AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Problem 1 – Cash & Trade Receivables Working Paper No. 2

Questions 1 thru 5 are based on the following information. ACCOUNTS RECEIVABLE
Your firm is currently conducting the audit of EVERLASTING COMPANY'S financial statements for Reconciliation Between Subsidiary Ledger and General Ledger Balances
the year ended May 31, 2015. You are now concentrating on the review of the working papers May 31, 2015
prepared by your staff where possible adjusting journal entries may be drafted to arrive at the Balance per subsidiary ledger P4,023,527
adjusted balances of the accounts that may be affected. Add (deduct) reconciling items:
Working Paper No. 1 Write-offs (See Working Paper No. 3) (187,608)
CASH - BPI Sales (Note 5) 61,250
Bank Reconciliation Collections (Note 6) 36,845
May 31, 2015 Balance per general ledger P3,934,014
The company maintains a credit term of n/30.
Balance per bank statement P7,823,170
Add (deduct) reconciling items: Audit Notes:
Deposit in transit (Note 1) 93,812 5. The goods were in transit as at May 31, 2015, terms FOB shipping point. The company
Outstanding checks (Note 2) (108,832) recognized a gross profit of 25% on this sale.
Note charged by the bank (Note 3) 41,850 6. This was collected from a customer by the company's branch on May 31, 2015 on sales made
Fund transfer from PNB (12.500) on March 25, 2015 and was remitted to the company on June 15, 2015. Collections from
Balance per general ledger P7.837.500 branches are charged to Cash - SB account.

The top schedule for Cash showed the following accounts with their unadjusted balances: Working Paper No. 3
Cash - BPI P7,837,500 ALLOWANCE FOR BAD DEBTS
Cash-PNB 112,500 May 31, 2015
Cash - SB 187,500 Balance, June 1, 2014 P407,500
Total P8,137.500 Add (deduct) transactions during the year:
Write-offs of accounts aged 5 years (187,608)
Audit Notes: Bad debt provision for the year 108,930
1. Inclusive of a customer's check in the amount of P18,750 dated April 25, 2014, which up to Balance, May 31, 2015 P328.822
now is not yet deposited because it has been misplaced.
2. Includes two checks totaling P14,354 which were among the items counted during the cash Based on the company's past experience, an allowance should be set up based on the following
count conducted early morning of June 1, 2015. rates:
3. This is the maturity value of a two-year note maturing on May 31, 2015. The note bears Aging Distribution Per Subsidiary Ledger Percentage
interest of 12%. Interest for the year ended May 31, 2014 was properly accrued. Current P868,845 2
4. Upon cross-referencing this with the working paper showing the bank reconciliation with PNB, Past due:
whereby the bank balance was reconciled with the general ledger balance, you verified that 1-30 808,670 5
the P12,500 was appropriately shown as an addition to the bank balance. 31 - 60 718,853 10
61 - 90 737,225 15
Over 90 889,934 20
Total P4.023.527
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Based on the preceding information, determine the adjusted balances of the following: 7. The following are appropriate procedures for controlling the petty cash fund, except
A. Each individual to whom petty cash is paid is required to present signed receipts to the
1. Cash in banks petty cash custodian.
A. P8,091,254 C. P8,140,599 B. To replenish the fund, the general cashier issues a company check to the petty q sh
B. P8,128,099 D. P8,165,599 custodian, rather than cash.
C. To monitor variations in different types of expenditures, the rjetty cash custodian files
2. Accounts receivable petty cash vouchers by category of expenditure after replenishing the fund.
A. P3,854,669 C. P3,879,074 D. To determine that the fund is being accounted for satisfactorily, surprise counts of the
B. P3,878,419 D. P3,915,919 fund are made from time to time by the internal auditor or other responsible official.

3. Allowance for bad debts 8. The entry to replenish the fund is

A. P328,822 C. P605,612 A. Office supplies expense 1,730
B. P385,720 D. P793,220 Postage expense 1,120
Entertainment expense 420
4. The principal amount of the 12% two-year note payable Cash 3,270
A. P1,850 C. P37,800
B. P33,750 D. P41,850 B. Office supplies expense 1,730
Postage expense 1,120
5. Cash in bank - BPI Entertainment expense 420
A. P7,778,754 C. P7,803,754 Cash over and short 100
B. P7,788,734 D. P7,812,546 Cash 3,370

C. Office supplies expense 1,730

Problem 2 – Petty Cash Fund Postage expense 1,120
Questions 6 thru 10 are based on the following information. Entertainment expense 420
On January 1, TANYA CO. establishes a petty cash account and designates Orly Reyes as petty Cash over and short 100
Cash custodian. The original amount included in the petty cash fund is P5,000. The following Petty cash 3,370
disbursements are made from the fund:
Office supplies Pl,730 D. Office supplies expense 1,730
Postage 1,120 Postage expense 1,120
Entertainment 420 Entertainment expense 420
The balance in the petty cash box is Pl,630. Petty cash 3,270

6. The person responsible, at all times, for the amount of the petty cash fund is the 9. The objective of establishing a petty cash fund is to
A. Chairman of the Board of Directors. C. Petty cash custodian. A. Account for cash sales.
B. General cashier: D. President of the company. B. Cash checks for employees.
C. Account for all cash receipts and disbursements.
D. Facilitate payment of small, miscellaneous items.
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

10. What is the effect of not replenishing the petty cash at year-end and not making the i. A check for Pl,010 (payable to a supplier) was recorded in the Check Register
appropriate adjusting entry? in December as Pl,500 490
A. A detailed audit is essential.
B. Cash will be, overstated and expenses understated. j. A check for Pl,120 was charged by the bank as Pl,210 in December 90
C. Expenses will be overstated and cash will, be understated.
D. The petty cash custodian should turn over the petty cash to the genera! cashier k. Rosario Co. issued a stop payment order to the bank in December. This pertains
to a check written in December which was not received by the payee.
A new check was written and recorded in the Check Register in December.
Problem 3 – Bank Reconciliation & Proof of Cash The old check was written off by a journal entry also in December. 390
Questions 11 thru 15 are based on the following information.
ROSARIO CO. has a current account in Northwest Bank. Your audit of the company's cash I. Bank service charge, Nov. 30, 2015 30
account reveals the following:
11. What is the total outstanding checks on December 31?
a. Balances taken from the company's general ledger: A. P19,000 C. P37,040
Cash balance, Nov. 30, 2015 P318,930 B. P31,110 D. P50,110
Cash balance, Dec. 31, 2015 288,210
Receipts, Dec. 1-31, 2015 153,110 12. What is the adjusted bank balance on November 30?
A. P317,400 C. P318,900
b. Balances taken from the December bank statement: B. P318,150 D. P342,590
Bank balance, Nov. 30, 2015 P342,590
Bank balance, Dec. 31, 2015 318,610 13. What is the adjusted book receipts in December?
Disbursements (debits) 178,040 A. P151,690 C. P153,110
B. P152,720 D. P153,750
c. Outstanding checks, Nov. 30, 2015
(P13,070 was paid by bank in December) 32,070 14. What is the adjusted bank disbursements in December?
A. P172,980 C. P182,920
d. Checks written and recorded in December; not included in the checks B. P176,990 D. P183,010
returned with the December bank statement 18,040
15. What is the adjusted book balance on December 31?
e. Deposit in transit, Nov. 30, 2015 7,630 A. P288,210 C. P288,750
B. P288,700 D. P289,730
f. Deposit in transit, Dec. 31, 2015 8,070

