1.

In which of the following circumstances would an auditor usually choose between expressing a qualified opinion
or disclaiming an opinion?
a. Departure from the requirements of the applicable financial reporting framework.
b. Unreasonable justification for a change in accounting principle.
c. Inability to obtain sufficient appropriate audit evidence.
d. Inadequate disclosure of accounting policies.

2. Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-
prepared data files rather than manually prepared files?
a. Random error associated with processing similar transactions in different ways is usually greater.
b. It is usually more difficult to compare recorded accountability with physical count of assets.
c. Attention is focused on the accuracy of the programming process rather than errors in individual
transactions.
d. It is usually easier for unauthorized persons to access and alter the files.

3. Which of the following is an example of a validity check?

a. The computer ensures that a numerical amount in a record does not exceed some predetermined amount.
b. As a computer corrects errors and data are successfully resubmitted to the system, the causes of the errors
are printed out.
c. The computer flags any transmission for which the control field value did not match that of an
existing file record.
d. After data for a transaction are entered, the computer sends certain data back to the terminal for
comparison with data originally sent.

4. An auditor anticipates assessing control risk at a low level in a computerized environment. Under these
circumstances, on which of the following activities would the auditor initially focus?
a. Programmed control activities
b. Application control activities
c. Output control activities
d. General control activities

5. To obtain evidence that on-line access controls are properly functioning, an auditor most likely would
a. Create checkpoints at periodic intervals after live data processing to test for unauthorized use of the
system.
b. Examine the truncation log to discover whether any transactions were lost or entered twice due to a
system malfunction.
c. Enter invalid identification numbers or passwords to ascertain whether the system rejects them.
d. Vouch a random sample of processed transactions to assure proper authorization.

6. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be
processed together without client operating personnel being aware of the testing process?
a. Integrated test facility
b. Input controls matrix
c. Parallel simulation
d. Data entry monitor

7. In creating lead schedules for an audit engagement, a CPA often uses automated work paper software. What client
information is needed to begin this process?
a. Interim financial information such as third quarter sales, net income, and inventory and receivable
balances.
b. Specialized journal information such as the invoice and purchase order numbers of the last few sales and
purchases of the year.
c. General ledger information such as account numbers, prior year account balances, and current
year unadjusted information.
d. Adjusting entry information such as deferrals and accruals, and reclassification journal entries.

8. Which of the following is probably the most significant effect of database technology on accounting?
a. Quicker access to and greater use of accounting information in decision-making.
b. Replacement of the double-entry system.
c. Change in the nature of financial reporting.
d. Elimination of traditional records such as journals and ledgers.

9. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have
unexpected relationships. The results of these procedures most likely indicate that
a. The communication with the audit committee should be revised.
b. Irregularities exist among the relevant account balances.

AUDITING PROBLEM – QUIZ 2 Page 1

 c. Additional substantive test of details are required.
d. Internal control activities are not operating effectively.

10. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s
relationship to the total entity because
a. This may permit the audit of intercompany account balances to be performed as of concurrent dates.
b. This may reveal whether particular transactions would have taken place if the parties had not been related.
c. The business structure may be deliberately designed to obscure related party transactions
d. Intercompany transactions may have been consummated on terms equivalent to arm’s length transactions.

11. Which of the following statements best expresses the auditor’s responsibility with respect to facts discovered after
the date of the auditor’s report but before the date the financial statements are issued?
a. The auditor should amend the financial statements.
b. If the facts discovered will materially affect the financial statements, the auditor should issue a new report
which contains either a qualified opinion or an adverse opinion.
c. The auditor should consider whether the financial statements need amendment, discuss the matter
with management, and consider taking actions appropriate in the circumstances.
d. The auditor should withdraw from the engagement

12. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about
an entity’s ability to continue as a going concern?
a. Restrictions on the disposal of principal assets are present.
b. Usual trade credit from suppliers is denied.
c. Significant related party transactions are pervasive.
d. Arrearages in principal stock dividends are paid.

13. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to continue as a
going concern for a reasonable period of time, the auditor’s responsibility is to
a. Consider the adequacy of disclosure about the client’s possible inability to continue as a going
concern.
b. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the
financial statements.
c. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.
d. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that specifically refers
to “substantial doubt” and “going concern.”

14. A written representation from a client’s management that, among other matters, acknowledges responsibility for
the fair presentation of financial statements, should normally be signed by the
a. Chief financial officer and the chair of the board of directors.
b. Chief executive officer and the chief financial officer.
c. Chief executive officer, the chair of the board of directors, and the client’s lawyer.
d. Chair of the audit committee of the board of directors.

15. Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel is most likely
to lead to
a. An adverse opinion.
b. A qualified opinion or an adverse opinion.
c. An unmodified opinion.
d. A qualified opinion or a disclaimer of opinion.

16. The auditor should consider the status of legal matters up to the
a. Balance sheet date.
b. Date of the auditor’s report.
c. Date of approval of the financial statements.
d. Date of issuance of the financial statements.

17. Which of the following statements best expresses the auditor’s responsibility with respect to facts which become
known to the auditor after the date of the auditor’s report but before the date the financial statements are issued?
a. The auditor should amend the financial statements.
b. If the facts discovered will materially affect the financial statements, the auditor should issue a new report
which contains either a qualified opinion or an adverse opinion.
c. The auditor should consider whether the financial statements need amendment, discuss the matter
with management, and consider taking actions appropriate in the circumstances.
d. The auditor should withdraw from the engagement.

18. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures
concerning the audited financial statements. Unless

AUDITING PROBLEM – QUIZ 2 Page 2

 a. Final determinations or resolutions are made of contingencies that had been disclosed in the financial
statements.
b. Information about an event that occurred after the date of the auditor’s report comes to the auditor’s
attention.
c. The control environment changes after issuance of the report.
d. Information, which existed at the report date and may affect the report, comes to the auditor’s
attention.

19. The Basis of Opinion section of the auditor’s report shall

a. State that the financial statements have been audited.
b. State that the objective of the auditor is to issue an auditor’s report that includes the auditor’s opinion.
c. Describe management’s responsibility for preparing the financial statements in accordance with the
applicable financial reporting framework.
d. State that the audit was conducted in accordance with Philippine Standards on Auditing (PSAs).

20. Which of the following management’s responsibilities shall be described in the Responsibilities for the Financial
Statements section the auditor’s report?
a. Responsibility for preparing the financial statements in accordance with the applicable financial
reporting framework.
b. Responsibility for obtaining reasonable assurance about whether the financial statements as a whole are
free from material misstatement.
c. Responsibility to exercise professional judgment and maintain professional skepticism throughout the
audit.
d. Responsibility to identify and assess the risks of material misstatement of the financial statements.

21. PSA 705 (Revised), Modification to the Opinion in the Independent Auditor’s Report, prohibits the auditor from
communicating key audit matters when the auditor expresses a/an
a. Unmodified opinion.
b. Qualified opinion.
c. Adverse opinion.
d. Disclaimer of opinion.

22. An independent auditor discovers that a payroll supervisor of the company being audited has misappropriated P
50,000. The company’s total assets and income before tax are P 70 million and P 15 million, respectively.
Assuming no other issues affect the report, the auditor’s report will most likely contain a/an
a. Unmodified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Scope qualification

23. The following statements relate to the auditor’s reporting responsibilities regarding comparatives. Which is
incorrect?
I. For corresponding figures, the auditor’s report only refers to the financial statements of the
current period.
II. For comparative financial statements, the auditor’s report refers to each period that financial
statements are presented.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

24. In which of the following circumstances would an auditor most likely add an Emphasis of Matter paragraph to the
auditor’s report while expressing an unmodified opinion?
a. The auditor is asked to report on a single financial statement (e.g., statement of financial position).
b. There is significant doubt about the entity’s ability to continue as a going concern.
c. Management’s estimates of the effects future events are unreasonable.
d. Certain transactions cannot be tested because of management’s records retention policy.

