2019.1.19 20 Aud Prob Error Correction Cash Inventory Non Financial Assets Equity

Calamba Review Center – Laguna (LCRC)
2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031, (02) 330-6057
CPA REVIEW (May 2019 Batch)
Auditing Problem Lord Gen A. Rilloraza, CPA
ERROR CORRECTION
PROBLEM 1
Case 1 – A one-year insurance for P120,000 paid on October 1, 2018 was initially recorded as an expense. No year-end adjustment was made.
Case 2 – A 3-month rent was collected in advance from a lessee on December 1, 2018. The rent was initially recorded as rent revenue, and no year-
end adjustment was made.
Case 3 – Utilities for December 2018 totalling to P600,000 was paid in January 2019. The expense was paid upon payment.
Case 4 – A one-year, 12%, P100,000 promissory note was received on April 1, 2018. The whole interest was recorded as an income upon collection
on March 31, 2019.
Case 5 – The annual depreciation of P1,000,000 was erroneously recorded as P100,000 in 2018.
Requirements:
1. Complete the table below by determining the effect on the given by writing (U) for understated, (O) for overstated, and (X) for unaffected,
for each case above.
2018 2019 2020
a. Net income
b. Retained earnings, if the books are still open
c. Retained earnings, if the books are already closed
2. Provide the correcting entry if the error was discovered in 2018, and
a. The books are still open b. The books are already closed
3. Provide the correcting entry if the error was discovered in 2019
4. Provide the correcting entry if the error was discovered in 2020
PROBLEM 2
You have been engaged to audit the accounts of LAGOON Co. for the first time in 2018. During the audit, you discovered the following information:
Year ended December 31,
2016 2017 2018
Omission of salaries payable at year-end 225,000 249,000 262,000
Ending inventory overstated as a result of
overcounting items at year-end 70,000 55,000 77,000
Ending inventory understated as a result of
wrong pricing and computational errors 40,000 14,000 32,000
Collection from a customer recorded as sales
but deliveries are made the following year 84,000 90,000 96,000
Delivery of merchandise to customers at
year-end recorded as sales only upon
collection the following year 47,000 43,000 29,000
Receipt of merchandise from suppliers at
year-end recorded as purchases only
upon payment the following year 16,000 22,000 20,000
Major repairs on equipment at the beginning
of each year, charged repairs expense but
should have been capitalized. Estimated
remaining useful life is 5 years. 300,000 250,000 210,000
Requirements:
1. Determine the effects of the errors to
a. 2016, 2017, and 2018 net income
b. 2018 retained earnings at year-end, before closing
c. 2018 retained earnings at year-end, after closing
d. 2017 effects on working capital
e. 2018 effects on working capital
2. Determine the adjusted net income for
a. 2016, if the unadjusted net income is P3,540,000
b. 2017, if the unadjusted net income is P4,050,000
c. 2018, if the unadjusted net income is P4,670,000
PROBLEM 3
The December 31 year-end financial statements of PEANUT Company contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated
1
An insurance premium of P330,000 was prepaid in 2017 covering years 2017, 2018 and 2019. The entire amount was charged to expense in 2017. In
addition, on December 31, 2018, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2019. There were no
other errors during 2017 and 2018, and no corrections have been made for any of the errors.
1. What is the total effect of the errors on PEANUT’s 2018 net income?
A. 123,500 overstatement C. 192,500 understatement
B. 27,500 overstatement D. 177,500 understatement
2. What is the total effect of the errors on the amount of PEANUT’s working capital at December 31, 2018?
A. 75,500 overstatement C. 225,500 understatement
3. What is the total effect of the errors on the balance of PEANUT’s retained earnings at December 31, 2018?
A. 156,000 understatement C. 133,000 understatement
PROBLEM 4
You were engaged to audit the 2018 financial statements of LAKE Corporation for the first time. You are currently determining whether there are
errors committed by your client, and their corresponding effect on the financial statements if there are any.
Based from your audit procedures, you were able to determine some transactions that transpired in 2017 and 2018 that may have possible effects
on your client’s financial statements.
Transactions in 2017
• December salaries totalling to P523,000 paid in January 2018 were recorded as expense in 2018.
• A one-year insurance for P120,000 paid on July 1 was recorded as expense. No adjustment was made at year-end.
• A lease contract for 6-months was entered into on December 1. Monthly rent to be paid by LAKE is P20,000. A two-month advance was
paid on December 1, which was recorded by your client as an expense. No year-end adjustment was made.
• A minor repair on October 1 performed on a machine was capitalized by your client. The cost is P32,500, and the remaining useful life of
the machine on December 31 is 3 years.
• A P600,000 dividend was declared on December 30, to be paid on January 31, 2019 to shareholders on record on January 15, 2019. No
entry was made for the declaration.
Transactions in 2018
• The dividends declared last December 30, 2018 was paid on January 31. The entry included a debit to retained earnings and a credit to
cash.
• Sales return for P134,000 on a 2018 credit sale, received in February, was recorded as a debit to other expense and credit to accounts
receivable.
• A payment for P60,000 made to a supplier on December 24 was recorded as a purchase. The goods were shipped by the supplier in 2019.
• A payment from a customer for P98,000 was recorded as sales. The goods were shipped by your client in 2019.
• A collection of accounts receivable for P50,000 on December 30 was recorded in 2019.
• December salaries were recorded in January 2019 upon payment.
Your client prepared the following schedule of change in retained earnings:

2017 2018
Retained earnings, beginning 9,826,540 11,701,540
Net income 1,875,000 1,995,500
Dividends paid (600,000)
Retained earnings, ending 11,701,540 13,097,040
Requirements:
1. Compute for the adjusted net income for 2017 and 2018.
2. Determine the effect of the errors to the 2017 and 2018 working capital of your client.
3. Compute for the adjusted retained earnings as of December 31, 2017 and December 31, 2018.
PROBLEM 5
You have been engaged to examine the books and other records of MOUNTAIN Corporation, which started its operations in 2017. Your examination
disclosed the following information:
• Reported profit (loss) for the year: 2017 – (P250,000); 2018 – P320,000; 2019 – P380,000.
• The company, during the three-year period, failed to recognize accruals and deferrals at year-end. The amounts omitted were as follows:
2017 2018 2019
Accrued expenses 20,000 25,000 30,000
Accrued income 32,000 30,000 26,000
Prepaid expenses 12,000 18,000 24,000
Unearned income 15,000 10,000 8,000
• Goods which were in transit at year-end were omitted from the physical count. These goods have been properly recorded as purchases
during the year:
End of 2018 28,000
End of 2019 64,000
• The company purchased a machine costing P80,000 on August 31, 2017. The amount was recorded as expense. The company depreciates
all its property, plant and equipment using the straight-line method, rounded to the nearest month and disregarding scrap values. This
equipment had an estimated useful life of 8 years.
• Dividends declared at the end of 2018 and 2019 amounting to P60,000 and P100,000, respectively, were recorded when paid in 2019 and
2020, respectively.
2
• The Retained Earnings account is as follows:
2017 2018 2019
January 1 balance (100,000) 300,000
Share premium 150,000
Gain on redemption of preference shares 30,000
Gain on sale of treasury shares - ordinary 80,000
Dividends paid (60,000)
Profit (loss) for the year (250,000) 320,000 380,000
December 31 balance (100,000) 300,000 650,000
Requirements:
1. Compute for the correct profit (loss) for the years 2017, 2018 and 2019.
2. Compute for the correct retained earnings balance at December 31, 2017, 2018, and 2019.
3. Prepare audit adjusting entries in 2019.
PROBLEM 6
The audited income statement of PEAK Corporation shows a net income of P175,000 for the year ended December 31, 2018. Adjustments were made
for the following errors:
• December 31, 2017 inventory overstated by P22,500.
• December 31, 2018 inventory understated by P37,500.
• A P10,000 customer’s deposit received in December 2018 was credited to sales in 2018. The goods were actually shipped in January 2019.
What is the unadjusted net income of PEAK for the year ended December 31, 2018?
A. 234,000 B. 125,000 C. 170,000 D. 200,000
PROBLEM 7
The condensed income statement of ABSOLUTE Corporation for the year ended December 31, 2018 is presented below:
Absolute Corporation
Income Statement
For the year ended December 31, 2018
Sales 1,000,000
Cost of goods sold (600,000)
Gross income 400,000
Operating expenses (150,000)
Net income 250,000
The December 31, 2018 audit of the company’s financial statements disclosed the following errors:
• The December 31, 2018 inventory is understated by P31,000.
• Accrued expenses of P4,000 and prepaid expenses of P6,000 were not recognized in the company’s books.
• Sales of P5,000 were not recorded until January 2019, although the goods were shipped in December 2018 and were excluded from the
December 31 physical inventory.
• Purchases of P30,000 made in December 2018 were not recorded although the good were received and properly included in the December
31 physical inventory.
• A machine was sold for P10,000 on July 1, 2018 and the proceeds were credited to Sales account. The machine was acquired on January 1,
2015 for P60,000. At that time, it had an estimated useful life of 6 years with no residual value. No depreciation was recorded on this
machine in 2018.
What is the corrected net income for the year ended December 31, 2018?
A. 228,000 B. 166,000 C. 258,000 D. 224,000
PROBLEM 8
CRISPY Corporation has been using the accrual basis of accounting. However, an examination of the records reveals that some expenses and revenues
have been handled on a cash basis by the inexperienced bookkeeper of the company. Income statements prepared by the bookkeeper reported
P145,000 net income for 2017 and P185,000 net income for 2018. Further review of the records reveals that the following items were handled
improperly.
• Rent of P6,500 was received from a lessee on December 23, 2017. It was recorded as income at that time even though the rental pertains
to 2018.
• Salaries payable on December 31 have been consistently omitted from the records of that date and have been recorded as expenses when
paid in the following year. The salary accruals recorded in this manner were P5,500 for December 31, 2016; P7,500 for December 31, 2017;
and P4,700 for December 31, 2018.
• Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end
of each year have been ignored, and no entry has been made for them. Supplies on hand were P6,500 on December 31, 2016; P3,700 on
December 31, 2017; and P7,100 on December 31, 2018.
1. What is the corrected net income for 2017?