g. A bank credit memo was issued in December to correct an erroneous Problem 4 – Audit of Inventories
charge made in November 750 Questions 16 thru 20 are based on the following information.
Or April 21, 2015, a fire damaged the office and warehouse of MUNTINLUPA COMPANY. The
h. Note collected by bank in December (company was not informed of the collection) 1,030 only accounting record saved was the general ledger, from which the trial balance below was
prepared:
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Muntinlupa Company e. The insurance company agreed that the fire loss claim should be oased on the assumpti that
Trial Balance the overall gross profit ratio for the past two years was in affect during the current year. The
March 31, 2015 company's audited financial statements disclosed the following information:
Debit Credit 2014 2013
Cash P 180,000 Net Seles P5,300,000 P3,900,000
Accounts receivable 400,000 Net purchases 2,800,000 2,350,000
Inventory, December 31, 2014 750,000 Beginning inventory 500,000 660,000
Land 350,000 Ending inventory 750,000 500,000
Building 1,100,000
Accumulated depreciation P 413,000 f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
Other assets 56,000 inventory was a total loss.
Accounts payable 237,000
Accrued expenses 180,000 Based on the preceding information, determine the following:
Ordinary share capital, P100 par 1,000,000
Retained earnings 520,000 16. Sales for the period January 1 to April 21, 2015
Sales 1,350,000 A. P1,430,000 C. P1,510,000
Purchases 520,000 B. P1,506,000 D. P1,519,500
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000 17. Net purchases for the period January 1 to April 21, 2015
A. P650,500 C P673,500
The following data and information have been gathered: B. P660,000 D. P683,000

a. The company's year-end is December 31. 18. Cost of sales for the period January 1 to April 21, 2015
A. P786,500 C. P830,500
b. An examination of the April bank statement and cancelled checks revealed that checks written B. P828,300 D. P835,725
during the period April 1 to 21 totaled P130,000: P57,000 paid to accounts payable as of
March 31; P34,000 for April merchandise purchases; and P39,000 paid for otherexpenses. 19. Estimated invertory on April 21, 2015
Deposits during the same period amounted to P129,500, which consisted of receipts on A. P570,000 C P587,775
account from customers with the exception of a P9,500 refund from a vendor for merchandise B. P579,500 D. P623,500
returned in April.
20. Estimated inventory fire loss
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P106,000 for A. P477,000 C. P535,000
April merchandise purchases, including P23,000 for shipments in transit on that date. B. P512,000 D. P579,500

d. Customers acknowledged indebtedness of P360,000 at April 21,2015. It was also estii that
customers owed another P80,000 that will never be acknowledged or recovered 0 the
acknowledged indebtedness, P6,000 will probably be uncollectible.

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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Problem 5 – Audit of Current Asset • Merchandise of P91,500 is held by PENTAGON on consignment. The consignor is Falcon
Questions 21 thru 25 are based on the following information. Company.
The general ledger balance of PENTAGON COMPANY includes the following balance s accounts • Merchandise costing P57,000 was shipped by PENTAGON, FOB destination, to a customer
at December 31, 2015: on December 31, 2015. The customer was expected to receive the goods on January 6, 2016.
Cash Pl,584,000 • Merchandise costing P69,000 was shipped by PENTAGON, FOB shipping point, to a
Accounts receivable 1,830,000 customer on December 29, 2015. The customer was scheduled to receive the goods on
Inventor/ 661,506 January 2, 2016.
Listed investments held for trading purposes at fair value 300,000 • Merchandise costing P124,500 shipped by a vendor, FOB destination, on December 31, 2015
Prepaid insurance 75,000 was received by PENTAGON on January 4, 2016.
Bank overdraft 150,000 • Merchandise costing P76,500 purchased under FOB shipping point term was shipped by the
Additional information: supplier on December 31, 2015 and received by PENTAGON on January 5, 2016.
Cash
 The sales book was left open up to January 5, 2016, and casn sales totaling P225,000 were Based on the above and the result of your audit, determine the adjusted amounts of the following:
considered as sales in December.
 Checks of P139,500 in payment of liabilities were prepared before December 31, 2015, 21. Cash
recorded in tne books, but not mailed or delivered to payees. A. P759,000 C. P876,000
 Post-dated checks totaling P117,000 are being held by the cashier as part of cash. The B. P781,500 D. P1,381,500
company's experience shows that post-dated checks are eventually realized,
 Customer's check for P22,500 deposited with but returned by bank, "NSF" on December 27, 22. Net accounts receivable
2015. The return was recorded in the company's books. A. P945,000 C. P1,151,700
 The cash account includes P600,000 of compensating balance against a short-term bank loan. B. P1,131,000 D. P1,174,200
The compensating balance is legally restricted as to withdrawal.
23. Trade and other receivables, net
Accounts receivable A. P990,000 C. P1,196,700
The accounts receivable consists of the following: B. P1,176,000 D. P1,219,200
Trade accounts receivable P975,000
Allowance for uncollectible accounts (30,000) 24. Inventory
Claim against shipper for goods lost in transit 45,000 A. P510,000 C. P795,000
Selling price of unsold goods sent by PENTAGON on consignment B. P676,500 D. P1,095,000
at 130% of cost (included in PENTAGON'S ending inventor/ at cost) 390,000
Security deposit on lease of warehouse used for storing some inventories 450,000 25. Current assets
Total P1,830,000 A. P3,541,500 C. P3,748,200
B. P3,727,500 D. P3,770,700
Inventory
A physical count of inventory at December 31, 2015 revealed that PENTAGON had inventory on
hand at that date with a cost of P661,500. The annual audit disclosed that the following items were
excluded from this amount and the related transactions were not recorded.

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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Problem 6 – Audit of Notes Receivable 28. The amount to be reported as noncurrent notes receivable on December 31, 2015 is
Questions 26 thru 30 are based on the following information. A. P5,477,500 C. P7,482,200
The HVR Company included the following in its notes receivable as of December 31, 2015: B. P6,037,300 D. P7,877,600
Note receivable from sale of land P2,640,000
Note receivable from consultation 3,600,000 29. The amount to be reported as current notes receivable on December 31, 2015 is
Note receivable from sale of equipment 4,800,000 A. P2,400,200 C. P4,800,000
B. P4,404,900 D. P7,440,000
The following transactions during 2015 and other information relate to the company's notes
receivable: 30. How much interest income should be recognized in 2015?
A. P756,000 C. P1,160,500
a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land, B. P974,200 D. P1,378,700
purchased 10 years ago, was carried on HVR's books at Pl,500,000. HVR received a
noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31, 2016.
There was no established exchange price for the land. The prevailing interest rate for this note Problem 7 – Audit of Trading Securities
on January 1, 2015 was 10%. Questions 31 thru 35 are based on the following information.
LABADA CO.'s portfolio of trading securities includes the following on December 31, 2015:
b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange Cost Fair Value
for the consultation services rendered. The note will mature on December 31, 2017, with 15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
interest receivable every December 31. The fair value of the services rendered is not readily 30,000 ordinary shares of Ganda Co. 1.638.000 1,710.000
determinable. The prevailing rate of interest for a note of this type was 10% on January 1, P3,069,000 P2,961,000
2015. All of the above securities have been purchased in 2015. In 2016, Labada Co. completed the
following securities transactions:
c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage
P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be commission of P13,500.
repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance). HVR April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes,
received the first payment on December 31, 2015. There is no established market value for and other transaction costs of P4,950.
the equipment. The market interest rate for similar notes was 14% on January 1, 2015.
The Labada Co. portfolio of trading securities appeared as follows on December 31, 2016:
Note: Round off present value factors to four decimal places and final answers to the nearest Cost Fair Value
hundred. 30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000
1,800 ordinary shares of Waston, Inc. 247,950 225,000
26. What amount of consultation fee revenue should be recognized in 2015? P1,885,950 P1,965.000
A. P2,705,000 C. P3,600,000 1. Net of P19,500 estimated transaction exists that would be incurred on the sale of the securities.
B. P3,152,500 D. P4,047,500 2. Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

27. What amount should be reported as gain on sale of equipment?

A. P994,800 C. P1,237,300
B. P1,162,700 D. P2,400,000
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

31. What amount of unrealized gain on these securities should be reported in the 2016 income EQUIPMENT
statement? Several used items were acquired on February 1,2014, by issuing a P300,000 noninterest-bearing
A. P31,050 C. P79,050 note. The note is due one year from the date of issuance. No market value of the note or the
B. P36,000 D. P84,000 equipment is available. Sabante's most recent borrowing rate was 8%.

32. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016? Feb. 1, 2014 Equipment 300,000
A. P13,500 C P130,500 Notes payable 300,000
B. P27,000 D. P144,000
Dec. 31,2014 Depreciation expense 30,000
33. What amount should be reported as trading securities in Labada's statement of financial Accumulated depreciation - equipment 30,000
position on December 31, 2016?
A. P1,885,950 C. P1,965,000 BUILDINGS
B. P1,909,950 D. P1,989,000 A building was acquired on June 1, 2014, by issuing 300,000 shares of the company's P5 par value
ordinary shares. The ordinary share is not widely traded, therefore no market price is available.
HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term The building was appraised on the transaction date at Pl,950,000.
differences in price. During 2015, Harlington Company purchased the following trading securities:
Security Cost Fair Value Dec. 31.2015 June 1, 2014 Building 1,500,000
A P 585,000 P 675,000 Ordinary shares (P5 x 1,500) 1,500,000
B 900,000 486,000
C 1,980,000 2,034,000 Dec. 31, 2014 Depreciation expense 60,000
Before any adjustments related to these trading securities, Harlington Company had net income of Accumulated depreciation - building 60,000
P2,700,000.
INVENTORY/FIXTURES
34. What is Harlington's net income after making any necessary trading security adjustments? Inventory and display fixtures were acquired for P375,000 cash on April 1, 2015, from a competitor
A. P2,286,000 C. P2,700,000 who was liquidating her business. The estimated value of the inventory was P255,000 and the
B. P2,430,000 D. P2,934,000 value of the fixtures was P 165,000.
April 1, 2015 Inventory 255,000
35. What would Harlington's net income be if the fair value of security B were P855,000? Display fixtures 165,000
A. P2,601,000 C. P2,700,000 Cash 375,000
B. P2,655,000 D. P2,799,000 Gain on acquisition of inventory and fixtures 45,000

On July 1,2015, Sabante exchanged machines with Bongga Company. The following facts pertain
Problem 8 – Audit of Property Plant & Equipment to these assets.
Questions 36 thru 40 are based on the following information. Sabante's Machines Bongca's Machines
SABANTE MANUFACTURING COMPANY had several transactions during 2014 and 2015 Original cost P864,000 P990,000
concerning Property, plant, and equipment. Several of these transactions are described below, Accumulated depreciation 345,600 468,000
followed by the entry or entries made by the company's accountant. Fair market value at date of exchange 540,000 675,000
Cash paid by Sabante 135,000
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Cash received by Bongga 135,000 B. Buildings 450,000

Share premium 450,000
Although the fair values of the assets Involved in the exchange had been reliably determined, C. Retained earnings 18,000
certain cash flow calculations made by both companies proved that this exchange transaction lacks Accumulated depreciation - buildings 18,000
commercial substance. D. No adjusting entry is necessary.
July 1, 2015 Machinery - new 135,000
Cash 135,000 38. The adjusting entry on December 31, 2015, to correct the inventory and fixtures-related errors
is (ignore the 2015 depreciation error)
Additional information: A. Inventory 27,321
Sabante uses straight-line depreciation, applied to all assets as follows: Display fixtures 17,679
1. A full year's depreciation taken in the year of acquisition and no depreciation taken in the year Gain on acquisition of inventory and fixtures 9,642
of disposal. B. Gain on acquisition of inventory and fixtures 45,000
2. Estimated life: 25 years for buildings; 10 years on ail other assets. (No salvage values are Inventory 27,321
assumed.) Display fixtures 17,679
C. Retained earnings 45,000
The books for 2015 have not been adjusted or closed. Inventory 27,321
Display fixtures 17,679
36. The adjusting entry on December 31, 2015, to correct the 2014 equipment-related errors is D. Gain on acquisition of inventory and fixtures 45,000
(ignore the 2015 depreciation error) Retained earnings 45,000
A. Interest expense 2,222
Retained earnings 20,370 39. The adjusting entry on December 31, 2015, to correct the machinery-related errors is (ignore
Equipment 22,592 the 2015 depreciation error)
B. Interest expense 1,851 A. Machinery - new 518,400
Retained earnings 20,370 Gain on exchange 518,400
Equipment 22,221 B. Accumulated depreciation - machinery 345,600
C. Retained earnings 22,221 Loss on exchange 518,400
Equipment 22,221 Machinery - old 864,000
D. Accumulated depreciation - equipment 2,222 C. Machinery-new 518,400
Interest expense 1,851 Accumulated depreciation - machinery 345,600
Retained earnings 18,148 Machinery - old 864,000
Equipment 22,221 D. Machinery - new 464,400
Accumulated depreciation - machinery 345,600
37. The adjusting entry on December 31, 2015, to correct the 2014 building-related errors is Loss on exchange 54,000
(ignore the 2013 depreciation error) Machinery-"old 864,000
A. Buildings 450,000
Retained earnings 18,000 40. The correct depreciation expense for 2015 is
Share premium 450,000 A. P149,497 C. P229,050
Accumulated depreciation - buildings 18,000 B. P185,850 D. P272,250
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Questions thru 41 are 45 based on the following information.

The following data pertain to KUKURUKUKU CORPORATION'S property, plant, and equipment for 41. Depreciation expense for 2015 on Buildings
2015, A. P929,700 C. P1,405,350
Audited balances at December 31, 2014: B. P1,200,000 D. P1,800,000
DEBIT CREDIT
Land P 7,500,000 42. Depreciation expense for 2015 on Leasehold Improvements
Buildings 30,000,000 A. P700,000 C. P933,333
Accumulated depreciation - Buildings 6,577,500 B. P840,000 D. P1,050,000
Machinery and equipment 22,500,000
Accumulated depreciation - Machinery and equipment 6,250,000 43. Accumulated depredation - Machinery and equipment, December 31, 2015
Delivery- equipment 5,750,000 A. P8,556,875 C. P8,644,375
Accumulated depreciation - Delivery equipment 4,230,000 B. P8,600,000 D. P8,844,375

Depreciation data: 44. Accumulated depreciation - Delivery equipment, December 31, 2015
Depreciation Method Useful Life A. P4,620,000 C. P4,800,000
Buildings 150% declining-balance 25 years B. P4,710,000 D. P5,430,000
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years''-digits 4 years 45. Gain (los.s) on trade in of truck on January 2, 2015
Leasehold Improvements Straight-line -- A. P(200,000) C. P70,000
B. P(70,000) D. P200,000
Transactions during 2015 and other information are as follows:
a) On January 2, 2015, KUKURUKUKU purchased a new truck for P1,000,000 cash and trade-in Questions 46 thru 50 are based on the following information.
of a 2-year-old truck with a cost of P900,000 and a book value of P270,000. The new truck has SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2014, on
a cash price of Pl,200,000; the market value of the trade-in is not known. installment basis. The deferred payment contract provides for a down payment of P300,000 and an
b) On April 1, 2015, a machine purchased for P575,000 on April 1, 2010, was stolen. 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of
KUKURUKUKU recovered P387,500 from its insurance company. P388,020, including 10% interest. The payments are to be made on December 31 of each year,
c) On May 1, 2015, costs of P8,4Q0,000 were incurred to improve leased office premises. The beginning December 31, 2014. The equipment has a cash price equivalent of P2,370,000.
leasehold improvements have a useful life of 8 years. The related lease terminates on Saxophone's financial year-end is December 31.
December 31, 2021.
d) On July 1, 2015, machinery and equipment were purchased at a total invoice cost of 46. What is the acquisition cost of the equipment?
P7,000,000; additional costs of P125,000 for freight and P625,000 for installation were A. P2,370,000 C. P3,104,160
incurred. B. P2,804,160 D. P3,404,160
e) KUKURUKUKU determined that the delivery equipment comprising the P5,750,000 balance at
January 1, 2015, would have been depreciated at a total amount of P900,000 for the year 47. The amount to be recognized on January 1, 2014, as discount on note payable is
ended December 31, 2015. A. P 0 C. P827,150
The salvage values of the depreciable assets are immaterial. The policy of KUKURUKUKU is to B. P310,416 D. P1,034,160
compute depreciation to the nearest month.
Based on the preceding information, compute the following:
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

48. The amount of interest expense to be recognized in 2014 is Allowances and hotel accommodation paid to foreign technicians
A. P0 C. P207,000 during installation and test run of machine 800,000
B. P188,898 D P310,416 Estimated dismantling cost to be incurred as required by contract 60,000
Cost of adjustment to machine to make it operate more efficiently 150,000
49. The amount of interest expense to be recognized in 2015 is Fee paid to consultants for advice on the acquisition of the machine 50,000
A. P 0 C. P207,000 Cost of training for personnel who will use the machine 50,000
B. P188,898 D. P310,416 Cost of open house party to celebrate opening of building 150,000

