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AUDIT OF CASH AND CASH EQUIVALENT
Problem 1
In connection with your audit of Caloocan Corporation for the year ended December 31, 2010, you gathered the following:
Traveler’s check 50,000
Not-sufficient-funds check 15,000
Money order 30,000
Petty cash fund(P4,000 in currency and expenses receipts for P6,000) 10,000
Treasury bills, due 3/30/11(purchased 12/29/10) 200,000
Treasury bills, due , 1/31/11(purchased 2/1/10) 300,000
QUESTION: Based on the above information and the result of your audit, compute for the cash and cash equivalents that will be reported on the December 31,
2010 statement of financial position.
a. P2,784,000 b. P3,084,000
c. P2,790,000 d. P2,704,000
Problem 2
The books of Manila’s Service, Inc. disclosed a cash balance of P687,570 on December 31, 2010. The bank statement as of December 31 showed a balance of
P547,800. Additional information that might be useful in reconciling the two balances follows:
a. Check number 748 for P30,000 was originally recorded on the books as P45,000.
b. A customer’s note dated September 25 was discounted on October 12. The note was dishonored on December 29 (maturity date). The bank charged
Manila’s account for P142,650, including a protest fee of P2,650.
c. The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit of P27,000.
d. Outstanding check totaled P98,850 as of December 31.
e. There were bank service charges for December of P2,100 not yet recorded on the books.
f. Manila’s account had been charged on December 26 for a customer’s NSF for check for P12,960
g. Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
h. Receipts of December 31 for P134,250 were recorded by the bank on January 2.
i. A bank memo stated that a customer’s note for P45,000 and interest of P1,650 had been collected on December 27, and the bank charged a P360
collection fee.
Based on the above and the result of your audit, determine the following
1. Adjusted cash in bank balance
a. P583,200 b. P577,200 c. P589,200 d.P512,400
2. Net adjustment to cash as of December 31, 2010
a. P104,370 b. P110,370 c. P98,370 d.P175,170
Problem 3
Your audit senior instructed you to prepare a four column proof of cash receipts and disbursements for the month of December, 2010.
The bank reconciliation prepared by Cubao Company at November 30 is reproduced below:
Unadjusted bank balance P96,800 Unadjusted book balance P58,640
Add: deposit in transit 18,000 Add: CM-Note collected 40,320
Total 114,800 Total 98,960
Less outstanding less: DM bank charges 160
Checks: No. 276 P2,400
282 7,200
284 4,800
285 1,600 16,000
Adjusted balance P98,800 Adjusted balance P98,800
The December bank statement, which has a beginning balance of P96,800, is reproduced below:
May Bank
Account Name: Cubao Company
Date Debits Credits
December 01 P18,000
December 02 P7,200 40,000
December 04 24,000
December 06 48,000
December 08 400,000 CM83
December 10 40,000 DM97
December 11 56,000
December 16 20,000
December 18 64,000
December 21 72,400
December 28 36,000 80,000
December 31 4,000 DM98 64,000 CM84
Totals P131,200 P842,400
DM97- Customers DAIF check CM83- Note collected by the bank

DM98- Service Charges CM84- Account collected by the bank
The company’s cash receipts and cash disbursement journals for the month of December 2010 are provided below:
The company’ s cash in Bank Ledger appears below:
Cash Receipts Journal Cash Disbursements Journal
Date OR No. Amount Date Check No Amount
Dec. 01 415 P40,000 Dec. 01 286 P16,000
05 416 48,000 03 287 24,000
10 417 56,000 10 288 32,000
17 418 64,000 14 289 20,000
20 419 72,000 20 290 28,000
27 420 80,000 23 291 36,000
31 421 88,000 26 292 40,000
28 293 44,000
31 294 48,000
Total P440,800 total P304,000
Cash in Bank
Balance P58,640 12/31/10 CDJ P304,000

12/01/10 GJ 40,320
12/10/10 GJ(CM83) 400,000
12/31/10 CRJ 440,800
Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following
1.How much is the outstanding checks as of December 31, 2010?
a. P208,000 b. P232,800 c. P216,800 d. P224,000
2. How much is the adjusted book receipts for December, 2010?
a. P913,200 b. P985,200 c. P904,800 d. P771,600
3. How much is the adjusted book disbursements for December, 2010?
a. P347,840 b. P332,000 c. P348,000 d. P339,200
4. How much is the cash shortage as of December 31, 2010?
a. 664,000 b. 680,000 c. 688,800 d. 672,800
5. How much is the cash shortage as of December 31, 2010?
a. P24,240 b. 15,840 c. P23,840 d. P0
AUDIT OF RECEIVABLES
Problem 1
Your audit disclosed that on December 31, 2010, the accounts receivable control account of Alilem Company had a balance of P2,865,000. An analysis of the
accounts receivable account showed the following
Interest receivable on bonds 150,000
Other trade accounts receivable-unassigned 750,000
Subscriptions receivable due in 30 days 825,000
Trade accounts receivable-assigned (Alilem company’s equity in assigned accounts is P150,000) 375,000
Trade installment receivable due 1-18 months, including unearned finance charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) 75,000
P2,865,000
Based on the above and the result of your audit, determine the adjusted balance of following:
1.The trade accounts receivable as of December 31, 2010 is
a. P1,147,500 b. P1,522,500 c. P1,485,000 d. P1,447,500
2. The net current trade and other receivables as of December 31, 2010 is
a. P2,647,500 b. 2610,000 c. P2,272,500 d. P1,822,500
3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2010?
a. P1,200,000 b. P375,000 c. P525,000 d. P0
Problem 2
Presented below are a series of unrelated situations. Answer the following questions relating to each of the independent situations as requested.
1. Bantay Company’s unadjusted trial balance at December 31, 2010. Included the following accounts:
Debit Credit
Accounts receivable P1,000,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales return and allowances 70,000
Bantay Company estimates its bad debt expense to be 1 ½% of net sales. Determine its bad debt expense for 2010.
a. P225,000 b. P254,500 c. P214,500 d.P55,000
2. An analysis and aging of Burgos Corp. accounts receivable at December 31, 2010, disclosed the following:
Amounts estimated to be uncollectible P1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000
What is the net realizable value of Burgos’ receivables at December 31, 2010?
a. P15,700,000 b. P17,500,000 c. P16,250,000 d. P14,450,000
3. Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are available for 2010.
Credit sales during 2010 P21,000,000
Allowance for doubtful accounts 1/1/10 170,000
Collection of accounts written off in prior years (Customer credit was reestablished) 80,000
Customer accounts written off as uncollectible during 2010 300,000
What is the balance in allowance for doubtful accounts at December 31, 2010?
a.P630,000 b. P420,000 c. P500,000 d. P580,000
4. At the end of its first year of operations, December 3, 2010, Caoayan, Inc. reported the following information:
Accounts receivable, net allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2010 240,000
Bad debts expense for 2010 840,000
What should be the balance in accounts receivable at December 31,2010 before subtracting the allowance for doubtful accounts?
a. P10,100,000 b. P10,340,000 c. P9,740,000 d. P10,580,000
5. The following accounts were taken from Cervantes Inc.’s statement of financial position at December 31, 2010.
Debit Credit
Accounts receivable P4,100,000
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2010
a. P123,000 b. P23,000 c. P223,000 d.P225,000
Problem 3
You were able to obtain the following information from your audit of Magsingal Corporation’s Accounts Receivable and Allowance for Doubtful Accounts
From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as of December 31, 2010. Below is a transcript of the
Allowance for Doubtful Accounts:
Debit Credit Balance
January 1- Balance 20,000
July 31-Write-off P16,000 4,000
December 31- Provision P52,000
The summary of the subsidiary ledger as of December 31, 2010 was totaled as follows:
Debit balances:
Under one month P360,000
One to six months 368,000
Over six months 152,000
P880,000
Credit balances:
Alien P8,000- OK; additional billing in Jan, 2011
T. Twister 14,000- Should have been credited to Apol
Dee Lah 18,000- Advances on sales contract
P40,000
The customer’s ledger is not in agreement with the accounts receivable control. The client requested you to adjust the control account to the subsidiary
ledger after corrections are made. It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are expected to
require a reserve of 2 percent. Accounts over six months are analyzed as follows:
Definitely bad P48,000
Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (estimated to be 90% collectible ) 80,000
Total P152,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2010?
a. P818,000 b. P846,000 c. P832,000 d.P826,000
2. How much s the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2010?
a. P30,680 b. P31,240 c. P30,960 d. P30,760
3. How much is the Doubtful Accounts expense for the year 2010?
a. P74,680 b. P75,240 c. P74,960 d. P74,760
Problem 4
The statement of financial position of Santiago Corporation reported the following long-term receivables as of December 31, 2009:
Note receivable from sale of plant P9,000,000
Note receivable from officer 2,400,000
In connection with your audit, you were able to gather the following transactions during 2010 and other information pertaining to the company’s long term
receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of P3,000,000 plus interest on the
unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2010.
b. The note receivable from officer is dated December 31, 2009, earns interest at 10% per annum, and is due on December 31, 2012. The 2010 interest
was received on December 31, 2010.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2010, in exchange for an P1,200,000 noninterest bearing note due on April 1, 2012.