25. The audit report date on an unmodified report indicates

a. The last date on which users may institute a lawsuit against either the client or the auditor.
b. The last day of the auditor’s responsibility for the review of significant events occurring after the
end of the reporting period.
c. The end of the reporting period.
d. The date on which the financial statements were filed with the Securities and Exchange Commission.

26. Which of the following statements is a basic element of the auditor’s report?
a. The auditor is responsible for the preparation and fair presentation of the financial statements.
b. The financial statements are consistent with those of the prior period.

AUDITING PROBLEM – QUIZ 2 Page 3

 c. An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements.
d. The disclosures provide reasonable assurance that the financial statements are free of material
misstatements.

27. A practitioner who reviews the financial statements of an entity should issue a report stating that a review
a. Provides negative assurance that internal control is functioning as designed.
b. Provides only limited assurance that the financial statements are fairly presented.
c. Is substantially more in scope than a compilation.
d. Is a limited assurance engagement.

28. When compiling an entity’s financial statements, an accountant would be least likely to
a. Perform analytical procedures designed to identify relationships that appear to be unusual.
b. Read the compiled financial statements and consider whether they appear to include adequate disclosure.
c. Obtain an acknowledgement from management of its responsibility for the financial statements.
d. Plan the work so that an effective engagement will be performed.

29. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to express an
opinion on one or more specified accounts or items of a financial statement provided that
a. The accountant’s report does not enumerate the procedures performed.
b. The financial statements are prepared in accordance with a comprehensive basis of accounting other than
generally accepted accounting principles.
c. Distribution of the accountant’s report is restricted.
d. The accountant is also the entity’s continuing auditor.

30. When an accountant examines prospective financial statements, the accountant’s report should include a separate
paragraph that
a. Contains an opinion as to whether the prospective financial statements are properly prepared on
the basis of the assumptions and are presented in accordance with generally accepted accounting
principles in the Philippines.
b. Provides an explanation of the difference between an examination and an audit.
c. States that the accountant is responsible for events and circumstances up to 1 year after the report’s date.
d. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective financial
statements.

31. The following are examples of special purpose frameworks, except

a. A tax basis of accounting for a set of financial statements that accompany an entity’s tax return.
b. The cash receipts and disbursements basis of accounting for cash flow information that an entity may be
requested to prepare for creditors.
c. Philippine Financial Reporting Standards (PFRS) promulgated by the Financial Reporting
Standards Council (FRSC).
d. The financial reporting provisions of a contract (for example, a financing agreement).

32. An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of accounting
should include all of the following, except
a. A statement that the audit was conducted n accordance with Philippine Standards on Auditing.
b. A reference to the note to the financial statements that describes the cash receipts and disbursements basis
of accounting.
c. A statement that the cash receipts and disbursements basis of accounting is not a comprehensive
basis of accounting.
d. An opinion as to whether the financial statements are presented fairly, in all material respects, in
accordance with the cash receipts and disbursements basis of accounting.

33. Which of the following statements is correct with respect to an auditor’s report expressing an opinion on a
specific element on a financial statement?
a. The auditor who has expressed an adverse opinion on the financial statements as a whole can never
express an unmodified opinion on a specific element in these financial statements.
b. The materiality determined for a specific element of a financial statement may be lower than the
materiality determined for the entity’s complete set of financial statements.
c. Such a report can only be issued if the auditor is also engaged to audit the entire set of financial
statements.
d. The attention devoted to the specific element is usually less than it would be if the financial statements as
a whole were audited.

34. In the auditor’s report on summary financial statements that are derived from an entity’s audited financial
statements, a CPA should indicate that the
a. CPA has audited and expressed an opinion on the complete financial statements.
b. CPA expresses limited assurance that the financial statements are presented in accordance with PFRS.