50. The carrying value of the note payable at December 31, 2015, is Audit Notes:
A. P1,312,062 C. P1,700,082
B. P1,689,858 D. P1,888,980 1. To acquire the property, McDODO, Inc. paid P3,800,000 cash and issued 10,000 preference
shares with par value of P100. On the acquisition date, the share had a closing market price of
P120 on a stock exchange. Current appraised values for the land and the usable building are
Questions 51 thru 55 are based on the following information. P4,500,000 and Pl,500,000, respectively.
McDODO, INC. incurred the following costs during the year ended December 31, 2015, in relation
to property, plant, and equipment: 2. The company negotiated a price of P400,000 to tear down the old building to make room for
construction of new building. The contractor retains all salvageable materials estimated to be
Land and old building (Note 1) P 4,800,000 worth P100,000.
Realtor commission 600,000
Legal fees, realty taxes and documentation expenses 100,000 3. This represents the contract price for the new building which was placed into service on
Amount paid to relocate persons squatting on the property 200,000 December 1, 2015.
Cost of removal of old building (Note 2) 300,000
Grading and drainage on land site 300,000 4. A one-year insurance was taken out on the building and its contents at P120,000 effective
Cost of new building (Note 3) 10,000,000 December 1, 2015.
Building permit fee 100,000
Excavation 100,000 5. A loan was obtained when the new building was placed into service to cover the contract price.
Cost of paving driveway and parking lot 80,000 Interest was calculated based on P10,000,000 at the effective 10% interest rate for 1 month,
Cost of trees, shrubs, and other landscaping 110,000 or P83,333.
Cost of installing lights in parking lot 10,000
Architect fee 400,000 51. What is the cost of land?
Payment of medical bills of employees accidentally injured while A. P4,800,000 C. P6,000,000
inspecting building construction 20,000 B. P4,950,000 D. P6,200,000
Insurance on new building (Note 4) 120,000
Interest expense on new building (Note 5) 83,333 52. What is the cost of building?
Cost of fencing the property 220,000 A. P1,300,000 C. P11,200,000
Invoice cost of machine acquired 4,000,000 B. P10,900,000 D. P12,150,000
Freight, unloading, and delivery charges 120,000
Custom duties and other charges 280,000
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

53. What is the cost of land improvement? at 20 years and P50,000, respectively.
A. P190,000 C. P420,000
B. P200,000 D. P430,000 The following transactions occurred from January 1, 2014:
2014
54. What is the cost of machine? Jan. 03 Bought a new machine (machine 3) for a cash price of P570,000. Freight charges of
A. P4,660,000 C. P5,400,000 P4,420 and installation costs of P17,580 were paid in cash. The useful life and residual
B. P5,310,000 D. P5,460,000 value were estimated at five years and P40,000, respectively.

55. How much of the above expenditures should be charged to expenses for the year ended June 22 Bought a second-hand vehicle for P152,000 cash. Repainting costs of P6,550 and four
December 31, 2015? new tires costing P3,450 were paid for in cash.
A. P303,333 C. P433,333
B. P313,333 D. P463,333 Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P125,000 at the date of
exchange. The fair value of machine 1 at the date of exchange was P115,000. The
office furniture originally cost P360,000 and, to the date of exchange, had been
Questions 56 thru 60 are based on the following information. depreciated by P241,000 in the previous owner's books. Jaran estimated the office
JARAN CO. started operations on September 1, 2010. Jaran's accounts at December 31, 2013 furniture's useful life and residual value at eight years and P5,400, respectively.
included the following balances:
Machinery (at cost) P 910,000 Dec. 31 Recorded depreciation.
Accumulated depreciation - machinery 482,000
Vehicles (at cost; purchased November 21, 2012) 468,000 2015
Accumulated depreciation - vehicles 196,560 April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.
Land (at cost; purchased October 25, 2010) 810,000
Building (at cost; purchased October 25, 2010) 1,857,200 May 25 Sold one of the vehicles bought on November 21, 2012 for P66,000 cash.
Accumulated depreciation - building 286,140
June 26 Installed a fence around the property at a cash cost of P55,000. The fence has an
Details of machines owned at December 312013 are as follows: estimated useful life of 10 years and zero residual value. (Debit the cost to a land
Machine Purchase Date Cost Useful Life Residual Value improvements asset account.)
1 October 7,2010 P430,000 5 years P25,000
2 February 4,2011 P480,000 6 years P30,000 Dec. 31 Recorded depreciation.

Additional information: 2016

• Jaran calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest peso, and the reporting date is December 31.
• Jaran uses straight-line depreciation for all depreciable assets except vehicles, which are
depreciated on the diminishing balance at 40% per annum.
• The vehicles account balance reflects the total paid for two identical delivery vehicles, each of
which cost P234,000.
• On acquiring the land and building, Jaran estimated the building's useful life and residual value
Jan. 05 Overhauled machine 2 at a cash cost of P120,000, after which Jaran estimated its
remaining useful life at one additional year and revised its residual value to P50,000.
June 20 Traded in the remaining vehicle bought on November 21, 2012 for a new vehicle. A
trade-in allowance of P37,000 was received and P233,000 was paid in cash.
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Oct. 04 Scrapped the vehicle bought on June 22, 2014, as it had been so badly damaged in a 62. What is the carrying value of the note at December 31, 2016?
traffic accident that it was not worthwhile repairing it. A. P819,612 C. P1,090,903
B. P991,730 D. P1,200,000
Dec. 31 Recorded depreciation.

56. What should be the depreciation expense for the vehicles for 2014? Problem 10 – Audit of Intagible Assets
A. P138,976 C. P140,286 Questions 63 thru 67 are based on the following information.
B P139,666 D. P140,976 BANAWE COMPANY began operations on January 2, 2007. Shown below is the company's trial
balance prepared by its staff accountant for December 31, 2015.
57. What should be the depreciation expense for the machinery for 2014? Banawe Company
A. P235,000 C. P242,733 UNADJUSTED TRIAL BALANCE
B. P239,400 D. P266,400 December 31, 2015
(in thousands of pesos)
58. What should be the balance of the Accumulated depreciation - Office furniture account at Debit Credit
December 31, 2015? Cash P 60
A. P18,267 C. P19,933 Accounts receivable 150
B. P19,833 D. P58,083 Inventory 360
Equipment 2,400
59. What should be the depreciation expense for the machinery for 2016? Accumulated depreciation - Equipment P 750
A. P197,400 C. P221,400 Buildings 3,600
B. P205,400 D. P277,708 Accumulated depreciation - Buildings 1,200
Patents 1,650
60. What should be the total depreciation expense for 2016? Franchise agreement 285
A. P394,060 C. P409,612 Organization costs 306
B. P403,832 D. P418,060 Goodwill 1,035
Accounts payable 36
Accrued wages payable 15
Problem 9 – Audit of Nonmonetary Exchange Accrued taxes payable 180
Questions 61 and 62 are based on the following information. Bonds payable 1,500
On December 31, 2014, BAIKAL COMPANY acquired a piece of equipment from Seller Company Premium on bonds payable 105
by issuing a P1,200,000 note, payable in full on December 31, 2018. Baikal's credit rating permits it Preference shares (P100 par value) 300
to borrow funds from its several lines of credit at 10%. The equipment is expected to have a 5-year Ordinary shares (P25 par value) 3,300
life and a P150,000 salvage value. Premium on share capital 660
Retained earnings (as of January 1) 1,200
61. What is the equipment's book value on December 31, 2016? Sales 2,700
A. P341,767 C. P551,767 Cost of goods sold 1,200
B. P491,767 D. P630,000 Selling and administrative expenses 900 .
P11,946 P11,946
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