The note had no ready market, and there was no established exchange price for the equipment. The prevailing interest rate for a note of this type at
April 1, 2010,was 12%. The present value factor of 1 for two periods at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two
periods at 12% is 1.690.
d. A tract of land was sold by the corporation to No Co. on July 1, 2010, for P6,000,000 under an installment sale contract. No Co. signed a 4-year 11%
note for P4,200,000 on July 1, 2010, in additional to the down payment of P1,800,000. The equal annual payments of principal and interest on the note
will be P1,353,750 payable on July 1, 2011, 2012, 2013, and 2014. The land has an established cash price of P6,000,000, and its cost to the corporation
was P4,500,000. The collection of the installments on this note is reasonably assured.
Based on the above and the result of your audit, determine the following:
1. Noncurrent notes receivable as of December 31, 2010
a. P13,556,400 b. P9,664,650 c. P10,556,400 d. P9,750,726
2. Current portion of long-term notes receivables as of December 31, 2010
a. P3,891,750 b. P4,353,750 c. P3,000,000 d. P0
3. Accrued interest receivable as of December 31, 2010
a. P771,000 b. P857,076 c. P540,000 d. P1,011,000
4. Interest income for the year 2010
a. P1,281,000 b. P1,637,076 c. P1,367,076 d. P1,512,000
Problem 5
On December 31, 2008, Ms. Tah signed a P2,000,000 note to Laoag Bank. The market interest rate at that time was 12%. The stated interest rate on the note
was 10%, payable annually. The note matures in five years. Unfortunately, because of lower sales, Ms. Tah’s financial condition worsened. On December 31, 2010,
Laoag Bank determined that it was probable that Ms. Tah would pay back only P1,200,000 of the principal at maturity. However, it was also considered likely
that interest would continue to be paid, based on the P2,000,000 loan. The prevailing interest rate for similar type of note as of December 31, 2010 is 14%.
Based on the above and the result of your audit, determine the following (Round off present value factors to four decimal places)
1.Amount of cash Ms. Tah received from the loan on Decmeber 31, 2008
a. P2,000,000 b. P1,892,960 c. P1,855,760 d.P1,134,800
2. Interest income in 2010
a. P225,41 b. P230,414 c. P222,691 d. P200,000
3. Loan impairment loss in 2010
a. P665,480 b. P616,009 c. P569,345 d. P761,489
4. Interest income in 2011
a. P137,085 b. P160,142 c. P239,858 d. P200,000
Problem 6
Tagudin Co. required additional cash for its operation and used accounts receivable to raise such needed cash, as follows:
a. On December 1, 2010, Tagudin Company assigned on a nonnotification basis accounts receivable of P5,000,000 to a bank in consideration for a loan of
90% of the receivables less a 5% service fee on the accounts assigned. Tagudin signed a note for the bank loan. On December 31, 2010, Tagudin
collected assigned accounts of P3,000,000 less discount of P200,000. Tagudin remitted the collections to the bank in partial payment for the loan. The
bank applied first the collection to the interest and the balance to the principal. The agreed interest iis 1% per month on the loan balance.
b. Tagulin Co. sold P1,550,000 of accounts receivable for P,340,000. The receivables had a carrying amount of P1,470,000 and were sold outright on a
nonrecourse basis
c. Tagudin Co. received an advance of P300,000 from Union Bank by pledging P360,000 of accounts receivable.
d. On June 30,2010, Tagudn Co. discounted at bank a customer’s P600,000, 6-month. 10% note receivable dated April 30, 2010. The bank discounted the
note at 12% on the same date.
Based on the above and the result of your audit, answer the followong:
1. In its December 31, 2010 statement of financial position, Tagudin should report note payable as a current liability at
a.. P1,745,000 b. P2,250,000 c. P1,545,000 d.P1,700,000
2. Tagudin Company’s equity in the assigned accounts receivable as of December 31, 2010 is
a. P255,000 b. P300,000 c. P455,000 d. P0
3. The entry to record the sale of accounts receivable would include
a. A debit to Finance Charge of P210,000 b. A debit to Allowance for Doubtful Accounts of P80,000
c. A credit to Accounts Receivable of P1,470,000 d. A credit to Notes Payable of P1,500,000
4. Accounts receivable pledged against borrowings, should be
a. Included in total receivables with disclosure b. Included in total receivables without disclosure
c. Excluded from total receivables with disclosure d. Excluded from total receivables without disclosure
5. The proceeds from the notes receivable discounted on June 30,2010 is
a. P564,000 b. P617,400 c. P604,800 d. P576,000
Problem 7
Vintar Company has the following transactions in 2010 involving notes receivable:
May 1 – Received a P1,000,000, 90-day, 12% interest bearing note from A Company in settlement of account
1 – Received a P1,500,000, six month, 12% interest bearing note from B Company in settlement of account
Jul. 30 – A Company defaulted on the P1,000,000 note
Aug.1 – Discounted the B Company note at a bank at 15%
Sep. 1 – Received a one-year noninterest bearing note from C Company in settlement of a P600,000 account receivable. The face value of the note was P660,000
28 – Collected the defaulted A Company note plus accrued interest at 12% per annum on the total amount due
Oct 1 – Received a P2,500,000, 90 day note from D Company. The note is for the payment goods purchased and ears interest at 12%
Nov. 1 – B Company defaulted on the P1,500,000 note. Vintar Company paid the bank the total amount due plus P60,000 for protest fee and other bank charges
Dec. 30 – Collected D Company note in full
31 – Collected from B Company in full including interest on the total amount due at 12% since default date
1. The proceeds from the discounted B Company note on August 1, 2010 is
a. P1,530,375 b. P1,487,062 c. P1,542,300 d. P1,000,000
2. The amount collected on September 28, 2010 on the defaulted A Company note is
a. P1,030,000 b. P1,050,600 c. P1,050,000 d. P1,081,500
3. The amount collected on December 31, 2010 on defaulted B Company note is
a. P1,683,000 b. P1,650,000 c.P1,681,800 d. P1,680,000
4. The interest income to be recognized in 2010 related to these transactions is
a. P268,600 b. P238,780 c. P223,600 d. P193,600
AUDIT OF INVENTORY
PROBLEM 1
Presented below is a list of items that may or may not reported as inventory in a company’s December 31 statement of financial position.
Goods out on consignment at another company’s store P800,000
Goods sold on installment basis 100,000
Good purchased f.o.b. shipping point that are in transit at December 31 120,000
Goods purchased f.o.b. destination that are in transit at December 31 200,000
Goods sold to another company, for which our company has signed an agreement to repurchase at
a set price that covers all costs related to the inventory 300,000
Goods sold where large returns are predictable 280,000
Goods sold f.o.b. shipping point that are in transit December 31 120,000
Freight charges on goods purchased 80,000
Factory labor costs incurred on goods still unsold 50,000
Interest cost incurred for inventories that are routinely manufactured 40,000
Costs incurred to advertise goods held for resale 20,000
Materials on hand not yet placed into production 350,000
Office supplies 10,000
Raw materials on which a the company has started production , but which are not completely processed 280,000
Factory supplies 20,000
Goods held on consignment from another company 450,000
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 b. P2,000,000 c. P2,260,000 d. P2,220,000
PROBLEM 2
In connection with your audit of the Alcala Manufacturing Company, you received its inventory as of December 31, 2010 and found the following items:
a. A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was taken. It was not included n
the inventory because it was marked “ Hold for shipping instructions”. The customer’s order was dated December 18, but the case shipping and the
customer billed on January 10, 2011.
b. Merchandise costing P600,000 was received on December 28, 2010, and the invoice was recorded. The invoice was in the hands of the purchasing agent;
it was market “ On consignment”.
c. Merchandise received on January 6, 2011, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB
shipping point on December 31, 2010. Because it was not on hand during the inventory count, it was not included.
d. A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on December 30. The customer was
billed for P300,000 on that date and the machine was excluded from inventory although it was shipped January 4, 2011.
e. Merchandise costing P200,000 was received on January 6,2011, and the related purchase invoice was recorded January 5. The invoice showed the
shipment was made on December 29, 2010, FOB destination.
f. Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the goods on that date. The
merchandise was included in inventory because Alcala still holds legal title. Historical experience suggests that full payment on installment sale is received
approximately 99% of the time
g. Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the sale was accompanied by a
purchase agreement requiring Alcala to buy back the inventory in February 2011.
Based on the above and the result of your audit, how much of these items should be included in the inventory balance at December 31, 2010?
a. P1,300,000 b. P800,000 c. P1,650,000 d. P1,050,000
PROBLEM 3
The following accounts were included in the unadjusted trial balance of Bani Company as of December 31, 2010:
Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500
During your audit, you noted that Bani held its cash books open after year-end. In additional, your audit revealed the following:
1. Receipt for January 2011 of P327,300 were recorded in the Dec. 2010 cash receipts book. The receipts of P180,050 represent cash sales and P147,250
represent collections from customers, net of 5% cash discounts.
2. Accounts payable of P186,200 was paid in Jan. 2011. the payments, on which discounts of P6,200 were taken, were included in the Dec. 2010 check
register.
3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information had been found relating to certain inventory
transactions.
a. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory figure.
b. Goods costing P108,750 were received from a vendor on Jan. 4, 2011. The related invoice was received and recorded on Jan. 6 2011. The goods
were shipped on Dec. 31, 2010, terms FOB shipping point.
c. Goods costing P318,750 were shipped on Dec. 31, 2010, and were delivered to the customer on Jan. 3, 2011. The terms of the invoice were FOB
shipping point. The goods were included in the 2010 ending inventory even though the sale was recorded in 2010.
d. A P91,000 shipment of goods to a customer on Dec. 30, terms FOB destination are not included in the year- end inventory. The goods cost
P65,000 and were delivered to the customer on Jan 3, 2011. The sale was properly recorded in 2011.
e. The invoice for goods costing P87,500 was received and recorded as a purchase on Dec. 31, 2010. The related goods, shipped FOB destination were
received on Jan. 4, 2011, and thus were not included in the physical inventory.
f. Goods valued at P306,400 are on consignment from a vendor, These goods are not included on the physical inventory.
Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2010:
1. Cash
a. P481,600 b. P340,500 c. P334,300 d. 346,700
2. Accounts receivable
a. P1,454,300 b. P1,282,000 b. P1,127,000 d. P1,274,250
3. Inventory
a. P3,017,500 b. P3,040,000 b. P2,930,000 d. P2,505,000
4. Accounts payable
a. P2,395,450 b. P2,286,500 b. P2,286,500 d. P2,301,750
5. Current ratio
a. P2.00 b. P1.83 c. P1.84 d. P2.01
PROBLEM 4
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts at December 31, 2009, had the following
balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company during 2010.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of 20% and 10%; terms 2/15, n/30. Bolinao values
inventory at the net invoice price
Feb 14 Bolinao repossessed an inventory item from a customer who was overdue in making payment. The unpaid balance on the sale is P15,200. The
repossessed merchandise is to be refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated refinished costs of
P6,800. The normal profit for this item is considered to be P3,200.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400. A reduction of P8,000 off the list price was
granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the
sales price.
Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual inventory system)
1. The entry on Jan.8 will include a debit to Raw Materials Inventory of
a. P200,000 b. P144,000 c. P141,120 d.P196,000
2. The repossessed inventory on Feb. 14 is most likely to e valued at
b. P14,000 b. P24,000 c. P17,200 d. P14,400
3. The journal entries on Apr. 3 will include a
a. Debit to Cash of P24,000 b. Debit to Cost of Repossessed Goods Sold of P14,000
c. Credit to Profit on Sale of Repossessed Inventory of P3,600 d. Credit to Repossessed Inventory of P20,400.
4. The trade-in inventory on Aug. 30 is most likely to be valued at
a. P8,000 b. P4,800 c. P6,000 d. P6,400
5. How much will be recorded as Sales on Aug. 30?
a. P51,200 b. P56,000 c. P57,200 d. P57,600
PROBLEM 5
During your audit of the records of the Manaoag Corporation for the year ended December 31, 2010, the following facts were disclosed
Raw materials inventory, 1/1/2010 P720,200
Raw materials purchases 5,232,800
Direct labor 4,900,000
Manufacturing overhead applied (150% of direct labor) 7,350,000
Finished goods inventory, 1/1/2010 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200
Your examination disclosed the following additional information:

a. Purchases of raw materials
Month Units Unit Price Amount
Jan – Feb. 55,000 P17.76 P976,800
March – Apr. 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – Aug. 35,000 20.00 700,000
Sep. – Oct. 45,000 20.40 918,000
Nov. – Dec. 60,000 20.80 1,248,000
265,000 P5,232,800
b. Data with respect to quantities are as follows:
Units
Explanation 1/1/10 12/31/10
Raw materials 35,000 ?
Work in process (80% completed) – 25,000
Finished goods 15,000 40,000
Sales, 200,000 units
c. Raw materials are issued at the beginning of the manufacturing process. During the year , no returns, spoilage, or wastage occurred. Each unit of finished
goods contains one unit of raw materials.
d. Inventories are stated at cost as follows:
i. Raw materials – according to the FIFO method
ii. Direct labor – at an average rate determined by correlating total direct labor cost with effective production during the period
iii. Manufacturing overhead – at an applied rate of 150% of direct labor cost
1. The raw materials inventory as of December 31, 2010 is
a. P992,000 b. P888,000 c. P936,000 d. P1,040,000
2. The work in process inventory as of December 31, 2010 is
a. P1,496,000 b. P1,514,000 c. P1,746,000 d .P1,776,000
3. The finished goods inventory as of December 31, 2010 is
a. P2,793,600 b. P3,334,000 c. P3,553,130 d. P2,812,000
4. The cost of goods sold for the year ended December 31, 2010 is
a. P16,897,000 b. P14,161,400 c. P14,077,000 d. P13,911,400
PROBLEM 6
You noted the following related to the biological assets owned by Malasiqui Farms, Inc. in connection with your audit.
Carrying amount, January 1, 2010 P800,000
Purchases 230,000
Gain arising from changes in fair value less costs to sell attributable to physical changes 60,000
Gain arising from changes in fair value less costs to sell attributable to price changes 40,000
Sales 110,000
Based on the above and the result of your audit, answer the following
1. The carrying amount of the biological assets on December 31, 2010
a. P1,030,000 b. P1,130,000 c. P1,020,000 d. P920,000
2. The amount to e recognized in 2010 profit or loss related to these biological assets is
a. P100,000 b. P210,000 c. P20,000 d. P110,000
PROBLEM 7
A public limited company, Mabini Dairy Products, produces milk on its farms. As of January 1, 2010 Mabini has a stock of P1,050 cows (average age, 2 years old)
and 150 heifers (average age, 1 year old).
Additional information:
a. Mabini purchased 375 heifers, average age 1 year, on July 1, 2010. No animals were born or sold during the year.
b. The company produced milk with a fair value of P660,000 (that is determined at the time of milking) in the year ended 31 December 2010. The
company also estimated the following costs.
i. Commissions to brokers and dealers 20,000
ii. Transport and other costs necessary to get milk to a market 10,000
c. The company has had problems during the year. Contaminated milk was sold to customers. As a result, milk consumption has gone down. The government
decide to compensate farmers for potential loss in revenue from sale of milk. This fact was published in the national press on December 1, 2010. Mabini
received an official letter on December 10, 2010, starting that P100,000 would be paid it on April 3, 2011.
d. The company’s business is spread over different parts of the country. The only region affected y the contamination was Region X. where the government
curtailed milk production in the region. The cattle was unaffected by the contamination and were healthy. The company estimates that the future
discounted cash flow income from the cattle in Region X amounted to P2 million, after taking into account the government restriction order. The company
feels that it cannot measure the fair value of the cows in the region because of the problems created by the contamination .There are 300 cows and 100
heifers in the region. All these animals had been purchased before January 1, 2010. A rival company had offered Mabini P1.5 million for these animals
after costs to sell and further offered P3 million for the farms themselves in that region. Mabini has no intention of selling the farms at present.
The fair values less costs to sell were:
1-year old animal at Dec.31, 2010 P3,200
2-year old animal at Dec.31, 2010 4,500
1.5- year old animal at Dec.31, 2010 3,600
3-year old animal at Dec.31, 2010 5,000
1-year old animal at Jan. 1- July 1, 2010 3,000
2-year old animal at Jan. 1, 2010 4,000
1. The milk should be valued at
a. P660,000 b. P640,000 c. P650,000 d.P630,000
2. The increase in value of biological assets in 2010 due to price change?
a. P460,000 b. P555,000 c. P630,000 d. P1,500,000
3. The increase in value of biological assets in 2010 due to physical change?
a. P870,000 b. P720,000 c. P590,000 d. P780,000
4. The carrying amount of the biological assets as of January 1, 2010 is
a. P4,650,000 b. P5,205,000 c. P590,000 d. P3,150,000
5. The carrying amount of the biological assets as of December 31, 2010 is
a. P6,150,000 b. P6,825,000 c. P7,325,000 d. P7,275,000
AUDIT OF INVESTMENTS IN EQUITY AND DEBT SECURITIES

PROBLEM 1
The following transactions of the Angat Company were completed during the year 2010:
Jan.2 Purchased 20,000 shares of Bulacan Auto C, for P40 per share plus brokerage costs of P4,500. These shares were classified as held for trading
Feb. 1 Purchased 20,000 shares of Malolos Company ordinary shares at P125 per share plus brokerage fees of P19,000. Angat classifies these shares as
available for sale
Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P35,000. In addition, the company paid brokerage fees
of P18,000. Angat classified these bonds as held for trading
Jul.1 Received semiannual interest on the RP Treasury Bonds
Aug.1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest
Oct.1 Sold 3,000 shares of Malolos at its fair value of P132 per share
1. Gain or loss on sale of P500,000 RP Treasury Bonds on Aug. 1, 2010
a. P15,000 gain b. P2,500 gain c. P2,000 loss d. P7,500 loss
2. Disregarding income taxes, reclassification adjustment for other comprehensive income on the sale of 3,000 Malolos shares on October 1, 2010
a. P18,150 b. (P18,150) c. P21,000 d. (P21,000)
3. Gain or loss on sale of 3,000 Malolos shares on October 1, 2010
a. P18,150 loss b. P18,150 gain c. P2,000 gain d. P21,000 gain
4. Gain or loss arising from change in the fair value of securities to be recognized in 2010 profit or loss
a. P92,500 b. P74,500 c. P97,000 d. P80,000
5. Net unrealized gain in accumulated other comprehensive income in equity as of Dec.31,2010
a. P68,850 b. P85,000 c. P66,000 d. P 0
PROBLEM 2
On December 31, 2008, Magalang Co purchased equity securities as trading securities. Pertinent data are as follows:
Cost Fair value
12/31/2010 12/31/2009
C Company P900,000 P780,000 P880,000
P Company 1,100,000 1,240,000 1,120,000
A Company 2,000,000 1,720,000 1,920,000
Total P4,000,000 P3,740,000 P3,920,000
On December 31, 2010, Magalang transferred its investment in security A from trading to available-for sale because Magalang intends to retain security A as a
long term investment.