AUDITING PROBLEM – QUIZ 2 Page 4

 c. Summary financial statements are not fairly presented in all material respects.
d. Summary financial statements are prepared in accordance with special purpose financial reporting
framework.

35. The report on an agreed-upon procedures engagement should contain

a. Identification of the purpose for which the agreed-upon procedures were performed.
b. An expression of positive assurance based on the specific procedures performed.
c. A statement that the auditor is independent of the entity.
d. A general description of the procedures performed.

PROBLEM NO. 1

You obtain the following information pertaining to Red Co.’s property, plant, and equipment for 2005 in connection with
your audit of the company’s financial statements.

Audited balances at December 31, 2004:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
Accumulated depreciation – Buildings P 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation – Machinery and Equipment 6,250,000
Delivery Equipment 2,875,000
Accumulated Depreciation – Delivery Equipment 2,115,000

Depreciation Data: Depreciation Method Useful Life

Buildings 150% declining – balance 25 years

Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight-line -

Transaction during 2005 and other information are as follows:

a. On January 2, 2005, Red purchased a new truck for P500,000 cash and traded-in a 2-year-old truck with a cost of
P450,000 and a book value of P135,000. The new truck has a cash price of P600,000; the market value of the old
truck is not known.
b. On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyed by fire. Red recovered
P387,500 from its insurance company.
c. On May 1, 2005, cost of P4,200,000 were incurred to improve leased office premises. The leasehold improvements
have a useful life of 8 years. The related lease terminates on December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional cost of
P125,000 for freight and P625,000 for installation were incurred.
e. Red determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2005, would have
been depreciated at a total amount of P450,000 for the year ended December 31, 2005.
The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute depreciation to the
nearest month.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
36. How much is the Accumulated depreciation – Buildings as of December 31, 2005?
a. P7,777,500 b. P7,103,700 c. P7,982,850 d. P8,377,500

Depreciation Depreciation
Book Value Rate Expense
Year 1 30,000,000.00 0.06 1,800,000.00
Year 2 28,200,000.00 0.06 1,692,000.00
Year 3 26,508,000.00 0.06 1,590,480.00
Year 4 24,917,520.00 0.06 1,495,051.20
Year 5 23,422,468.80 0.06 1,405,348.13
nearest 7,982,879.33

37. How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2005?
a. P8,556,875 b. P8,844,375 c. P8,614,375 d. P8,830,000

AUDITING PROBLEM – QUIZ 2 Page 5

 depreciation expense
Machinery and equipment 22,500,000.00 562,500.00 from 01/01/05-04/01/05
Less: Destroyed by fire 575,000.00
depreciation expense
Balance 21,925,000.00 1,644,375.00 from 04/01/05-12/31/05
Number of years remaining

machine destroyed by fire 575,000.00

number of years 10.00
annual depreciation 57,500.00
Expired life 5 years
Accumulated depreciation of machine destroyed (287,500.00)

Acquisition cost of new machinery 7,750,000.00

useful life 10 years
Depreciation expense from 07/01/05-12/31/05 387,500.00

Accumulated Depreciation 12/31/04 6,250,000.00

Accumulated Depreciation 12/31/05 8,556,875.00

38. How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2005?
a. P2,715,000 b. P2,805,000 c. P2,490,000 d. P2,400,000

Depreciation Expense 1/1/05-12/31/05 450,000.00

Depreciation expense related to trade in equipment
450,000*2/10 (90,000.00)
Depreciation expense, adjusted 360,000.00
Accumulated depreciation 12/31/04 2,115,000.00
Accumulated Depreciation of traded in equipment
450,000*4/10+450,000*3/10 (315,000.00)
Depreciation expense - new delivery equipment
600000*4/10 240,000.00
Total accumulated depreciation 2,400,000.00

39. How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2005?
a. P525,000 b. P420,000 c. P350,000 d. P630,000

Leasehold improvements 4,200,000

Remaining lease term (05/1/05-12/31/11) 80 months
Depreciation expense per month 52,500
8 months
Accumulated depreciation 12/31/05 420,000

40. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2005?
a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)

Loss on Trade – in 35,000

Gain from insurance claims 100,000
Net gain 65,000

Solution to Problem 1
a. Delivery Equipment – New 600,000
Accumulated Depreciation – Delivery Equipment 315,000
Loss on Trade – in 35,000
Delivery Equipment – Old 450,000

AUDITING PROBLEM – QUIZ 2 Page 6

 Cash 500,000

b. Cash 387,500
Accumulated Depreciation – Mach & Equip 287,500
Mach & Equip 575,000
Gain from insurance claims 100,000

c. Leasehold Improvements 4,200,000

Cash 4,200,000

d. Mach & Equip. 7.750,000

Cash 7,750,000

e. Depreciation Expense – Delivery Equipment 360,000

Depreciation Expense – Delivery Equipment 360,000

PROBLEM NO. 2

Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan 2 Paid legal fees of P 230,000 and stock certificate costs of P 97,000 to complete organization of the
corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and candy to
create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.

Apr. 1 Patented a newly developed process with costs as follows:

Legal fees to obtain patent P 543,000
Patent application and licensing fees 157,000
Total P 700,000

It is estimated that in 10 years other companies will have developed improved processes, making the Pink
Corporation process obsolete.

May 1 Acquired both a license to use a special type of container and a distinctive trademark to be printed on the
container in exchange for 9,000 shares of Pink’s no-par common stock selling for P100 per share. The
license is worth twice as much as the trademark, both of which may be used for 9 years.

July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed in future
research projects.

Dec. 31 Incurred salaries for an engineer and chemist involved in product development totaling P 1,434,400 in
2005.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
41. Cost of patent
a. P 0 b. P 157,000 c. P 543,000 d. P 700,000

42. Cost of licenses

a. P 600,000 b. P 300,000 c. P100,000 d. P0

Total cost of licenses and trademark 900,000

License 2/3
Cost of license 600,000

43. Cost of trademark

a. P 600,000 b. P 300,000 c. P100,000 d. P0

Total cost of licenses and trademark 900,000

Trademark 1/3
Cost of license 300,000

44. Carrying amount of Intangible Assets

a. P 1,480,833 b. P 1,600,000 c. P 119,167 d. P0

AUDITING PROBLEM – QUIZ 2 Page 7

 Patent 700,000
Depreciation (700,000/10*9/12) 52,500

License and Trademark 900,000

Depreciation (900,000/9*8/12) 66,667

Total Cost of Intangible Assets 1,600,000

Accumulated Depreciation 119,167
Carrying amount of intangible assets 1,480,833

45. Total amount resulting from the foregoing transactions that should be expensed when incurred
a. P3,086,400 b. P1,776,400 c. P1,434,400 d. P0

Legal fees and stock cert. cost 327,000

Promotional expenses 15,000
Salaries Expense 1,434,400
Total expenses 1,776,400

PROBLEM NO. 3

On December 31, 2004, Silver Corporation acquired the following three intangible assets:
 A trademark for P300,000. 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 P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing reporting unit.
 A customer list for P220,000. By contract, Silver 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, 2005, 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 P10,000 per
year. The useful life of trademark still extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000 per year for the
next 22 years. Book values and fair values of the assets and liabilities of the Hayo Manufacturing reporting unit
are as follows:
Book values Fair values
Identifiable assets P 2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000 in 2007.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for
all items is 6%):

46. Total amortization for the year 2005

a. P 73,333 b. P 141,515 c. P 116,190 d. P 86,857

47. Impairment loss for the year 2005

a. P 90,476 b. P 133,333 c. P 179,584 d. P 0

AUDITING PROBLEM – QUIZ 2 Page 8

 48. Carrying value of Trademark as of December 31, 2005
a. P300,000 b. P257,143 c. P166,667 d. P120,416

49. Carrying value of Goodwill as of December 31, 2005

a. P 1,500,000 b. P 1,431,818 c. P 1,425,000 d. P 1,462,500

Since goodwill is not amortized and is not impaired as of 12/31/05, the carrying value is still P 1,500,000.00

50. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0

PROBLEM NO. 4
You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability 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 of the balance sheet date.
b. Bank notes payable include two separate notes payable Allied Bank.