As a member of the audit team for Banawe Company, you have been assigned the audit of the
company's intangible assets. Your investigation reveals the following: 65. What is the carrying value of the Organization Costs on December 31, 2015?
A. P0 C. P194,625
Patents. The patents, acquired January 2, 2008, are being amortized over an expected useful life B. P171,000 D. P417,375
of 14 years. Improvements made to equipment covered by the patents costing P225,000 were
debited to the account in January 2012. Amortization in 2012-2014 included amortization on the 66. What is the carrying value of Goodwill on December 31, 2015?
P225,000 for the remaining life of the relevant patent. It is determined that the P225,000 should A. P585,000 C P1,009,125
have been expensed in 2012. It is further determined on December 31, 2014, that one of the B. P600,000 D. P1,035,000
patents has a remaining life of only 2 years. This patent was originally assigned a cost of
P630,000. 67. What is the total Patent amortization for 2015?
A. P168,214 C. P325,714
Franchise Agreement. A franchise agreement was signed on January 1, 2015. A P150,000 fee B. P315,000 D. P370,714
was paid, covering a 5-year period, at the end of which the company may renew the agreement by
paying P150,000. A decision on renewal has not been made as of December 31, 2015. The
agreement calls for an annual payment of 5% of revenue. An entry debiting the account for Problem 11 – Audit of Research and Development Costs
P135,000 was made at the time of the cash payment for 2015. Questions 68 and 69 are based on the following information.
The following are independent situations involving the audit of intangible assets.
Organization Costs. Organization costs include the unamortized portion of amounts paid to
promote for services rendered at the inception of the corporation. These fees have been amortized, GENESIS RECORDING, INC. has initiated an extensive research program to develop a more
since inception, over an estimated 40-year life. The decision is made, as of December 31, 2015, to efficient method of recording compact discs. Management expects to be able to lease its
reduce the total period of amortization of organization costs to 12 years. production facilities, when completely refined, to the many record-producing companies in the area.

Goodwill. The goodwill account includes the following:
P135,000 -- Legal expenses relative to incorporation. These were assigned to the account in
January 2007.
P600,000 - Excess of cost over assigned net asset values of an enterprise acquired in early
2013 expected to be of value for an indefinite period.
P300,000 ~ Paid to an advertising consulting firm in early 2014 for a major advertising effort
expected to be beneficial for an indefinite period.
No amortization has been taken on any amount in the Goodwill account.
You have been asked to assist in the preparation of financial statements for the year ended
December 31, 2015. Costs related to the project have been accumulated in a master account
identified simply as "Recording" since the beginning of the project in early 2015, as follows:
DEBITS
P555,000 Equipment purchased for use in many research projects over a five-year period.
234,000 Salaries of staff working on research project.

63. What is the carrying value of the Patents on December 31, 2015? 52,500 Computer program services purchased through a contract with another enterprise.
A. P1,009,286 C. P1,211,786
B. P1,166,786 D. P1,256,786 74,400 Legal fees related to the patent acquired on the new production process, which is
expected to be useful in producing revenue for ten .years.
64. What is the carrying value of the Franchise Agreement on December 31, 2015?
A. P112,500 C. P123,000 P264,000 Down payments received from other companies that have contracted to new
B. P120,000 D. P228,000 production process in the future.
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

December 31, 2016 P20.000

Management has determined that general and administrative expense of P526,500 were incurred December 31, 2017 20,000
during 2015. Based on the time spent on various enterprise functions, you estimate that 25% of December 31, 2018 20,000
this amount relates to the research project identified as "Recording." The appropriate discount rate to be used for these cash flows is 8%.

Discussions with corporate officials reveal that all long-lived assets are depreciated with a full 70. What is the total carrying value of Pedring's patents on December 31, 2014?
year's amortization taken in the year of acquisition and none in the year of disposal. You A. P463,542 C. P673,542
determine that the process began to generate revenue in 2015 and, therefore, the amortization of B. P524,500 D. P794,500
the patent should begin in this year.
71. What amount of impairment loss should be reported by Pedring for the year ended December
68. What is the total Research and Development expense for 2015? 31, 2015?
A. P529,125 C. P603,525 A. P37,300 C. P51,542
B. P536,565 D. P792,375 B. P45,958 D. P240,458

69. The following should be reported on the statement of financial position at December 31, 72. What Is the total carrying value of Pedring's patents on December 31, 2015?
2015: A. P403,542 C. P673,542
A. B. C. D. B. P673,452 D. P719,500
Carrying value of equipment P444,000 P444,000 P444,000 P555,000
Carrying value of patents P 66,960 P 66,960 P 74,400 P 74,400
Unearned revenue P237,600 P264,000 P237,600 P264,000 Problem 13 – Audit of Impairment of Assets
Questions 73 thru 77 are based on the following information.
One of the cash generating units of PIPIT COMPANY is that associated with the manufacture of
Problem 12 – Audit of Intagible Assets and Research Development Costs wine barrels. At December 31, 2015, Pipit Company believed, based on an analysis of economic
Questions 70 thru 72 are based on the following information. indicators, that the assets of the unit were impaired. The carrying amounts of the assets and
PEDRING INDUSTRIES reports the following patents on its December 31, 2014 statement of liabilities of the unit at December 31, 2015 were:
financial position.
Initial Cost Date of Acquisition Useful life (at date of acquisition) Buildings P4,200,000
Patent A P408,000 March 1, 2011 17 years Accumulated depreciation - buildings * (1,800,000)
Patent B 150,000 July 1,2012 10 years Factory machinery 2,200,000
Patent C 144,000 Sept. 1, 2013 4 years Accumulated depreciation - machinery ** (400,000)
Goodwill 150,000
The following events occurred during the year ended December 31, 2015.' Inventory 800,000
1. Research and development costs of P245,700 were incurred during the year. These costs Receivables 400,000
were incurred prior to projects achieving economic viability. Allowance for doubtful accounts (50,000)
2. Patent D was purchased on July 1 for P285,000. It has a remaining life of 9-1/2 years. Cash 200,000
3. A possible impairment of Patent B's value may have occurred at December 31, 2016. This is Accounts payable 300,000
due to a significant reduction in the demands for certain products protected by Patent B. The Loans 200,000
company's controller estimates the following future cash flows from Patent B. * Depreciated at P600,000 per annum
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