What total amount of gain or loss on its securities should be included in Magalang’s 2010 profit or loss?
a. P20,000 gain b. P260,000 loss c. P180,000 loss d. P180,000 gain
PROBLEM 3
On December 31, 2008, Masantol Co. purchased equity securities as available-for-sale securities. Pertinent data are as follows:
Cost Fair value
12/31/2010 12/31/2009
C Company P900,000 P780,000 P880,000
P Company 1,100,000 1,240,000 1,120,000
A Company 2,000,000 1,720,000 1,920,000
Total P4,000,000 P3,740,000 P3,920,000
On December 31, 2010, Masantol transferred its investment in security P from available-for sale to financial asset at fair value through profit or loss.
How much should e reported as net unrealized loss in AFS in (accumulated) equity as of December 31, 2010?
a. P300,000 b. P260,000 c. P 0 d. P400,000
PROBLEM 4
Meycauayan Inc. acquired 50,000 ordinary shares of AAA for P5 per share and 125,000 ordinary shares of BBB for P10 per share on January 2, 2009. Both AAA
Inc. and BBB Corp. have 500,000 ordinary shares outstanding. Both securities are being held as long term investments. Changes in retained earnings for AAA and
BBB for 2009 and 2010 are as follows:
AAA, Inc. BBB Corp
Retained earnings (deficit), 1/1/09 P1,000,000 (P175,000)
Cash dividends, 2009 (125,000)
Profit for 2009 200,000 325,000
Retained earnings, Dec. 31, 2009 1,075,000 150,000
Cash dividends, 2010 (150,000) (50,000)
Profit for 2010 300,000 125,000
Retained earnings, Dec.31, 2010 P1,225,000 P225,000
Market value of share: 12/31/09 P7.00 P12.00
12/31/10 6.50 15.00
1. The income from investment in AAA, Inc. in 2010 is
a. P15,000 b. P1,000 c. P12,500 d. P 0
2. The income from investment in BBB, Inc. in 2009 is
a. P31,250 b. P81,250 c. P2,500 d. P 0
3. The carrying amount of Investment in AAA, Inc. as Dec.31, 2010 is
a. P250,000 b. P350,000 c. P325,000 d. P 252,500
4. The carrying amount of Investment in BBB, Inc. as December 31, 2010 is
a. P1,250,000 b. P1,268,750 c. P1,875,000 d. P1,350,000
5. How much should be reported as net unrealized gain or loss on AFS (accumulated) in equity as of December 31, 2010?
a. P75,000 gain b. P25,000 loss c. P25,000 gain d. P 0
PROBLEM 5
On January 1, 2009, Capas Corporation purchased P1,000,000 10% bonds designated as held-to-maturity. The bonds were purchased to yield 12%. Interest is
payable annually every December 31. The bonds mature on December 31, 2013. On December 31, 2009 the bonds were selling at 99. On December 31,
2010, Capas sold P500,000 face value bonds at 101. The bonds were selling at 103 on December 31, 2013.
Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places)
1. The purchase price of the bonds on January 1, 2009 is
a. P927,880 b. P946,480 c. P1,075,796 d. P939,230
2. The carrying amount of the investment in bonds on December 31, 2009 is
a. P1,063,376 b. P951,938 c. P960,058 d. P939,226
3. How much s the realized gain on sale of the investment in bonds in 2010?
a. P41,060 b. P29,034 c. P35,387 d. P10,000
4. How much is the net unrealized gain in accumulated other comprehensive income in equity as of December 31, 2010?
a. P39,034 b. P29,033 c. P31,917 d. P 0
a. P39,034 b. P29,034 c. P31,917 d. P0
PROBLEM 6
On January 1, 2009, Bamban Corporation purchased P4,000,000 10% bonds for P3,711,520 and designated as available-for-sale. The bonds were purchased
to yield 12%. Interest is payable annually every December 31. The bonds mature on December 31, 2013. The bonds were selling at 99 and 98 on
December 31, 2009 and 2010, respectively. Because of the change in intention and ability, Bamban reclassified the investment to held0to-maturity on
December 31, 2011. On the date of reclassification, the prevailing market interest rate is 9%.
Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places and final answers to nearest
hundred)
a. P112,300 b. P208,500 c. P90,800 d. P40,000
a. P205,780 b. P358,900 c. P93,500 d. P0
3. How much should be recognized in 2012 profit or loss related to this investment in bonds?
a. P366,300 b. P396,400 c. P463,800 d. P400,000
4. How much is the net unrealized gain in accumulated other comprehensive income in equity as of December 31, 2012
a. P0 b. P175,700 c. P172,100 d. P400,000
5. How much is the carrying amount of the investment in bonds on December 31, 2012?
a. P4,036,800 b. P3,928,400 c. P4,006,700 d. P4,104,100
PROBLEM 7
Pura Company purchased investment in bonds on January 1, 2009. At this date, the cost and fair value is P1,000,000. The bonds are classified as available-
for-sale. On December 31, 2009 the bonds were selling at 90. Because of the significant financial difficulty of the issuer, the bonds are considered impaired
on December 31, 2010 when the bonds are quoted 70. On December 31, 2011, the bonds are quoted at 95. The increase in the fair value of the bonds on
December 31, 2011 is due to the improvement of the issuer’s credit rating.
1. How much should be recognized in 2010 profit or loss as a result of the fair value changes?
a. P300,000 b. P200,000 c. P100,000 d. P 0
2. How much should be recognized in 2011 profit or loss as a result of the fair value changes?
a. P250,000 b. P200,000 c. P100,000 d. P 0
PROBLEM 8
Candon, Inc. completed the construction of a building at the end of 2008 for a total cost of P20 million. The building is estimated to be economically useful
for 25 years. The building was constructed for the purpose of earning rentals under operating leases. The tenants began occupying the building after its
completion. The company opted to use the fair value model to measure the building. An independent valuation expect was used by the company to estimate
the fair value of the building on an annual basis. According to the expert the fair values of the building at the end of 2008, 2009 and 2010 were P22
million , P24 million and 25 million, respectibely.
The company’s business expanded in 2009. As a result, the company started to use the building in its operations on January 1, 2010. Because of the change
in use, the company reclassified the building from investment property, plant and equipment.
How much is the carrying amount of the building on December 31, 2010?
a. P24,000,000 b. P23,040c. P23,000,000 d.P21,120,000
PROBLEM 9
Dagupan, Inc. owns a building purchased on January 1, 2006 for P100 million. The building was used as the company’s head office. The building has an
estimated useful life of 25 years. In 2010, the company transferred its head office and decide to lease out the old building. Tenants began occupying the old
building by the end of 2010. On December 31, 2010, the company reclassified the building as investment property to be carries at fair value. The fair value
on the date of reclassification was P85 million.
How much should be recognized in the 2010 profit or loss as a result of the transfer from owner-occupied to investment property?
a. P15,0000,0000 b. P1,000,000
c. P5,000,000 d. P 0
AUDIT OF PROPERTY, PLANT AND EQUIPMENT

PROBLEM 1
Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the Aliaga’s property and equipment transactions:
QUESTIONS:
Cost of land, which included an old apartment building appraised at P300,000 P3,000,000
Apartment building mortgage assumed, including related interest due at the time of purchase 80,000
Deliquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building more energy efficient 90,000
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally injured while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new building 50,000
Cost of windows broken by vandals distracted by the celebration 12,000
Based on the above and the result of your audit, determine the following
1. Cost of land
a. P2,980,000 b. P3,270,000 c. P3,185,000 d. P3,205,000
2. Cost of buildings
a. P10,810,000 b. P10,895,000 c. P10,875,000 d. P11,110,000
3. Cost of Land Improvements
a. P12,000 b. P72,000 c. P122,000 d. P 0
4. Amount that should be expensed when incurred
a. P80,000 b. P110,000 c. P62,000 d. P50,000
5. Total depreciable property and equipment
a. P11,182,000 b. P10,967,000 c. P10,947,500 d. P10,882,000
PROBLEM 2
In connection with your audit of Cuyapo Company’s financial statements for the year 2010, you noted the following transactions affecting the property and
equipment items of the company:
Jan.1 Purchased real property for P5,026,000, which included a charge of P146,000 representing property tax for 2010 that had been prepaid by the
vendor; 20% of the purchase price is deemed applicable to land the balance to buildings. A mortgage of P3,000,000 was assumed by Cuyapo on
the purchase. Cash was paid for the balance
Jan. 15 Previous owners had failed to take care of normal maintenance and repair requirements on the buildings, necessitating current reconditioning at a
cost of P236,800.
Feb. 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber salvage. The company proceeded to construct a
warehouse. The cost of such warehouse was P540,800, which was P90,000 less than the average bids made on the construction by independent
contractors.
Upon completion of construction, city inspectors ordered extensive modifications to the building as a result of failure on the part of the company
to comply with building safety code. Such modifications, which could have been avoided, cost P76,800.
Mar. 1 The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a patent and a new equipment. The equipment has a fair
value of P200,000.
Apr. 1 The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer of the machinery. Payment was
made by issuing bonds with a face value of P400,000 and by paying cash of P144,000. The value of the franchise is set at P160,000, while the
machine’s fair value is P360,000.