A. 133,700 B. 144,200 C. 146,700 D. 139,300
2. What is the corrected net income for 2018?
A. 184,700 B. 197,700 C. 185,600 D. 190,900
CASH AND CASH EQUIVALENTS

PROBLEM 1
The accountant of CROWN COMPANY is in the process of preparing the company’s financial statements for the year ended December 31, 2018. He
is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset on the statement of financial position. The
following items are being considered:
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• Balances in the company’s accounts at the Metropolitan Bank:
o Current account P 81,000
o Savings account 132,600
• Undeposited customer checks of P 22,200 (including a customer check dated January 2, 2019 for P 3,000)
• Currency and coins on hand of P 3,480
• Petty cash of P 4,000 (currency of P 1,200 and unreplenished vouchers for P2,800)
• P120, 000 in a current account at the Philippine National Bank. This represents a 20% compensating balance for P600,000 loan with the
bank. Everlasting Company is legally restricted to withdraw the funds until the loan is due in 2019.
• Treasury bills:
Two- month maturity bills P 90,000
Seven- month bills 120,000
What is the correct balance of cash and cash equivalents to be reported in the current assets section of the statement of financial position?
A. P547,480 B. P427,480 C. P430,280 D. P327,480
PROBLEM 2
Your audit of the December 31, 2018, financial statements of LEGACY CORPORATION reveals the following:
Current account at Prime Bank P (30,000)
Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity date is December 31, 2018) 1,500,000
Payroll account 390,000
Foreign bank account-restricted (translated using
the December 31, 2017, exchange rate) 2,000,000
Postage stamps 1,250
Employee’s postdated check 4,500
IOU from the vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveler’s check 21,000
Money order 12,900
Petty cash fund (P 3,000 in currency and expense
vouchers for P12, 000) 15,000
What amount would be reported as “cash and cash equivalents in the statement of financial position on December 31, 2018?
A. P840,050 B. P873,900 C. P849,400 D. P861,900
PROBLEM 3
You were engaged by DAUGHTERS Corporation to audit their financial statements as of and for the period ended December 31, 2018. In your audit
of their cash and cash equivalents, with a balance of P15,750,000, you were able to obtain the following breakdown:
Cash on Hand 565,000
BPI Savings Account (Acct No. 788045) 635,000
BPI Savings Account (Acct No. 788046) 200,000
MB Savings Account (Acct No. 3343) 560,000
BDO Checking Account (Acct No. 00101) 4,900,000
BDO Checking Account (Acct No. 00102) (30,000)
CB Checking Account (Acct No. 4009) (80,000)
Rural Bank of AAA Account (Acct No. 0019) 30,000
PNB Time Deposit 100,000
DB Savings Account (Acct No. 1001) 340,000
LB Savings Account (Acct No. 22248) 5,000,000
Petty Cash Fund 50,000
Payroll Fund 840,000
Dividend Fund 1,200,000
Bond Sinking Fund 650,000
IOU From Employees 90,000
Treasury Bills 300,000
Investment in Equity Securities 400,000
Based from your audit procedures, you noted the following:

• Cash on Hand balance includes:
o a check for P50,000, dated January 3, 2019, issued by Swish Co., a customer;
o a check for 18,000, dated December 30, 2018, issued by Swoosh Corp., a customer;
o a check for P24,000, dated December 29, 2018, issued to Jazz Corp.;
o a check for P6,000, dated January 8, 2019, issued to Mirage Co.;
o a check for P15,000, dated June 3, 2018, issued to Melon Company (the payee agreed to extinguish the liability of Daughters
because it was Melon’s fault the check was not deposited); and,
o a money order for P10,000
• Information related to BPI Savings Accounts are as follows:
o Account No. 788045 includes the 10% compensating balance from a loan with a principal amount of P500,000. The loan was
entered into last October 4, 2018, and will mature on October 4, 2020. The compensating balance is under a formal agreement,
thus, is legally restricted.
o Account No. 788046 includes the 8% compensating balance from a loan with a principal amount of P100,000. The loan was
entered into last December 1, 2018, and will mature on November 30, 2019. The compensating balance is legally restricted.
4
• The MB Savings Account includes the 10% compensating balance from a P300,000 loan that will mature on December 31, 2020. The
compensating balance is under an informal agreement and is essentially unrestricted in use.
• The negative balances of BDO Checking Account No. 00102 and CB Checking Account no. 0019 are both due to overdrafts.
• Rural Bank of AAA was closed last November 8, 2018, and is in the process of liquidation. Based from their liquidation process, it was
determined that all depositors will be able to recover 70% of their deposit, or P500,000, whichever is lower. The amount is to be paid on
June 30, 2020.
• The 90-day PNB Time Deposit was entered into last December 1, 2018.
• The accounts in DB and LB are foreign currency denominated. Both accounts were translated to Philippine Peso using the current exchange
rate on December 31, 2018. The deposit in LB is restricted for a planned plant expansion in that country for the next five years.
• The breakdown of the Petty Cash Fund is as follows: bills and coins – P42,000; IOU from employee – P6,000; transportation expense –
P2,000
• The Bond Sinking Fund was set up in 2014 to settle the bonds payable that will mature on July 1, 2019.
• The Treasury Bills were acquired last December 1, 2018. P200,000 will mature on February 28, 2019; the rest will mature on March 31,
2019.
• Investment in Equity Securities includes the following:
o 10,000 ordinary shares of White Corporation; the fair value on December 31, 2018 is P250,000; the entity intends to hold the
investment for trading purposes.
o 15,000 redeemable preference shares of Black Company; the value on December 31, 2018 is P150,000, which is equal to its
acquisition cost last November 1, 2018; the redemption date of the shares is on January 31, 2019.
Requirements:
1. How much shall be presented as Cash and Cash Equivalents as of December 31, 2018?
2. Based from the items initially included as Cash and Cash Equivalents, how much shall be transferred and presented under Current Assets
as of December 31, 2018?
3. Based from the items initially included as Cash and Cash Equivalents, how much shall be transferred and presented under Non-Current
Assets as of December 31, 2018?
4. Based from the items initially included as Cash and Cash Equivalents, how much shall be transferred and presented under (or deducted
also from) Current Liabilities as of December 31, 2018?
5. Prepare the adjusting journal entries on December 31, 2018.
PROBLEM 4
Requirement: For each of the following cases, compute for the cash overage or shortage.
Case 1
From the general ledger of your client, you determined that the balance of their cash is P40,000 as of December 31. A physical count of cash held by
the cashier on the same date revealed that bills total to P35,000, and coins total to P1,498.
Case 2
From the general ledger of your client, you determined that the balance of their cash is P100,000 as of December 31. The December bank statement
showed an ending balance of P144,000. Checks issued in December, presented for payment only in January of next year, are as follows:
Check Number Amount
1214222 P12,400
1214256 16,600
Case 3
You have been engaged to audit the December 31, 2018 financial statements of UNANG BIRIT Corporation, which started its operations last January
1, 2018.
In your audit of their cash, you were able to count P122,484 in currency. The bank statement for the month of December 2018 shows a balance of
P257,890. Outstanding checks for the month is P2,350.
Pertinent transactions that occurred during the year and some audit notes are presented below:
• 2,000 ordinary shares, P200 par, were issued for P250/share.
• A building was purchased, cash basis, for P300,000.
• Furniture and office equipment were purchased, cash basis, for P75,000.
• Paid administrative expenses for the year total to P89,560
• Sales, all on credit, amounted to P1,680,000. The gross profit rate of the entity is 45%.
• The ending balance of accounts receivable is P245,000, while the ending balance of the accounts payable total to P355,000. All purchases
are on account.
• Based on the physical count, inventory costing P476,000 are still unsold.
• The balance of the building presented in the trial balance is P250,000, net of accumulated depreciation and mortgage payable.
• Depreciation expense for the period total to P35,000: P5,000 for office equipment; P10,000 for furniture; and P20,000 for building.
PROBLEM 5
The bookkeeper-cashier of the SM COMPANY absconded on the evening of April 16, 2018, apparently with a large portion of the company’s cash. He
had taken with him certain accounting records, including the cash journals and the general ledger. You are called upon to ascertain, if possible, the
shortage with which the missing employee may be charged.
A statement of financial position prepared from the books and other files follows:
SM Company
Statement of Financial Position
December 31, 2017
ASSETS
Cash P 32,670
Accounts receivable 226,230
5
Inventory (at cost) 440,350
Furniture P 74,560
Less: Accumulated depreciation 31,800 42,760
Total assets P 742,010
LIABILITIES AND SHAREHOLDER’S EQUITY

Accounts payable P 114,720
Share capital 500,000
Retained earnings 127,290
Total liabilities and shareholder’s equity P 742,010
You obtain the following information from the available subsidiary journals, ledgers, and other data.
Balances at close of business, April 16, 2018
Account receivable P 442,550
Accounts payable 207,300
Cash in bank, less checks outstanding 98,830
Transactions, January 1 - April 16, 2018

Sales, per receivable clerk P 5,876,170
Sales allowances in customer’s accounts 18,330
Cash purchase of furniture , per dealer’s invoice 3,000
Total merchandise purchase 3,615,260
Expenses paid, supported by paid invoices and payrolls 1,865,830
Cash dividend declared, P 50,000 (of which P 10,000 remains unpaid) 40,000
Requirements:
1. What is the total amount pad for merchandise purchase?
A. P 3,615,260 B. P 3,293,240 C. P 3,522,680 D. P 3,707,840
2. What is the total amount of collections from sales?
A. P 5,641,520 B. P 5,659,850 C. P 6,074,160 D. P 6,092,490
3. What is the total amount of cash disbursement from January 1-April 1, 2018?
A. P 5,524,090 B. P 5,202,070 C. P 5,431,510 D. P 5,432,510
4. What is the cashier’s accountability (correct cash balance before shortage) on April 15, 2018?
A. P 242,680 B. P 90,830 C. P 143,850 D. P 43,850
5. What is the amount of cash shortage?
A. P 100,000 B. P 43,850 C. P 143,850 D. P 242,680
PROBLEM 6
Your audit client, TESSERACT Corporation, set up a petty cash fund for the first time last October 1, 2018, for P20,000. Transactions related to the
fund are as follows:
• October and November fund disbursements (before the November 15 replenishment) include the following:
Transportation expense 4,500
Repairs for office equipment 6,780
IOU from employees 3,000
• The fund was replenished on November 15 when the petty cash on hand total to P1,200. The check drawn is enough to bring the petty cash
balance to P20,000. The shortage is appropriately recorded by your client.
• November (after the November 15 replenishment) and December disbursements include the following:
Transportation expense 3,600
Office supplies 2,200
Office furniture (purchased Dec. 31) 5,000
IOU from employees 800
• Cash count related to the fund revealed currencies totaling to P3,400. The fund was replenished in January 2019. All supplies were used
during the year.
Requirements:
1. Provide the journal entries for 2018 related to the petty cash fund.
2. How much expense should be recognized in 2018?
3. Provided that the entity did not prepare a year-end adjusting journal entry, for how much is the 2018 net income overstated?
4. What is the balance of petty cash fund to be presented in the December 31, 2018 statement of financial position?
5. How much petty cash shortage should be recognized in 2018?
PROBLEM 7
SHIELD Corporation, your audit client, set up a petty cash fund with a balance of P30,000. The entity assigned Mr. Kapitan Amerikano as its petty
cash custodian. Your count conducted on December 31, 2018 revealed the following breakdown of your client’s fund:
• Currencies total to P2,350.
• Unreplenished expense vouchers include the following:
Transportation and meals expense for employees 5,940
Postage stamps 500
Office supplies 680
Computer repairs 3,420
Miscellaneous expenses 400
• Included in the cash box was an employee IOU for P500.
• Checks include the following:
Date of Check Maker Payee Amount
6
December 30, 2018 SHIELD Corporation Kapitan Amerikano 10,000
December 20, 2018 Villegas Group Steve Rogelio 5,000
• Steve Rogelio is an employee of SHIELD, who indorsed the check to Amerikano. The check was encashed last December 30, 2018, but was
returned due to insufficient funds.
Requirements:
1. How much is the overage or shortage?
2. At what amount should the petty cash fund be presented at December 31, 2018?
PROBLEM 8
On January 2, 2017, you conducted a surprise in connection with your audit of the financial statements of Doctor Corp. for the year ended December
31, 2016. The following were identified on your examination:
Bills consist of one (1) P1,000 bill; three (3) P500 bill; three (3) P200 bill; six (6) P100 bill; seven (7) P50 bill; and four (4) P20 bill. Coins consist of nine
(9) P10 coin; eight (8) P5 coin; and seven (7) P1 coin.
Checks include the following:

Date Maker Payee Amount
Dec. 30 John Floyd Cruz Doctor Corp. ₱13,000
Dec. 30 SLUU Inc. Doctor Corp. 5,000
Dec. 30 Indo Inc. Doctor Corp. 7,000
Dec. 31 Doctor Corp. Benedict, Custodian 10,000
Unreimbursed vouchers comprise of the following:

Date Description Amount
Dec. 27 Postage ₱1,000
Dec. 27 Transportation 2,000
Dec. 28 Computer repairs 1,500
Dec. 30 Supplies 800
Additional information:
• An open envelope was marked “P2,000 for Christmas Party” with vouchers totalling to P1,850. Based on your inquiry, the whole amount
was mingled with the petty cash fund and only the expense vouchers were inserted back to the envelope.
• Official receipts dated December 24 to December 31 were as follows:
OR No. Form of Payment Amount
120141 Cash ₱566
120142 Check 7,000
120143 Cash 891
120144 Check 12,000
120145 Check 13,000
120146 Check 5,000
• The custodian is not authorized to cash checks.
• Cash collections from December 24 to December 31 were not yet deposited.
• Unused postage stamp amount to P350.
• The last replenishment was on December 25. The petty cash fund was set up at P20,000.
Requirements:
1. What is the amount of undeposited collections on December 31, 2016?
2. What is the balance of the petty cash fund to be presented as of December 31, 2016?
3. What is the total amount of shortage/overage?
PROBLEM 9
In the course of your audit of the cash in bank balance of Prime Corporation, you were able to obtain the following information:
• The company’s books for December 31, 2016 showed a balance of P24,650.
• The bank statement shows a cash balance of P10,500 as of December 31, 2016.
• The deposit in transit for the month of December is P64,050 and the outstanding checks total to P25,500.
• A credit memo pertaining to a bank loan of P40,000 was not yet recorded by the entity. Debit memos include a service charge of P1,600
and a charge on the loan for P4,000.
• A book error was discovered wherein a collection of accounts receivable for P1,000 was recorded as P10,000.
• The bank debits include a check issued by Primer Corporation amounting to P1,000.
Requirement:
1. What is the adjusted cash in bank balance as of December 31, 2016?
2. Prepare a compound entry to adjust the cash in bank balance to its correct balance as of December 31, 2016.
PROBLEM 10
Doughnut Corp., your audit client, has a cash balance of P15,000 on December 31, 2016. Based on the bank statement provided by BPI covering the
month of December 2016, the following information were determined:
Bank Statement
Doughnut Corp.
For the month of December 2016
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Date Description Check No. Dr Cr Balance
1 Balance last statement ₱27,645
2 Check issued 12046 ₱24,500 3,145
3 Check issued 12038 2,000 1,145
3 Check deposited ₱28,500 29,645
5 Check issued 65004 19,000 10,645
5 CM - loan 30,000 40,645
7 DM - discount on loan 2,000 38,645
8 Check deposited 100,500 139,145
20 Check issued 12051 57,005 112,940
20 Check issued 12048 89,900 23,040
29 DM - service charge 400 22,640
Based on the check register of your client, the following checks were issued during the month of December:
Date Payee Check No. Amount
Dec. 1 Hello Co. 12046 ₱24,500
Dec. 4 It’s Me Corp. 12047 5,600
Dec. 5 I Was Inc. 12048 89,900
Dec. 6 Wondering Co. 12049 10,000
Dec. 9 If After Company 12050 2,040
Dec. 15 All Corp. 12051 57,005
Dec. 27 These Years Co. 12052 5,400
Additional Information:
• All deposits pertain to collections during the month. Collections for the month of December total to P183,800.
• Check no. 12038 pertain to a payment on Nov. 13, 2016. This check is the only outstanding check for the month of November.
• Check no. 65004 pertains to a check issued by Donut Corp.
Requirements:
1. What is the amount of deposit in transit?
2. What is the total amount of outstanding checks?
3. What is the correct cash balance that should be presented in the Statement of Financial Position as of December 31, 2016?
PROBLEM 11
Anying Velasco is reviewing the cash accounting for FOUR Inc. Anying’s review will focus on the petty cash fund account and the bank reconciliation
for the month ended May 31, 2016. She has collected the following information from FOUR’s bookkeeper for this task.
Petty Cash Fund

1. The petty cash fund was established on May 2, 2016, in the amount of P10,000.
2. Expenditures from the fund by the custodian as of May 31, 2016, were evidenced by approved petty cash vouchers for the following:
Various office Supplies P 3,920
IOU from employees 1,200
Shipping charges 2,298
Miscellaneous Expense 1,526
On May 31, 2016, the petty cash fund was replenished and increased to P12,000; currency and coins in the fund at that time totalled P756.
Bank Reconciliation
Shore Bank
Bank Statement
Disbursements Receipts Balance
Balance, May 1, 2016 P 350,760
Deposits P 1,120,000
Note payment direct from customer (Interest 37,200
of P1,200)
Checks cleared during May P 1,246,000
Bank Service Charges 1,080
Balance, May 31, 2016 260,880
FOUR, Inc’s Cash Account

Balance, May 1, 2016 P 354,000
Deposits during May 2016 1,240,000
Checks written during May 2016 1,273,400
Deposits in transit are determined to be P120,000, and checks outstanding at May 31 total P34,000. Cash on hand (besides petty cash) at May 31,
2016, is P9,840.
Requirements:
1. What is the amount of petty cash shortage?
A. P2,300 C. P300
B. P11,244 D. P0
8
2. The journal entry to record the replenishment of, and increase in the petty cash fund includes a credit to
A. Cash of P10,944
B. Cash of P11,244
C. Petty cash fund of P10,944
D. Petty cash fund of P11,244
3. What amount of cash should be reported in the May 31, 2016, statement of financial position?
A. P368,720 C. P368,420
B. P356,720 D. P358,880
PROBLEM 12
In relation to your audit of the cash in bank of your client, MEG Company, the following information were gathered:
• As of May 31, 2016, the book balance is P20,000 and the bank balance is P18,000.
• The deposit in transit for May is P10,000; for June, P15,000.
• The outstanding checks for May amount to P2,000 and the outstanding checks for June total to P5,000.
• Credit memo for May pertain to a collection for a note totalling to P8,000; while for June, the credit memo is P30,000 pertaining to a bank
loan.
• Debit memos total to P500 for May and P2,000 for June.
• A May book disbursement for P1,500 was not recorded. The correction was made in June.
• A June collection for P4,500 was not recorded. No correction was made.
• Bank errors for June are as follows: a deposit of P10,200 made by the entity was erroneously omitted; and a disbursement made by your
client for P3,000 was erroneously debited to the account of MIG Company. No corrections were made during the month.
• June book debits – P150,000; June bank debits – P158,000; June cash balance per books (unadjusted) – P6,000; June bank credits – P161,300
Requirements:
1. How much is the total disbursement made by the entity for the month of June 2016?
2. What is the adjusted cash balance as of May 31, 2016?
3. What is the adjusted cash balance as of June 30, 2016?
4. Prepare a compound adjusting journal entry to correct the cash in bank balance as of June 30, 2016.
PROBLEM 13
The bank statement for the current account of FIVE Co. showed a December 31, 2016, balance of P585,284. Information that might be useful in
preparing a bank reconciliation is as follows:
a) Outstanding checks were P52,810.

b) The December 31, 2016, cash receipts of P23,000 were not deposited in the bank until January 2, 2017.
c) One check written in payment of rent P8,940 was correctly recorded by the bank but was recorded by FIVE Co. as P9,840 disbursement.
d) In accordance with prior authorization, the bank withdraw P18,000 directly from the current account as payment on a mortgage note payable.
The interest portion of that payment was P14,000. FIVE Co. has made no entry to record the automatic payment.
e) Bank Service Charges of P740 were listed on the bank statement.
f) A deposit of P35,000 was recorded by the bank on December 12, but it did not belong to FIVE Co.
g) The bank statement included a charge of P3,400 for a not-sufficient-fund check. The company will seek payment from the customer.
h) FIVE Co. maintains an P8,000 petty cash fund that was appropriately reimbursed at the end of December.
i) According to instructions from FIVE Co. on December 30, the bank withdrew P40,000 from the account and purchased treasury bills for FIVE Co.
The company recorded the transaction in its books on December 31 when it received notice from the bank. Half of the treasury bills mature in three
months and the other half in six months.
Requirements:
1. What is the cash in bank balance per books on December 31, 2016?
A. P549,714 C. P534,914
B. P543,514 D. P541,714
2. What is the adjusted cash in bank balance on December 31,2016?
A. P520,474 C. P518,674
B. P527,274 D. P520,154
3. What amount would FIVE Co. report as cash and cash equivalents in the current assets section of the December 31, 2016, statement of financial
position?
A. P928,474 C. P720,474
B. P728,474 D. P735,274
PROBLEM 14
In relation to your audit of the cash in bank of your client, MEG Company, the following information were gathered:
• As of May 31, 2016, the book balance is P20,000 and the bank balance is P18,000.
• The deposit in transit for May is P10,000; for June, P15,000.
• The outstanding checks for May amount to P2,000 and the outstanding checks for June total to P5,000.
• Credit memo for May pertain to a collection for a note totalling to P8,000; while for June, the credit memo is P30,000 pertaining to a bank
loan.
• Debit memos total to P500 for May and P2,000 for June.
• A May book disbursement for P1,500 was not recorded. The correction was made in June.
• A June collection for P4,500 was not recorded. No correction was made.
• Bank errors for June are as follows: a deposit of P10,200 made by the entity was erroneously omitted; and a disbursement made by your
client for P3,000 was erroneously debited to the account of MIG Company. No corrections were made during the month.
• June book debits – P150,000; June bank debits – P158,000; June cash balance per books (unadjusted) – P6,000; June bank credits – P161,300
Requirements:
9
1. How much is the total disbursement made by the entity for the month of June 2016?
2. What is the adjusted cash balance as of May 31, 2016?
3. What is the adjusted cash balance as of June 30, 2016?
4. Prepare a compound adjusting journal entry to correct the cash in bank balance as of June 30, 2016.
PROBLEM 15
Mr. Mando Rukot, the accountant of Square Room Corporation, who was hired on June 5, 2016, absconded on June 30 2016; apparently with a huge
amount of cash. You were engaged on July 1, 2016 to ascertain the amount of money taken by the accountant.
To aid you in your examination, you obtained the May bank reconciliation prepared by the previous accountant, Mr. Sipi Ey; acquired the bank
statement for June; and conducted a cash count on the undeposited collections for June.
May bank reconciliation

