CHAPTER 10 – Pre-Board Examinations

PB Examination No. 1

INSTRUCTIONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED

QUESTIONS. USE THE SPECIAL ANSWER SHEET AND DRAW A VERTICAL LINE
ACROSS THE LETTERED BOX THAT CORRESPONDS TO YOUR CHOICE. STRICTLY
NO ERASURES ARE ALLOWED.
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Problem 1
You have been engaged for the audit of the Letecia Company for the year ended December
31, 2007. The Letecia Company is engaged in the wholesale chemical business and makes
all sales at 25% over cost.

Following are portions of the client’s sales and purchases accounts for the calendar
year 2007.
SALES
Date Reference Amount Bal.
Forward
Date Reference Amount
12-31 Closing entry P 699,860 P 658,320
12-27 SI # 965 5,195
12-28 966 19,270
12-28 967 1,302
12-31 969 5,841
12-31 970 7,922
_______ 12-31 971 2,010
P 699,860 P 699,860

PURCHASES
Bal.
Forward
Date Reference Amount Date Reference Amount
P 360,300 12-31 Closing entry P 385,346
12-28 RR # 1059 3,100
12-30 1061 8,965
12-31 1062 4,861
12-31 1063 8,120 _______
P 385,346 P 385,346

SI – Sales Invoice
RR – Receiving Report

You observed the physical inventory of goods in the warehouse on December 31,
2007 and were satisfied that it was properly taken.

When performing a sales and purchases cutoff tests, you found that at December 31,
2007, the last receiving report that had been used No. 1063 and that no shipments have

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been made on any sales invoices with numbers larger than No. 968. You also obtained the
following additional information:

1. Included in the warehouse physical inventory at December 31, 2007, were chemicals
that had been purchased and received on receiving report No. 1060 but for which an
invoice was not received until 2008. Cost was P2,183.

2. In the warehouse at December 31, 2007, were goods that had been sold and paid for by
the customer but which were not shipped out until 2008. They were all sold on sales
invoice No. 965 and were not inventoried.

3. On the evening of December 31, 2007, there were two cars on the Letecia Company
siding:

(a) Car BR38162 was unloaded on January 2, 2008, and received on receiving report No.
1063. The freight was paid by the vendor.

(b) Car BAE74123 was loaded and sealed on December 31, 2007, and was switched off
the company’s siding on January 2, 2008. The sales price was P12,700 and the
freight was paid by the customer. This order was sold on sales invoice No. 968.

4. Temporarily stranded at December 31, 2007, on a railroad siding were two cars of
chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice No. 966
and the terms were FOB destination.

5. En route in the Letecia Company on December 31, 2007, was a truckload of material
that was received on receiving report no. 1064. The material was shipped FOB
destination and freight of P75 was paid by the Letecia Company. However, the freight
was deducted from the purchase price of P975.

6. Included in the physical inventory were chemicals exposed to rain while in transit and
deemed unsalable. Their invoice cost was P1,250, and freight charges of P350 had been
paid on the chemicals.

Questions:

1. The inventory at year-end is understated by:

a. P 23,976 b. P 32,096 c. P 33,696 d. P 44,714

2. The adjusted sales at year-end is:

a. P 664,817 b. P 677,517 c. P 680,590 d. P 712,560

3. The adjusted purchases at year-end is:

a. P 377,226 b. P 379,409 c. P 383,163 d. P 387,529

4. The cost of sales at year-end is overstated by:

a. P 31,513 b. P 50,991 c. P 52,591 d. P 63,609

5. The sales at year-end is overstated by:

a. P 19,270 b. P 22,343 c. P 35,043 d. P 40,120

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Problem 2
During the audit of a new client, Cialette Company, for the year ended December 31, 2007,
you learned of the following transactions between Cialette Company and another client,
financiers, Inc.:

1. Cialette completed construction of a warehouse building on its own land in June, 2006
at a cost of P2 million. Construction was financed by a construction loan from the
Capital Development Bank.

2. On July 1, 2006, Financiers, Inc. bought the building from Cialette for P2 million, which
Cialette used to discharge its construction loan.

3. On July 1, 2006, Financiers, Inc. borrowed P2 million from Capital Development Bank,
to be repaid quarterly over four years plus interest at 9%. A mortgage was placed on
the building to secure the loan, and Cialette signed as a guarantor of the loan.

4. On July 1, 2006, Cialette signed a noncancelable 20-year lease of the building from
Financiers, Inc. The lease specified that Cialette would pay P242,700 per year for 20
years, payable in advance on each July 1, and granted an option exercisable at the
end of the 20-year period, permitting Cialette to either (a) purchase the building for
P240,000 or (b) renew the lease for an additional 15 years at P30,000 per year and
purchase the building for P20,000 at the end of the renewal period. The lease
specified that P12,000 of the annual payment would be for insurance, taxes, and
maintenance for the following 12 months; if the lease should be renewed, P10,000 of
each annual payment would be for insurance, taxes and maintenance.

5. The building has a useful life of 40 years and is to be depreciated under the straight-
line method (assume no salvage value).

6. Cialette and financiers negotiated the lease for a return of 10%. You determine that
the present value of all future lease payment is approximately equal to the sales price
and that the sale-and-leaseback transaction is in reality only in financing arrangement.

Instructions: For the December 31, 2007, balance sheet of Cialette company, prepare
schedules computing the balances for the following items:

Questions:

6. The prepaid insurance, taxes, and maintenance at December 31, 2007 is:
a. P 0 b. P 6,000 c. P 10,000 d. P 12,000

7. The cost of the warehouse building at December 31, 2007 is:

a. P 2,720,000 b. P 2,180,000 c. P 2,192,000 d. P 2,000,000

8. The current liabilities arising from the lease at December 31, 2007 is:
a. P 59,147 b. P 144,923 c. P 230,700 d. P 242,700

9. The long-term liabilities arising from the lease at December 31, 2007 is:
a. P 1,769,300 b. P 1,715,530 c. P 1,656,383 d. P 1,570,607

10. The accumulated depreciation of the warehouse building at December 31, 2007 is:
a. P 50,000 b. P 54,800 c. P 75,000 d. P 82,200

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Problem 3
Charmaine Corporation was incorporated on January 1, 2000, and began operations one
week later. Charmaine is a nonpublic enterprise. Charmaine Corporation’s controller
prepared the following financial statements for the 11 months ended November 30, 2005:

Balance Sheet
November 30, 2005
ASSETS
Current Assets:
Cash 150,000.00
Marketable securities, at cost 60,000.00
Accounts receivable 450,000.00
Allowance for doubtful accounts (59,000.00)
Inventories 430,000.00
Prepaid expenses 15,000.00
Total current assets 1,046,000.00
Property, plant and equipment 426,000.00
Accumulated depreciation (40,000.00)
Other Assets 120,000.00
Total assets 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable & accrued expenses 592,000.00
Income tax payable 0
Total current liabilities 592,000.00
Stockholders’ Equity
Common stock, P10 par value 300,000.00
Retained earnings 660,000.00
Total stockholders’ Equity 836,000.00
Total liabilities & Stockholders’ Equity 1,552,000.00

Statement of Income
For the year ended November 30, 2005

Net sales 2,950,000.00

Cost & expenses:
Cost of sales 1,670,000.00
Selling and Administrative 650,000.00
Depreciation 40,000.00
Research and Development 30,000.00
2,390,000.00
Income before income taxes 560,000.00

Transactions for the month of December 2005:

1. Purchased merchandise from Abegail Industries, P350,000. Terms: Less 5%, 10%, FOB
shipping point, 2/10, n/30. Abegail Industries paid P2,000 for the transportation cost.
It is the policy of the company to record the purchases at net of discount.

2. Collected P150,000 accounts receivable less 2% discount.

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3. Sold merchandise on account to Bing Supplies, P300,000. Terms: FOB destination,
3/10, n/30. Charmaine Corporation paid the freight for P3,000. The company records
these sales at net of discount.