May 1 The company contracted for parking lots and waiting sheds at a cost P360,000 and P76,800, respectively. The work was completed and paid for
on June 1.
Dec. 31 The business was closed to permit taking the year-end inventory. During this time, required redecorating and repairs were completed at a cost of
P60,000.
Based on the above and the result of your audit, determine the cost of the following:
1. Land
a. P940,000 b. P1,005,200 c. P976,000 d. P1,052,800
2. Buildings
a. P4,645,600 b. P5,005,600 c. P4,762,400 d. P4,681,600
3. Machinery and Equipment
a. P360,000 b. P560,000 c. P576,615 d. P659,692
4. Land improvements
a. P360,000 b. P76,800 c. P436,800 d. P 0
5. Total
a. P6,764,400 b. P6,731,200 c. P6,718,092 d. P6,618,400
PROBLEM 3
Gabaldon Company’s property, plant and equipment and accumulated depreciation balances at December 31, 2009 are:
Cost Accumulated Depreciation
Machinery and equipment P1,380,000 P367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Depreciation policy:
a. Depreciation methods and useful lives:
i. Machinery and equipment – straight line ; 10 years
ii. Automobiles and trucks – 150% declining balance ; 5 years, all were acquired after 2005
iii. Leasehold improvements – straight line
b. Depreciation is computed to the nearest month.
c. Salvage values are immaterial except for automobiles and trucks which have estimated salvage values equal to 15% of cost
a. Gabaldon interest into a 12-year operating lease stating January 1, 2007. The leasehold improvements were completed on December 31, 2006 and the
facility was occupied on January 1, 2007
b. On July 1, 2010, machinery and equipment were purchased at a total invoice cost of P325,000. Installation cost of P44,000 was incurred.
c. On August 30, 2010, Gabaldon purchased new automobile for P25,000.
d. On September 30, 2010, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2009 was sold for P23,500.
e. On December 20, 2010, a machine with a cost of P17,000, a carrying amount of P2,975 on date of disposition, was sold for P4,000.
f. QUESTIONS:
1. The gain on sale of truck on September 30 is
a. P2,680 b. P6,500 c. P250 d. P0
2. The gain on sale of machinery on December 20, 2010 is
a. P1,025 b. P2,725 c. P13,000 d. P 0
3. The adjusted balance of the property, plant and equipment as of December 31, 2010 is
a. P1,919,000 b. 2, 388,500 c. P2,307,000 d. P2,351,000
4. The total depreciation expense for the year ended December 31, 2010 is
a. P185,402 b. P245,065 c. P138,000 d. P221,402
5. The carrying amount of the property, plant and equipment as of December 31, 2010 is
a. P1,567,497 b. P1,290,547 c. P1,578,547 d. P1,617,322
PROBLEM 4
On June 1, 2010, Natividad Mining Corp. acquired the rights to a coal mine containing an estimated reserves of 2,000,000 tons of coal. The company
estimated that 25,000 tons of coal would be extracted and sold each month. Cost allocable to coal was P7,000,000.
Also on June 1, 2010, the company purchased an equipment to be used in the production, costing P190,000 which has an estimated useful life of 10 years.
The equipment was expected to become obsolete after the coal deposits had been extracted from the mine and only P10,000 selling price of the equipment
could be expected. Production was in full blast since June 2, 2010.
1. What would be the depletion expense for the year ended December 31, 2010?
a. P1,050,000 b. P525,000 c. P306,250 d. P612,500
2. What would be the depreciation expense on the new equipment for the year ended December 31, 2010?
a. P18,000 b. P9,000 c. P15,750 d. P16,625
Problem 5
In connection with your audit of the Talavera Mining Corporation for the year ended December 31, 2010, you noted that the compant purchased for
P10,400,000 mining property estimated to contain 8,000,000 tons of ore. The residual value of the property is P800,000.
Building used in mine operations cost P800,000 and have estimate life of fifteen years with no residual value. Mine machinery costs P1,600,000 with an
estimated residual value P320,000 after its physical life of 4 years.
Following is the summary of the company’s operations for the first year of operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P 4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first out basis. Depreciation on the building is to be allocated as follows: 20% to operating expense, 80% to production.
Depreciation on machinery is chargeable to production.
Questions:
Based on the above and the result of your audit, answer the following (Disregard tax implications)
1. How much is the depletion for 2010?
a. P768,000 b. P192,000 c. P960,000 d. P1,040,000
2. Total inventoriable depreciation for 2010?
a. P400,000 b. P384,000 c. P362,667 d. P0
3. How much is the Inventory as of December 31, 2010?
a. P438,400 b. P425,600 c. P422,400 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2010?
a. P1,689,600 b. P1,702,400 c. P1,753,600 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the company’s first year of operations?
a. P1,494,400 b. P1,302,400 c. P1,289,600 d. P1,319,467
PROBLEM 6
On December 31, 2009, the statement of financial position of Tinio Company showed the following property and equipment after charging depreciation:
Building P3,000,000
Accumulated (1,000,000) P2,000,000
Equipment 1,200,000
Accumulated depreciation ( 400,000) 800,000
The company has adopted the revaluation model for the valuation of property and equipment. This has resulted in the recognition in prior periods of an
asset revaluation surplus for the building of P150,000. On December 31, 2009, an independent valuer assessed the fair value of the building to be
P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of December 31, 2009.
Based on the above and the result of your audit, determine the following: (Ignore deferred tax consequence)
1. Revaluation surplus as of December 31, 2009, after recording the revaluation
a. P250,000 b. P150,000 c. P100,000 d. P 0
2. Amount to be recognized in 2009 profit or loss related to the revaluation of property and equipment
a. P400,000 b. P300,000 c. P250,000 d. P150,000
3. Total depreciation in 2010
a. P289,000 b. P625,000 c. P100,000 d. P420,000
4. Carrying amount of property and equipment as of December 31, 2010
a. P2,500,000 b. P2,400,00 c. P2,080,000 d. P2,211,000
5. Revaluation surplus as of December 31, 2010
a. P100,000 b. P75,000c. P144,000 d. P 0
PROBLEM 7
On January 1, 2010, San Isidro Corporation decided to dispose of an item of plant that is carried in its records at a cost of P900,000, with accumulated
depreciation of P160,000. Depreciation on the plant since it was originally acquired has been charged at P10,000 per month. The plant will continue to be
operated until it is sold, at which time the operations of the plant will be outsourced. The company undertook all the necessary actions to be able to
classify the asset as held to for sale. It is estimated that it could sell the plant for its fair value, P720,000, incurring P20,000 selling costs in the process.
The plant has been depreciated at an amount of P10,000 per month.
On March 31, 2010, the plant had not been sold but, due to a shortage of this type of plant, there had been an increase in the fair value to P770,000. On
June 30, 2010, San Isidro sold the plant for P785,000, incurring P25,000 selling costs.
1. The impairment loss to be recognized on January 1, 2010 (date of classification as held for sale) is
a. P40,000 b. P20,000 c. P180,000 d. P 0
2. The depreciation expense to be recognized in 2010 is
a. P60,000 b. P56,760 c. P58,380 d. P 0
3. The gain to be recognized in profit or loss as a result of increase in the fair value of the plant is
a. P70,000 b. P50,000 c. P40,000 d. P 0
4. The gain to be recognized on sale of plant on June 30, 2010 is
a. P20,000 b. P10,000 c. P68,380 d. P45,000
AUDIT OF INTANGIBLE ASSETS

PROBLEM 1
The following are items that could be included in the Intangible Assets:
1.Investment in a subsidiary company P1,500,000
2.Timberland 2,000,000
3.Cost of engineering activity required to advance the design of a product to the manufacturing stage 120,000
4.Lease prepayments (6 months’ rent paid in advance) 60,000
5.Cost of equipment obtained under finance lease 700,000
6.Internally generated publishing title 230,000
7.Costs incurred in the information of the corporation 90,000
8.Operating losses incurred in the start-up of the business 560,000
9.Training costs incurred in start-up operations 80,000
10.Purchase of a franchise 1,200,000
11.Goodwill internally generated 300,000
12.Cost of testing in search for product alternatives 65,000
13.Goodwill acquired in the purchase of a business 640,000
14.Cost of developing a patent 140,000
15.Cost of purchasing a patent from an inventor 500,000
16.Legal cost incurred in securing a patent 70,000
17.Cost of a successful legal suit to protect the patent 230,000
18.Cost of a conceptual formulation of possible product alternatives 160,000
19.Cost of purchasing a copyright 900,000
20.Research and development costs 340,000
21.Long-term receivables 310,000
22.Cost of developing a trademark 61,000
23.Cost of purchasing a trademark 290,000
24.Computer software for a computer-controlled machine that cannot operate without that specific software130,000
25.Operating system of a computer 10,000
How much could be recognized as Intangible Assets?
a. P3,600,000 b. P3,740,000 c. P5,830,000 d. P3,530,000
PROBLEM 2
You noted the following items relative to the company’s Intangible assets in connection with your audit of the Paete Corporation’s financial statements for the year
2010.
 On January 1, 2010, Paete signed an agreement to operate as franchisee of Clear Copy Services, Inc. for an initial franchise of P680,000. Of this
amount, P200,000 was paid when the agreement was signed and the balance was payable in four annual payments of P120,000 each, beginning
January 1, 2011. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit
rate for a loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must be paid to the franchisor annually.
