College of Accounting Education

3F Facundo Hall, Business and Engineering Building

Matina Campus, Davao City
Telefax: (082)300-1496
Phone No.: (082) 305-0645 Local 137

FINAL Examination – Applied Auditing

1st SY 2017-2018

INSTRUCTION: Follow the instruction in the special answer sheet.

Problem 1
You are engaged to audit the books of Yanguas Enterprise. From the records of the company, you gathered the
following information:

Yanguas Enterprises started its operation on October 2, 2017 with Tropico investing P150,000 cash. Monthly bank
reconciliation statements have not been prepared; however, bank statements for October, November, and
December were made available to you. Your analysis of these bank statements showed total bank credits
(deposits) of P575,000 including Tropico’s initial investment and a bank loan, details of which are in the additional
data. The bank statement in December 2017 showed an ending balance of P30,380.

Examination of the paid checks disclosed that checks totaling P4,500 were issued by the company in December,
2017, and were presented for payments only in January 2018. Cash count of the cashier’s accountability
amounted to P6,300. You were told by the cashier that P5,000 of these, in checks, were cash sales on December
28, 2017, deposited on January 3, 2018. The balance, in currency and coins, represents petty cash fund.

Additional data:

a. Accounts receivable subsidiary ledgers had a total balance of P70,000 at December 31, 2017. P5,000 of
this was ascertained to be uncollectible.

b. Suppliers’ unpaid invoices for merchandise totaled P15,000, while an account for store fixtures bought
for P50,000 had an unpaid balance of P5,000.

c. Merchandise inventory at December 31, 2017 amounted to P30,000 but P5,000 of these were spoiled
with no resale value.

d. The bank statement in October showed a bank credit for P98,000, dated October 2, 2017. Inquiry from
the cashier disclosed that the amount represents proceeds of a 90-day, discounted bank note. P80,000 of this
loan was paid by check in December 2017.

e. Operating expenses paid during the period totaled P180,000; while merchandise purchases amounted to
P250,000.

f. The gross profit rate is 120% of cost.

Questions:

1. The unaccounted cash receipt is

a. P 67,000 b. P 72,000 c. P 82,000 d. P 87,000

2. The unsupported and unrecorded disbursement is

a. P 2,820 b. P 3,320 c. P 7,820 d. P 11,220

3. Total shortage is
a. P 78,220 b. P 79,820 c. P 89,820 d. P 90,320

4. The cash per ledger before adjustment is

a. P 119,400 b. P 120,700 c. P 135,700 d. P 200,700

5. The adjusted cash balance is

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 a. P 24,280 b. P 25,880 c. P 30,380 d. P 30,880

Solution:

Collection from customers

Purchases 250,000
Less: Ending Inventory 30,000
Cost of Sales 220,000
Add: 120% 264,000
Total Sales 484,000
Less: AR 70,000
Collections 414,000

Reconstruction of Cash Account

Receipts: Investment 150,000
Loan proceeds 98,000
Collections from customer 414,000 662,000

Disb. Petty Cash fund 1,300

Purchases (250,000 – 15,000) 235,000
Furniture 45,000
Loan repayment 80,000
Operating expenses 180,000 541,300
Balance Cash – December 31, 2009 120,700

Bank Reconciliation
Bank Book
Unadjusted bal. 30,380 120,700
Outstanding checks (4,500)
Dep. In transit 5,000 ______
Total 30,880 120,700
Shortage _____ (89,820)
Adjusted balance 30,880 30,880

Receipts disbursement
Per bank 575,000 544,620
Outstanding checks 4,500
Deposit in transit 5000 _______
Adjusted bal. 580,000 549,120
Per reconciliation 662,000 641,300
Unaccounted receipts 82,000
Unsupported disb. 7,820

Problem 2
You are auditing the financial statements of Asidor Corporation for the year ended December 31, 2017. The
internal control procedures surrounding cash transactions were not adequate. Marcela Ramos, the bookkeeper-
cashier, handles cash receipts, maintains accounting records, and prepare the monthly reconciliations of the bank
account.

The bookkeeper-cashier prepared the following reconciliation at the end of the year.