Cash in bank balance per book, May 31 505,000
Add: Proceeds of bank loan 100,000
Outstanding checks 65,000 165,000
Total 670,000
Less: Undeposited collections 23,000
May bank service charge 2,000 25,000
Cash in bank balance per bank, May 31 645,000
Based on your cash count, cash totalling to P15,600 were still undeposited. June book debits total to P348,000, while book credits total to P240,000.
The book debits only include cash collections for June, which is ascertained to be correct; and it does not include the bank loan credited by the bank
in May. The book credits include the May bank service charge; the rest pertains to cash disbursements.
Based on the June bank statement, June bank credits total to P268,000, including the deposit in transit in May; while June bank debits total to
P305,000, including the June bank service charge for P2,000. The rest of the bank debits pertain to cleared checks. All May outstanding checks cleared
the bank in June.
Requirements:
1. How much is the outstanding checks as of June 30, 2016?
A. 238,000 B. 65,000 C. 2,000 D. – 0 –
2. How much is the correct undeposited collections before the theft?
A. 103,000 B. 348,000 C. 80,000 D. 87,400
3. How much was taken by Mr. Mando Rukot?
A. 103,000 B. 348,000 C. 80,000 D. 87,400
4. At what amount shall the cash in bank be presented as of June 30, 2016?
A. 711,000 B. 623,600 C. 603,000 D. 613,000
INVENTORY
PROBLEM 1
Your audit client presented the following information on December 31, 2016: Net purchases (all on account) – P2,400,000; Inventory, December 31,
2016 (based on physical inventory count) – P350,000.
The audited balance of inventory on December 31, 2015 is P260,000.
Additional information:
a. A purchase of inventory for P6,000 was recorded on December 28, 2016 and the goods are still in transit as of December 31. The related
freight term is FOB Destination.
b. Goods (costing P20,000) consigned by your client to another entity are not yet sold as of December 31, 2016. No journal entry was prepared
by your client upon the transfer of goods to the consignee.
c. Goods costing P8,000 were sold for P15,000 on December 28, 2016. The freight term is FOB Shipping Point.
d. A purchase of goods costing P13,500 on December 31, 2016 was not recorded until the receipt of the goods on January 3, 2017. The term
is FOB Shipping Point.
e. Goods consigned to your client was recorded as a purchase upon receipt of the goods on December 10, 2016. The cost of the goods is
P30,000. The amount of inventory left in the warehouse as of December 31, 2016 is P12,000.
f. Goods costing P17,500 was sold for P22,000 on December 30, 2016; term is FOB Destination. The sale was recorded on January 5, 2017
when the goods were already received by the customer.
Requirements:
1. What is the correct net purchases for 2016?
2. What is the correct balance of inventory as of December 31, 2016?
3. Prepare the adjusting journal entries to reflect the correct amounts.
PROBLEM 2
You are engaged in an audit of financial statements of Stark Corporation for the year ended October 31, 2018, and have observed the physical
inventory count on October 30, 2018.
All merchandise received up to and including October 30, 2018 has been included in the physical count which totalled to P354,500. As a result of
the count, the following cost of sales schedule has been prepared by the client’s accountant:
Stark Corporation
Schedule of Cost of Sales
For the period ended October 31, 2018
10
Inventory, November 1, 2017 235,000
Net purchases, unadjusted 2,543,900
Cost of goods available for sale 2,778,900
Less: Inventory per count 354,500
Cost of sales 2,424,400
The following list of invoices is for the purchases of merchandise and are entered in the purchase journal for the months of October and November
2018:
OCTOBER
Receiving Report No. Amount Freight Terms Date of Invoice Date Goods were Received
11201 14,400 Destination Oct. 19 Oct. 21

11203 18,500 Shipping Pt. Oct. 20 Oct. 30
11204 7,800 Destination Oct 25 Nov. 3
11205 5,000 Destination Nov. 4 Oct. 29
NOVEMBER
Receiving Report No. Amount Freight Terms Date of Invoice Date Goods were Received

11213 14,440 Shipping Pt. Nov. 2 Nov. 3
11214 25,640 Shipping Pt. Oct. 23 Nov. 3
11215 28,400 Shipping Pt. Oct. 23 Nov. 3
11216 14,200 Destination Oct. 27 Nov. 3
Requirement: What is the correct cost of sales for the period ended October 31, 2018?
PROBLEM 3
In testing the sales cut-off for the THIRTEEN COMPANY in connection with an audit for the year ended October 31, 2016, you find the following
information.
A physical inventory was taken as of the close of business on October 31, 2016. All customers are within a three-day delivery area of the company’s
plant. The unadjusted balances of Sales and Inventories are P7,500,000 and P330,000, respectively.
Invoice FOB Terms Date Shipped Date Recorded Sales Cost
Number
6671 Destination Oct. 20 Oct. 31 P 3,000 P 2,700
6672 Shipping Point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping Point Oct. 25 Oct. 31 5,400 3,600
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping Point Nov. 2 Oct. 23 19,500 15,300
6677 Shipping Point Nov. 5 Nov. 6 22,500 17,400
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping Point Nov. 4 Oct. 31 25,800 24,600
6680 Destination Nov. 5 Nov. 2 15,000 12,000
Based on the foregoing information, compute for the October 31, 2016, adjusted balances of the following accounts:
1. Sales
A. P7,461,300 C. P7,449,600
B. P7,455,900 D. P7,487,100
2. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300
PROBLEM 4
Taken Corporation is currently preparing its interim financial statements as of and for the interim period ended September 30, 2016. The following
information were obtained:
Inventory, January 1, 2016 1,200,000
Purchases, January 1 to September 30 800,000
Purchase returns, January 1 to September 30 25,000
Purchase discounts, January 1 to September 30 35,000
Freight in 20,000
Sales 1,395,000
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Sales returns 10,000
Sales discounts 40,000
Employee discounts 15,000
1. What the correct net sales for inventory estimation purposes?

2. If the company is using a gross profit rate based on sales of 30%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?
3. If the company is using a gross profit rate based on cost of 40%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?
PROBLEM 5
EIGHTEEN INC. was organized on January 1, 2015. On December 31, 2016, the company lost most of its inventory in a warehouse fire just before the
year-end count of Inventory was to take place. The company’s records disclosed the following data:
2015 2016
Inventory, January 1 P 0 P 204,000
Purchases 860,000 692,000
Purchase returns and allowances 46,120 64,600
Sales 788,000 836,000
Sales returns and allowances 16,000 20,000
On January 1, 2016, Eighteen’s pricing policy was changed so that the gross profit rate would be three percentage points higher than the one earned
in 2015.
Salvaged undamaged merchandise was marked to sell at P24,000 while damaged merchandise market to sell at P16,000 had an estimated realizable
value of P3,600.
1. What is the company’s gross profit rate beginning January 1, 2016?

A. 24% C. 17%
B. 21% D. 20%
2. How much is the inventory fire loss?
A. P189,400 C. P146,920
B. P183,640 D. P254,000
PROBLEM 6
The warehouse of your client, Minamalas Corporation, was destroyed by fire on October 2, 2016. All of the inventory stored in the warehouse were
also destroyed, and you were engaged to estimate the fire loss related to the inventory.
Retrieved were the records pertaining to the inventory of your client, which shows the following information covering January 1 to September 30:
Purchases 1,766,500
Purchase discounts 22,500
Purchase returns 3,000
Sales 2,518,000
Discounts granted to employees 2,000
You have determined that the appropriate gross profit rate to be applied in 2016 is based on the average gross profit rate for the past three years
(round gross profit rate to the nearest percentage; i.e. xx%). A summary of the previous performance of your client (for 2013, 2014, and 2015) is
presented below:
2013 2014 2015

Beginning inventory 424,830 516,630 525,520
Net purchases 1,322,300 1,433,890 1,500,430
Ending inventory 516,630 525,520 524,000
Sales 2,000,000 2,439,000 2,500,800
As of the date of fire, inventory costing P58,000 is still in transit, including a purchase made in October 1 for P12,000 which was not yet recorded by
your client. The term is FOB shipping point. Damaged inventory with cost of P3,000 was sold at cost after the fire. No other transactions occurred
from September 30 to October 2.
1. What is the average cost ratio?

2. What is the entity’s net sales for the purpose of determining the loss from the fire?
3. What is the estimated inventory as of October 2, 2016 before the fire?
4. What is the estimated loss on fire?
PROBLEM 7
In the evening of December 31, 2018, an explosion destroyed the whole warehouse of your client, KABOOM Corporation, before an inventory count
can be conducted. You are now tasked to ascertain the loss from the incident. To aid you in determining such loss, you reviewed the following relevant
accounts:
12
Accounts Receivable
The beginning balance of your client’s accounts receivable is P3,545,000. On January 3, 2019, the replies from the confirmation requests sent to the
six (6) customers with outstanding balances were received. The December 31, 2018 balance being confirmed is P4,300,000, and the replies are noted
as follows:
Customer Per Ledger Per Reply Difference
Posporo, Inc. 1,254,600 1,204,600 50,000
Apoy Company 222,000 202,000 20,000
Fireworks Corporation 894,400 894,400 -
Sindi Corporation 169,000 169,000 -
Leebang Co. 760,000 760,000 -
Pfft Ltd. 1,000,000 1,000,000 -
You were able to ascertain that the difference between the amount per ledger and amount per reply for both Posporo and Apoy were due to
shipments made on December 30, 2018 recorded as sales. The term for the sales is FOB Destination, and are still in transit as of December 31, 2018.
The entity has been consistent in using its gross profit rate of 30%. Collection of accounts receivable for 2018 total to P9,005,600.
Allowance for Bad Debts

In your client’s trial balance, the unadjusted balance of allowance for bad debts is P59,205. This includes the interim provision of bad debts expense
based from 1% of the interim credit sales of P7,000,000, and a write-off for P99,420. The entity is consistent in using percentage of accounts receivable
in estimating its uncollectible accounts. You ascertained that this method, and the percentage used by your client (which is unchanged) is reasonable.
Inventory
The January 1, 2018 balance of KABOOM’s inventory is P947,750. Purchases for the year total P8,700,000, and purchase discounts total P110,000.
On January 2, 2019, goods purchased costing P80,000 were received and were temporarily put in an open space in the administrative building.
KABOOM recorded the purchase upon receipt of the goods. These goods were shipped by the suppliers in 2018 FOB shipping point.
Cash Sales, Sales Returns, and Sales Discounts

Cash sales for the period total to P1,360,900. Actual sales returns for 2018, all from sales on account, total to P190,080; while sales discounts total
to P450,400. An estimate of 1% of gross credit sales will be returned in 2019.
1. What is the balance of KABOOM’s inventory as of December 31, 2018?