Paete’s revenue from the franchise for 2010 was P8,000,000. Paete estimates that the useful life of the franchise to be ten years.
 Paete incurred P624,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2010. Legal fees
and other costs associated with the registration of the patent totaled P131,200. Paete estimates that the useful life of the patent will be eight years.
 A trademark was purchased from Tsek Company for P320,000 on July 1, 2007. Expenditures for successful litigation in defense of the trademark totaling
P80,000 were paid on July 1, 2010. Paete estimates that the trademark’s usefull life will be indefinite
Based on the above and the result of your audit, determine the following: (Round off present value factors to 4 decimal places)
1. Total expenses related to franchise in 2010
a. P503,914 b. P535,200 c. P448,950 d. P454,964
2. Carrying amount of franchise as of December 31, 2010
a. P549,644 b. P494,680 c. P124,640 d. P123,482
3. Carrying amount of patent as of December 31, 2010
a. P131,200 b. P114,800 c. P124,640 d. P123,483
4. Carrying amount of trademark as of December 31, 2010
a. P320,000 b. P288,000 c. P304,000 d. P400,000
5. Carrying amount of intangible assets as of December 31, 2010
a. P1,046,800 b. P984,444 c. P1,009,480 d. P929,480
PROBLEM 3
On January 2, 2002, Nagcarlan Company spent P480,000 to apply for and obtain a patent on a newly developed product. The patent had an estimated
useful life of 10 years. At the beginning of 2006, the company spent P144,000 in successfully prosecuting an attempted patent infringement. At the beginning
of 2007, the company purchased for P280,000 a patent that was expected to prolong the life of its original patent by 5 years. On July 1, 2010, a
competitor obtained rights to a patent that made the company’s patent obsolete.
1. Carrying amount of patent as of December 31, 2006
a. P360,000 b. P240,000 c. P369,600 d.P355,200
2. Amortization of patent in 2007
a. P64,000 b. P64,960 c. P52,000 d. P63,520
3. Carrying amount of patents as of December 31, 2009
a. P448,000 b. P454,720 c. P444,640 d.P364,000
4. Loss on patent obsolescence in 2010
a. P338,000 b. P416,000 c. P448,000 d.P364,000
PROBLEM 4
On December 31, 2009, Siniloan Corporation acquired the following three intangible assets:
 A trademark for P450,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future,
indefinitely, without problem.
 Goodwill for P2,250,000. The goodwill is associated with Siniloan’s Laguna Manufacturing reporting unit.
 A customer list for P330,000. By contract, Siniloan has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list
will have economic value for just 3 years.
On December 31, 2010, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets:
a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P15,000 per year. The useful life of trademark still
extends beyond the foreseeable horizon.
b) The cash flows expected to be generated by the Laguna Manufacturing reporting unit is P375,000 per year for the next 22 years. Carrying amounts and
fair values of the assets and liabilities of the Laguna Manufacturing reporting units are as follows:
Carrying amount Fair values
Identifiable assets P4,050,000 P4,500,000
Goodwill 2,250,000 ?
Liabilities 2,700,000 2,700,000
c) The cash flows expected to be generated by the customer list are P180,000 in 2011 and P120,000 in 2012.
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%. Round off present value
factors to 4 decimal places):
1. Total amortization for the year 2010
a. P110,000 b. P174,285 c. P212,273 d. P130,285
2. Impairment loss for the year 2010
a. P135,714 b. P269,376 c. P200,000 d. P 0
3. Carrying amount of Trademark as of December 31, 2010
a. P450,000 b. P250,000 c. P385,715 d. P180,624
4. Carrying amount of Goodwill as of December 31, 2010
a. P2,250,000 b. P2,137,500 c. P2,147,727 d. P2,193,750
5. Carrying amount of Customer list as of December 31, 2010
a. P330,000 b. P264,000 c. P220,000 d. P 0
AUDIT OF LIABILITIES
PROBLEM 1
You were able to obtain the following from the accountant for Agdangan Corp. related to the company’s liabilities as of December 31, 2010.
Accounts payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000
The following additional information pertains to these liabilities.
a. All trade notes payable are due within six months from the end of the reporting period.
b. Bank notes-payable include two separate notes payable to Allied Bank.
i. A P300,000, 8% notes issued March 1, 2008, payable on demand. Interest is payable every six months.
ii. A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010, Agdangan negotiated a written agreement with Allied Bank
to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2011. The interest was paid on December 31, 2010.
c. The 10% mortgage note was issued October 1, 2007, with a term of 10 years. Terms of the note give the holder the right to demand immediate
payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010,
Agdangan is three months behind is paying its required interest payment
d. The 12% mortgage note was issued May 1,2004, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest
payable annually on April 30. A payment of P220,000 is due April 30, 2011. The payment includes interest of P180,000
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31.
1. Interest payable as of December 31, 2010 is
a. P155,000 b. P203,000 c. P143,000 d. P215,000
2. The portion of the Note Payable- bank to be reported under current liabilities as of December 31, 2010 is
a. P300,000 b. P800,000 c. P500,000 d. P 0
3. Total current liabilities as of December 31, 2010 is
a. P3,950,000 b. P3,938,000 c. P4,138,000 d. P3,998,000
4. Total noncurrent liabilities as of December 31, 2010 is
a. P1,760,000 b. P3,960,000 c. P2,560,000 d. P1,960,000
PROBLEM 2
The following information related to Candelaria Company’s obligations as of December 31, 2010. For each of the numbered items, determined the amount of any,
that should be reported as current liability in Candelaria’s December 31, 2010 statement of financial position.
1. Accounts payable:
Accounts payable per general ledger control amounted to P5,400,000, net of P240,000 debit balances in supplier’s accounts. The unpaid voucher file included
the following items that not had been recorded as of December 31, 2010:
a. A company- P224,000 merchandise shipped on December 31, 2010, FOB destination; received on January 10, 2011.
b. B, Inc. – P192,000 merchandise shipped on December 26,2010, FOB shipping point; received on January 16, 2011
c. C Super Services – P144,000 janitorial services for the three month period ending January 31, 2011.
d. Meralco- P67,200 electric bill covering the period December 16, 2010 to January 15, 2011.
On December 28, 2010, a supplier authorized Candelaria to return goods billed at P160,000 and shipped on December 20,2010. The goods were turned by
Candelaria on December 28, 2010, but the P160,000 credit memo was not received until January 6, 2011.
a. P5,923,200 b. P5,601,600 c. P5,712,000 d. P5,841,600
2. Payroll:
Items related to Candelaria’s payroll as of December 31, 2010 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 b. P832,000 c. P992,000 d. P912,000
3. Litigation:
In May, 2010, Candelaria became involved in a litigation. The suit being contested, but Candelaria’s lawyer believes there is probable that Candelaria may be
held liable for damages estimated in the range between P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other
amount.
a. P 0 b. P3,000,000 c. P2,000,000 d. P2,500,000
4. Bonus obligation:
Candelaria Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the tax rate of 30% and the correct
income before bonus and tax is P9,600,000. (Ignore the effects of other given items on net income.)
a. P722,600 b. P2,240,000 c. P395,000 d. P628,000
5. Note payable:
A note payable to the Bank of the Philippines Islands for P2,400,000 is outstanding on December 31, 2010. The note is dated October 1, 2009, bears
interest at 18%, and is payable in three equal annual installment of P800,000. The first interest and principal payment was made on October 1, 2010.
a. P800,000 b. P72,000c. P908,000 d. P872,000
6. Purchase commitment:
During 2010, Candelaria entered in a noncancellable commitment to purchase 320,000 units of inventory at fixed price of P5 per unit, delivery to be made
in 2011. On December 31, 2010, the purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the purchase contract were
delivered on January 28. 2011.
a. P 0 b. P1,408,000 c. P1,600,000 d. P192,000
7. Deferred taxes:
On December 31, 2010, Candelaria’s deferred income tax account has a 2010 ending credit balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000Cr
For depreciation on property and equipment 576,000Cr
For product warranty expense 179,200Dr
P772,800Cr
a. P772,800 b. P196,800 c. P952,000 d. P0
8. Product warranty:
Candelaria has a one year product warrant on selected items in its product line. The estimated warranty liability on sales made during 2009, which was
outstanding as of December 31, 2009, amounted to P416,000.
The warranty costs on sales made in 2010 are estimated at P1,504,000. Actual warranty costs incurred during 2010 are as follows:
Warranty claims honored on 2009 sales P416,000
Warranty claims honored on 2010 sales 992,000
Total warranty claims honored P1,408,000
a. P0 b. P96,000c. P1,504,000 d. P512,000
9. Premiums:
To increase sales, Candelaria Company inaugurated a promotional campaign on June 30, 2010. Candelaria placed a coupon redeemable for a premium in each
package of product sold. Each premium costs P100. A premium is offered to customers who send 5 coupons and a remittance of P30. The distribution cost
per premium is P20. Candelaria estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2010, the
following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 b. P1,600,000 c. P1,152,000 d. P576,000
PROBLEM 3
In your initial audit of Infanta Finance Co., you find the following ledger account balances.