Balance per bank statement P350,000

Add: Deposit in transit P175,250
Note collected by bank 15,000 190,000
Balance P540,250
Less: Outstanding checks 246,750
Balance per general ledger P293,500

In the process of your audit, you gathered the following:

a. At December 31, 2017, the bank statement and the general ledger showed balances of P350,000 and
P293,500, respectively.
b. The cut-off bank statement showed a bank charge on January 2, 2018 for P30,000 representing a correction
of an erroneous credit.
c. Included in the list of the outstanding checks were the following:
 A check payable to a supplier, dated December 29, 2017, in the amount of P14,750 released on
January 5, 2018.
 A check representing advance payment to a supplier in the amount of P37,210, the date of which is
January 4, 2018, and released in December, 2017.
d. On December 31, 2017, the company received and recorded customer’s postdated check amounting to
P50,000.
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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
 Required:
6. The adjusted deposit in transit at December 31, 2017:
a. P175,250 b. P125,250 c. P225,250 d. P125,000

7. The adjusted outstanding checks as at December 31, 2017:

a. P298,710 b. P232,000 c. P209,540 d. P194,790

8. The adjusted cash to be presented in the balance sheet as at December 31, 2017:
a. P235,460 b. P250,460 c. P265,460 d. P310,460

9. The cash shortage

a. P45,000 b. P58,040 c. P60,000 d. P8,040

10. The net adjustments to cash account

a. P43,040 b. P60,000 c. P58,040 d. P45,000

Bank Book
Unadj. Bal 350,000 Unadj. Bal 293,500
DIT 175,250 CM - notes 15,000
OC (246,750)
Error - over Receipt (30,000)
Unreleased check 14,750 Unreleased check 14,750
Company's PDC 37,210 Company's PDC 37,210
Customers' PDC (50,000) Customers' PDC (50,000)
250,460 310,460
- Cash shortage (60,000)
Adjusted bal. 250,460 Adjusted bal. 250,460

DIT per book 175,250 OC per book 246,750

Customers' PDC (50,000) Unreleased check (14,750)
Adjusted DIT 125,250 Company's PDC (37,210)
Adjusted OC 194,790

Cash per book 293,500

Cash per audit 250,460
Net Adjustment 43,040

Problem 3
In connection with your examination of the financial statements of Aguilar, Inc for the year ended December 31,
2019, you were able to obtain certain information during your audit of the accounts receivable and related
accounts.

The December 31, 2019 balance in the Accounts Receivable control accounts is P788,000.

The only entries in the Doubtful Accounts Expense account were:

 A credit for P1,296 on December 2, 2019 because
Company A remitted in full for the accounts charged off on October 31, 2019; and
 A debit on December 31 for the amount of the
credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance

January 1, 2019 P14,632
October 31, 2019
Uncollectible accounts:
Company A – P1,296
Company B – P3,280
Company C – P2,256 P6,032 8,600
December 31, 2019 P39,400 P48,000

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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
An aging schedule of the accounts receivable as of December 31, 2019 is presented below:

Age Net debit balance Amount to which the Allowance is to be

Adjusted after adjustment and
Corrections have been made
0 to 1 month P372,960 1 percent
1 to 3 months 307,280 2 percent
3 to 6 months 88,720 3 percent
over 6 months 24,000 Definitely uncollectible, P4,000; P8,000 is
considered 50% uncollectible; the remainder is
estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an advance on a sales
contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of P2,000 for which
merchandise will be accepted by the customers.

The ledger accounts have not been closed as of December 31, 2019. The Accounts Receivable control account is
not in agreement with the subsidiary ledger. The difference cannot be located, and you decided to adjust the
control account to the sum of the subsidiaries after corrections are made.

Questions:
Based on the above and the result of your audit, answer the following:

11. How much is the adjusted balance of Accounts Receivable as of December 31, 2019?
a. P794,000 b. P793,200 c. P802,960 d. P798,960

12. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2019?
a. 19,057 b. 63,552 c. 23,057 d. 18,937

13. How much is the net adjustment to the Allowance for Doubtful Accounts?
a. P28,943 debit c. P15,552 credit c. P24,493 debit d. P29,063 debit

14. How much is the Doubtful Accounts expense for the year 2019?
a. P18,411 b. P58,456 c. P13,841 d. P13,961

15. How much is the net adjustment to the Doubtful Accounts expense account?
a. P20,352 debit b. P24,143 credit c. P24,263 credit d. P19,693 credit