A. 150,000 B. 129,000 C. 80,000 D. none
2. How much is the estimated inventory loss from the explosion?
A. 2,390,050 B. 1,566,420 C. 1,486,420 D. 1,367,826
PROBLEM 8
SOUPIE, Inc., your audit client, is keeping a record of their inventory at cost with their corresponding selling price. Your client’s record revealed the
following information related to their inventory on September 30, 2018:
Cost Retail
Inventory, October 1, 2017 372,000 620,000
Purchases 3,110,000 4,760,000
Transportation in 55,000
Sales 4,872,000
Purchase return 27,000 45,000
Sales allowance 125,500
Purchase allowance 18,500
Purchase discounts 15,960
Normal breakages 50,500
Abnormal breakages 200,000 308,000
Discounts granted to employees 75,500
Departmental transfer out 135,500 175,000
Departmental transfer in 125,500 165,000
Mark ups 290,000
Mark downs 283,000
Mark up cancellations 40,000
Mark down cancellations 40,000
The company reported inventories per a physical count conducted on September 30 at P225,000. You ascertained that the count conducted was
adequately made by the client.
You used the retail inventory method of estimating ending inventory to check whether the amount per count is reasonable, and whether there is a
shortage in the inventory.
Note: round off percentages to whole number (for instance, 78.43% is 78%).
Requirement: Compute for the cost of inventory shortage under

1. The conventional retail method
2. The average cost retail method
3. The FIFO retail method
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PROBLEM 9
FIFTEEN CO. sells musical instruments. In your audit of the company’s financial statements for the year ended December 31, 2016, you have gathered
the following data concerning inventory.
At December 31, 2015, the balance in Fifteen’s Inventory account was P502,000, and the Allowance for Inventory Writedown had a balance of
P32,000. The relevant inventory cost and market data at December 31, 2016, are summarized in the schedule below.
Replacement Sales Net Realizable Normal Profit
Cost Cost Price Value
Guitars P 89,000 P 86,000 P 91,500 P 87,000 P 6,400
Xylophones 94,000 92,000 93,000 85,000 7,440
Trumpets 125,000 135,000 129,000 111,000 11,610
Violins 194,000 114,000 205,000 197,000 20,500
Total P 502,000 P 427,000 P 518,500 P 480,000 P 45,950
Requirements:
1. What is the proper balance in the Allowance for Inventory Writedown at December 31, 2016?
A. P75,000 C. P32,000
B. P22,000 D. P25,000
2. The adjusting entry on December 31, 2016, to arrive at the proper allowance balance should be
A. Allowance for Inventory Writedown 7,000
Gain on Inventory Recovery 7,000
B. Loss on Inventory Writedown 7,000
Allowance for Inventory Writedown 7,000
C. Allowance for Inventory Writedown 3,000
Gain on Inventory Recovery 3,000
D. Loss on Inventory Writedown 43,000
Allowance for Inventory Writedown 43,000
PROBLEM 10
The balances of the inventories of Turon Corporation are presented below:
Dec. 31, 2017 Dec. 31, 2018
Finished goods 815,000 780,000
Work-in-process 340,000 354,000
Raw materials 200,000 185,000
The allowance for inventory writedown for the finished goods as of December 31, 2015 is at P15,000.
Audit notes:
• The entity purchased P1,200,000 worth of raw materials for 2018. 80% of the purchases were on account.
• P25,000 worth of raw materials are still in transit as of December 31, 2018. It was included in the ending inventory, but was only recorded
as purchase in January 5, 2019. The term is FOB shipping point.
• Factory overhead for the year total to P840,000, which is 20% more than the direct labor.
• The estimated selling price of the finished goods is P800,000 and the estimated cost to sell the goods is at 4% of its selling price.
• The entity closes any inventory writedown to its cost of goods sold.
Requirements:
1. What is the required allowance for inventory writedown on December 31, 2018?
2. How much is the cost of goods sold for 2018?
PROBLEM 11
LORDS Corporation uses the lower of cost and net realizable value in presenting its inventory. Data regarding the company’s inventories are as
follows:
Finished Goods AAA BBB CCC

Cost 550,000 540,000 430,000
Selling price 675,000 620,000 820,000
Estimated cost to sell, as % of sales 20% 15% 15%
Work-in-process
Cost 240,000 188,000 320,000
Selling price 360,000 289,000 735,000
Estimated cost to complete 48,000 97,650 74,000
Replacement cost 208,000 168,000 375,000
Normal profit margin as % of selling price 25% 35% 40%
Raw Materials - Item AAA A001 A002 A003

Cost 250,000 500,000 400,000
Current purchase price 250,000 480,000 375,000
Raw Materials - Item BBB B001 B002 B003

Cost 400,000 300,000 200,000
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Current purchase price 450,000 275,000 180,000
Raw Materials - Item CCC C001 C002

Cost 375,000 450,000
Current purchase price 395,000 420,000
The beginning balances of the following accounts are as follows:

Allowance for Inventory Writedown - Finished Goods 10,000
Allowance for Inventory Writedown – Work-in-Process 0
Allowance for Inventory Writedown - Raw Materials 40,000
Requirements:
1. What is the correct Finished Goods inventory to be reported at the balance sheet date for
a. AAA? b. BBB? c. CCC?
2. What is the correct Work-in-process inventory to be reported at the balance sheet date for
a. AAA? b. BBB? c. CCC?
3. What is the correct total raw materials for AAA to be reported at the balance sheet date?
4. What is the correct total raw materials for BBB to be reported at the balance sheet date?
5. What is the correct total raw materials for CCC to be reported at the balance sheet date?
6. What is the total loss on inventory write-down to be reported for the period?
NON-FINANCIAL ASSETS
PROBLEM 1
You were engaged by Honor Inc., a company organized at the beginning of January 2017, to audit their financial statements as of and for the period
ended December 31, 2017. The entity incurred all of the following transactions related to Property, Plant and Equipment during the first half of
January:
Transaction Cost Recorded as
Purchase price of land 10,540,000 Land
Fees for registration and transfer of the title of the land 80,000 Expense
Demolition cost of old building 250,000 Expense
Special assessment for public roadways and other
government projects 100,000 Land Imp.
Construction permit fee 75,000 Expense
Architect's fees 350,000 Building
Excavation costs 500,000 Land
Cost of constructing the building 35,000,000 Building
Cost of temporary quarters 140,000 Land Imp.
Cost of constructing pavements and parking lot 950,000 Land Imp.
Cost of constructing a permanent fence after the
completion of the construction of the building 480,000 Building
Purchase price of machineries and equipment to be
used in the normal operations of the entity 2,500,000 Mach. & Eqt.
Freight charges on the machineries and equipment 150,000 Expense
Insurance costs during the delivery of the machineries
and equipment 100,000 Expense
Discount on early payment for the purchase of
machineries and equipment; the discount was not
taken 25,000
Installation costs of the machineries and equipment 95,000 Expense
Based from your audit procedures, you were able to ascertain the following:
• The entity received proceeds totalling to P45,000 as income. Further investigation revealed that the proceeds came from the initial testing
of the equipment.
• The estimated useful life of each of the accounts under PPE are as follows:
o Building – 50 years
o Machineries and equipment – 20 years
o Land Improvements – 20 years
• The building’s residual value is P500,000
• The entity applied the straight-line method in depreciating their depreciable assets.
Requirements:
1. What is the correct initial cost of the land?
2. What is the correct initial cost of the building?
3. What is the correct initial cost of land improvements?
4. What is the correct initial cost of machineries and equipment?
5. What is the correct carrying value of Property, Plant and Equipment as of December 31, 2017?
6. How much is the overstatement(understatement) on the 2017 net income of the entity?
PROBLEM 2
TWENTYTHREE COMPANY acquires a new manufacturing equipment on January 1, 2016, on instalment basis. The deferred payment contract provides
for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual instalment payments of P388,020,
15
including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2016. The equipment has a cash price
equivalent of P2,370,000. Twentythree’s financial year-end is December 31.
Requirements:
1. What is the acquisition cost of the equipment?
A. P3,404,160 C. P2,370,000
B. P2,804,160 D. P3,104,160
2. The amount to be recognized on January 1, 2016, as discount on note payable is

A. P1,034,160 C. P827,160
B. P310,416 D. P0
3. The amount of interest expense to be recognized in 2016 is
A. P0 C. P310,416
B. P188,898 D. P207,000
4. The amount of interest expense to be recognized in 2017 is
A. P310,416 C. P207,000
B. P188,898 D. P0
5. The carrying value of note payable at December 31, 2017, is
A. P1,689,858 C. P1,312,062
B. P1,888,980 D. P1,700,082
PROBLEM 3
Various equipment used by TWENTYFOUR CO. in its operations are either purchased from dealers or self-constructed. The following items for two
different types of equipment were recorded during the calendar year 2016.
Manufacturing equipment (self-constructed)