Debit Credit
12%, 25-year bonds Payable, 2006 issue
01/01/2006 P6,400,000
Treasury Bonds
10/01/2010 P864,000
Bond Premium
01/01/2006 320,000
Bond Interest Expense
01/01/2010 384,000
07/01/2010 384,000
The bonds were redeemed for permanent cancellation on October 1, 2010 at 105 plus accrued interest
Based on the above and the result of your audit , determine the following: (Use straight line method to amortize premium or discount)
1. The adjusted balance of bonds payable as of December 31, 2010 is
a. P5,536,000 b. P6,400,000 c. P5,600,000 d. P4,000,000
2. The unamortized bond premium on December 31, 2010 is
a. P320,000 b. P224,000 c. P256,000 d. P235,200
3. The total bond interest expense for the year 2010 is
a. P756,400 b. P755,200 c. P731,600 d. P731,200
4. The gain or loss on partial bond redemption is
a. P7,600 loss b. P72,400 loss c. P7,600 gain d. P72,400 gain
PROBLEM 4
On January 1, 2009, Perez Corporation issued 5,000 of its 5 year. P1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield)
of 9%. Interest is payable each December 31. Perez uses the effective interest method of amortization. On December 31, 2010, the 3,000 bonds were
extinguished early through acquisition in the open market by Perez for P2,970,000 plus accrued interest.
Based on the above and the result of your audit, determine the following : (Round off present value factors to four decimal places.)
1. The issue price of the bonds on January 1, 2009 is
a. P5,388,835 b. P4,630,655 c. P5,282,135 d. P5,000,000
2. The carrying amount of the bonds on December 31, 2009 is
a. P4,755,930 b. P5,453,840 c. P5,323,830 d. P5,000,000
3. The gain on early retirement of bonds on December 31, 2010 is
a. P116,442 b. P266,811 c. P181,785 d. P 0
PROBLEM 5
In connection with your audit of Pagbilao Corporation, you gathered the following liability and equity account balances as December 31, 2009:
11% bonds payable, at face value P10,000,000
Premium on bonds payable 704,760
Share capital 16,000,000
Share premium 4,590,000
Retained earnings 4,930,000
Treasury shares, at cost 650,000
Transaction during 2010 and other information relating to the Corporation’s liability and equity accounts were as follows:
a) The bonds were issued on December 31, 2007, for P10,756,000 to yield 10%. The bonds mature on December 31, 2022. Interest is payable annually
on December 31. The Corporation uses the effective interest method to amortize bond premium.
b) At December 31, 2009, the Corporation had 4,000,000 , P10 par, authorized ordinary shares.
c) On January 15, 2010, the Corporation reissued 30,000 of its 50,000 treasury shares for P550,000. The treasury shares had been acquired on February
28, 2009.
d) On November 2, 2010, the Corporation borrowed P8,000,000 at 9% evidenced by a note payable to ABC Bank. The note is payable in five annual
principal installments of P1,600,000. The first principal and interest payment is due on November 2, 2011.
e) On December 31, 2010, the Corporation owned 20,000 ordinary shares of Awoo Corp. which represented a 1% ownership interest. Pagbilao accounts for
this as available for sale securities. The shares were purchased on May 4, 2009 at P20 per share. The market price was P21 per share on December
31, 2009, and P18 per share on December 31, 2010.
Based on the above and the result of your audit, answer the following questions:
1. How much is the carrying of the bonds payable on December 31, 2010?
a. P10,675,236 b. P10,704,760 c. P9,324,764 d. P10,654,360
2. How much is the treasury shares balance as of December 31, 2010?
a. P200,000 b. P650,000 c. P260,000 d. P100,000
3. How much is the noncurrent portion of the note payable to bank as of December 31, 2010?
a. P6,400,000 b. P1,600,00 c. P8,000,000 d. P 0
4. How much is the 2010 total interest expense?
a. P1,220,000 b. P1,190,476 c. P1,249,524 d. P1,187,236
5. How much is the net unrealized loss on available for sale securities as of December 31, 2010?
a. P60,000 b. P40,000 c. P20,000 d. P 0
PROBLEM 6
Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor of computers , Luna purchased a new system on December 31,
2009. The system was delivered the same day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed the:
Following information relating to lease transaction:
Cost of system to Luna P550,000
Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) P40,000
Luna’s implicit rate of interest 12%
General’s incremental borrowing rate 14%
Date of first lease payment Dec. 31, 2009
Additional information is as follows:
a) At the end of the lease, the system will revert to Luna
b) General is aware of Luna’s rate of implicit interest
c) The lease rental consists of equal payments.
Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places.)
1. The annual lease payment under the lease is
a. P110,717 b. P95,950c. P102,665 d. P91,664
2. The total financial revenue to be earned by the lessor over the lease term is
a. P257,600 b. P183,312 c. P271,320 d. P335,736
3. The interest income to be recognized by the lessor in 2010 is
a. P53,680 b. P52,714 c. P54,486 d. P52,547
4. The total expenses related to the lease that will be recognized by the lessee in 2010 is
a. P121,464 b. P130,792 c. P112,630 d. P119,276
5. The amount to be reported under current liability under finance lease as of December 31, 2010 is
a. P60,239 b. P48,611 c. P35,615 d. P64,963
PROBLEM 7
Catanauan Incorporated uses leases as a method of selling its products. In early 2009, Catanauan completed construction of a passenger ferry for use between
Quiapo and Guadalupe. On April 1, 2009, the ferry was leased to the Balik-Balik Ferry line on a contract specifying that ownership of the ferry will transfer
to the lessee at the end of the lease period. The ferry is expected to be economically useful for 25 years. Annual lease payments do not include executory
costs. Other terms of the agreement are as follows:
Original cost of the ferry P1,500,000
Lease payments P225,000
Estimated residual value P78,000
Implicit rate 10%
Date of first lease payment April 1, 2009
Lease period 20 years
PV of an ordinary annuity of 1 for 20 periods at 10% 8.5136
PV of an annuity due of 1 for 20 periods at 10% 9.3649
PV of 1 for 20 periods at 10% 0.1486
Based on the above and the result of your audit, determine the following.
1. Total finance income that will be earned by the lessor over the lease term
a. P2,459,306 b. P2,650,849 c. P2,392,897 d. P2,584,440
2. The profit on sale to be recognized by the lessor
a. P607,103 b. P427,151 c. P415,560 d. P618,694
3. Liability under finance lease to be reported by the lessee as of December 31, 2010
a. P1,634,616 b. P1,845,313 c. P1,858,063 d. P1,647,366
4. Amount to be reported under current liabilities as liability under finance lease by the lessee as of December 31, 2010
a. P61,538 b. P39,194 c. P40,469 d. P60,263
5. Depreciation expense to be recognized by the lessee for the year 2009
a. P61,221 b. P55,127 c. P76,091 d d. P60,873
PROBLEM 8
Guinayangan Co. purchases land and constructs a service station and car wash for a total of P6,750,000. At January 2, 2010, when construction is
completed, the facility and land on which it was constructed are sold to a major oil company for P7,500,000 and immediately leased from the oil company
by Guinayangan. Fair value of the land at time of the sale was P750,000. The lease is a 10 year, noncancelable lease. The agreement requires equal rental
payments at the end of each year beginning December 31, 2010. The interest rate implicit in the lease is 10%. Guinayangan uses straight-line depreciation
for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to
Guinayangan at termination of the lease.
Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places)
1. The amount of annual lease payment is
a. P1,098,526 b. P1,220,584 c. P976,467 d. P1,109,632
2. The total lease-related expenses to be recognized by the lessee during 2010 is
a. P1,000,000 b. P1,425,000 c. P1,0875,000 d. P1,200,000
3. The total lease-related income to be recognized by the lessee during 2010 is
a. P75,000 b. P50,000 c. P750,000 d. P0
4. The total lease-related income to be recognized by the lessor during 2010 is
a. P675,000 b. P600,000 c. P750,000 d. P 0
5. The amount to be reported under current liabilities as liability under finance lease as of December 31, 2010 is
a. P517,642 b. P470,595 c. P414,114 d. P465,879
PROBLEM 9
On December 31, 2010, Maca Company was indebted to Lelon Co. on a P2,000,000 , 105 note. Only interest had been paid to date. Due to its financial
difficulties Maca Company has negotiated a restructuring of its note payable. The parties agreed that Maca Company would settle the debt on the following terms.
 Settle one-half of the note by transferring land with a recorded value of P800,000 and a fair value of P900,000
 Settle one-fourth of the note by transferring 200,000 shares of P1 par ordinary shares with a fair market value of P15 per share
 Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5%, extend the due date three years from the date of
restructuring and reducing the principal to P300,000.
1. Gain on extinguishing of debt on the 1 million note
a. P300,000 b. P200,000 c. P100,000 d. P 0
2. Share premium to be recognized on the settlement of P500,000 note by issuing ordinary shares
a. P2,500,000 b. P300,000 c. P2,300,000 d. P 0
3. Total gain on extinguishment of debt
a. P437,306 b. P337,306 c. P550,006 d. P 0
4. Interest expense in 2011
a. P15,000 b. P26,269 c. P7,500 d. P13,134
5. Carrying amount of the note payable as of December 31, 2011
a. P273,963 b. P262,694 c. P142,494 d. P300,000
PROBLEM 10
The following differences enter into the reconciliation of accounting profit and taxable profit of Mulanay Company for the year ended December 31, 2010, its first
year of operations.