PROBLEM 9
GL SL - Net NET AMOUNT
788,000 792,960 372,960 307,280 88,720 24,000
(800)
(4,000) (4,000) (4,000)
8,000 8,000 8,000
2,000 2,000 2,000
793,200 798,960
5,760 - - - - -
798,960 798,960 380,960 309,280 88,720 20,000
8,000 12,000
x 1% x 2% x 3% x 50% X 20%
Required Allow. 19,057 3,810 6,186 2,662 4,000 2,400

OE: Cash 1,296

Bad Debts 1,296 Allow. for DA
CE: Cash 1,296 1,296 6,832 14,632
Allow. for DA 4,000 1,296
Adj: Bad Debts 1,296 13,961 DA Exp.
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 Allow. for DA 1,296 19,057
OE: Bad Debts 39,400
Allow. for DA 39,400 Allow. for DA
CE: Bad Debts 13,961 Per Book 48,000
Allow. for DA 13,961 Per Audit 19,057
Adj: Allow. for DA 25,439 Adj. overstatement 28,943
Bad Debts 25,439
Adj: Allowance for DA 800 Bad Debts Exp
Accnts. Receiv 800 39,400 1,296
Adj: Allowance for DA 4,000
Accnts. Receiv 4,000 38,104
Adj: Accnts. Receiv. 8,000
Adv. From cust. 8,000 Bad Debts:
Adj: Accnts. Receiv. 2,000 Per Book 38,104
Cust. with cr. Bal. 2,000 Per Audit 13,961
Adj: Accnts. Receiv. 5,760 Adj. overstatement 24,143
Sales 5,760

Problem 4
Angelo Company, a financing company, extended a loan to Alonso Corporation amounting to P10M on January 1,
2011 receivable five years after. The loan bears 10% annual interest collectible at the end of each year starting
December 31, 2011. The company paid direct origination cost amounting to P300,000 and charged Alonso
Corporation origination fees at P1,020,955. The yield on the loan under this arrangement was at 12%.

The 2011 to 2013 interest were collected as scheduled.

By the end of 2014, due to financial difficulties being experienced by Alonso Corporation, Alonso Corporation
failed to pay the annual interest as scheduled and Angelo Company is doubtful as to the collectability of the
remaining interest and the principal.

After due consideration and correspondence with Alonso Corporation, Angelo Company estimated that it will be
able to recover the following amounts at respective estimated dates:

Amount Expected recovery date

P1,000,000 December 31, 2015
2,000,000 December 31, 2016
2,500,000 December 31, 2017
2,500,000 December 31, 2018

Required: (round-off PV factor to 4 decimal places)

16. What is the carrying value of the loans receivable as of December 31, 2014 before impairment?
a. P 9,392,530 b. P 9,519,634 c. P 9,661,990 d. P 9,821,429

17. How much is impairment loss on the receivable (including interest receivable) as of December 31, 2014?
a. P 4,806,499 b. P 4,965,879 c. P 6,344,509 d. P 6,855,491

18. What is the correct net book value of the receivable as of December 31, 2014?
a. P 5,344,509 b. P 5,855,550 c. P 6,344,509 d. P 6,855,491

19. Assume that in December 31, 2015, amounts were received as estimated, what is the balance of the
receivable as of December 31, 2015?
a. P 2,232,143 b. P 2,500,000 c. P 4,225,128 d. P 5,558,216

20. Assume that in December 31, 2016, amounts were received as estimated, what is the correct interest
income to be recognized in 2016?
a. P 267,857 b. P 507,015 c. P 666,986 d. P 702,659

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Solution
Int. Received Int. Inc. Amort Amortized Cost
9,279,045 1/1/2011
1,000,000 1,113,485 113,485 9,392,530 12/31/2011
1,000,000 1,127,104 127,104 9,519,634 12/31/2012
1,000,000 1,142,356 142,356 9,661,990 12/31/2013
1,000,000 1,159,439 159,439 9,821,429 12/31/2014

Recoverable cost - based on original yield rate

1,000,000 x 0.8929 892,900
2,000,000 x 0.7972 1,594,400
2,500,000 x 0.7118 1,779,500
2,500,000 x 0.6355 1,588,750 5,855,550
Carrying value of loans (9,821,429 + 1,000,000) 10,821,429
Impairment loss (4,965,879)

Int. Received Int. Inc. Amort Principal Amortized Cost

5,855,550 12/31/2014
- - 702,666 1,000,000 5,558,216 12/31/2015
- - 666,986 2,000,000 4,225,202 12/31/2016
- - 507,024 2,500,000 2,232,226 12/31/2017
- - 267,774 2,500,000 0 12/31/2018

Problem 5
Barangan Company has the following transactions in 2017 involving notes receivable:

May 1 Received a P1,000,000, 90-day 12% interest bearing note from Barbosa Company in settlement
of account.

