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Auditing Problems by Adrianne Paul I. Fajatin, CPA: Problem 1
Auditing Problems by Adrianne Paul I. Fajatin, CPA: Problem 1
Problem 1
MARVEL Trading Corporation (MARVEL) was incorporated 3 years ago as a trading company
engaged in the sale and distribution of hardware and electrical supplies.
You were given by your client’s controller a copy of the unadjusted trial balance as of December
31, 2019.
The Company maintains its bank account with Secured Bank. Your review of the bank
reconciliation statement disclosed the following information:
1. On December 22, 2019, the bank erroneously credited the account of MARVEL for
P195,000 representing deposit for the account of another company.
2. Postdated checks totaling P37,900 were included in the deposits in transit. These
represent collections of accounts receivable from customers. The checks were actually
deposited on January 5, 2020.
3. On December 28, 2019, the Company issued checks to creditors totaling P115,000.
These checks were released on January 5, 2020.
4. A check dated December 12, 2019, in payment of accounts payable was recorded as
P12,000. Upon examination of the checks returned by the bank, the actual amount was
P21,000.
5. A check for P4,750 in payment of a minor repair of office equipment was not recorded on
the Company books.
6. Transfer of fund of P59,300 to Secured Bank current account of DBS Securities was not
recorded. This pertains to purchase of 5,000 shares of William Lines to be held as
trading securities. Based on quoted price as of December 31, 2019, the market value
per share is P8.20.
8. Deposits in transit and outstanding checks at December 31, 2019, amounted to P89,200
and P132,000, respectively.
9. The cash in bank balance per book on December 31, 2019, is P681,200.
The petty cash fund of P35,000 maintained on an imprest basis was counted on January 2,
2020. Unreplenished expenses include petty cash vouchers for various expenses totaling
P19,300 and employees’ advances for P5,800 all dated December 2019.
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
MARVEL purchased several non-trading equity securities during 2019. The company has
elected irrevocably to present changes in fair value in other comprehensive income. At
December 31, 2019, the company had the investments in equity securities listed below. None
was held at the last reporting date.
Your physical count of stock certificates disclosed that stock dividend of the following issues
were not yet recorded.
The unadjusted trial balance of the company at December 31, 2019, included the following
accounts:
Debit Credit
Accounts receivable P1,452,700
Allowance for doubtful accounts P 10,200
Sales 4,820,000
Your review of the Accounts receivable schedule disclosed that various collections totaling
P17,350 were not recorded in the books but already reflected in the subsidiary ledgers. You
also noted the following information:
3. Goods sold on account and delivered on December 21, 2019, amounting to P31,810
were not recorded.
4. Collection of P15,275 on October 31, 2019, from Cathay Trading was credited to the
account of Supreme Mercantile.
5. A promissory note was issued by a customer to MARVEL for goods purchased worth
P168,000. The said note carries an interest of 12% per annum with a term of 60 days,
value dated November 15, 2019. This was reflected as part of accounts receivable. No
interest was accrued as of year-end.
6. Bad debts are provided based on 2% outstanding accounts receivable at the end of the
year.
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
A physical count of merchandise on hand was made on December 30 and 31, 2019, which
reflected a balance of P3,873,000. Your review of the inventory list disclosed the following:
1. Goods costing P148,000 shipped FOB shipping point on December 30, 2019, by a
supplier to MARVEL was received on January 3, 2020. The purchase was recorded on
December 30, 2019.
2. Goods costing P195,000, shipped FOB destination by the supplier on December 28,
2019, were recorded and received on January 5, 2020.
3. Goods purchased in cash for P41,700 were returned to the supplier on December 22,
2019. These goods were still included in the inventory schedule and the refund was
received and recorded on January 10, 2020.
4. Goods consigned to MARVEL totaling P89,500 were included in the physical count.
5. Included in the physical count were goods sold to a customer on FOB shipping point on
December 27, 2019. These goods with a selling price of P52,830 and a cost of P35,600
were already recorded as sales on account but were shipped only on January 5, 2020.
Prepaid advertising consists of payment to an advertising agency for the design of newspaper
ad which will run for a period of one year from July 31, 2019.
MARVEL renewed its 5-year lease contract on the office building which expired on October 31,
2019. Total advance rental for 3 months was made amounting to P165,000 was booked as
prepaid rent.
The Company books purchased office supplies as inventory. The expense is normally taken up
after the physical count is made at year-end. On July 9, 2019, a total of P38,450 worth of
supplies was bought and included in the inventory. As of year-end, unused supplies inventory
per physical count amounted to P53,200. No entry to set up the expense was recorded.
