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AUDITING PROBLEMS You are engaged to examine the financial statements of the Olive
FINAL EXAMINATION Manufacturing Corp. for the year ended December 31, 2014. The
SET A following schedules for property, plant, and equipment and related
accumulated depreciation accounts have been prepared by your
PROBLEM NO. 1 client. The opening balances agree with your prior year's. audit
You obtained the following information from the balance sheet of working papers.
Caloocan Company in connection with your audit of the Company's
financial statements for the year 2014: Olive Manufacturing Co.
Dec 31, 2014 Dec 31, 2013 Analysis of Property, Plant, and Equipment and Related Accumulated
Cash 706,600 P200,000 Depreciation Accounts
Notes receivables 0 50,000 Year Ended December 31, 2014
Inventory ? 399,750
Accounts payable ? 150,000 Audited Per books
Cost 12-31-13 Additions Retirement 12-31-14
All operating expenses are paid by Caloocan with cash and all Land P450,000 P100,000 P- P550,000
purchases of inventory are made on account. Caloocan sells only one Building 2,400,000 350,000 - 2,750,000
product. All sales are cash sales which are made for P100 per unit. Machinery &
Caloocan purchases 1,500 units of inventory per month and values Equipment 2,770,000 808,000 520,000 3,526,000
its inventory using periodic FIFO. The unit cost of inventory during 5,620,000 1,258,000 520,000 6,826,000
January 2014 was P65.20 and increased PO.20 per month during the
year. During 2014, payments to suppliers totaled P943,400 and Audited Per Books
operating expenses totaled P440,000. The ending inventory for 2013 Accumulated 12-31-13 Additions Retirement 12-31-14
was valued at P65.00 per unit. Depreciation
Buildings 1,200,000 103,000 P- 1,303,000
QUESTIONS: Based on the above and the result of your audit, Machinery & 546,500 313,600 - 860,100
determine the following: Equipment
1,746,500 416,600 P- 2,163,100
1. Number of units sold during 2014
A. 18,900 Further investigation revealed the following:
B. 18,400 a. All depreciable assets are depreciated on the straight line
C. 8,268 basis (with no salvage value) based on the following
D. 8,768 estimated lives: Buildings - 25 years, all other items 10
2. Accounts payable balance at December 31, 2014 years.
A. P400,000 b. The company entered into a lease contract for a derrick
B. P380,200 machine with annual rental of P100,000 payable in
C. P150,000 advance every April 1. The parties to the contract
D. P383,500 stipulated that a 30-day written notice is required to
3. Inventory amount at December 31, 2014 cancel the lease. Estimated useful life is 10 years. The
A. P 385,900 derrick was recorded under machinery and equipment at
B. P1,055,183 P808,000 and P60,600, applicable to the machine was
C. P 352,500 included in the depreciation expense during the year.
D. P1,022,483 c. The company finished construction of a new building wing
4. Which of the following audit procedures would provide in June 30. The useful life of the main building was not
the least reliable evidence that the client has legal title to prolonged. The lowest construction bid was P350,000
inventories? which was the amount recorded. Company personnel
A. Confirmation of inventories at locations outside the constructed the building at a total cost of P330,000,
client's facilities. d. P100,000 was paid for the construction of a parking lot
B. Observation of physical inventory counts. which was completed on July 1, 2014. The expenditure
C. Examination of paid vendors' invoices. was charged to land.
D. Analytical review of inventory balances compared to e. The P520,000 equipment under retirement column
purchasing and sales activities. represent cash received on October 1, 2014 for a
5. An auditor generally tests physical security controls over machinery bought on October 1, 2010 for P960,000. The
inventory by bookkeeper recorded depreciation expense of P72,000 on
A. Test counts and cutoff procedures. this machine in 2014.
B. Examination and reconciliation. f. The company's president donated land and building
C. Inquiry and observation. appraised at P200,000 and P400,000 respectively to the
D. Inspection and recomputation. company to be used as plant site. The company began
operating the plant on September 30, 2014. Since no
PROBLEM NO. 2 money was involved, the bookkeeper did not make any
entry for the above transaction.
c. Outstanding checks 150,000 120,000 16. How much is the unadjusted balance per books as of
November 30, 2014?
d. The bank statement for the month of December *:* A. P504,000
showed total credits of P240,000. B. P484,000
e. DAIF checks are recorded as a reduction of cash receipts. C. P430,000
DAIF checks which are later redeposited are then recorded D. P356,000
as regular receipts. Data regarding DAIF checks are as 17. How much is the unadjusted book receipts for December,
follows: 2014?
1. Returned by the bank in Nov. and recorded by the A. P860,000
company in Dec., P10,000. B. P770,000
2. Returned by the bank in Dec, and recorded by the C. P735,000
company in Dec., P25,000. D. P738,000
3. Returned by the bank in Dec, and recorded by the 18. How much is the unadjusted book disbursements for
company in Jan., P29,000. December, 2014?