4. Charmaine Corporation issued check for P100,000 as partial payment of the account to
Abegail Industries.

5. Paid various operating expenses, P215,000.

6. Collected in full the account of Bing Supplies within the discount period.

7. Charmaine Corporation issued check for full payment of accounts to Abegail Industries
20 days after the invoice date.

8. Ending inventory, P500,000.

Additional Information:

a. Income tax rate is 35%.

b. The investment portfolio consist of short-term investments in marketable

equity securities with a total market valuation of P75,000 as of December 31, 2005.

b. A P15,000 insurance premium paid on November 30, 2004, on a policy expiring one year
later was charged insurance expense.

c. On June 1, 2002, a machine purchased for P45,000 was charged to repairs and
maintenance. Charmaine depreciates machines of this type on the straight-line method
over a five year life, with no salvage value, for financial and tax purposes.

d. During November 2005, a competitor company filed suit against Charmaine for
patent infringement claiming P200,000 in damages. Charmaine Corporation’s legal
counsel believes that an unfavorable outcome is probable. A reasonable estimate of the
court’s award to the plaintiff is P50,000.

Questions:

11. Cash
a. P 51,230 b. P 62,765 c. P 68,750 d. P 70,250

12. Marketable Equity Securities

a. P 50,000 b. P 60,000 c. P 75,000 d. P 80,000

13. Property, Plant, & Equipment

a. P 398,750 b. P 399,500 c. P 426,000 d. P 471,000

14. Total Current Assets

a. P 899,750 b. P 804,980 c. P 884,750 d. P 908,750

15. Accounts payable and others

a. P 592,000 b. P 642,000 c. P 773,775 d. P 765,600

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16. Retained earnings - beg
a. P 100,000 b. P 123,075 c. P 135,070 d. P 146,700

17. Sales
a. P 3,190,000 b. P 3,238,000 c. P 3,247,000 d. P 3,301,000

18. Selling and admin expenses

a. P 946,735 b. P 945,485 c. P 937,735 d. P 936,485

19. Research and Development cost

a. P 0 b. P 30,000 c. P 45,000 d. P 50,000

20. Depreciation
a. P 40,000 b. P 49,000 c. P 71,500 d. P 72,250

Problem 4
The Vanessa Company engaged Mr. Coliseo, a CPA, in 2007 to examine its books and
records and to make whatever adjustments are necessary.

The CPA’s examination disclosed the following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS
Balance
Date Particular Debit Credit Debit Credit

2005
Jan. 1 Balance 580,000
Dec. 31 Net income for the year 310,000 890,000

2006
Jan 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of par 90,000 840,000
Aug. 30 Gain on retirement of preferred
Stock at less than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500

2007
Jan 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 434,000

b. Dividends had been declared on December 31, 2005 and 2006 but had not been
entered in the books until paid.

c. The company purchased a machine worth P360,000 on April 30, 2004. The company
charged the purchase to expense. The machine has an estimated useful life of 3 years.
The company uses the straight line method and residual values are deemed immaterial.

d. The company received at transportation equipment as donation from one of its

stockholders on September 30, 2006. The equipment was used to deliver goods to
customers. The equipment costs P750,000 and has a remaining life of 3 years on the
date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred

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 for registering the transfer of ownership. The company did not record the donation on its
books. The expenses paid related to the donated equipment were charged to expense.

e. The physical inventory of merchandise had been understates by P64,000 and by

P44,500 at the end of 2005 and 2007, respectively.

f. The merchandise inventoried at the end of 2006 and 2007 did not include
merchandise that was then in transit shipped FOB shipping point. These equipments of
P43,400 and P32,600 were recorded a purchases in January 2007 and 2008,
respectively.

Questions
Based on the above audit findings, the adjusted balances of the following are: (Disregard
tax implication)

21. Retained earnings, 12/31/04

a. P 860,000 b. P 850,900 c. P 790,900 d. P 760,900

22. Net income for 2005

a. P 373,100 b. P 369,800 c. P 254,000 d. P 215,800

23. Retained earnings, 12/31/05

a. P 976,700 b. P 974,000 c. P 860,700 d. P 720,700

24. Net loss for 2006

a. P 379,000 b. P 359,700 c. P 349,700 d. P 269,700

25. Retained earnings, 12/31/06

a. P 341,000 b. P 411,000 c. P 481,000 d. P 495,000

26. Retained earnings, 12/31/07

a. P 362,700 b. P 332,700 c. P 302,700 d. P 254,000

Problem 5
You have been engaged to audit the financial statements of Cuajotor Corporation for the
calendar year 2007. The company was organized on January 2, 2006 and has not been
audited before.

The following items relating to equity and income statement accounts appear in your
Working Balance Sheet (WBS) and Working Income Statement (WIS)

WBS- December 31, 2007: Balance Per Books

Long- term liabilities P240,800
Capital Stock issued 560,000
Additional Paid in capital 100,000
Revaluation increment- Land 90,000
Retained Earnings 54,000

WIS- Year ended December 31, 2007

Income before tax 150,000
Provision for income tax 45,000
Income before extraordinary items 105,000
Extraordinary items(net of tax) 77,000

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 Net income 28,000
Following are your audit findings:

1. Long- term liabilities- This consist

Mortgage payable P180,000

Accrued interest on mortgage payable 10,800
Reserve for general contingencies 50,000
Total P240,800

The company mortgage its land to the Philippine National Bank for P180,000 on
September 1, 2007. The mortgage liability is payable in 18 semi-annual installments of
P10,000 plus accrued interest of 18% to date. The first installments due March 1, 2004.

The reserve for general contingencies was set up by resolution of the Board of Directors
on December 27, 2007. its purpose is to provide for possible future losses due to the
risk of an impending business recession. A corresponding charge was made to general
contingency losses which is classified as an extraordinary item.

2. Capital Stock issued- The company is authorized to issue 10,000 shares of P100 par
value common stock. Your analysis of the capital stock issued account shows:

2007 DESCRIPTION AMOUNT

Jan. 1 Balance, 4,500 shares issued P450,000

Mar. 1 Sold 500 shares at P120 per share 60,000
Nov. 1 Assessment on stockholders P10 per share 50,000
Dec. 31 Balance P 560,000

3. Additional paid in capital - The account balance represents the fair value of property
donated to the company in 2006. There was no manager’s check account in 2006.

4. Revaluation increment (Land) – Land was written up to appraised value on December

of 2007. The appraised value of P90,000 was determined by the company engineer. The
property was acquired in 2006 at a cost of P40,000.

5. Retained earnings, December 31, 2007 – Analysis of the retained earnings account
for 2007 shows:

Balance, January 1, 2007 P18,000

Net income – 2007 28,000
Gain on sale of treasury stock 8,000
Balance, December 31, 2007 P54,000

6. Over/Understatement – The following over/understatements were discovered in the

course of your audit:

2006 2007
Inventory, end 4,000 under 10,000 under
Depreciation expense 2,500 under 2,000 under
Accrued expenses payable end 1,000 under 1,600 over

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7. Extraordinary items – Extraordinary items consists of:

General contingency losses P50,000

Write-off of obsolete inventory 20,000
Loss due to earthquake 40,000
Total 110,000
Less: Tax savings, 30% 33,000
Extraordinary items, net of tax 77,000

8. Provision for income tax - The income tax rate is 30%. There are no permanent
differences between financial and taxable income.

Required: For each item below, determine the amount per audit that should appear in your
working balance sheet and working income statement. Assume that client approves all
adjustments.

Questions

27. Capital stock issued

a. P 580,000 b. P 550,000 c. P 510,000 d. P 500,000

28. Additional paid-in capital

a. P 168,000 b. P 150,000 c. P 110,000 d. P 100,000

29. Long-term liabilities

a. P 230,000 b. P 190,800 c. P 180,000 d. P 160,000

30. Current portion of long-term debt

a. P 80,000 b. P 20,000 c. P 10,000 d. P 0

31. Revaluation increment – Land

a. P 90,000 b. P 50,000 c. P 40,000 d. P 0

32. Retained earnings, 12/31/2006

a. P 21,850 b. P 20,800 c. P 18,350 d. P 18,000

33. Extraordinary items (net of tax)

a. P 0 b. 42,000 c. 40,000 d. 28,000

34. Income before tax

a. P 96,600 b. 136,600 c. 134,600 d. 120,400

35. Provision for income tax

a. P 40,980 b. P 40,380 c. P 36,120 d. P 28,980

36. Net income

a. P 67,620 b. P 54,220 c. P 42,280 d. P 24,280

37. Retained earnings, 12/31/2007

a. P 85,970 b. 72,220 c. 63,080 d. 47,720

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Problem 6
On January 1, 2006, Kazoo Company acquired a factory equipment at a cost of P150,000.
The equipment is being depreciated using the straight line method over its projected useful
life of 10 years. On December 31, 2007, a determination was made that the asset’s
recoverable amount was only P96,000. Assume that this was properly computed and that
recognition of the impairment was warranted. On December 31, 2008, the asset’s
recoverable amount was determined to be P111,000 and management believes that the
impairment loss previously recognized should be reversed. You have been asked to assist
the company’s accountant in the application of PAS 36, the standard on impairment of
assets.