₱1,045,00
Furniture and equipment 0
Delivery equipment 1,637,000
Leasehold improvements 363,000
₱3,045,00
Total 0
Accumulated depreciation -936,500
₱2,108,50
Net book value 0
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
The building under lease was renovated at a cost of 363,000 which was booked as leasehold
improvements on September 30, 2019. These improvements will be amortized over 5 years. No
amortization was recorded as at December 31, 2019.
On May 31, 2019, the Company bought new computers totaling P325,000. In addition to the
cost, it paid additional charges which were taken up as repairs expense. These are delivery
charges – P12,500; installation cost – P11,300; and testing cost – P6,520. The estimated useful
life of these computers is 4 years. No depreciation was provided on the equipment as of
December 31, 2019.
MARVEL opened additional stores in nearby localities. To service more deliveries, additional 3
units of delivery equipment were bought on installment basis on December 29, 2019. The
installment price was P1,200,000 but the cash price was P1,000,000. The terms are P200,000
down payment and the balance payable in four equal quarterly installments. A non-interest
bearing promissory note was issued for the unpaid portion on December 30, 2019. The down
payment of P200,000 was recorded as a debit to Delivery equipment and a credit to Cash.
Included in the Company’s unadjusted trial balance on December 31, 2019, are Accounts
payable and Accrued expenses of P523,100 and P63,100, respectively. Upon verification, the
following information was discovered:
1. On December 26, 2019, the Company purchased on account goods worth P215,000, but
no entry was made in the books. The goods were already included in the year-end
physical count.
3. Your review of subsequent payments from January 2-15, 2020, revealed that no accrual
was made on December 31, 2019, for the following:
₱21,20
Light and water for Nov. and Dec. 2019 0
Telephone bills for Dec. 2019 18,150
Representation expenses for Dec. 2019 11,990
Minor repair of a delivery car on Dec. 26, 2019 3,180
Transportation expenses for 2020 2,560
₱57,08
Total 0
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
Interests are paid on scheduled maturity dates. No accrual was made as of year-end.
The Company issued P1,200,000 face value of 12% bonds at par on July 1, 2019, maturing on
July 1, 2024, and paying interest semi-annually on January 1 and July 1.
4. What is the carrying value of the investment in William Lines on December 31, 2019?
a. P 41,000
b. P 59,300
c. P156,312
d. Nil
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
d. P1,209,330
7. What is the year-end adjustment to the Allowance for doubtful accounts?
a. P14,745
b. P15,801
c. P35,145
d. P15,043
11. The total cost of the Company’s Property, plant and equipment at December 31, 2019, is
a. P3,868,800
b. P4,075,320
c. P4,238,320
d. P3,875,320
12. What is the net book value of the Company’s Property, plant and equipment at
December 31, 2019?
a. P2,862,332
b. P2,868,852
c. P3,231,852
d. P2,938,820
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
Problem 2
You have been asked by a client to review the records of IRONMAN Co., a small manufacturer
of precision tools and machines. Your client is interested in buying the business, and
arrangements have been made for you to review the accounting records.
a. IRONMAN commenced business on April 1, 2019, and has been reporting on a fiscal
year ending March 31. The Company has never been audited, but the annual
statements prepared by the bookkeeper reflect the following income before closing and
before deducting income taxes:
2020 ₱13,000
2021 None
2022 11,180
Sales price was determined by adding 30% to cost. Assume the consigned machines
are sold the following year.
c. On March 30, 2021, two machines were shipped to a customer on a COD basis. The
sale was not entered until April 5, 2021, when the cash was received for P12,200. The
machines were not included in the inventory at March 31, 2021. (Title passed on March
31, 2021)
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
d. All machines are sold subject to a five-year warranty. It is estimated that the expense
ultimately to be incurred in connection with the warranty will amount to ½ of 1% of sales.
The Company has charged an expense account for warranty costs incurred.