AUDITING PROBLEM – QUIZ 2 Page 9

 (1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written
agreement with Allied Bank to replace the note with 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, Mavericks is three months behind in paying its required interest
payment.
d. The 12% mortgage note was issued May 1, 2001, with a term of 20 years. The current principal amount due is P
1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30, 2011. The
payment includes interest of P 180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semi-annually every June 30 and
December 31.
Based on the above and the result of your audit, answer the following:

51. Interest payable as of December 31, 2010 is

a. P 155,000 b. P 143,000 c. P 203,000 d. P 215,000
Interest on notes payable – bank (300,000 x 4% x 4/6) 8,000
Interest on mortgage payable (600,000 x 10% x 3/12) 15,000
Interest on mortgage payable (180,000 x 8/12) 120,000
Total interest payable 143,000
52. The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is
a. P 300,000 b. P 500,000 c. P 800,000 d. 0
53. Total noncurrent liabilities as of December 31, 2010 is
a. P 1,760,000 b. P 2,560,000 c. P 3,960,000 d. P 1,960,000
Mortgage payable (1,500,000 – 40,000) 1,460,000
Notes payable – noncurrent 500,000
Total noncurrent liabilities 1,960,000

PROBLEM NO. 5

The Perseverance Corporation has requested you to audit its financial statements for the year 2005. During your audit,
Perseverance presented to you its balance sheet as of December 31, 2004 containing the following capital section:

Preferred stock P10 par; 60,000 shares authorized and issued,

of which 6,000 are treasury shares costing P90,000 and shown as an asset P600,000

Common stock, par value P4; 600,000 shares authorized,

of which 450,000 are issued and outstanding 1,800,000

Additional paid in capital (P5 per share on preferred stock issued in 2000) 300,000

Allowance for doubtful accounts receivable 12,000

Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000
Additional information:

1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005. Perseverance credited the
proceeds to the Preferred Stock account. The treasury shares as of December 31, 2004 were acquired in one
purchase in 2004.
2) The preferred stock carries an annual dividend of P1 per share. The dividend is cumulative. As of December 31,
2004, unpaid cumulative dividends amounted to P5 per share. The entire accumulation was liquidated in June,
2005, by issuing to the preferred stockholders 54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred stockholders of record December
15, 2005. The dividend is payable on January 15, 2006.
4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had
balances of P 25,000 and P1,050,000, respectively.
5) On March 1, 2005, the Reserve for Fire Insurance was increased by P 60,000; Retained Earnings was debited.

AUDITING PROBLEM – QUIZ 2 Page 10

 6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P 30,000, which represents the carrying
value of a machine destroyed by fire on that date. Estimated fire cleanup costs of P 6,000 does not appear on the
records.
7) The December 31, 2004 Retained Earnings consists of the following:
Donated land from a stockholder (Market value on date of donation) P 450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P 2,250,000
8) Net income for the year ended December 31, 2005 was P 1,297,500 per company’s records.
QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2005. (Disregard tax implications)
A B C D
54. Preferred stock 555,000 630,000 570,000 600,000
55. Common stock 2,070,000 2,016,000 1,800,000 1,854,000
56. Additional paid in capital 810,000 864,000 414,000 804,000
57. Appropriated retained earnings 0 303,000 258,000 228,000
58. Unappropriated retained earnings 2,623,500 2,677,500 2,578,500 2,626,500
59. Treasury stock 0 36,000 45,000 90,000
60. Total stockholders’ equity 6,316,500 3,700,500 6,319,500 5,812,500

PROBLEM NO 6

On January 1, 2014, Marissa Company acquired 40% of the outstanding shares of an investee at a total cost of P 25,000,000.
At the time, the carrying amount of net assets of the investee totaled P 50,000,000.