Questions:

38. How much impairment loss should be recognized on December 31, 2007?
a. P0 b. P9,000 c. P24,000 d. P54,000

39. What is the asset’s carrying amount on December 31, 2008?

a. P84,000 b. P86,400 c. P90,000 d. P96,000

40. What would have been the asset’s carrying amount at December 31, 2008,
had the impairment not been recognized in 2007?
a. P84,000 b. P86,400 c. P96,000 d. P105,000

41. How much impairment recovery should be reported in the 2008 income
statement of Kazoo Company?
a. P0 b. P6,000 c. P21,000 d. P27,000

Problem 7
Mark Company has a department that performs machining operations on parts that are sold
to contractors. A group of machines had an aggregate carrying amount of P3,690,000 on
December 31, 2006. This group of machinery has been determined to constitute a cash
generating unit for purposes of applying PAS 36, Impairment of Assets. A cash generating
unit as defined in this standard is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or group of
assets.

Presented below are data about future expected cash inflows and outflows based on the
diminishing productivity expected of the machinery as it ages and the increasing costs that
will be incurred to generate output from the machines.
Cost, Excluding
Year Revenues Depreciation
2007 P2,250,000 P 840,000
2008 2,400,000 1,260,000
2009 1,950,000 1,650,000
2010 600,000 450,000
Totals P7,200,000 P4,200,000

The fair value of the machinery in this cash generating unit, net of estimated disposition
costs, is determined to amount to P2,535,000. The company discounts the future cash flows
of this cash generating unit by using a 5% discount rate.

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The following are lifted from the present value tables:

Present value of 1 at 5% for:

1 period 0.95238
2 periods 0.90703
3 periods 0.86384
4 periods 0.82270
5 periods 0.78353

Questions:
42. How much impairment loss should be recognized at December 31, 2006?
a. P 0 b. P 224,427 c. P 930,573 d. P 1,155,000

Problem 8
On January 1, 2007, Greg Corporation contracted with Mega Construction Company to
construct a building for P40,000,000 on land that Greg purchased several years ago. The
contract provides that Greg is to make five payments in 2007, with the last payment
scheduled for date of completion. The building was completed on December 31, 2007.

Greg made the following payments during 2007:

January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P 40,000,000

Greg had the following debt outstanding at December 31, 2007:

a. A 12%, 4-year note January 1, 2007, with interest compounded

quarterly. Both principal and interest are payable on December
31, 2010. This loan relates specifically to the building project. P 17,000,000
b. A 10%, 10-year note dated December 31, 2003, with simple
interest; interest payable annually on December 31 12,000,000
c. A 12%, 5-year note dated December 31, 2005, with simple interest;
interest payable annually on December 31 14,000,000

Greg adopts the allowed alternative treatment of capitalizing borrowing costs under PAS 23:
Borrowing Costs.

The following present and future value factors are taken from the present and future value
tables:
3% 12%
Future value of 1 for:
4 periods 1.12551 1.57352
16 periods 1.60471 6.13039

Present value of 1 for:

4 periods 0.88849 0.63552
16 periods 0.62317 0.16312

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Questions:

43. The amount of interest to be capitalized during 2007 is

a. P 0 b. P 2,133,680 c. P 2,277,710 d. P 5,013,680

44. The amount of interest that would be expensed for 2007 is

a. P 0 b. P 2,277,720 c. P 2,735,960 d. P 5,013,680

Problem 9
Sydel Company was organized on January 1, 2007, 25,000 shares of P100 par value
ordinary share being issued in exchange for property, plant, and equipment valued at
P3,000,000 and cash of P1,000,000. The following data summarize activities for the year.

1. Net income for the period ending December 31, 2007 was P1,000,000.
2. Raw materials on hand on December 31 were equal to 25% of raw materials purchased.
3. Manufacturing costs were distributed as follows:
Materials used 50%
Direct labor 30%
Factory overhead 20% (includes depreciation of building, P100,000)
4. Goods in process remaining in the factory on December 31 were equal to 33 1/3% of the
goods finished and transferred to stock.
5. Finished goods remaining in stock were equal to 25% of the cost of goods sold.
6. Expenses were 30% of sales.
7. Cost of goods sold was 150% of expenses total.
8. Ninety percent of sales were collected. The balance was considered collectible.
9. Seventy five percent of the raw materials purchased were paid for. There were no
expense accruals or prepayments at the end of the year.

Questions:

45. Sales at year-end is:

a. P 4,000,000 b. P 5,000,000 c. P 2,222,222 d. P 2,200,000

46. Cost of goods sold at year-end is:

a. P 2,250,000 b. P 1,800,000 c. P 1,200,000 d. P 666,667

47. Purchases at year-end is:

a. P 2,300,000 b. P 2,000,000 c. P 1,800,000 d. P 1,500,000

48. Cash receipts at year-end is:

a. P 2,980,000 b. P 3,000,000 c. P 4,600,000 d. P 5,500,000

49. Cost of goods sold rate is:

a. 56.25% b. 45% c. 30% d. 24%

50. Periodic or cycle of selected inventory items are made at various times during the year
rather than a single inventory count at year end, which of the following is necessary if
the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are integrated with production accounting records.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

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 ---End of Examination---
Answer and Solution to the Problem
Answer -
1. b 2. a 3. d 4. d 5. c

Solution – Problem 1

(a) Adjustment to the Physical Inventory of 12.31.07

Item 3a – Goods received per RR # 1063 P 8,120
Item 3b – Goods sold per SI # 968 (P12,700 / 125%) 10,160
Item 4 -- Goods sold per SI # 966 15,416
Item 6 – Cost of damaged chemicals ( 1,600)
Amount to be added to the Physical Inventory P32,096

(b) Letecia Company

Audit Working Paper Adjusting Entries
December 31, 2007

(1) Sales 15,773

Accounts Receivable 15,773
To adjust for unshipped goods:
Invoice No. 969……………….. P 5,841
970……………….. 7,922
971………………. 2,010
P15,773

(2) Cost of Sales 2,183

Vouchers Payable 2,183
To take up cost of chemicals purchased and received per RR #
1060 but not recorded.

(3) Inventory 8,120

Cost of Sales 8,120
To include in the EI merchandise received per RR# 1063.
(4) Inventory 10,160
Cost of Sales 10,160
To include in the EI the cost of merchandise sold per SI # 968
(12,700/125%); goods considered sold in 2003.
(5) Sales 19,270
Inventory 15,416
Accounts Receivable 19,270
Cost of Sales 15,416
To reverse entry made on SI # 966; ( goods in transit sold FOB
destination). Cost = P19,270/120%)

(6) Claim Receivable – Trucking Company 1,600

Inventory 1,600
To set up claim for unsaleable chemicals from the trucking
company . (P1,250 + P350)

Answer -
6. b 7. d 8. b 9. c 10. c

Solution – Problem 2

a. Computation of prepaid insurance, taxes and maintenance:

Paid for the period July 1, 2007 to June 30, 2008 P12,000
Less expired portion at 12.31.07 (1/2) (6,000)
Prepaid portion at 12.31.07 P 6,000

b. Computation of cost of building less acc. depr.