Materials and purchased parts at gross invoice price (Twentyfour failed to take the 2% cash
discount) P 450,000
Imputed interest on funds used during construction (stock financing) 36,000
Labor costs 185,000
Overhead costs (fixed – P40,000; variable – P60,000) 100,000
Gain on self-construction 74,000
Installation cost 8,600
Store equipment (purchased)
Cash paid for equipment P 175,000
Freight and insurance cost while in transit 3,500
Cost of moving equipment into place at store 1,200
Wage cost for technicians to test equipment 7,000
Insurance premium paid during first year of operation on this equipment 5,200
Special plumbing features required for this equipment 8,200
Repair cost incurred in first year of operations related to this equipment 1,450
Requirements:
1. What is the total cost of the self-constructed equipment?
A. P674,600 C. P734,600
B. P770,600 D. P743,600
2. What is the total cost of the store equipment purchased?
A. P200,100 C. P191,400
B. P193,700 D. P194,900
PROBLEM 4
TWENTYFIVE COMPANY incurred the following expenditures in 2016:
Purchase of Land P 7,982,000
Land survey 104,000
Fees for search of title for land 12,000
Building permit fee 70,000
Temporary quarters for construction crews 215,000
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Dividends 100,000
Damages awarded for injuries sustained in construction (no insurance carried) 168,000
Cost of construction 58,000,000
Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees, and other landscaping 660,000
A portion of the building site had been temporarily used by Twentyfive to operate a car park while the building was being constructed. A total of
P325,000 was earned by Twentyfive from this incidental activity.
Requirements:
1. What is the cost of the land?
A. P8,896,000 C. P9,648,000
B. P8,048,000 D. P10,448,000
16
2. What is the cost of land improvements?
A. P660,000 C. P1,460,000
B. P1,500,000 D. P800,000
3. What is the cost of the building?
A. P58,485,000 C. P58,252,000
B. P58,160,000 D. P59,425,000
PROBLEM 5
TWENTYSIX, INC. constructs equipment for its own use. The account below is for a manufacturing equipment it had assembled in 2016.
EQUIPMENT
Debit Credit
Cost of dismantling old equipment P 43,440
Cash proceeds from sale of old equipment P 36,000
Raw materials used in construction of new equipment 228,000
Labor in construction of new machine 147,000
Cost of installation 33,600
Cost of testing the equipment 25,000
Materials spoiled in machine trial run 7,200
Profit on construction 72,000
An analysis of the details in the account disclosed the following:
a) The old equipment, which was removed before the installation of the new one, had been fully depreciated.
b) Cash discounts received on the payments for materials used in construction totalling P9,000 were reported in the purchase discounts account.
c) The factory overhead account shows a balance of P876,000 for the year ended December 31, 2016; this balance exceeds normal overhead on
regular plant activities by approximately P50,700 and is attributable to equipment construction.
d) A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been
purchased.
e) While testing the equipment, sample items were produced. These were sold for P5,000 which was credited to miscellaneous revenue.
Requirements:
1. What is the total cost of the new equipment?
A. P486,500 C. P477,500
B. P457,500 D. P482,500
2. Prepare individual journal entries to correct the accounts as of December 31, 2016. Assume that the nominal accounts are still open.
PROBLEM 6
On July 1, 2016, TWENTYSEVEN, INC. exchanged machines with Bondat Company. The following facts pertain to these assets:
TWENTYSEVEN’S BONDAT’S
ASSET ASSET
Original cost P 288,000 P 330,000
Accumulated depreciation (to date of exchange) 135,000 156,000
Fair maket value at date of exchange 180,000 225,000
Cash paid by Twentyseven 45,000
Cash received by Bondat 45,000
Although the fair values of the assets involved in the exchange had been reliably determined, certain cash flow calculations made both companies
proved that this exchange transaction lacks commercial substance.
Requirement: What entry should be made on the books of each company to record the exchange?
PROBLEM 7
TWENTYNINE COMPANY buys a machine for P228,600 on January 1, 2013. The maintenance costs for the years 2013-2016 are as follows:
Year Cost
2013 P 13,500
2014 10,800
2015 65,700*
2016 18,900
*includes P54,900 for cost of a new motor installed in December 2015.
Twentynine recorded the cost of the machine frame in one account at a cost of P176,400 and the motor was recorded in a second account at a cost
of P52,200. Straight-line method of depreciation is used with a useful life of 10 years for the frame and 4 years for the motor. Residual values are
immaterial and thus ignored in the computation of depreciation charges.
Requirements:
1. What is the total machine-related expenses in 2013?
A. P44,190 C. P70,650
B. P30,690 D. P36,630
2. What amount of loss should be recognized on the replacement of motor in 2016?
A. P10,800 C. P26,100
B. P13,050 D. P0
3. What is the depreciation expense in 2015?
A. P31,365 C. P30,690
B. P17,640 D. P44,415
A. P54,540 C. P89,775
17
B. P41,490 D. P42,165

A. P42,030 C. P52,965
B. P31,365 D. P50,265
PROBLEM 8
At December 31, 2017, KUPAS Corporation’s non-current operating assets and accumulated depreciation and amortization accounts had balances as
follows:
Accumulated
Depreciation or Depreciation Useful
Category Cost of Asset Amortization Method Life
Land 13,000,000
150% declining
Buildings 12,000,000 2,654,000 balance 25 yrs
Machinery and Equipment 7,750,000 1,962,000 straight-line 10 yrs
150% declining
Automobiles and Trucks 13,200,000 8,620,000 balance 5 yrs
Leasehold Improvements 2,210,000 1,105,000 straight-line 8 yrs
Land Improvements straight-line 12yrs
Depreciation is computed to the nearest month. The salvage value of the depreciable assets is considered immaterial.
Transactions during 2018 and other information are as follows:

a. On January 6, 2018, a plant facility consisting of land and a building was acquired from Atlas Corporation for P16 million. Of this amount,
20% was allocated to land.
b. On April 1, 2018, new parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of P1,920,000. These
expenditures had an estimated useful life of 12 years.
c. The leasehold improvements were completed on December 31, 2014, and had an estimated useful life of eight years. The related lease,
which would have terminated on December 31, 2020, was renewable for an additional four-year term. On April 30, 2018, KUPAS exercised
the renewal option.
d. On July 1, 2018, machinery and equipment were purchased at a total invoice cost of 250,000. Additional costs of P10,000 for delivery and
P30,000 for installation were incurred.
e. On August 30, 2018, KUPAS purchased a new automobile for P1,650,000.
f. On September 30, 2018, a truck with a cost of P2,400,000 and a carrying amount of P810,000 on the date of sale was sold for P1,150,000.
Depreciation for 9 months ended September 30, 2018 was P235,200.
g. On December 30, 2018, a machine with a cost of P170,000 and a carrying amount of P29,750 at date of disposition was scrapped without
cash recovery.
Determine the adjusted balances of the following:

1. Land
2. Land Improvements
3. Accumulated Depreciation – Land Improvements
4. Building
5. Accumulated Depreciation – Building
6. Machinery and Equipment
7. Accumulated Depreciation – Machinery and Equipment
8. Automobiles and Trucks
9. Accumulated Depreciation – Automobiles and Trucks
10. Leasehold Improvements
11. Accumulated Depreciation – Leasehold Improvements
PROBLEM 9
ABCDEF Corporation, your audit client, presented the following schedules of expenditures for 2017 related to its PPE:
ABCDEF Company
Schedule of PPE Additions
For the period ended December 31, 2017
Additions to Building:
Repainting of Rooms 100A, 100B, and 101A 80,000
Replacement of broken tiles 143,000
Upgrade of electrical wiring systems for the
installation of security equipment 280,000
Cost of renovating the 5th floor 1,200,000
Total additions to Building 1,703,000
Additions to Machinery and Equipment:

Acquisition cost of new machine 560,000
Installation costs 30,000
Service contracts 10,000
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Replacement of minor gears 8,500
Total additions to machinery and equipment 608,500
Total Additions 2,311,500
ABCDEF Company
Repairs and Maintenance Expense
For the period ended December 31, 2017
Installation of storm windows 1,200,000

Replacement of major components of
Equipment AA 600,000
Rearrangement costs of machinery and
equipment for efficiency in production 490,000
Cost of installing additional cabinets and
cupboards which are added permanently
as part of the building 550,000
Repairs and maintenance expense 2,840,000
Requirements:
1. How much from the items given shall be capitalized to Building?
2. How much from the items given shall be capitalized to Machinery and Equipment?
3. How much from the items given shall be expensed?
PROBLEM 10
Your audit client, GITARA Company, followed up on its plan to expand its operations in 2018. The entity’s plan was to start the construction of its
new building beginning of March, and start its operations in the new site beginning of November.
GITARA, however, projected at the beginning of the year that its funds will not be enough to start the construction come March. So, on January 1,
2018, the entity obtained a loan from Bank of PI for P50 million, specifically to fund the construction. The loan is due December 31, 2020, and the
entity will be paying 12% interest every December 31.
Since the construction will not commence until beginning of March, and the construction will not require a one-time outflow of cash, the entity
decided to invest the unused proceeds in an investment facility that yields 0.5% return monthly. The unused proceeds will be invested at the
beginning of each month. The first investment was made on January 1, 2018.
Construction started on March 1, 2018, and ended on October 31, 2018. The schedule of payments made during the construction is as follows:
Date Amount
March 1 5,000,000
April 30 8,600,000
July 1 10,000,000
August 1 7,400,000
September 30 2,000,000
October 31 15,000,000
The entity started using the building on November 2, and estimated that the building will have an estimated useful life of 20 years with no residual
value. The building was capitalized for P48 million, equal to the actual payments made during the construction period. Interest paid for the loan was
recorded as interest expense, and all returns from the investment facility were recorded as income. The entity provided a depreciation of P400,000
for 2018 using the straight-line method.
Requirements:
1. How much is the capitalizable borrowing cost?
2. What is the correct initial cost of the building?
3. What is the correct interest expense for 2018?
4. What is the correct income from investment for 2018?
5. For how much is the 2018 net income overstated/understated?
6. Provide the adjusting journal entries for 2018.
PROBLEM 11
TAMBOL Corporation decided to expand and build a new manufacturing site in 2018. The entity has three outstanding loans as of December 31,
2017, as follows:
• P25,000,000 loan from Bank of PI; 10% annual interest payable every December 31; due date December 31, 2019.
• P30,000,000 loan from Bank of Metro; 11% annual interest payable every December 31; due date December 31, 2021.
• P15,000,000 loan from Bank of DO; 8.5% annual interest payable every December 31; due date December 31, 2021.
TAMBOL decided to use the cash financed by the general borrowings, and not to obtain additional loans for the construction.
The construction started on January 2, 2018, and ended on December 31, 2018. Presented below is the schedule of payments made by the entity
during the construction:
Date Amount
January 2, 2017 2,400,000
April 2, 2017 4,800,000
19
June 1, 2017 5,500,000
August 31, 2017 8,400,000
September 30, 2017 900,000
December 1, 2017 1,200,000
December 31, 2017 450,000
The entity capitalized the building at P23,650,000, equal to the cash payments during the construction. All interest payments related to the
borrowings are recorded as expense. Interest income from the temporary investment of unused proceeds from the loans, which was recorded by
your client as interest income for the year, total to P850,000.
Requirements:
1. How much is the capitalizable borrowing cost?
2. What is the initial cost of the building?
3. How much is the interest expense for the period?
4. How much is the interest income during the period?
5. Provide the adjusting journal entries for 2018.
PROBLEM 12
Yoyo Company purchased an equipment on January 1, 2015 for P15,000,000; the estimated useful life is 10 years. The entity is using the revaluation
model in accounting for this class of PPE after its initial recognition.
Answer the following requirements under the two (2) cases, as follows:
Case 1 – On December 31, 2016, the equipment was appraised as having a gross replacement cost of P18,000,000.
Case 2 – On December 31, 2016, the fair market value of the equipment is P18,000,000.
Requirements:
1. What is the carrying value of the equipment on December 31, 2016 after revaluation?
2. What is the balance of revaluation surplus on December 31, 2016 after revaluation?
3. How much is the depreciation expense for 2017?
4. What is the carrying value of the equipment on December 31, 2017?
5. Assuming that the company uses the Piecemeal Basis of transferring revaluation surplus to retained earnings, what is the balance of
revaluation surplus as of December 31, 2017?
6. Suppose that the entity sold the PPE on July 1, 2018 for P16,000,000, how much is the gain or loss on disposal?
7. In relation to requirement no. 6, how much revaluation surplus is transferred to retained earnings as a lump-sum?
PROBLEM 13
Punch Co. purchased an equipment last January 2, 2015 for the production of the main product of the entity. The purchase price of the equipment
is P10,000,000. The estimated useful life is 10 years, and the residual value is P1,000,000. The company uses the straight-line method.
During 2017, Jab Company, the direct competitor of Punch, developed a new product designed as a way better substitute of the product produced
by Punch. By the end of 2017, Jab unveiled its new product, and the perception of the public was positive. Because of this, Punch assessed its
equipment to be impaired.
On December 31, 2017, the equipment’s remaining useful life is reduced to 4 years, with a new residual value of P300,000. On this date, the fair
value of the equipment is P1,800,000, with an estimated cost to sell at P50,000.
The equipment is still estimated to generate net cash inflow to the entity by the end of 2018, 2019, 2020, and 2021 for P500,000, P480,000, P450,000,
and P350,000, respectively. The prevailing discount rate by the end of 2017 is 8%.
Requirements:
1. What is the value in use of the equipment?
2. How much is the recoverable amount?
3. How much is the impairment loss to be recognized in 2017?
4. What is the carrying value of the equipment on December 31, 2017, after the impairment?
5. How much is the depreciation expense for 2018?
6. What is the carrying value of the equipment on December 31, 2018?
PROBLEM 14
ELDER WAND, Inc. has its own research department. However, the company purchases patents from time to time. The following is a summary of
transactions involving patents now owned by the entity:
• During 2012 and 2013, ELDER WAND spent a total of P459,000 in developing a new process that was patented (Patent A) on April 1, 2014;
additional legal and other costs of P50,000 were incurred.
• A patent (Patent B) developed by Gin Yus, an inventor, was purchased for P187,500 on December 31, 2015, on which date it had an
estimated useful life of 12 ½ years.
• During 2014, 2015, and 2016, research and development activities cost P510,000. No additional patents resulted from these activities.
• A patent infringement suit brought by the company against a competitor because of the manufacture of articles infringing on Patent B was
successfully prosecuted at a cost of P42,600. A decision in the case was rendered in June 2016.
• On July 1, 2017, Patent C was purchased for P172,800. This patent had 16 years yet to run.
• During 2018, ELDER WAND expended P180,000 on patent development. However, the company is still undecided as to how the patent, if
approved by the Bureau of Patents, will generate probable future economic benefits.
Assume that the legal life of each patent is also its useful life.
1. What is Patent A’s carrying value on December 31, 2018?