e. Bad debts have been recorded on a direct write-off basis. Experience of similar
enterprises indicates that losses will approximate ¼ of 1% of sales. Bad debts written off
were:
Bad Debts Incurred on Sales Made In
f. Commissions on sales have been entered when paid. Commissions payable on March
31 of each year were:
2020 ₱2,800
2021 1,600
2022 2,240
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
3. Additional warranty expense for the year ended March 31, 2022
a. P10,133
b. P24,834
c. P 6,886
d. P17,833
4. Additional bad debt expense for the year ended March 31, 2021
a. P2,473
b. P1,217
c. P8,917
d. P6,858
6. Additional commission expense for the year ended March 31, 2022
a. P1,600
b. P2,240
c. P4,640
d. P 640
7. Manager’s bonus expense for the year ended March 31, 2022
a. P 902
b. P1,781
c. P2,683
d. P1,149
8. Correct income before income taxes for the year ended March 31, 2020
a. P229,841
b. P228,692
c. P125,785
d. P126,417
9. Correct income before income taxes for the year ended March 31, 2021
a. P228,692
b. P179,488
c. P125,785
d. P126,417
10. Correct income before income taxes for the year ended March 31, 2022
a. P179,488
b. P229,841
c. P180,390
d. P126,417
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
Problem 3
Presented below are THOR Company’s comparative statements of financial position and
income statements:
THOR Company
COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2019 and 2018
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
THOR Company
CONDENSED COMPARATIVE INCOME STATEMENTS
December 31, 2019 and 2018
2019 2018
Net sales ₱3,561,000 ₱3,254,000
Cost of goods sold -2,789,000 -2,568,000
Gross income 772,000 686,000
Expenses -521,000 -486,000
Net income ₱251,000 ₱200,000
1. Cash collected from accounts receivable, assuming all sales are on account
a. P3,619,000
b. P3,503,000
c. P3,561,000
d. P3,249,000
4. Dividends declared
a. P 63,000
b. P207,000
c. P107,000
d. Nil
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
Problem 4
AMERICA Bank loaned P16,500,000 to HAWKEYE Company on January 1, 2019. The initial
loan repayment terms include a 10% interest rate plus annual principal payments of P3,300,000
on January 1 each year. HAWKEYE made the required interest payment in 2019 but did not
make the P3,300,000 principal payment nor the P1,650,000 interest payment for 2020.
AMERICA is preparing its annual financial statements on December 31, 2020. HAWKEYE is
having financial difficulty, and AMERICA has concluded that the loan is impaired.
Analysis of HAWKEYE’s financial condition on December 31, 2020, indicates the principal
payments will be collected, but the collection of interest is unlikely. AMERICA did not accrue the
interest on December 31, 2020.
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
3. What is the carrying value of the loan receivable on December 31, 2022?
a. P 4,772,355
b. P 5,250,000
c. P 9,793,050
d. P13,675,500
Problem 5
1. Jan.5 10,000 shares of authorized and unissued ordinary shares were sold for P8 per
share.
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
3. Feb. 10 20,000 shares of authorized and unissued ordinary shares were sold for P12 per
share.
4. March 1 A 30% stock dividend was declared and issued. Market value per share is
currently P15.
5. April 1 A two-for-one split was carried out. The par value of the shares was to be
reduced to P2.50 per share. Market value on March 31 was P18 per share.
6. July 1 A 15% stock dividend was declared and issued. Market value is currently P10
per share.
7. Aug. 1 A cash dividend of 20 centavos per share was declared, payable September 1 to
shareholders of record on August 21.
Based on the preceding information, determine the balances of the following at December 31,
2020.
3. Share premium
a. P2,277,750
b. P1,020,000
c. P3,567,750
d. P2,310,000
4. Retained earnings
a. P 596,000
b. P1,853,750
c. P 338,860
d. P 306,610
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Auditing Problems by Adrianne Paul I. Fajatin, CPA 2019
Problem 6
THANOS Company purchased 250,000 ordinary shares of HULK Corp. on July 1, 2019, at
P16.50 per share, which reflected book value as of that date. At the time of the purchase, HULK
had 1,000,000 ordinary shares outstanding. THANOS had no ownership interest in HULK prior
to this purchase. HULK reported net income of P840,000 for the six months ended June 30,
2019. THANOS received a dividend of P105,000 from HULK on August 1, 2019. HULK reported
net income of P1,800,000 for the year ended December 31, 2019, and again paid THANOS
dividends of P105,000.
On January 1, 2020, THANOS sold 100,000 shares of HULK ordinary shares for P17 per share
resulting to a loss of significant influence. The quoted market price for such investment was P20
on January 1, 2020. HULK reported net income of P1,860,000 for the year ended December 31,
2020, and paid THANOS dividends of P60,000. The investment’s fair value on December 31,
2020, was P25 per share.
3. In 2020, what amount should THANOS report as gain from remeasurement of the
investment in associate to fair value?
a. P1,257,000
b. P 507,000
c. P 750,000
d. Nil
4. The share in net income of HULK to be recognized by THANOS in its income statement
for 2020 should be
a. P219,000
b. P 60,000
c. P279,000
d. Nil
===End===
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