Cost, July 1, 2006 P2,000,000
Less accumulated depreciation to 12.31.06
P2,000,000 / 40 = P50,000 x 1 ½ years 75,000

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 Building cost less acc. depr. P1,925,000

c. Computation of Current Liabilities Arising from the Lease:

Original lease balance (present value) P2,000,000
Lease payment , July 1, 2006 P242,700
Less maintenance fee to 6.30.07 12,000 230,700
Lease balance, July 1, 2006 P1,769,300
Lease payment, July 1, 2007 P242,700
Less maintenance fee to 6.30.08 12,000
Balance applicable to lease P230,700
Interest, 10% from 7.1.06 to 7.1.07 (P1,769,300 x 10%) 176,930
Balance applicable to lease 53,770
Lease balance, July 1, 2007 P1,715,530

Payment due on lease – July 1, 2008 P230,700

Less interest at 10% from 7.1.07 - 7.1.08 (10% x P1,715,530 (171,553)
Current portion of lease liability P 59,147
Accrued interest payable, 7.1.07 - 12.31.07 (P171,553 / 2) 85,776
Total Current liabilities arising from lease P144,923

d. Computation of long-term liabilities arising from lease:

Lease balance, July 1, 2007 (refer to letter c) P1,715,530
Less current portion of lease liability (refer to letter c) (59,147)
Long-term liabilities arising from the lease P1,656,383
Answer –
11. c 12. c 13. a 14. a 15. b 16. b
17. b 18. c 19. b 20. b

Solution – Problem 3
Additional Information:
Cost of sales 295,265.00
Accounts payable 293,265.00 Valuation Allowance 15,000.00
Cash 2,000.00 Unrealized holding gain 15,000.00

Cash 147,000.00 Insurance expense 13,750.00

Sales 3,000.00 Retained earnings - beg 8,937.00
Accounts Receivable 150,000.00 Income tax payable 4,813.00

Accounts receivable 291,000.00 Property plant & equip 45,000.00

Selling and Admin exp 3,000.00 Retained earnings - beg 29,250.00
Sales 291,000.00 Income tax payable 15,750.00
Cash 3,000.00
Retained earnings - beg 15,112.00
Accounts payable 100,000.00 Income tax payable 8,138.00
Cash 100,000.00 Depreciation 9,000.00
Accum. Depreciation 32,250.00
Selling and admin exp 215,000.00
Cash 215,000.00 Selling and admin exp 50,000.00
AP and others 50,000.00
Cash 291,000.00
Accounts receivable 291,000.00

Accounts payable 193,265.00

Selling and admin exp 5,958.00
Cash 199,250.00

Cost of sales 430,000.00

Inventory 430,000.00

Inventory 500,000.00
Cost of sales 500,000.00

Net Sales 3,238,000.00 3,238,000.00

14
Cost of sales 1,895,265.00 1,895,265.00
Gross profit 1,342,735.00 1,342,735.00
Other Operating income - 15,000.00 15,000.00
Total 1,342,735.00 1,357,735.00
Selling and admin 873,985.00 63,750.00 937,735.00
Depreciation 40,000.00 9,000.00 49,000.00
R&D 30,000.00 30,000.00
Income from operations 398,750.00 341,000.00
Provision for income tax - 119,350.00
Net income 398,750.00 221,650.00
Retained Earnings - beg 100,000.00 15,112.00 38,187.00 123,075.00
Retained Earnings - end 498,750.00 344,725.00

Cash 68,750.00 68,750.00

Marketable securities 60,000.00 15,000.00 75,000.00
Accounts receivable 300,000.00 300,000.00
Allowance for BD (59,000.00) (59,000.00)
Inventories 500,000.00 500,000.00
Prepaid expenses 15,000.00 15,000.00
Property plant & equip 426,000.00 45,000.00 471,000.00
Accum. Depreciation (40,000.00) 32,250.00 (72,250.00)
Other Assets 120,000.00 120,000.00
1,390,750.00 1,418,500.00

AP & others 592,000.00 50,000.00 642,000.00

Income tax payable - 8,138.00 139,913.00 131,775.00
Common stock 300,000.00 300,000.00
Retained earnings 498,750.00 344,725.00
1,390,750.00 1,418,500.00
Answer –
21. a 22. c 23. b 24. a 25. d 26. d

Solution – Problem 4
2005 2006 2007
Unadjusted net income/(loss) 310,000 (205,000) (165,500)
Adjustments:
“c” – Depreciation (120,000) (120,000) (40,000)
“d” – Error in charging to expense 30,000
Depreciation (20,000) (80,000)
“e” – Understatement of inv. – 2005 64,000 (64,000)
Understatement of inv. - 2007 44,500
“f” – Understatement of inv. - 2006 43,400 (43,400)
Understatement of inv. – 2007 32,600
Under. of purchases – 2006 (43,400) 43,400
Under. of purchases – 2007 ___________ ___________ (32,600)
Adjusted Net income 254,000 (379,000) (241,000)
Plus: Retained Earnings – beg unadj. 580,000
Prior period adjustment
Error in charging to expense 360,000
Unrecorded depreciation (80,000)
Retained Earnings – beg adjusted 860,000 974,000 495,000
Less: Dividends (140,000) (100,000) _________
Retained earnings – end 974,000 495,000 254,000

Answer –
27. d 28. a 29. d 30. b 31. d 32. c
33. a 34. a 35. d 36. a 37. a

15
Solution – Problem 5
Long-term liability 20,000
Mortgage Payable – current 20,000
Long-term liability 10,800
Interest payable 10,800
Long-term liability 50,000
Extraordinary item 35,000
Income tax payable 15,000
Capital stock 10,000
APIC 10,000
Capital stock 50,000
APIC 50,000
APIC 100,000
APIC - Donated capital 100,000
Revaluation increment 40,000
Land 40,000
Gain on sale 8,000
APIC – TS 8,000
Beg. Inventory 4,000
Retained earnings - beg 2,800
Income tax payable 1,200
Inventory 10,000
Cost of sales 10,000
Retained earnings – beg 1,750
Income tax payable 750
Depreciation 2,000
Accum. Depreciation 4,500
Retained earnings – beg 700
Income tax payable 300
Expenses 1,000
Accrued expenses 1,600
Expenses 1,600
Loss on inventory 20,000
Loss on damages 40,000
Extraordinary items 42,000
Income tax payable 18,000

Unadjusted NI 150,000
Under beg. Inv. ( 4,000)
Under ending invent. 10,000
Under depreciation ( 2,000)
Under AE – beg 1,000
Over AE – end 1,600
Loss on inventory (20,000)
Loss on damages (40,000)
Income before tax 96,600
Provision 28,980
Net income 67,620

Answer –
38. c 39. a 40. d 41. c

Solution – Problem 6
38. Recoverable amount 96,000
Carrying value 120,000
Impairment Loss 24,000

39. Carrying value – 12/31/07 96,000

Depreciation – 2008 12,000
Carrying value – 12.31/08 84,000
40. Historical cost 150,000
Depreciation – 2006 to 2008 45,000
Carrying value had no impairment been made 105,000

16
41. Carrying value had no impairment been made 105,000
Carrying value with impairment 84,000
Replacement cost 111,000

Impairment loss (105,000 – 84,000) 21,000

PAS 36 provides that “an impairment loss recognized for an asset in prior years should be reversed if there has
been a change in the estimate used to determine the asset’s recoverable amount since the last impairment loss
was recognized.”

This means that the recoverable amount of an asset that has previously been impaired turns out to be higher than
the asset’s current carrying value, the carrying amount of the asset should be increased to its new recoverable
amount.

However, the standard further provides that “the increased carrying amount of an asset due to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined, had no impairment loss
been recognized for the asset in prior years.”