** Depreciated at P450,000 per annum A. P 1,250,000 C. P2,200,000

B. P2,000,000 D. P2,400,000
Pipit Company determined the value in use of the unit to be P5,350,000. The receivables were
considered to be collectible, except those considered doubtful. The inventory's recoverable value is
equal to the carrying amount. The fair value less cost of disposal of the company's buildings is Problem 14 – Audit of Current Liabilities, Provision and Contingencies
P2,350,000. Questions 78 and 79 are based on the following information.
The following are independent situations. Answer the questions at the end of each situation.
During the year 2016, Pipit Company increased the depreciation charge on buildings to P650,000
per annum, and to P500,000 per annum for factory machinery. The inventory on hand at January OMPOT COMPANY sells its products in expensive, reusable containers. The customer is char a
1, 2016 was sold by the end of the year. At December 31, 2016, Pipit Company, due to a return in deposit for each container delivered and receives a refund for each container returned W two years
the market to the use of the traditional barrels for wines and an increase in wine production, after the year of delivery. Ompot accounts for the containers not returned within the time limit as
assessed the recoverable amount of the cash generating unit to be P350,000 greater than the being sold at the deposit amount. Information for 2015 is as follows:
carrying amount of the unit. As a result, Pipit Company recognized a reversal of the impairment
loss. Containers held by customers at December 31, 2014, from deliveries in:
2013 85,000
73. What amount of impairment loss on December 31, 2015 should be allocated to Machinery? 2014 240,900 325,000
A. P 0 C. P85,714 Containers delivered in 2015 430,000
B. P50,000 D. P150,000 Containers returned in 2015 from deliveries in:
2013 57,500
74. What is the carrying amount of Buildings (after allocation of impairment loss) on December 2014 140,300
31, 2015? 2015 157,300 354,500
A. P1,800,000 C. P2,285,714
B. P2,250,000 D. P2,350,000 78. How much revenue from container sales should be recognized for 2015?
A. P27,500 C. P127,500
75. What amount of reversal of impairment loss should be recognized on December 31, 2016? B. P85,000 D. P267,500
A. P0 C. P300,000
B. P200,000 D. P350,000 79. What is the total amount of Ompot Company's liability for returnable containers at December
31, 2015?
76. Assume that the recoverable amount at December 31,2016 was P200,000 greater than the A. P267,500 C. P400,500
carrying amount of the cash generating unit. What is the net carrying amount of the B. P373,000 D. P430,000
Machinery after recognition of the impairment recovery?
A. P1,150,000 C. P1,300,000
B. P1,230,702 D. P1,819,298 Questions 80 thru 82 are based on the following information.
MORENO CORPORATION manufactures and sells food products and food processing machinery.
77. Assume that the recoverable amount at December 31, 2016 was P200,000 greater than the Its balance sheet date is December 31. Relevant extracts from its financial statements at
carrying amount of the cash generating unit and that the recoverable amount of the Buildings December 31, 2014 are as follows:
was Pl,800,000. What is the net carrying amount of the Factory Machinery after the Current liabilities
recognition of the impairment recovery? Provision
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AUDITING PROBLEM CPA Review School of Accountancy
Provision for warranties P270,000
Noncurrent liabilities Provision
Provision for warranties 180,000
Note 36 - Contingent Liabilities
MORENO is engaged in litigation with various parties in relation to allergic reactions to
traces of peanuts alleged to have been found in packets of fruit gums. MORENO
strenuously denies the allegations and, as at the date of authorizing the financial
statements for issue, is unable to estimate the financial effect, if any, of any costs or
damages that may be payable to the plaintiffs.
The provision for warranties at December 31, 2014 was calculated using the following
assumptions: There was no balance carried forward from the prior year.
Estimated cost of repairs - products with minor defects P1,000,000
Estimated cost of repairs - products with major defects P6,000,000
Expected % of products sold during 2014 having no defects in 2015 80%
Expected % of products sold during 2014 having minor defects in 2015 15%
Expected % of products sold during 2014 having major defects in 2015 5%
Expected timing of settlement of warranty payments
- those with minor defects All in 2015
Expected timing of settlement of warranty payments
- those with major defects 40% in 2015,
60% in 2016
During the year ended December 31, 2015, the following occurred:
1 In relation to the warranty provision of P450,000 at December 31, 2014, P200,000 was paid
out of the provision. Of the amount paid, P150,000 was for products with minor defects and
P50,000 was for products with major defects, all of which related to amounts that had been
expected to be paid in 2015.
2. In calculating its warranty provision for December 31, 2015, MORENO made the following
adjustments to the assumptions used for the prior year:
Estimated cost of repairs - products with minor defects No change
Estimated cost of repairs - products with major defects P5,000,000
Expected % of products sold during 2015 having no defects in 2016 85%
Expected % of products sold during 2015 having minor defects in 2016 13%
First & Final Pre-board Examination
Expected % of products sold during 2015 having major defects in 2016 2%
Expected timing of settlement pf warranty payments
- those with minor defects All in 2016
Expected timing of settlement of warranty payments
- those with major defects 20% in 2016,
80% in 2017
3. MORENO determined that part of its plant and equipment needed an overhaul - the convevo''
belt on one of its machines would need to be replaced in about December 2015 at estimated
cost of P250/000. The carrying amount of the conveyor belt at December 31... 2C14 was
P140,000. Its original cost was P200,000.
4. MORENO was unsuccessful in its defense of the peanut allergy case and was ordered to pay
P1,500,000 to the plaintiffs. As at December 31, 2015, MORENO had paid P8Q0,00C.
5. MORENO commenced litigation against one of its advisers for negligent advice given on the
original installation of the conveyor belt referred to in (3) above. In October 2015, the court
found in favor of MORENO. The hearing for damages had not been scheduled as at the date
the financial statements for 2015 were authorized for issue. MORENO estimated that it would
receive about P425,000.
6. MORENO signed an agreement with Chocnut Bank to the effect that MORENO would
guarantee a loan made by Chocnut Bank to MORENO'S subsidiary, Choc Choc Co. Choc
Choc's loan with Chocnut Bank was P3,200,000 as at December 3i, 2015. Choc Choc was in a
strong financial position at December 31, 2015.
Based on the above and the result of your audit, answer the following:
80. The provision for warranties as of December 31, 2015 is
A. P230,000 C. P430,000
B. P410,000 D. P580,000
81. The. provision for warranties to be reported as current liability as of December 31, 20?.5 is
A. P150,000 C. P330,000
B. P220,000 D. P400,000
82. Total provisions to be reported in the statement of financial position as of December 31, 2015
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

is Share premium 9,000,000

A. P410,000 C. P1,180,000 Retained earnings 13,500,000
B. P480,000 D. P1,360,000 Total shareholders' equity P26,700,000

The following equity transactions occurred during 2014 and 2015:

Problem 15 – Audit of Compound Financial Instrument 1. On February 2, 2014, 45,000 ordinary shares were acquired by the company for P33 per
Questions 83 thru 85 are based on the following information. share.
On January 1, 2014, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value of 2. On September 30, 2014, 15,000 preference shares were converted to Ordinary shares. One
P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%. Each preference share is convertible into one ordinary share. At the time of conversion, the ordinary
bond is convertible, at the holder's option, into 200 P2 par value ordinary shares at any time up to shares had a market value of P42 per share.
maturity. On the date of issuance, the prevailing market interest rate for similar debt without the 3. On December 21, 2014, the company placed a share subscription of 30,000 ordinary shares at
conversion privilege was 9%. On the same date, the market price of one ordinary share was P3. a subscription price of P33 per share. The subscription contract required a cash down
The bonds were converted on December 31, 2015. payment equal to 60% of the subscription price, with the balance due on February 1, 2015.
4. On February 1, 2015, 25,500 ordinary shares were issued according to the subscription
83. The equity component of the convertible debt is contract. Because of default by a subscriber, 4,500 shares were not issued. The subscription
A. P303,768 C. P1,973,621 contract requires the subscriber to forfeit all cash advances.
B P1,600,000 D. P2,400,000 5. On April 15, 2015, 30,000 shares held as treasury were reissued at P50 per share.
6. On May 16, 2015, a special dividend of preference shares was distributed to ordinary
84. The interest expense to be reported on Dias Company's income statement for the year ended shareholders. One hundred ordinary shares entitled a shareholder to one preference share.
December 31, 2015, is The market price of preference shares was P40 per share at the time.
A. P101,000 C. P240,000 7. Cash dividends are declared for preference and ordinary shares on October 31 and April 30 of
B. P110,107 D. P341,000 each year. Semiannual cash dividends for ordinary shares are P0.50 per share.

85. The entry to record the bond conversion on December 31, 2015, should include a credit to Bliss, Inc. reported net income of P1,980,000 in 2014 and P2,670,000 in 2015. What are the
share premium - issuance of balances of the following accounts on December 31, 2014?
A. P 0 C. P2,400,000
B. P2,289,893 D. P2,593,661 86. Share premium
A. P9,840,000 C. P10,328,100
B. P10,239,000 D. P10,355,000
Problem 16 – Audit of Shareholder’s Equity
Questions 86 thru 90 are based on the following information. 87. Retained earnings (before appropriation for treasury shares)
On January 1, 2014, the shareholders' equity section of BLISS, INC.'s statement of financial A. P14,740,800 C. P14,895,000
position disclosed the following information: B. P14,872,503 D. P14,902,500

12.5% Convertible preference shares (P40 par value; 150,000 shares What are the balances of the following accounts on December 31, 2015?
authorized, 60,000 shares issued and outstanding) P2,400,000
Ordinary shares (F5 par value; 600,000 shares authorized, 350,000
shares issued and outstanding) 1,800,000 88. Share premium
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

A. P10,328,100 C. P10,838,100 91. What amount of compensation expense should be recognized in year 1?
B. P10,683,900 D. P10,964,100 A. P 150,000 C. P225,000
B. P 160,000 D. P240,000
89. Retained earnings (before appropriation for treasury shares)
A. P16,790,662 C. P17,098,400 92. What amount of compensation expense should be recognized in year 2?
B. P16,944,862 D. P17,665,000 A. P52,000 C. P67,000
B. P57,000 D. P122,000
90.
A. B. C. D. 93. What amount of compensation expense should be recognized in year 3?
Preference Shares P1,800,000 P1,800,000 P1,954,200 P1,954,200 A. P146.000 C. P156,000
Ordinary Shares 1,875,000 2,002,500 1,875,000 P2,002,500 B. P151,000 D. P216,000