A. P773,000
f. Check of Syrio Company amounting to P90,000 was B. P700,000
charged to the company's account by the bank in error on C. P735,000
December 31. 19. P760,000 19. How much is the unadjusted balance per
g. A bank memo stated that the company's account was books as of December 31, 2014?
credited for the net proceeds of a customer's note for A. P481,000
P106,000. B. P530,000
h. The company has hypothecated its accounts receivable C. P309,000
with the bank under an agreement whereby the bank D. P539,000
lends the company 80% of the hypothecated accounts 20. Cash receipts should be deposited on the day of receipt or
receivable. The company performs accounting and the following business day. Select the most appropriate
collection of the accounts. Adjustments of the loan are audit procedure to determine that cash is promptly
made from daily sales reports and deposits. deposited.
i. The bank credits the company account and increases the A. Review cash register tapes prepared for each sale.
amount of the loan for 80% of the reported sales. The loan B. Compare the daily cash receipts totals with the bank
agreement states specifically that the sales report must be deposits.
accepted by the bank before the company is credited. C. Review the functions of cash handling and
Sales reports are forwarded by the company to the bank maintaining accounting records for proper separation
on the first day following the date of sale. The bank of duties.
allocates each deposit 80% to the payment of the loan, D. Review the functions of cash receiving and disbursing
and 20% to the company account. Thus, only 80% of each for proper separation of duties.
day's sales and 20% of each collection deposits are entered
on the bank statement. The company accountant records PROBLEM NO. 5
the hypothecation of new accounts receivable (80% of The adjusted trial balance of Austronesian Corporation on December
sales) as a debit to Cash and a credit to the bank loan as of 31, 2013, includes the following cash and receivables balances.
the date of sales. One hundred percent of the collection on Cash-Allied Bank P450,000
accounts receivable is recorded as a cash receipt; 80% of Currency on hand 160,000
the collection is recorded in the cash disbursements books Petty cash Fund 10,000
as a payment on the loan. In connection with the Cash in Fund sinking fund 150,000
hypothecation, the following facts were determined: Notes receivable (including notes
Included in the undeposited collections is cash from discounted with recourse,
the hypothecation of accounts receivable. Sales were P155,000) 365,000
P180,000 on November 30, and P200,000 at Accounts receivable P865,000
December 31. The balance was made up from Allowance for doubtful accounts (41,500) 814,500
collections which were entered on the books in the Interest receivable 5,250
manner indicated above.
Collections on accounts receivable deposited in Current liabilities reported in the December 31, 2013, statement of
December, other than deposits in transit, totaled financial position included:
P725,000. Obligation on discounted notes receivable P155,000
j. Interest on the bank loan for the month of December
charged by the bank but not recorded in the books, Transactions during 2014 included the following:
amounted to P38,000. a. Sales on account were P7,670,000.
b. Cash collected on accounts totaled P5,765,000, including
QUESTIONS: Based on the above and the result of your audit, accounts of P930,000 with cash discounts of 2%.
answer the following: c. Notes received in settlement of accounts totalled
P825,000.
A. Examination of cash receipts records to determine Jumbo Unlimited Inc. shares P27.00 per share
promptness of interest and principal payments.
B. Reconciliation of the detail of notes receivable and QUESTIONS:
the provision for uncollectible amounts to the general Based on the above and the result of your audit, determine the
ledger control. following:
C. Confirmation of note receivable balances with the 31. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April
debtors. 15, 2014
D. Examination of notes for appropriate debtors' A. P1,000 gain
signatures. B. P1,000 loss
30. A logical substantive test for accrued interest receivable C. P11,875 gain
would be to D. P11,875 loss
A. Verify the interest income by a calculation based on 32. Net realized gain or loss on sale of 4,000 Bulaklak Inc.
the face amount of notes and the nominal interest shares on May 4, 2014
rate. A. P12,000 gain
B. Recalculate interest earned and compare it to the B. P4,000 gain
amounts received. C. P12,000 loss
C. Verify the cost, carrying value, and market value of D. P 4,000 loss
notes receivable. 33. Carrying amount of Trading Securities as of December 31,
D. Compare the interest income with published interest 2014
investment records. A. P2,337,000
B. P2,287,800
PROBLEM NO. 7 C. P2,304,100
On December 31, 2013, La Cost Company's financial statements D. P2,297,400
showed the following balances related to its securities accounts: 34. Carrying amount of Available for Sale Securities as of
Trading securities P1,477,500 December 31, 2014
Available-for-sale securities (AFS) 1,180,000 A. P844,000
B. P806,000
La Cost's securities portfolio on December 31, 2013, was made up of C. P906,000
the following securities: D. P944,000
Security Classification Cost Fair value 35. In 2014, what amount of unrealized gain or loss should be
10,000 Yeye shown as component of income and equity?