Answer -
42. c

Solution - Problem 7
Fair market value - 2,535,000
Cash Inflow Cash Outflow Net Cash flow PV factors Value in Use
2,250,000.00 840,000.00 1,410,000.00 0.95238 1,342,855.80
2,400,000.00 1,260,000.00 1,140,000.00 0.90703 1,034,014.20
1,950,000.00 1,650,000.00 300,000.00 0.86384 259,152.00
600,000.00 450,000.00 150,000.00 0.82270 123,405.00
2,759,427.00

Recoverable amount 2,759,427

Carrying value 3,690,000
Impairment loss 930,573

Answer –
43 c 44. c

Solution – Problem 8
Computation of Average Accumulated Expenditures:
4,000,000 x 12/12 = 4,000,000
8,000,000 x 9/12 = 6,000,000
12,200,000 x 6/12 = 6,100,000
8,800,000 x 3/12 = 2,200,000
7,000,000 x 0/12 = 0
18,300,000

Computation of Interest Potentially Capitalizable (Avoidable Interest)

Specific borrowing –
Future value - 17,000,000 x 1.12551 = 19,133,670
Present value 17,000,000 2,133,670
General borrowing
2,880,000/26,000,000 = 11.08 x 1,300,000 144,040
2,277,710
Actual Interest Cost –
Specific borrowing 2,133,670
General borrowing
12,000,000 x 10% 1,200,000
14,000,000 x 12% 1,680,000
5,013,670
Interest to be capitalized is P 2,277,710 which is the lower between the Interest Potentially Capitalizable and the
Actual Interest Cost.

17
Total interest cost 5,013,670
Capitalized interest 2,277,710
Interest expense – 2007 2,735,960
Answer -
45. a 46. b 47. b 48. c 49. b 50. b

Solution – Problem 9
Sales (1,000,000/25%) 4,000,000
Cost of goods sold (45% x 4,000,000) (1,800,000)
Gross income 2,200,000
Expenses (30% x 4,000,000) (1,200,000)
Net income 1,000,000

Cost of goods sold (150% x 30%) 45%

Net income (100% - 45% - 30%) 25%

Computation:
Purchases (1,500,000/75%) 2,000,000
Raw materials – December 31 500,000
Raw materials used (50% x 3,000,000) 1,500,000
Direct labor (30% x 3,000,000) 900,000
Factory overhead (20% x 3,000,000) 600,000
Total manufacturing cost 3,000,000
Goods in process – December 31 (1/3 x 2,250,000) 750,000
Cost of goods manufactured 2,250,000
Finished goods – December 31 (25% x 1,800,000) 450,000
Cost of goods sold 1,800,000

Cash receipts:
Cash investment 1,000,000
Collections (90% x 4,000,000) 3,600,000 4,600,000
Cash disbursements:
Purchases (75% x 2,000,000) 1,500,000
Direct labor 900,000
Factory overhead (600,000 – 100,000) 500,000
Operating expenses 1,200,000 4,100,000
Cash balance – December 31 500,000

18
PB Examination No. 2

INSTRUCTIONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED

QUESTIONS. USE THE SPECIAL ANSWER SHEET AND DRAW A VERTICAL LINE
ACROSS THE LETTERED BOX THAT CORRESPONDS TO YOUR CHOICE. STRICTLY
NO ERASURES ARE ALLOWED.
======================================================================

Problem 1
In reconciling the cash in bank account of Charmaine Company with the bank statement
balance for the month of July 2007, the following data are summarized:

Cash in bank:

Balance, June 30 1,000,000

Book debits for July including June CM for note collected, P300,000 4,000,000
Book credits for July including June NSF of P100,000 and service
charge of P4,000 3,600,000

Bank statement for July:

Balance, June 30 1,650,000

Bank debits for July including service charge of P1,000 and June
outstanding checks of P854,000 2,500,000
Bank credits for July including CM for bank loan of P500,000 and
June deposit in transit of P400,000 3,500,000

Questions:

1. Deposit in transit at July 31 is:

a. P 1,150,000 b. P 1,100,000 c. P 900,000 d. P 850,000

2. Outstanding checks at July 31 is:

a. P 1,851,000 b. P 1,954,000 c. P 1,951,000 d. P 1,861,000

3. Cash balance at June 30 is:

a. P 1,846,000 b. P 1,650,000 c. P 1,196,000 d. P 1,200,000

4. Cash balance at July 31 is:

a. P 1,599,000 b. P 1,846,000 c. P 1,899,000 d. P 2,300,000

5. An entity’s internal control structure requires for every check request that there be an
approved voucher, supported by a prenumbered purchase order and prenumbered
receiving report. To determine whether checks are being issued for unauthorized
expenditures, an auditor most likely would select items for testing from the population of
all
a. Purchase orders.
b. Canceled checks.

19
 c. Receiving reports.
d. Approved vouchers.

Problem 2
Gaze Company sells directly to customers. On January 1, 2006, the balance of accounts
receivable was P250,000 while allowance for doubtful accounts was a credit of P20,000.
The following data are available since 2003:

Credit sales Write-off Recoveries

2003 1,100,000 26,000 2,000
2004 1,200,000 29,000 3,000
2005 1,500,000 30,000 4,000
2006 3,000,000 40,000 5,000

Doubtful accounts are provided for as a percentage of credit sales. The accountant
calculates the percentage annually by using the experience of the three years prior to the
current year. The formula is accounts written off less recoveries expressed as a percentage
of the credit sales for the period. Cash receipts in 2006 from credit sales amounted to
P2,615,000.

Questions:

6. What is the percentage to be used in computing the allowance for doubtful accounts on
December 31, 2006?
a. 1.63% b. 1.75% c. 2.00% d. 2.17%

7. How much is the provision for doubtful accounts for 2006?

a. P 65,100 b. P 60,000 c. P 52,500 d. P 48,900

8. What is the ledger balance of accounts receivable on December 31, 2006?

a. P 615,000 b. P 600,000 c. P 534,900 d. P 385,000

9. What is the ledger balance of the allowance for doubtful accounts after necessary
adjustments on December 31, 2006?
a. P 28,900 c. P 32,500 c. P 45,000 d. P 45,100

10. Which of the following controls most likely would help ensure that all credit sales
transactions of an entity are recorded?
a. The billings department supervisor sends copies of approved sales orders to the
credit department foe comparison to authorized credit limits and current customer
account.
b. The accounting department supervisor independently reconciles the accounts
receivable subsidiary ledger to the accounts receivable control account monthly.
c. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.

Problem 3
Metro Company has experience a critical cash flow problem largely occasioned by collection
problems with customers. Consequently, it has become involved in a number of

20
transactions relating to note receivable. The following transaction occurred during a period
ending December 31:

May 1 Received a P200,000, 90-day, 12% interest bearing note from EF, a
customer, in settlement of an account.
1 Received a P300,000, six month, 12% interest bearing note from MN, a
customer, in settlement of an account.
July 30 EF defaulted on the P200,000 note.
Aug. 1 Discounted the MN note at the bank at 15%.
Sept. 1 Received a one-year noninterest bearing note from DJ, a customer, in
settlement of a P120,000 account receivable. The face of the note was
P132,000.
28 Collected the defaulted EF note plus accrued interest 12% per annum on the
total amount due.
Oct. 1 Received a P500,000, 90-day note from RS, a customer. The note was in
payment for goods purchased and was interest bearing at 12%.
Nov. 1 MN defaulted on the P300,000 note. Metro Company paid the bank the total
amount due plus a P12,000 protest fee and other bank charges.
Dec. 30 Collected RS note in full.
31 Collected from MN in full including interest on total amount due at 12% since
default date.

Questions:

11. Proceeds in the discounting of note on August 1 is:

a. P 324,075.00 b. P 306,075.00 c. P 323,400.00 d. P 297,412.50

12. Proceeds in the collected note on September 28 of EF that was defaulted is:
a. P 210,120.00 b. P 206,000.00 c. P 204,000.00 d. P 202,000.00

13. Proceeds of RS note that was collected on December 30 is:

a. P 515,000.00 b. P 500,000.00 c. P 485,000.00 d. P 450,000.00

14. Proceeds of MN note that was collected on December 31 is:

a. P 318,000.00 b. P 324,000.00 c. P 336,600.00 d. P 336,000.00

15. Which of the following is not a step in an auditor’s decision to assess control risk at
below the maximum?
a. Evaluate the effectiveness of the internal control procedures with tests of controls.
b. Obtain an understanding of the entity’s accounting system and control environment.
c. Perform tests of details of transactions to detect material misstatements in the
financial statements.
d. Consider whether control procedures can have a pervasive effect on financial
statement assertions.