94. What amount should the entity report as share options outstanding at the end of year 2?
Problem 17 – Audit of Share-Based Payment A. P272,000 C. P292,000
Questions 91 thru 95 are based on the following information. B. P282,000 D. P307,000
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon
the employees remaining in the entity's employ during the vesting period. The shares will vest at 95. What amount should the entity report as share options outstanding at the end of year 3?
the end of year 1 if the: entity's earnings increase by more than 18 percent;/at the end of year 2 if A. P428,000 C. P490,000
the entity's earnings increase by more than an average of 13 percent per year over the two-year B. P450,000 D. P500,000
periods/and at the end of year 3 if the entity's earnings increase by more than an average of 10
percent per year over the three-year period. The shares have a fair value of P10 per share .at the
start of year 1, which equals the share price at grant date. Problem 18 – Cash Basis to Accrual Basis of Accounting
Questions 96 and 97 are based on the following information.
By the end of year:., the entity's earnings have increased by 14 percent, and 20 employee:.: r left. LOTLOT, INC. has used the accrual basis of accounting for several years. A review of the records,
The entity expects that earnings will continue to increase at a similar rate in year therefore expects however, indicates that some expenses and revenues have been handled on a cash basis
that the shares will vest at the end of year 2. The entity expects, on the basis of a weighted because of errors made by an inexperienced bookkeeper. Income statements prepared by the
average probability, that a further 30 employees will leave during /ear 2, bookkeeper reported P530,000 net income for 2014 and P999,000 net income for 2015. Further
examination of the records reveals that the following items were handled improperly.
By the end of year 2, the entity's earnings have increased by only 10 percent and therefore the
shares do not vest at the end of year 2. 42 employees have left during the year. The entity expects 1. Rent was received from a tenant in December 2014. The amount, P120,000, was recorded
that a further 15 employees will leave during year 3, and that the entit/'s earnings . increase by at as income at that time even though the rental pertained to 2015.
least 6 percent, thereby achieving the average 10 percent per year.
2. Wages payable on December 31 have been consistently omitted from the records of that date
By the end of year 3,10 employees have left and the entity's earnings had increased by 8 percei and have been entered as expenses when paid in the following year. The amounts of accruals
resulting in an average of 10.67 percent per year. recorded in this manner were:
December 31, 2013 P33,000
Based on the foregoing, answer the following: December 31, 2014 36,000
December 31, 2015 28,200
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

A. P1,173,600 C. P1,193,400
3. Invoices for office supplies purchased have been charged to expense accounts when B. P1,191,600 D. P1,213,200
received. Inventories of supplies on hand at the end of each year have been ignored, and no
entry has been made for them. 100. Accounts payable balance at December 31, 2015
December 31, 2013 P39,000 A. P393,400 C. P419,800
December 31, 2014 28,200 B. P400,000 D. P793,400
December 31, 2015 42,600
101. Inventory quantity at December 31, 2015
96. What is the corrected net income for the year 2014? A. 5,250 C. 6,550
A. P396,200 C. P417,800 B. 5,750 D. 8,150
B. P402,200 D. P636,200
102. FIFO cost of inventory on December 31, 2015
97. What is the corrected net income for 2015? A. P352,500 C. P425,830
A. P901,200 C. P1,125,600 B. P385,900 D. P439,230
B. P1,112,400 D. P1,141,200
Problem 19 – Correction of Errors
Questions 103 thru 107 are based on the following information.
Questions 98 thru 102 are based on the following information. EZE COMPANY underwent a restructuring in 2015. The company conducted a thorough internal
The following information was obtained from the statement of financial position of LION, INC.: audit, during which the following facts were discovered. The audit occurred during 2015 before any
Dec. 31, 2015 Dec. 31, 2014 adjusting entries or closing entries are prepared.
Cash P706,600 P200,000 A. Additional printers were acquired at the beginning of 2013 and added to the company's office
Notes receivable 0 50,000 network. The P45,000 cost of the printers was inadvertently recorded as maintenance
Inventory ? 399,750 expense. The printers have five-year useful lives and no material salvage value. This class of
Accounts payable ? 150,000 equipment is depreciated by the straight-line method.
All operating expenses are paid by Lion, Inc. with cash and all purchases of inventory are made on
account. Lion, Inc. sells only one product. All sales are cash sales v/hich are made for P100 B. Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the
perunit. Lion, Inc. purchases 1,300 units .of inventory per month and values its inventory using expenditure as office supplies. The error was discovered a week later.
periodic FIFO. Tine-unit cost of inventory during January 2015 was P65.20 and increased P0.20
par month during the year. During 2015, payments to suppliers totaled P943,400 and operating C. On December 31, 2014, inventory was understated by P112,000 due to a mistake in the
expenses totaled P440,000. The ending inventory for 2014 was valued at P65.00 per unit. physical inventory count. The company uses the periodic inventory system.

Based on the preceding information, determine the following: D. Three years earlier, the company recorded a 3% stock dividend (12,000 ordinary shares, PI
par) as follows:
98. Number of' units sold during 2015 Retained earnings 12,000
A. 16,000 C 18,900 Ordinary share capital 12,000
B. 18,400 D. 21,400 The shares had a market price at the time of P10 per share.

99. Total cost of purchases during 2015 E. At the end of 2014, the company failed to accrue interest expense that accrued during the last
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

four months of 2014 on bonds payable. The bonds which were issued at face value mature in Questions 108 thru 110 are based on the following information.
2019. The following entry was recorded on March 1, 2015, when the semiannual interest was You have been assigned to audit the financial statements of SENDONG COMPANY for the year
paid ended December 31, 2015. You discover the following situations.
Interest expense 180,000
Cash 180,000 1. Interest income of P46,500 was not accrued at the end of 2014. It was recorded when
received in February 2015.
F. A three-year insurance policy was purchased at the beginning of 2014 for P216,000. The full 2. A computer costing P65,000 was expensed when purchased on July 1, 2014. It is
premium was debited to insurance expense at the time. expected to have a 5-year life with no residual value. The company typically uses
straight-line depreciation for all property, plant, and equipment.
Based on the preceding information, determine the following: (Ignore tax effects.) 3. Research costs of P120,000 were incurred early in 2014. They were capitalized and
were to be amortized over a 4-year period. Amortization of P30,000 was recorded in
103. The entry to correct the error described in item A should include a 2014 and P30,000 for 2015.
A. Debit to equipment - P18,000. 4. On January 4, 2014, Sendong Company leased a building for 5 years at a monthly rental
B. Credit to retained earnings - 27,000. of P24,000. On that date, the company paid the following amounts, which were
C. Debit to depreciation expense - P27,000. expensed when paid.
D. Credit to accumulated depreciation - P18,000. Security deposit P 60,000
First month's rent 24,000
104. The entry to correct the error described in item D should include a Last month's rent 24,000
A. Credit to share premium - P120,000. P108.000
B. Debit to retained earnings - P108,000. 5. The company received P108,000 from a customer at the beginning of 2014 for services
C. Debit to retained earnings - P120,000. that it is to perform evenly over a 3-year period beginning in 2014. None of the amount
D. Credit to ordinary share capital - P108,000. received was reported as unearned revenue at the end of 2014.
6. Merchandise inventory costing P14,600 was in the warehouse at December 31, 2014,
105. The accrued interest payable account balance at December 31, 2015 should be but was incorrectly omitted from the physical count at that date. The company uses the
A. P60,000 C. P180,000 periodic inventory method.
B. P120,000 D. P240,000
Assume all amounts are material and ignore income tax effects.
106. The prepaid insurance account balance at December 31, 2015 should be
A. P 0 C. P144,000 108. Sendong Company's net income in 2014 is understated by
B. P72,000 D. P216,000 A. P35,100 C. P48,100
B. P41,600 D. P71,600
107. The correct interest expense on bonds for 2015 is
A. P120,000 C. P360,000 109. Sendong Company's net income in 2015 is overstated by
B. P180,000 D. P400,000 A. P1,600 C. P27,600
B. P8,100 D. P80,100

