000 P98,100 P152,800

Customer's note
collected by bank:
November 8,000 (8,000)
December 7,000 7,000

Bank service charge:

November (100) (100)
December
150 (150)
Book errors:
Check no. 7159
(P30,000-P3,000) (27,000) (27,000)
Check no. 7767
(mutilated check) 5,000                     5,000
Adjusted book
balance P63,800 P172,000 P 98,150 P137,650
a
(P90,800 + P169,000 – P123,800)

Answers: 1) A; 2) C; 3) C; 4) D; 5) B
PROBLEM NO. 4
You are engaged in the regular annual examination of the accounts and records of
Valenzuela Manufacturing Co. for the year ended December 31, 2005. To reduce the
workload at year end, the company, upon your recommendation, took its annual
physical inventory on November 30, 2005. You observed the taking of the inventory
and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is
on perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no
finished goods inventory.

The company’s physical inventory revealed that the book inventory of P1,695,960 was
understated by P84,000. To avoid delay in completing its monthly financial statements,
the company decided not to adjust the book inventory until year-end except for obsolete
inventory items.

Your examination disclosed the following information regarding the November 30

inventory:
a. Pricing tests showed that the physical inventory was overstated by P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in footings
and extensions.
c. Direct labor included in the inventory amounted to P280,000. Overhead was
included at the rate of P200% of direct labor. You have ascertained that the
amount of direct labor was correct and that the overhead rate was proper.
d. The physical inventory included obsolete materials with a total cost of P7,000.
During December, the obsolete materials were written off by a charge to cost of
sales.

Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Adjusted amount of physical inventory at November 30, 2005
 a. P1,715,560 b. P1,845,760 c. P1,631,560 d. P1,722,560
2. Adjusted amount of inventory at December 31, 2005
a. P1,509,760 b. P1,502,760 c. P1,516,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of
December 31, 2005
a. P819,560 b. P728,560 c. P812,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31, 2005
a. P618,800 b. P338,800 c. P232,400 d. P386,400
5. The amount of factory overhead included in work in process as of December 31,
2005
a. P772,800 b. P464,800 c. P1,237,600 d. P777,600
SUGGESTED ANSWERS: A, A, C, C, B