The investee owned equipment with 5-year remaining life and with a fair value of P 3,000,000 more than carrying amount.

The investee owned land with a fair value of P 1,000,000 more than carrying amount.

The investee earned net income of P 6,000,000 evenly during the current year. The investee declared and paid a cash
dividend of P 3,000,000 to shareholders at year-end. The fair value of the investment at year-end is P 7,500,000.

61. What is the goodwill arising from the investment in associate?

a. 5,000,000 b. 3,400,000 c. 1,600,000 d. 0

62. What is the investment income for 2014?

a. 2,400,000 b. 2,160,000 c. 1,960,000 d. 650,000

63. What is the carrying amount of the investment in associate on December 31, 2014?
a. 25,000,000 b. 25,960,000 c. 26,200,000 d. 27,150,000

PROBLEM NO. 7
Amazon Company purchased 250,000 ordinary shares of Kabalega Corp. on July 1, 2013, at P 16.50 per share,
which reflected book value as of that date. At the time of the purchase, Kabalega had 1,000,000 ordinary shares
outstanding. Amazon had no ownership interest in Kabalega prior to this purchase. Kabalega reported net income
of P 840,000 for the six months ended June 30, 2013. Amazon received a dividend of P 105,000 from Kabalega on
August 1, 2013. Kabalega reported net income of P 1,800,000 for the year ended December 31, 2013, and again
paid Amazon Company dividends of P 105,000.
On January 1, 2014, Amazon sold 100,000 shares of Kabalega Corp. ordinary shares for P 17 per share resulting to
a loss of significant influence. The quoted market price for such investment was P 20 on January 1, 2014. Kabalega
reported net income of P 1,860,000 for the year ended December 31, 2014, and paid Amazon Company dividends
of P 60,000. The investment’s fair value on December 31, 2014, was P 25 per share.
64. In 2014, what amount should Amazon report as gain from remeasurement of the investment in associate to
fair value?
a. P 1,257,000
b. P 507,000
c. P 750,000

AUDITING PROBLEM – QUIZ 2 Page 11

 d. P 0
65. The share in net income of Kabalega to be recognized by Amazon in its income statement for 2014 should
be
a. P 219,000
b. P 60,000
c. P 279,000
d. P 0
66. What is the investment balance of Amazon on December 31, 2014?
a. P 3,750,000
b. P 4,125,000
c. P 2,493,000
d. P 3,000,000

PROBLEM NO. 8

The following data were obtained from the initial audit of BIBI Company:

15%, 10-year, Bonds Payable, dated January 1, 2016

Debit Credit Balance

Cash proceeds from issue on January 1, 2016

of 1,000, P 1,000 bonds. The market rate of
interest on the date of issue was P 12% P 1,172,044 P 1,172,044

Bond Interest Expense

Cash paid, 1/2/17 P 75,000 P 75,000
Cash paid, 7/1/17 75,000 150,000
Accrual, 12/31/17 75,000 225,000

Accrued Interest on Bonds

Balance, 1/1/17 P 75,000 P 75,000
Accrual12/31/17 75,000 150,000

Treasury Bonds
Redemption price and interest to date on
200 bonds permanently retired on 12/31/17 P 265,000 P 265,000

Based on the preceding information, determine the following:

67. Carrying value of bonds payable at December 31, 2017

a. P 831,110 b. P 800,000 c. P 1,151,583 d. P 921,266

68. Loss on Bond Redemption

a. P 4,683
b. P 19, 683
c. P 15,000
d. P 34,683

69. Accrued Interest on Bonds at December 31, 2017

a. P 75,000
b. P 135,000
c. P 60,000
d. P 52,500

70. Bond Interest Expense for the year ended December 31, 2017
a. P 150,000
b. P 139,174
c. P 69,745
d. P 160,826

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