Problem 20 - Comprehensive 110. The retained earnings reported on Sendong Company's statement of financial position at
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

December 31, 2015, is understated by 3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year
A. P8,100 C. P33,500 are depreciated at' half this rate. There were no purchases during the year. On December 31,
B. P14,000 C. P41,600 2014, the balance ofthe Plant and equipment account was P2,400,000.
4. On December 28, 2015, the bookkeeper incorrectly credited Sales for a receipt on account in
the amount of P100.000.
Problem 21 – Accounting Cycle 5. At December 31, 2015, salaries and wages accrued but unpaid ware P4,200,000.
Questions 111 thru 115 are based on the following information. 6, Alterado estimates that 1% of sales will become uncollectible.
The following list of accounts and their balances represents the unadjusted trial balance of 7, On August 1, 2015, Alterado purchased, as a short-term investment, 600 PI,000, 7% be of-
ALTERADO COMPANY at December 31, 2015: Alendog Corp. at par. The bonds mature on August 1, 2016. Interest payment dates are July
Cash P290,900 31 and January 31.
Trading securities 600,000 8, On April 30, 2015, Alterado rented a warehouse for P30,000 per month, paying P360,000 in
Accounts receivable 690,000 advance.
Allowance for doubtful accounts P 5,000
. Inventory 547,200 111. What are the adjusted balances of the following accounts on December 31, 2015?
Prepaid rent 360,000 A. B. C. D.
Plant and equipment 1,600,000 Prepaid insurance - P 6,000 P54,000 P66,000
Accumulated depreciation •- Plant and equipment 147,400 Insurance expense P110,500 P104,500 P56,500 P44,500
Accounts payable 113,700
Bonds payable 900,000 112. What is the total depreciation expense for the year ended December 31, 2015?
Ordinary share capita! 1,700,000 A. P120,000 C. P200,000
Retained earnings 971,800 B. P160,000 D. P240,000
Sales 2,148,000
Cost of goods sold 1,544,000 113. What is the bad debt expense for the year ended December 31, 2015?
Freight-out 110,000 A. P15,480 C. P21,480
Salaries and wages expense 320,000 B. P20,480 D. P25,480
Interest expense 20,400
Rental income 216,000 114. What amount of Interest and rent income should be reported in the income statement for the
Miscellaneous expense 8,900 year ended December 31, 2015?
Insurance expense 110,500 . A. B. C. D.
P6,201,900 P6,201,900 Interest income P17,500 P 17,500 P24,500 P 24,500
Rental income P36,000 P180,000 P36,000 P180,000
Additional data:
1. The balance in the Insurance expense account contains the premium costs of three policies: 115. What adjusting entry is necessary on December 31, 2015 for the Prepaid rent account?
Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2014; A. Rent expense 270,000
Policy 2, original cost of P72,000, 3-year term, taken out on October 1, 2.015; Prepaid rent 270,000
Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2015. B. Prepaid rent 270,000
2. On September 30, 2015, Alterado received P216,000 rent from its lessee for eighteen-moi Prepaid rent 270,000
lease beginning on that date. C. Prepaid rent 240,000
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

Rent expense 240,000 the counts in the department from which the inventory was taken.
D. Rent expense 240,000
Prepaid rent 240,000 During the year-end audit work you obtained selling prices, costs, terms, and recording data for
each receipt and shipment. They are as shown below.

Problem 22 – Sales and Purchases Cut-off Tests PURCHASES OF INVENTORY

Questions 116 thru 120 are based on the following information. Receiving Date Date Peso Amount Included in (I) or Excluded FOB Origin or
MACHINE PARTS SUPPLY COMPANY is a distributor of various engine parts. In testing the sales Report No. Shipped Received of Acquisition from (E) August Purchases Destination
and purchases cutoff of the company in connection with your audit of its financial statements for Journal
the year ended August 31, 20X1, you find the following information: 679 8-29 8-30 P 25,800 I Destination
680 8-27 9-01 36,330 I Origin
The company has ceased operation during the physical count on September 2, except for receiving 681 8-20 9-01 5,790 I Origin
goods from suppliers and making shipments to essential wholesale customers. On the morning of 682 8-27 9-01 140,220 I Destination
the physical count, you noted in your working papers the last shipping document (no. 314) and 683 8-30 9-02 13,500 E Destination
receiving report (no. 682) issued the previous day. 684 8-30 9-02 3,180 E Origin
685 9-02 9-02 84,000 E Origin
You observed the client's counting procedures and performed test counts of selected inventory 686 8-30 9-02 20,580 E Destination
items. You found the counts and descriptions to be accurate.
Before leaving the warehouse at the end of the day after all counting is completed, you performed
the following: SHIPMENTS OF INVENTORY
Shipping Date Peso Amount Included in (I) or Excluded from
1. Examined the receiving reports book. The last number used was 686. The receiving clerk Document No. Shipped of Sales (E) August Sales Journal
informed you that all goods received on September 2 were kept in the receiving department 310 8-31 P 23,400 I
with other goods received during the past two or three days. 311 9-01 1,680 I
312 9-01 95,820 I
2. Examined the shipping documents book. The last number used was 318. 313 9-01 19,050 I
314 9-01 5,790 I
3. Asked the receiving department to identify all goods received September 1. He told you that 315 9-02 48,630 E
receiving reports 680 through 682 are those goods received on September 1. 316 9-02 10,350 E
317 9-02 2,340 E
4. Asked the shipping department to identify all goods shipped or sold over the counter
September 1. He informed you goods on shipping documents 311 to 313 were shipped 116. The entry to adjust the records as of August 31 for cutoff errors in accounts payable is:
September 1. A. Accounts payable 25,800
Purchases 25,800
5. Examined the client's inventory counts in the receiving department. Inventory had been B. Accounts payable 37,260
counted only for receiving reports 674 to 684. Purchases 37,260
C. Accounts payable 137,040
6. Your examination showed that inventory for all shipments made September 2 were included in Purchases 138,040
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AUDITING PROBLEM CPA Review School of Accountancy First & Final Pre-board Examination

D. Accounts payable 182,340 Answer Key

Purchases 182,340 1. B 31. B 61. C 91. C
2. D 32. C 62. B 92. B
117. The entry to adjust the records as of August 31 for cutoff errors in sales is: 3. B 33. D 63. B 93. A
A. Accounts receivable 23,400 4. B 34. B 64. B 94. B
Sales 23,400 5. C 35. D 65. A 95. A
B. Sales 98,940 6. C 36. D 66. B 96. A
Accounts receivable 98,940 7. C 37. A 67. C 97. D
C. Sales 122,340 8. B 38. B 68. A 98. B
Accounts receivable 122,340 9. D 39. C 69. B 99. C
D. Accounts receivable 169,650 10. B 40. B 70. B 100. B
Sales 169,650 11. C 41. C 71. B 101. B
12. C 42. B 72. C 102. B
For the following questions, assume that no adjustments in questions 1 and 2 affected inventory
13. D 43. A 73. D 103. B
and that the gross profit percentage is approximately 30 percent.
14. C 44. C 74. D 104. B
118. As a result of the purchases cutoff test, how much should be removed from the client's 15. D 45. B 75. C 105. B
physical inventory? 16. C 46. A 76. B 106. B
A. P140,220 C. P146,010 17. A 47. D 77. A 107. C
B. P143,400 D. P153,720 18. C 48. C 78. A 108. B
19. A 49. B 79. B 109. B
119. As a result of the sales cutoff test, how much should be added to the client's physical 20. B 50. B 80. B 110. C
inventory? 21. B 51. B 81. C 111. D
A. P38,094 C. P102,018 22. C 52. B 82. A 112. C
B. P81,585 D. P118,755 23. C 53. C 83. A 113. B
24. C 54. D 84. D 114. A
120. The net adjustment to the client's inventory is 25. C 55. B 85. D 115. D
A. P41,382 decrease C. P72,135 decrease 26. B 56. D 86. D 116. C
B. P64,425 decrease D. P102,126 decrease 27. C 57. B 87. C 117. C
28. A 58. A 88. C 118. D
29. B 59. A 89. A 119. B
30. D 60. A 90. D 120. C

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