Problem 4
Deli Company is a wholesale distributor of automotive replacement parts. Initial amounts
taken from accounting records on December 31, 2006 are as follows:

Inventory at December 31 (based on physical count on December) 1,250,000

Accounts payable 1,000,000

21
Sales 9,000,000

Additional information is as follows:

1. Parts held on consignment from XYZ to Deli, the consignee, amounting to P165,000,
were included in the physical count on December 31, 2006, and in accounts payable at
December 31, 2006.
2. P20,000 of parts which were purchased and paid for in December 2006, were sold in
the last week of 2006 and appropriately recorded as sales of P28,000. The parts were
included in the physical count on December 31, 2006, because the parts were on the
loading dock waiting to be picked up by the customers.
3. Parts in transit on December 31, 2006, to customers, shipped FOB shipping point,
on December 28, 2006, amounted to P34,000. The customers received the parts on
January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by Deli
on January 2, 2007.
4. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on
consignment from Deli, at their stores on December 31, 2006.
5. Goods were in transit from a vendor to Deli on December 31, 2006. The cost of
goods was P25,000, and they were shipped FOB shipping point on December 29, 2006.

Questions:
16. The inventory at year-end is:
a. P 1,320,000 b. P 1,300,000 c. P 1,290,000 d. P 1,270,000

17. The accounts payable at year-end is:

a. P 1,190,000 b. P 1,165,000 c. P 860,000 d. P 835,000

18. Net sales at year-end is:

a. P 8,960,000 b. P 9,034,000 c. P 9,000,000 d. P 9,040,000

19. Which of the following questions would most likely be included in an internal control
questionnaire concerning the completeness assertion for purchases?
a. Is an authorized purchase order required before the receiving department can accept
a shipment or the vouchers payable department can record a voucher?
b. Are purchase requisitions prenumbered and independently matched with vendor
invoices?
c. Is the unpaid voucher file periodically reconciled with inventory records by an
employee who does not have access to purchase requisitions?
d. Are purchase orders, receiving reports, and voucher prenumbered and periodically
accounted for?

Problem 5
On April 30, 2006, a fire damaged the office of Amaze Company. The following balances
were gathered from the general ledger on March 31, 2006:

Accounts receivable 920,000

Inventory – January 1 1,880,000
Accounts payable 950,000
Sales 3,600,000
Purchases 1,680,000

22
Additional information:

1. An examination of the April bank statement and canceled checks written during the
period April 1-30 as follows:

Accounts payable as of March 31 240,000

April merchandise shipments 80,000
Expenses 160,000

Deposits during the same period amounted to P440,000 which consisted of collections
from customers with the exception of P20,000 refund from a vendor for merchandise
returned in April.

2. Customers acknowledgement indebtedness of P1,040,000 at April 30, 2006.

Customers owed another P30,000 that will never be recovered. Of the acknowledge
indebtedness, P40,000 may prove uncollectible.
3. Correspondence with suppliers revealed unrecorded obligations at April 30 of
P340,000 for April merchandise shipment, including P100,000 for shipments in transit on
that date.
4. The average gross profit rate is 40%.
5. inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance
of the inventory was a total loss.

Questions:
20. Sales from January 1 to April 30, 2006 is:
a. P 4,220,000 b. P 4,200,000 c. P 3,600,000 d. P 3,480,000

21. Purchases from January 1 to April 30, 2006 is:

a. P 2,100,000 b. P 2,020,000 c. P 1,980,000 d. P 1,680,000

22. Fire loss on April 30, 2006 is:

a. P 1,200,000 b. P 1,440,000 c. P 1,340,000 d. P 1,140,000

23. Periodic or cycle of selected inventory items are made at various times during the year
rather than a single inventory count at year end, which of the following is necessary if
the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are integrated with production accounting records.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

24. Tracing bills of lading to sales invoices provides evidence that

a. Shipments to customers were recorded as sales.
b. Recorded sales were shipped.
c. Invoiced sales were shipped.
d. Shipments to customers were invoiced.

Problem 6

23
The management of JENNY Company has engaged you to assist in the preparation of year-
end (December 31) financial statements. Based on your examination, the following
pertinent information were gathered:

a. The company’s year-end inventory of 43,500 units is based on a physical count taken on
December 31 which has been undertaken under your observation.

b. During the month of December, sales totaled 138,630 units including 40,000 units
shipped on consignment to BASAN Corporation.

c. A letter received from the BASAN Corporation indicates that as of December 31, it has
sold 15,200 units and was still trying to sell the remainder.

d. Your review of the December purchase orders to various suppliers disclosed the
following:

a. 4,200 units were shipped on January 2, 2004 and received on January 5, 2004,
under FOB destination.
b. 3,600 units were shipped on December 17, 2003 and received on December 22,
2003, under FOB destination.
c. 7,900 units were shipped on January 5, 2004 and received on January 7, 2004,
under FOB shipping point.
d. 8,000 units were shipped on December 29, 2003 and received on January 2, 2004,
under FOB shipping point.
e. 4,600 units were shipped on January 4, 2004 and received on January 6, 2004,
under FOB destination.
f. 3,500 units were shipped on January 5, 2004 and received on January 7, 2004,
under FOB destination.

e. JENNY Company uses the “passing of legal title” for inventory recognition.

Questions:

25. Inventory balance in units to be reported on December 31, 2003

a. 76,300 units b. 55,100 units c. 51,500 units d. 43,600 units

26. Total units available for sale to be reported on December 31, 2003
a. 157,330 units b. 165,330 units c. 168,960 units d. 190,130 units

27. Cost of sales in units to be reported on December 31, 2003

a. 153,830 units b. 138,630 units c. 125,430 units d. 113,830 units

28. Inventory level in units on November 30, 2003

a. 178,530 units b. 168,960 units c. 165,330 units d. 157,330 units

29. Purchases for the month is

a. 3,600 units b. 11,600 units c. 16,200 units d. 19,700 units

Problem 7
The income statement and a schedule reconciling cash flows from operating activities to net
income are provided below (P in 000s) for Abajero Computers.

Abajero Computers

24
 Income Statements
For the year ended Dec. 31, 2004

Sales 305
Cost of goods sold 185
Gross profit 120
Salaries expense 41
Insurance expense 19
Depreciation expenses 11
Loss on sale of land 5 76
Income before tax 44
Income tax expense 22
Net Income 22

Abajero Computers
Income Statements
For the year ended Dec. 31, 2004

Net income 22
Adjustments for Noncash effects:
Depreciation expense 11
Loss on sale of land 5
Decrease in accounts receivable 6
Increase in inventory ( 13)
Decrease in accounts payable ( 8)
Increase in salaries payable 5
Decrease in prepaid insurance 9
Increase in income tax payable 20
Net cash flows from operation 57
Questions:
30. The cash received from customer during the reporting period is:
a. P 319 b. P 311 c. P 305 d. P 299

31. The cash paid to suppliers of goods during the reporting period is:
a. P 214 b. P 206 c. P 198 d. P 190

32. The cash paid to employees during the reporting period is:
a. P 46 b. P 41 c. P 36 d. P 11

33. The cash paid for insurance during the reporting period is:
a. P 10 b. P 11 c. P 19 d. P 28

34. The cash paid for income taxes during the reporting period is:
a. P 42 b. P 22 c. P 18 d. P 2

Problem 8
In your audit of the December 31, 2008, financial statements of ABELLO, INC., you found
the following inventory-related transactions.

a. Goods costing P25,000 are on consignment with a customer. These goods

were not included in the physical count on December 31, 2008.

25
b. Goods costing P16,500 were delivered to Abello, Inc. on January 4, 2009. The
invoice for these goods was received and recorded on January 10, 2009. The invoice
showed the shipment was made on December 29, 2008, FOB shipping point.

c. Goods costing P21,640 were shipped FOB shipping point on December 31,
2008, and were received by the customer on January 2, 2009. Although the sale was
recorded in 2008, these goods were included in the 2008 ending inventory.
d. Goods costing P8,645 were shipped to a customer on December 31, 2008,
FOB destination. These goods were delivered to the customer on January 5, 2009, and
were not included in the inventory. The sale was properly taken up in 2009.

e. Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2009, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2008, this shipment was
recorded as a purchase in 2008.

f. Goods valued at P51,000 were received from a vendor under consignment

term. These goods were not included in the physical count.

g. Abello, Inc. recorded as a 2008 sale a p64,300 shipment of goods to a

customer on December 31, 2008, FOB destination. This shipment of goods costing
P37,500 was received by the customer on January 5, 2009, and was not included in the
ending inventory figure.