A. 120,888 B. 497,125 C. 38,125 D. 388,113
2. What is Patent B’s carrying value on December 31, 2018?
20
A. 141,250 B. 28,906 C. 32,092 D. 173,342
3. What is Patent C’s carrying value on December 31, 2018?
A. 162,000 B. 327,600 C. 159,840 D. 156,600
4. What is the total patent amortization expense to be reported in ELDER WAND’s income statement for the year ended December 31, 2018?
A. 37,300 B. 28,741 C. 74,325 D. 28,300
PROBLEM 15
CAMERA Corporation has provided information on intangible assets as follows:
• A patent was purchased from Patintero Company for P6 million on January 1, 2017. On acquisition date, the patent was estimated to have
a useful life of 10 years. The patent had a net book value of P6 million when Patintero sold it to CAMERA.
• On February 1, 2018, a franchise was purchased from the Franchisor Company for P1,440,000. The contract which runs from 20 years
provides that 5% of revenue from the franchise must be paid to Franchisor. Revenue from the franchise for 2018 was P7,500,000.
• The following research and development costs were incurred by CAMERA in 2018:
Materials and equipment 426,000
Personnel 567,000
Indirect costs 306,000
Total 1,299,000
• Because of recent events, CAMERA, on January 1, 2018, estimates that the remaining useful life of the patent purchased on January 1,
2017, is only 5 years from January 1, 2018.
1. On December 31, 2018, the carrying value of the patent should be

A. 4,320,000 B. 6,000,000 C. 1,680,000 D. – 0 –
2. The unamortized cost of the franchise at December 31, 2018 should be
A. 999,000 B. 1,356,250 C. 1,440,000 D. 1,374,000
3. How much should be charged against CAMERA’s income for the year ended December 31, 2018?
A. 2,280,000 B. 2,826,000 C. 2,820,000 D. 1,725,000
PROBLEM 16
The THIRTY COMPANY engaged in the following transactions at the beginning of 2016:
1. Purchased a patent for P700,000 that had originally been filed in January 2010. The acquisition was made to protect another patent that the
company had filed for in January 2012 and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary shares (P10 par) selling for P60 per share. The book sells
1 million copies in 2016 and is expected to sell a total of 500,000 copies in the future years.
3. Purchased the franchise to operate a ferry service from the government for P100,000. A bridge has been planned to replace the ferry, and it is
expected that it will be completed in five years. The company hopes that the ferry will continue as a tourist attraction, but profits are expected to be
only 20% of those earned before the bridge is opened.
4. Paid P280,000 to attorneys for services to successfully defend the patent acquired in transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently displayed on his taxis for two years.
Based on the preceding information, determine the carrying value of the value at the end of 2016:
1. Patent
A. P630,000 C. P910,000
B. P656,250 D. P650,000
2. Copyright
A. P2,000,000 C. P3,000,000
B. P0 D. P4,000,000
3. Franchise
A. P100,000 C. P80,000
B. P84,000 D. P76,000
PROBLEM 15
THIRTYONE ENTERPRISES developed a new machine that reduces the time required to mix the chemicals used in one of its leading products. Because
the process is considered to very valuable to the company, Thirtyone patented the machine.
Thirtyone incurred the following expenses in developing and patenting the machine:
Research and development laboratory expenses P 750,000

Materials used in the construction of the machine 240,000
Blueprints used to design the machine 96,000
Legal expenses to obtain patent 360,000
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)
900,000
Expense of drawing required by the Patent Office to be submitted with the patent application 51,000
Fees paid to Patent Office to process application 75,000
One year later, Thirtyone Enterprises paid P525,000 in legal fees to successfully defend a patent against an infringement suit by Gaya-gaya Company.
21
Requirements:
1. What is the total cost of the patent?
A. P993,000 C. P564,000
B. P486,000 D. P126,000
2. What is the total cost of the new machine?
A. P1,362,000 C. P780,000
B. P0 D. P876,000
3. What is the entry to record the legal fees paid for the successful defense of the patent against infringement suit.
A. Patents 525,000
Cash 525,000
B. Legal Fees Expense 525,000
Cash 525,000
C. Machinery 525,000
Cash 525,000
D. Amortization expense – Patents 525,000
Cash 525,000
PROBLEM 16
The following amounts are included in the general ledger of THIRTYTWO CORPORATION at December 31, 2016:
Organization Costs P 72,000
Trademarks 45,000
Patents 225,000
Discount on Bonds Payable 105,000
Deposits with advertising agency for ads to promote goodwill of company 30,000
Costs of equipment acquired for various research and development projects 320,000
Costs of developing a secret formula for a product that is expected to be marketed for at least
20 years 240,000
Requirement: On the basis of the information above, what is the total amount of intangible assets to be reported by Thirtytwo in its statement of
financial position at December 31, 2016?
A. P342,000 C. P510,000
B. P270,000 D. P830,000
SHAREHOLDERS’ EQUITY
PROBLEM 1
The following information has been taken from the ledger accounts of F Corp.
Total income since incorporation P317,000
Total cash dividends declared 60,000
Proceeds from sale of donated stock 40,000
Total value of stock dividends distributed 30,000
Gains on treasury stock transactions 18,000
Unamortized discount on bonds payable 32,000
Treasury stock 20,000
Appropriated for plant expansion 70,000
Unpaid cash dividends 24,000
Determine the current balance of unappropriated retained earnings.

a. P 227,000 b. P157,000 c. P 137,000 d. none of these
PROBLEM 2
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 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 5, 2018, Zion issued at P54 per share, 50,000 shares of P50 par value, 9% cumulative convertible preferred stock. Each share of
preferred stock is convertible at the option of the holder, into two shares of ordinary stock. Zion had 300,000 shares of preferred stock.
The preferred stock has a liquidation value equal to its par value.
• 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 June 18, 2018, Zion declared a cash 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.
• On January 20, 2019, before the books were closed for 2018. Zion became aware that the ending inventories at December 31, 2017 were
understated by P150,000 (after tax effect on 2017 net income was P90,000). The appropriate correction entry was recorded the same day.
22
• After correcting the beginning inventory, net income for 2018 was P2,250,000
Requirements:
1. Ordinary Stock
a. 10,000,000 b. 12,500,000 c. 12,450,000 d. 14,250,000
2. Additional Paid In Capital
a. 5,725,000 b. 5,700,000 c. 5,500,000 d. 5,525,000
3. Unappropriated retained earnings
a. 4,125,000 b. 4,045,000 c. 4,035,000 d. 3,955,000
4. Treasury stock
a. 160,000 b. 55,000 c. 50,000 d. 80,000
5. Total stockholders’ equity
a. 22,190,000 b. 24,690,000 c. 24,770,000 d. 24,840,000
6. Book value per share of ordinary stock
a. 17.71 b. 17.89 c.17.82 d.15.41
PROBLEM 3
The capital section of the balance sheet of the J Co., Dec. 31, 2017, appears as follows:
Preferred stock, 6 percent, P100 par of 5,000 shares P 500,000
Equity of common stock, 50,000 shares 3,500,000
Total Capital P 4,000,000
At Dec. 31, 2018, the capital section appears as follows:
Preferred stock, 6 percent, P100 par of 4,500 shares P 450,000
Equity of common stock,60,000 shares 4,550,000
Total Capital P 5,000,000
Certain 2018 transactions follows:

(1) The additional 10,000 shares of no-par common stock were sold at P60 per share. The par value of common stock is P40 per share. The first
50,000 shares were issued at P50.
(2) Net income for 2018 was P665,000.
(3) Preferred stock, 500 shares, was purchased for the treasury at P110 each.
(4) Cash dividends paid: preferred, P30,000; common, P180,000.
Requirements:
1. What is the adjusted retained earnings balance at the end of 2018?
a. P 1,455,000 b. P 2,155,000 c. P1,400,000 d. none of these
2. The total stockholders’ equity at the end of 2018 should be:
a. P5,000,000 b. P 5,055,000 c. P 4,555,000 d. none of these
PROBLEM 4
SMDC Corporation was authorized at the beginning of 2017 with 300,000 authorized shares of P100, par value ordinary shares. At December 31,
2017, the shareholders’ equity section of SMDC was as follows:
Share capital, par value P100 per share; authorized 300,000

shares; issued 30,000 shares P3,000,000
Share premium 300,000
Retained earnings 450,000
Total shareholders’ equity P3,750,000
On June 15, 2018, SMDC issued 50,000 ordinary shares for P6,000,000. A 5% share dividend was declared on September 30, 2018 and issued on
November 10, 2018 to shareholders of record on October 31, 2018. Market value of ordinary share was P110 per share on declaration date. The
profit of SMDC for the year ended December 31, 2018 was P475,000.
During 2019, SMDC had the following transactions;

Mar. 1 SMDC reacquired 3,000 shares of its ordinary shares for P95 per share.
May 31 SMDC sold 1,500 treasury shares for P120 per share.
Aug. 10 Issued to shareholders one right for each share held to purchase two additional ordinary
shares for P125 per share. The rights expire on December 31, 2019.
Sep. 15 25,000 rights were exercised when the market value of ordinary share was P130 per
share.
Oct. 31 40,000 rights were exercised when the market value of the ordinary share was P140 per
share.
Dec. 10 SMDC declared a cash dividend of P2 per share payable on January 5, 2020 to
shareholders of record on December 31, 2019.
Dec. 20 SMDC retired 1,000 treasury shares and reverted them to an unissued basis. On this
date, the market value of the ordinary share was P150 per share.
Dec. 31 Profit for 2019 was P500,000.
Based on the above and the result of your audit, determine the following as of December 31, 2019:
23
1. Share capital
a. P21,400,000 b. P21,300,000 c. P14,800,000 d. P21,250,000
2. Share premium
a. P4,627,500 b. P3,007,500 c. P4,632,500 d. P4,592,500
3. Total retained earnings
a. P600,000 b. P565,000 c. P557,000 d. P560,000
4. Total equity
a. P26,397,500 b. P25,932,500 c. P26,492,500 d. P26,445,000
PROBLEM 5
The shareholders’ equity section of the San Miguel Corporation’s balance sheet as of December 31, 2018 is presented below:
12% Preference share capital, P100 par P 270,000

Ordinary share capital, P20 par 1,598,400
Share premium – preference 36,800
Share premium – ordinary 235,200
Share premium – treasury shares 3,200
Retained earnings 1,585,840
Total shareholders’ equity P3,729,440
San Miguel had 65,000 ordinary shares as December 31, 2017.
The following shareholders’ equity transactions were recorded in 2018 and 2019:
2018
May 1 - Sold 9,000 ordinary shares for P24, par value P20.
July 1 - Sold 700 preference shares for P124, par value P100.
Jul. 31 - Issued an 8% share dividend on ordinary shares. The market value
of ordinary share was P30 per share.
Aug. 30 - Declared cash dividends of 12% on preference shares and P3 per
share on ordinary shares.
Dec. 31 - Profit for the year amounted to P1,345,040.
2019
Feb. 1 - Sold 2,200 ordinary shares for P30.
May 1 - Sold 600 preference shares for P128.
May 31 - Issued a 2-for-1 split of ordinary shares. The par value of the
ordinary share was reduced to P10 per share.
Sep. 1 - Purchased 1,000 ordinary shares for P18 to be held as treasury
shares.
Oct. 1 - Declared cash dividends of 12% on preference shares and P4 per
share on ordinary shares.
Nov. 1 - Sold 1,000 shares of treasury shares for P22.
Dec. 31 - Profit for the year amounted to P991,520.
Determine the amounts, as required, in San Miguel Corporation’s comparative financial statements as of and for the years ended December 31, 2018
and 2019.
1. Total equity as of December 31, 2019
a. P4,175,200 c. P4,182,400
b. P4,171,200 d. P4,157,200
2. Basic earnings per share for 2018

a. P17.12 c. P 8.56
b. P 8.21 d. P18.49
3. Basic earnings per share for 2019

a. P7.40 c. P5.86
b. P7.34 d. P5.81
PROBLEM 6
The Company adopted the following stock compensation plan for its employees. For each case, compute the amount of expense that should be
recognized each year.
CASE 1
In connection with a stock option plan for the benefit of key employees, the company intends to distribute treasury shares when the options are
exercised. These shares were bought in 2015 at P42 per share. On January 1, 2016, the Company granted stock options for 100,000 shares at P38 per
share as additional compensation for services to be rendered over the next three years. The options are exercisable during a 2-year period beginning
January 1, 2019, by grantee still employed by the Company. Market price of the Company’s stock was P47 per share at the grant date. The fair value
of the stock option is P12 on grant date. No stock options were terminated during 2016.
CASE 2
24
On January 1, 2017, the Company granted stock options to certain key employees as additional compensation. The options were for 100,000 shares
of P2 par value ordinary stock at an option price of P15 per share. Market price of this stock on January 1, 2017, was P20 per share. The fair value of
each stock option on January 1, 2017 is P8. The options were exercisable beginning January 1, 2017 and expire on December 31, 2018. On April 1,
2017, the Company’s stock was trading at P21 per share, all the options were exercised.
CASE 3
Vesting condition
– Three years of continued employment
• Assumptions:
– 100 share options granted to each of the 1,000 employees on January 1, 2013
– FV of each share option is P30.00
– Exercise price is P120.00, par value of each share of stock is P100.00
• Actual and revised estimate of employees who leave the company
• 2013 - 40 employees left, revised estimate is 50 of remaining employees will leave the entity
• 2014 – 20 employees left; revised estimate is 40 of remaining employees will leave the entity
• 2015 – 30 of the remaining employees left.
CASE 4
Vesting condition
– Employees must remain in the entity’s employ during the vesting period
– Shares will vest as follows:
• End of 2017, if earnings increase by at least 18%
• End of 2018, if earnings over two years increase by average of at least 13%
• End of 2019, if earnings over three years increase by average of at least 10%
–Assumptions:
– 100 share options granted to each of the 1,000 employees on January 1, 2017 (total shares – 100,000)
– FV of each share option is P30.00
• Actual and revised estimate of entity’s average earnings

– End of 2017: actual- 14%; est. earnings in 2018- 14%
– End of 2018: actual- 10%; est. earnings in 2019-6%
– End of 2019: actual- 8%
• Actual and estimate of employees who will leave the company
– 2017 - 60 employees left, add’l employees to leave - 70
– 2018 – 50 employees left; add’l employees to leave - 30
– 2019 – 40 employees left
PROBLEM 7
At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The grant is conditional upon the executive remaining in the
entity’s employ until the end of year 3.
The share options can be exercised if the entity’s share price increases from P20 at the beginning of year 1 to above P30 at the end of year 3. If the
share price is above P30 at the end of year 3, the share options can be exercised at any time during the next five years, i.e., by the end of year 8.
The entity estimates the fair value of the share options on grant date to be P5 per option. This estimate takes into account the following market
condition:
• The possibility that the share price will exceed P30 at the end of year 3, i.e., the share options become exercisable; and
• The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share options will be forfeited.
The following actual events occurred in year 1 to 3:

Year 1
• The share price has increased to P24.
• The entity’s estimate of the fair value of the options Is P4 at the end of year 1. This takes into account whether the market condition
will be satisfied by the end of year 3.
Year 2
• The share price has decreased to P22. However, the entity remains optimistic that the share price target will be met by the end of year
3.
• The estimated fair value of the share options is P3. Again, this estimate takes into account the market condition noted above.
Year 3
• The share price only reaches P28 by the end of year 3.
• The estimated fair value of the share options is zero, as the market condition has not been satisfied.
Based on the preceding information, determine the following:

1. Compensation expense for year 1
A. P30,000 B. P40,000 C. P50,000 D. P60,000
2. Compensation expense for year 2
A. P30,000 B. P40,000 C. P50,000 D. P60,000
3. Compensation expense for year
A. P0 B. P30,000 C. P40,000 D. P50,000
4. Share options outstanding at the end of year 2
A. P70,000 B. P80,000 C. P90,000 D. P100,000
5. Cumulative compensation expense for the three-year period
A. P0 B. P70,000 C. P100,000 D. P150,000
25

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Calamba Review Center – Laguna (LCRC)

Your client prepared the following schedule of change in retained earnings:

1. What is the corrected net income for 2017?

CASH AND CASH EQUIVALENTS

Based from your audit procedures, you noted the following:

LIABILITIES AND SHAREHOLDER’S EQUITY

Transactions, January 1 - April 16, 2018

Checks include the following:

Unreimbursed vouchers comprise of the following:

Petty Cash Fund

FOUR, Inc’s Cash Account

a) Outstanding checks were P52,810.

May bank reconciliation

The audited balance of inventory on December 31, 2015 is P260,000.

11201 14,400 Destination Oct. 19 Oct. 21

11210 4,000 Destination Oct. 29 Oct. 31

1. What the correct net sales for inventory estimation purposes?

1. What is the company’s gross profit rate beginning January 1, 2016?

2013 2014 2015

1. What is the average cost ratio?

Allowance for Bad Debts

Cash Sales, Sales Returns, and Sales Discounts

1. What is the balance of KABOOM’s inventory as of December 31, 2018?

Requirement: Compute for the cost of inventory shortage under

Finished Goods AAA BBB CCC

Raw Materials - Item AAA A001 A002 A003

Raw Materials - Item BBB B001 B002 B003

Raw Materials - Item CCC C001 C002

The beginning balances of the following accounts are as follows:

2. The amount to be recognized on January 1, 2016, as discount on note payable is

Manufacturing equipment (self-constructed)

5. What is the total machine-related expenses in 2016?

Transactions during 2018 and other information are as follows:

Determine the adjusted balances of the following:

Additions to Machinery and Equipment:

Installation of storm windows 1,200,000

1. What is Patent A’s carrying value on December 31, 2018?

1. On December 31, 2018, the carrying value of the patent should be

Research and development laboratory expenses P 750,000

Determine the current balance of unappropriated retained earnings.

Ordinary Stock P10,000,000

Certain 2018 transactions follows:

Share capital, par value P100 per share; authorized 300,000

During 2019, SMDC had the following transactions;

Dec. 31 Profit for 2019 was P500,000.

12% Preference share capital, P100 par P 270,000

San Miguel had 65,000 ordinary shares as December 31, 2017.

2. Basic earnings per share for 2018

3. Basic earnings per share for 2019

• Actual and revised estimate of entity’s average earnings

The following actual events occurred in year 1 to 3:

Based on the preceding information, determine the following:

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