Life insurance expense P100,000
Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred on the books
but appropriately recognized in taxable profit 400,000
Interest income from long-term certificate of deposit 200,000
a. On July 1, 2010 Mulanay paid insurance premium of P200,000 on the life of an officer with Mulanay Company as beneficiary.
b. Excess tax deprecation will reverse equally over a four-year period, 2011 – 2014
c. The warranty liability is the esstimated warranty cost that was recognized as expense in 2010 but deductible for tax purposes when actually paid.
d. It is estimated that litigation liability will be paid in 2014
e. In January 2010, Mulanay Company incurred P4,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was
capitalized and amortized over 4 years for accounting purposes. However, the total amount was expensed in 2010 for tax purposes.
f. Rent income will be recognized during the last year of the lease, 2014.
g. Interest income from the from long-term certificate of deposit is expected to be P200,000 each year until their maturity At the end of 2014
h. Accounting profit for 201 is P10,000,000. Tax rate is 35%.
Based on the above and the result of your audit, compute for the following:
1. Deferred tax liability
a. P1,050,000 b. P1,890,000 c. P2,100,000 d. P1,750,000
2. Deferred tax asset
a. P385,000 b. P1,085,000 c. P2,800,000 d. P1,820,000
3. Current tax expense
a. P2,100,000 b. P1,750,000 c. P2,800,000 d. P1,820,000
4. Tax expense
a. P3,535,000 b. P3,500,000 c. P3,465,000 d. P4,830,000
AUDIT OF EQUITY
PROBLEM 1
Alcoy Corporation’s post-closing trial balance at December 31, 2010 was as follows:
Alcoy Corporation
Post – Closing Trial Balance
December 31, 2010
Debit Credit
Accounts payable P459,000
Accounts receivable P963,000
Reserve for depreciation 360,000
Reserve for doubtful accounts 54,000
Premium on ordinary shares 1,800,000
Gain on sale of treasury shares 450,000
Bonds payable 720,000
Building and equipment 1,980,000
Cash 396,000
Dividends payable on preference shares 7,200
Ordinary share capital (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
Available-for-sale securities at fair value 513,000
Trading securities at fair value 387,000
Net unrealized loss on available-for-sale securities 45,000
Preference shares capital (P50 par value) 900,000
Prepaid expenses 72,000
Donated capital 800,000
Share warrants outstanding 208,000
Retained earnings 415,800
Treasury shares- ordinary, at cost 324,000
Totals P6,480,000 P6,480,000
At December 31, 2010, Alcoy had the following number of ordinary and preference shares:
Ordinary Preference
Authorized 900,000 90,000
Issued 270,000 18,000
Outstanding 252,000 18,000
The dividends on preference shares are P0.40 cumulative. In addition, the preference share has a preference in liquidation of P50 per share.
Based on the above and the result of your audit, determine the following as of December 31, 2010:
1. Share premium / Additional paid-in capital
a. P3,213,000 b. P3,258,000 c. P3,050,000 d. P2,600,000
2. Total contributed capital
a. P4,428,000 b. P4,220,000 c. P3,770,000 d. P1,170,000
3. Unappropriated retained earnings
a. P415,800 b. P4,200,00 c. P3,770,000 d. P1,170,000
4. Total equity
a. P4,266,800 b. P4,519,800 c. P4,888,800 d. P4,474,800
PROBLEM 2
The equity section of the Austrias Inc. showed the following data on December 31, 2009: Share capital, P3 par, 300,000 shares authorized, 250,000 share
issued and outstanding, P750,000; Share premium – excess over par, P7,050,000; Share premium – share options, P150,000; Retained earnings, P480,000.
The share options were granted to key executives and provided them the right to acquire 30,000 ordinary shares at P35 per share. Each option has a fair
value of P5 at the time the options were granted.
The following transactions occurred during 2010:
Feb. 1 Key executives 4,500 options outstanding at December 31, 2009. The market price per share was P44 at this time
Apr.1 The company issued bonds of P2,000,000 at par, giving each P1,000 bond a detachable warrant enabling the holder to purchase two
ordinary shares at P40 each for a 1 year period. The bonds would sell at P996 per P1,000 bond without the warrant.
July 1 The company issued rights to shareholders (one right on each share, exercisable within a 30-day period) permitting holders to acquire one
share at P40 with every 10 rights submitted. All but 6,000 rights were exercised on July 31, and the additional shares were issued.
Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised.
Dec . 1 The market price per share dropped to P33 and options came due. Because the market price was below the option price, no remaining
options were exercised.
Dec. 31 Profit for 2010 was P250,500.
1. Share capital
a. P777,300 b. P848,700 c. P833,850 d. P850,050
2. Total share premium
a. P7,522,200 b. P8,402,800 c. P8,219,650 d. P8,419,450
3. Total contributed capital
a. P8,299,500 b. P9,053,500 c. P9,269,500 d. P9,251,500
4. Retained earnings
a. P580,500 b. P858,000 c. P730,500 d. P654,150
5. Total equity
a. P10,000,000 b. P9,784,000 c. P9,030,000 d. P9,982,000
PROBLEM 3
Bogo Corporation began operations on January 1, 2010. The company was authorized to issue 60,000, P10 par value, ordinary shares and 120,000 shares of
10%, P100 par value convertible preference shares.
In connection with your audit of the company’s financial statements, you noted the following transactions involving shareholders’ equity during 2010:
Jan. 1 Issued 1,500 ordinary shares to the corporation promoters in exchange for equipment valued at P510,000 and services valued at P210,000. The
property costs P270,000 3 years ago and was carried on the promoters’ books at P150,000.
Jan. 31 Issued 30,000 convertible preference shares at P150 per share. Each share can be converted to five ordinary shares. The corporation paid
P225,000 to an agent for selling the shares
Feb. 15 Sold 9,000 ordinary shares at P390 per share. The corporation paid issue costs of P75,000
May 30 Received subscriptions for 12,000 ordinary shares at P450 per share
Aug. 30 Issued 2,100 ordinary shares and 4,200 preference share in exchanged for a building with a fair value of P1,530,000. The building was
originally purchased for P1,140,000 by the investors and has a carrying amount of P660,000. In addition, 1,800 ordinary shares were sold for
P720,000 cash
Nov. 15 Payments in full for half of the subscriptions and partial payments for the rest of the subscriptions were received. Total ash received was
P4,200,000. Shares stock were issued for the dully paid subscriptions. The balance is collectible next year.
Dec. 1 Declared a cash dividend of P10 per share on preference shares, payable on December 31 to shareholders of record on December 15, and 20
per share cash dividend on ordinary shares, payable on January 15, 2011 to shareholders of record on December 15
Dec. 31 Paid the preference share dividend.
Profit for the first year of operations was P1,800,000
1. Ordinary share capital
a. P204,000 b. P144,000 c. P264,000 d. P186,000
2. Share premium-preference
a. P1,500,000 b. P1,545,000 c. P1,275,000 d. P1,860,000
3. Share premium – ordinary
a. P8,211,000 b. P10,851,000 c. P11,121,000 d. P10,032,000
4. Retained earnings
a. P1,050,000 b. P1,170,000 c. P930,000 d. P1,458,000
5. Total equity
a. P17,295,000 b. P16,950,000 c. P15,810,000 d. P17,010,000
PROBLEM 4
In connection with your audit of the Colon Corporation, you were able to obtain the following information pertaining to the corporation’s equity accounts.
Colon Corporation has 32,000, P2 par value, ordinary shares authorized. Only 75% of these shares have been issued, and of the shares issued, only 22,000 are
outstanding. On December 31, 2009, the equity section revealed that the balance in Share premium –ordinary was P832,000, and the Retained Earnings balance
was P220,000. The Treasury shares were purchased at an average price of P37.50 per share.
During 2010, Colon had the following transactions:
Jan.15 Colon issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative preference shares; 4,000 shares are authorized
Feb. 01 Colon sold 3,000 newly issued ordinary shares at P42 per share
Mar. 15 Colon declared a cash dividend on ordinary shares for P43 per share.
Employees exercised 2,000 share options granted in 2004. When the options were granted, each option entitled the employees to purchase 1
ordinary share for P50 per share. The share price on the date of grant was also P50 per share. Colon issued new shares to the employees.
May 01 Colon declared a 10% share dividend to be distributed on June 1 to shareholders of record on May 7. The market price of the ordinary share was
P50 per share on May 1
31 Colon sold 300 treasury shares reacquired on April 15 and an additional 400 shares costing P15,000 that had been on hand since the beginning
of the year. The selling price was P57 per share
Sept. 15 The semiannual cash dividend on ordinary shares was declared, amounting to P0.15 per share. Colon also declared the yearly dividend on
preference shares. Both are payable on October 15 to shareholders of record on October 1.
Profit for 2010 was P100,000.
Based on the above and the result of your audit, determine the balances of the following as of December 31, 2010:
1. Preference share capital
a. P86,000 b. P90,000 c. P80,000 d. P84,000
2. Ordinary share capital
a. P63,320 b. P23,320 c. P183,320 d. P58,000
3. Share premium
a. P1,175,680 b. P1,068,000 c. P1,195,680 d. P1,099,680
4. Treasury shares
a. P64,300 b. P77,200 c. P92,200 d. P75,000
5. Total retained earnings
a. P74,756 b. P99,756 c. P183,250 d. P174,756

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AUDIT OF CASH AND CASH EQUIVALENT

DM97- Customers DAIF check CM83- Note collected by the bank

Balance P58,640 12/31/10 CDJ P304,000

Your examination disclosed the following additional information:

AUDIT OF INVESTMENTS IN EQUITY AND DEBT SECURITIES

AUDIT OF PROPERTY, PLANT AND EQUIPMENT

AUDIT OF INTANGIBLE ASSETS

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