Prior to any adjustments, Abello, Inc.’s ending inventory is valued at P445,346 and the
reported net income for the year is P1,648,723.

Questions:
35. The correct inventory amount to be reported in the financial statements of
Abello, Inc. for the year ended December 31, 2008 is
a. P 554,631 b. P 517,131 c. P 511,351 d. P 486,206

36. The adjusted net income for the year 2008 is

a. P 1,712,608 b. P 1,685,808 c. P 1,642,528 d. P 1,631,828

Problem 9
The ABERGAS, INC., reported net income before taxes of P843,600 for 2007 and P965,400
for 2008. The company takes its annual physical count of inventory every December 31.
Your audit revealed the following information:

a. The price used for 1, 500 units included in the 2007 ending inventory was P109. The
correct cost was P190 per unit.

a. Goods costing P23,600 was received from a vendor on January 5, 2008. the
shipment was made on December 26, 2007, under FOB shipping point term. The
purchase was recorded in 2007 but the shipment was not included in the 2007, ending
inventory.

b. Merchandise costing p64,750 was sold to a customer on December 29, 2007.

ABERGAS was asked by the customer to keep the merchandise until January 3, 2008,
when the customer would come and pick it up. Although the sale was properly recorded
in 2007, the merchandise was included in the ending inventory.

26
c. A supplier sold merchandise valued at P14,000 to Abergas, Inc. The merchandise
was shipped FOB shipping point on December 29, 2007, and was received by Abergas on
December 31, 2007. The purchase was recorded in 2008 and the merchandise was not
included in the 2007 ending inventory.

Questions:
37. Adjusted net income of 2007 is
a. P 1,087,450 b. P 965,950 c. P 988,700 d. P 923,950

38. Adjusted net income of 2008 is

a. P 1,045,750 b. P 885,050 c. P 843,050 d. P 755,550

Problem 10
Alang Corporation uses the physical inventory system. You observed the taking of a
physical inventory on December 31, 2007. The total inventory cost per client’s list is
P376,000.

Test of inventory pricing and quantities revealed the following:

a. A review of quantities in the inventory list with those in the original inventory tags
disclosed that one inventory item should be 10 dozens instead of 10 units. The price per
client list is P100 per unit.

b. Inventory includes P50,000 worth of goods received on consignment from Recta

Company. Freight and other shipping charges totaling P5,000 which were incurred by
Alang Corporation were recorded as delivery expenses. These are to be deducted from
Alang’s payment to Recta when consigned goods are sold.

c. To ascertain that there was a proper cut-off, you reviewed purchases and sales
transactions a few days before and after December 31, 2007. You review disclosed the
following:
a. Purchase invoice for P15,000 physically counted on December 31, 2007, was
recorded in January 2008 voucher register.
b. Goods with an invoice price of P18,000 (cost P12,000) shipped to a customer FOB
destination on December 28, 2007, were in transit on December 31, 2007. No entry
was made to record the sale.
c. Merchandise costing P74,500 was consigned to Alberca Corporation on December 24,
2007 Alang records consignment shipment on a memorandum basis and bears the
cost of shipping to consignees. As of December 31, 2007, Alberca reported sales
totaling P30,000 since December 24, and claimed P6,000 as commission of 20% of
sales. Alberca also claimed reimbursement of P4,000 for freight paid on December
2007 and P500 for advertising expense to be borne by Alang. No entry has been
made on Alang’s books for the consignment sales and the cost incurred by Alberca.
You have verified that as of December 31, 2007, the cost of consigned goods
amounts to P59,600.

Having been appointed auditor only in May 2008, you were unable to physically observe the
taking of client’s inventory on December 31, 2007. However, you adopted alternative
means to verify this item. Through inquiry and review of the inventory summary sheets and

27
records, you became aware that the beginning inventory was understated by P15,000.
Other than this, you were satisfied as to the general accuracy of the opening inventory.

Questions:
39. Inventories received from consignor will
a. Not be recorded but included in the inventories total.
b. Not be recorded but included in the notes to the balance sheet
c. Be recorded with a debit to inventories.
d. Either recorded or not recorded.
40. The shipping charges on the goods received on consignment was treated as
a. Other receivable c. Delivery charges
b. Deduction to accounts payable d. None of the above

41. Which of the following cost incurred by Alberca Corporation should be

capitalized by Alang as part of the consigned goods?
a. Freight charges c. Advertising charges
b. Consignment commissions d. None of the above

42. How much of the cost incurred by Alberca Corporation should be charged to
operating expenses?
a. P 10,500 b. P 7,300 c. P 6,500 d. P 6,000

43. What is the cost of consignment sales that should be reported by Alang in
connection with the sale of consigned goods by Alberca?
a. P 18,900 b. P 16,900 c. P 15,700 d. P 14,900

44. The inventories on consignment will be show a 2007 balance of

a. P 67,600 b. P 63,800 c. P 62,800 d. P 59,600

45. The 2007 inventories will be

a. P 411,800 b. P 408,600 c. P 348,300 d. P 312,500

46. The understatement in beginning inventory will result to

a. Net income decrease c. Retained earnings decrease
b. Retained earnings increase d. Net income increase

Problem 11
The following information is based on a first audit of Russell Company. The client has not
prepared financial statements for 2005, 2006 or 2007. During these years, no accounts
have been written off as uncollectible, and the rate of gross profit on sales has remained
constant for each of the three years.

Prior to January 1, 2005, the client used the accrual method of accounting. From January 1,
2005, to December 31, 2007, only cash receipts and disbursement records were
maintained. When sales on account were made, they were entered in the subsidiary
accounts receivable ledger. No general ledger postings have been made since December 31,
2004.

As a result of your examination, the correct data shown in the table below are available:

12/31/04 12/31/07
Accounts receivable balances:

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 Less than one year old P 15,400 P 28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P 16,600 P 33,000

Inventories P 11,600 P18,800

Accounts payable for inventory purchased P 5,000 P11,000

Cash received on accounts receivable in:

2005 2006 2007

Applied to:
Current year collections P148,800 P162,800 P208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total P162,800 P177,200 P227,600
Cash sales P 17,000 P 26,000 P 31,200
Cash disbursements for
Inventory purchased P125,000 P141,200 P173,800

Questions:

47. The company’s sales revenue for the three-year period amounted to
a. P 74,200 b. P 415,300 c. P 625,400 d. P 658,200

48. The aggregate amount of purchases for the three-year period is

a. P 131,000 b. P 434,000 c. P 440,000 d. P 446,000

49. What is the company’s gross profit ratio in each of the three-year period?
a. 33.33% b. 28.35% c. 35.16% d. 31.15%

50. What is the company’s gross profit for each of the three-year period?
2005 2006 2007
a. P 60,933 P 68,200 P 80,000
b. 55,533 60,133 79,000
c. 122,400 137,600 178,800
d. 61,200 68,800 89,400

---End of Examination---

29
Answer and Solution to the Problem

Answer –
1. b 2. a 3. c 4. c 5. b

Solution – Problem 1
a. Bank reconciliation – June 30
Book balance 1,000,000
Add: Credit memo for note collected 300,000
Total 1,300,000
Less: NSF check 100,000
Service charge 4,000 104,000
Adjusted book balance 1,196,000

Bank balance 1,650,000

Add: Deposit in transit 400,000
Total 2,050,000
Less: Outstanding checks 854,000
Adjusted bank balance 1,196,000
Bank reconciliation – July 31

Book balance 1,400,000

Add: Credit memo for bank loan 500,000
Total 1,900,000
Less: Service charge 1,000
Adjusted book balance 1,899,000

Bank balance 2,650,000

Add: Deposit in transit 1,100,000
Total 3,750,000
Less: Outstanding checks 1,851,000
Adjusted bank balance 1,899,000

b. Adjusting entries, July 31

1. Cash in bank 500,000
Bank loan payable 500,000
2. Bank service charge 1,000
Cash in bank 1,000

Computation of deposit in transit – July 31

Deposit in transit – June 30 400,000
Add: Deposits during July:
Book debits 4,000,000
Less: June credit memo for note collected 300,000 3 ,700,000
Total 4,100,000
Less: Deposits credited by bank during July:
Bank credits 3,500,000
Less: July credit memo for bank loan 500,000 3,000,000
Deposit in transit – July 31 1,100,000