Bonel Corp. Income Equity
shares Trading P750,000 P762,500 A. P28,725 gain P62,000 gain
8,000 Totoy B. P28,725 gain P22,000 loss
Bibo Inc. C. P32,900 loss P122,000 loss
shares Trading 550,000 528,250 D. P39,600 gain P78,000 gain
10%
Mayniladlad PROBLEM NO. 8
bonds Trading 250,000 186,750 On January 2, 2013, the Lakers, Inc. issued P4,000,000 of 8%
10,000 convertible bonds at par. The bonds will mature on January 1, 2017
Bulaklak Inc. Available for and interest is payable annually every January 1. The bond contract
shares sale 590,000 630,000 entities the bondholders to receive 6, P100 par value, ordinary
20,000 Jumbo Available for shares in exchange for each P1,000 bond. On the date of issue, the
Inc. shares sale 490,000 550,000 prevailing market interest rate for similar debt without the
conversion option is 10%.
During 2014, the following transactions took place:
Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. On December 31, 2014, the holders of the bonds with total face
for P229,500, classified as held for trading. value of P2,000,000 exercised their conversion privilege. In addition,
Apr. 15 Sold 4,000 shares of Totoy Bibo Inc. for P69 per share. the company reacquired at 110, bonds with a face value of
May 4 Sold 4,000 shares of Bulaklak Inc. for P62 per share P1,000,000.
Oct 30 Purchased 15,000 shares of Pasaway Co. for P832,500,
classified as held for trading QUESTIONS: Based on the above and the result of your audit,
answer the following:
The fair values of the shares and bonds on December 31, 2014, are 36. How much of the proceeds from the issuance of
as follows: convertible bonds should be allocated to equity?
Yeye Bonel Corp. shares P76.60 per share A. P1,266,000
Totoy Bibo Inc. shares P68.50 per share B. P 253,632
Pasaway Co. shares P55.25 per share C. 2443,328
Mayniladlad water bonds P205,550 D. P0
Bulaklak Inc. shares P61.00 per share
37. How much is the carrying amount of the bonds payable as Dec. 20 Perseverance retired 1,000 treasury shares and
of December 31, 2013? reverted them to an unissued basis. On this date, the
A. P4,000,000 market value of the ordinary share was P150 per share.
B. P3,592,340 Dec. 31 Profit for 2014 was P500,000.
C. P2,778,800
D. P3,801,000 QUESTIONS:
38. How much is the interest expense for the year 2014? Based on the above and the result of your audit, determine the
A. P320,000 following as of December 31, 2014:
B. P359,234 41. Share capital
C. P277,880 A. P21,400,000
D. P380,100 B. P21,300,000
39. The conversion of the bonds on December 31, 2014 will C. P14,800,000
increase share premium by D. P21,250,000
A. P730,553 42. Share premium
B. P615,786 A. P4,627,500
C. P800,000 B. P3,007,500
D. P0 C. P4,632,500
40. How much is the loss on bond reacquisition on December D. P4,592,500
31, 2014? 43. Total retained earnings
A. P100,000 A. P600,000
B. P192,106 B. P565,000
C. P134,724 C. P557,000
D. P0 D. P560,000
44. Total equity
PROBLEM NO. 9 A. P26,397,500
Perseverance Corporation was authorized at the beginning of 2012 B. P25,932,500
with 300,000 authorized shares of P100, par value ordinary shares. C. P26,492,500
At December 31, 2012, the shareholders' equity section of D. P26,445,000
Perseverance was as follows: 45. An auditor usually obtains evidence of shareholders'
equity transactions by reviewing the entity's
Share capital, par value P100 per share; P3,000,000 A. Canceled stock certificates.
authorized 300,000 shares; issued 30,000 B. Transfer agent's records.
shares C. Treasury stock certificate book.
Share premium 300,000 D. Minutes of board of directors meetings.
Retained Earnings 450,000
Total shareholder’s Equity P3,750,000 PROBLEM NO. 10
Bryant Corporation, a nonpublic entity, was incorporated on
On June 15, 2013, Perseverance issued 50,000 ordinary shares for December 1, 2013, and began operations one week late closing the
P6,000,000. A 5% share dividend was declared on September 30, books for the fiscal year ended November 30, 2014, the controller
2013 and issued on November 10, 2013 to shareholders of record on prepared the following financial statements:
October 31, 2013. Market value of ordinary share was P110 per Bryant Corporation
share on declaration date. The profit of Perseverance for the year Statement of Financial Position
ended December 31, 2013 was P475,000. November 30, 2014