Computation of outstanding checks – July 31

Outstanding checks, June 30 854,000
Add: Checks drawn by company during July:
Book credits 3,600,000
Less: June debit memos for
NSF check 100,000

30
 Service charge 4,000 104,000 3,496,000
Total 4,350,000
Less: Checks paid by bank during July:
Bank debits 2,500,000
Less: July service charge 1,000 2,499,000
Outstanding checks, July 31 1,851,000

Answer –
6. c 7. b 8. b 9. c 10. d

Solution – Problem 2
2002 2003 2004 Total
6. Writeoff 26,000 29,000 30,000 85,000
Less: Recoveries 2,000 3,000 4,000 9,000
Net writeoff 24,000 26,000 26,000 76,000

76,000
Percentage to be used in computing the allowance = ------------- = 2%
3,800,000
7. Credit sales for 2005 3,000,000
Multiply by bad debt percentage 2%
Provision for doubtful accounts 60,000

8. Accounts receivable – January 1, 2005 250,000

Add: Credit sales for 2005 3,000,000
Recoveries 5,000 3,005,000
Total 3,255,000
Less: Collections in 2005 2,615,000
Writeoff 40,000 2,655,000
Accounts receivable – December 31, 2005 600,000

9. Allowance for doubtful accounts – January 1 20,000

Add: Doubtful accounts for 2005 60,000
Recoveries 5,000 65,000
Total 85,000
Less: Writeoff 40,000
Allowance for doubtful accounts – December 31 45,000

Answer –
11. b 12. a 13. a 14. c 15. c

Solution – Problem 3
May 1 Notes receivable 200,000
Accounts receivable 200,000
1 Notes receivable 300,000
Accounts receivable 300,000
July 30 Accounts receivable 206,000
Notes receivable 200,000
Interest income (200,000 x 12% x 90/360) 6,000
Aug. 1 Cash 306,075
Note receivable discounted 300,000
Interest income 6,075

Principal 300,000
Interest (300,000 x 12% x 6/12) 18,000
Maturity value 318,000
Less: Discount (318,000 x 15% x 3/12) 11,925
Net proceeds 306,075

Sept. 1 Notes receivable 132,000

Accounts receivable 120,000
Interest income 12,000
28 Cash 210,120
Accounts receivable 206,000
Interest income (206,000 x 12% x 60/360) 4,120

31
Oct. 1Notes receivable 500,000
Sales 500,000
Nov. 1 Accounts receivable 330,000
(318,000 + 12,000)
Cash 330,000
Notes receivable discounted 300,000
Notes receivable 300,000

Dec. 30 Cash 515,000

Notes receivable 500,000
Interest income (500,000 x 12% x 90/360) 15,000
31 Cash 336,600
Accounts receivable 330,000
Interest income (330,000 x 12% x 2/12) 6,600

Answer –
16. b 17. c 18. d 19. d

Solution – Problem 4
Inventory Accounts payable Net sales
Unadjusted 1,250,000 1,000,000 9,000,000
1 ( 165,000) ( 165,000) -
2 ( 20,000) - -
3 - - ( 40,000)
4 210,000 - -
5 25,000 25,000 - ___
1,300,000 860,000 9,040,000

Answer –
20. b 21. a 22. a 23. b 24. d

Solution – Problem 5
20. Accounts receivable – April 30, 2005 1,040,000
Writeoff 60,000
Collections (440,000 – 20,000) 420,000
Total 1,520,000
Less: Accounts receivable – March 31, 2005 920,000
Sales for April 600,000
Sales up to March 31, 2005 3,600,000
Total sales 4,200,000

21. Accounts payable – April 30 for April shipments 340,000

Payment for April merchandise shipments 80,000
Purchases of April 420,000
Purchases up to March 31, 2005 1,680,000
Total purchases 2,100,000

22. Inventory – January 1 1,880,000

Purchases 2,100,000
Less: Purchases return 20,000 2,080,000
Goods available for sale 3,960,000
Less: Cost of sales (4,200,000 x 60%) 2,520,000
Inventory – April 30 1,440,000
Less: Goods in transit 100,000
Salvage value 140,000 240,000
Fire loss 1,200,000

Answer –
25. a 26. d 27. d 28. a 29. b

Solution – Problem 6
Inventory – Nov. (squeezed figure) 178,530 * Physical count 43,500
Purchases (3,600 + 8,000) 11,600 Out on consignment 24,800
Total Goods Available for Sale 190,130 In-transit (d) 8,000
Ending inventory 76,300* Adjusted ending inv. 76,300

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 Cost of sales 113,830

Answer – Problem 7
30. b 31. b 32. c 33. a 34. d

Solution –
* - assumed amount

Accounts Receivable___ Accounts payable___

beg. bal. 10* collection 311 (squeezed figure) payment 206 beg. bal. 10 *
Sales 305 ___ (squeezed purchases 198
315 311 figure) ___ ___
end. bal 4 * 206 208
end bal. 2
Inventory – beg 10 *
Purchases 198 (squeezed figure)
TGAS 208
Inventory – end 23 *
COS 185

Salaries insurance Income taxes

Cash paid – squeezed figure 36 10 2
Prepaid expense – beg * 10
Accrued expenses – end * 15 * 30
Prepaid expense – end * ( 1)
Accrued expenses – beg * (10) __ * (10)
Expenses – IS 41 19 22

Answer –
35. c 36. c

Solution –Problem 8
Inventory NI - 2008
Unadjusted balance 445,346 1,648,723
A – Understatement of inventory 25,000 25,000
B – understatement of inventory 16,500 16,500
- Overstatement of purchases (16,500)
C – Overstatement of inventory (21,640) (21,640)
D – Understatement of inventory 8,645 8,645
E – Overstatement of purchases 8,600
F- - -
G – Understatement of inventory 37,500 37,500
- Overstatement of sales ________ (64,300)
Adjusted balance 511,351 1,642,528

Answer –
37. d 38. b

Solution – Problem 9
2007 2008
Net Income - unadjusted 843,600 965,400
A – Understatement of 2007 ending inventory 121,500 (121,500)
B – Understatement of 2007 ending inventory 23,600 (23,600)
C – Overstatement of 2007 ending inventory (64,750) 64,750
D – Understatement of 2007 ending inventory 14,000 (14,000)
- Understatement of 2007 purchases (14,000) 14,000
Adjusted balance 923,950 885,050

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Answer – Problem 10
39. b 40. a 41. a 42. c 43. c 44. c
45. a 46. d

Solution –
a Inventory 11,000
Cost of sales 11,000
b Cost of sales 50,000
Inventory 50,000
Other Receivable 5,000
Delivery expenses 5,000
c-a Cost of sales 15,000
Accounts payable 15,000
c-b Inventory 12,000
Cost of sales 12,000
c-c Inventory 74,500
Cost of sales 74,500
Accounts Receivable 30,000
Sales 30,000
Cost of sales 14,900
Inventory (74,500 – 59,600) 14,900
Commission expense 5,000
Advertising 500
Accounts receivable 6,500
Inventory 3,200
Cost of sales 800
Accounts Receivable 4,000
59,600/74,500 x 4,000 = 3,200

Answer –
47. d 48. d 49. a 50. d

Solution – Problem 11
* - squeezed figure

Accounts Receivable – 3 yrs______ Accounts Payable _____

2004 16,600 Collection 567,600 payment 440,000 2004 5,000
Sales584,000* _______ _______ purchases 446,000 *
600,600 567,600 440,000 451,000
2007 33,000 2007 11,000

Cash sales - 74,200

Credit sales - 584,000
Total sales 658,200

Sales 658,200
COS
Beg. Inv. 11,600
Purchases 446,000
Ending inventory (18,800) 438,800
Gross profit 219,400 33.33%

2005 2006 2007

Current year collection 148,800 162,800 208,800
28,200
Cash sales 31,200
Total Sales 268,200

34
X GP rate 33.33%
Gross profit 89,400

35