1 Received a P1,500,000, six-month, 12% interest bearing note from Barlovinto Company in
settlement of account.

Jul. 30 Barbosa Company defaulted on the P1,000,000 note.

Aug. 1 Discounted the Barlovinto Company note at a bank at 15%.

Sept.1 Received a one-year noninterest bearing note from Bastunan in settlement of a P600,000 account
receivable. The face value of the note was P660,000.

28 Collected the defaulted Barbosa Company note plus accrued interest at 12% per annum on the
total amount due.

Oct.1 Received a P2,500,000, 90-day note from Batante. The note is for the payment goods purchased
and bears interest at 12%.

Nov.1 Barlovinto defaulted on the P1,500,000 note, Barangan Company paid the bank the total amount
due plus P60,000 for protest fee and other bank charges.

Dec.30 Collected Batante note in full.

Collected from Barlonvinto Company in full including interest on the total amount due at 12% since default date.

Questions:
Based on the above and the result of your audit, answer the following:

21. The proceeds from discounted Barlovinto note on August 1, 2017 is

a. P 1,530,375 b. P 1,542,300 c. P 1,487,062 d. P 1,000,000
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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
22. The amount collected on September 28, 2017 on the defaulted Barbosa Company note is
a. P1,030,000 b. P 1,050,000 c. P 1,050,600 d. P 1,081,500

23. The amount collected on December 31, 2017 on defaulted Barlovinto note is
a. P 1,683,000 b. P 1,681,800 c. P 1,650,000 d. P 1,680,000

24. The interest income to be recognized in 2017 related to these transactions is

a. P 128,600 b. P 248,975 c. P 158,975 d. P 223,600

25. Which of the following audit procedures provides the best evidence about the collectibility of notes
receivable?
a. Examination of cash receipts records to determine the best evidence about the principal
payments.
b. Reconciliation of the detail of notes receivable and the provision for uncollectible amount to the
general ledger control.
c. Confirmation of note receivable balances with the debtors.
d. Examination of notes for appropriate debtors’ signatures.

PROBLEM 19
Notes Receiv. Acc. Int. Int. Inc. Liab. On NR disc. Int. Expense Accn. Receiv.
Barbosa 1,000,000
(1,000,000) 30,000 1,030,000
20,600 (1,030,000)
             
Barlovinto 1,500,000
45,000 (1,500,000) 14,625
(1,500,000) 1,500,000 1,650,000
33,000 (1,650,000)
             
Bastunan 660,000 20,000
             
Batante 2,500,000
(2,500,000) 75,000
12/31/17 bal. 660,000 - 223,600 - 14,625 -

P = 1,590,000 - 59,626 = 1,530,375

Cash 1,530,375
Int. Exp 14,625
Liab. On NR disc. 1,500,000
Interest income 45,000

OE: NR 660,000
Accnts. Receiv. 600,000
Unearned int. inc. 60,000

Problem 6
You have been engaged for the audit of the Aude Company for the year ended December 31, 2017. The Aude
Company is engaged in the wholesale business and makes all sale at 30% gross profit based on sales price.
Portions of the client’s Sales and Purchases accounts follow.

Sales
Date Reference Amount Date Reference Amount
12/31 Closing entry P4,313,000 Balance forwarded P4,000,000
12/27 SI No. 706 60,000
12/28 SI No. 708 80,000

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 12/28 SI No. 709 50,000
12/31 SI No. 710 40,000
12/31 SI No. 711 45,000
_________ 12/31 SI No. 712 38,000
P4,313,000 P4,313,000

Purchases
Date Reference Amount Date Reference Amount
Balance forwarded P3,200,000 12/31 Closing entry P3,735,000
12/28 RR No. 903 100,000
12/30 RR No. 905 110,000
12/31 RR No. 906 150,000
12/31 RR No. 907 175,000 _________
P3,735,000 P3,735,000
RR – Receiving report
SI – Sales invoice

You observed the physical inventory count in the warehouse on December 31, 2017 and were satisfied that it was
properly taken. When performing sales and purchases cutoff tests, you found that at December 31, 2017:

A. The last receiving report was No. 907.

B. The last sales invoice used with actual shipment of goods was No. 709.

You also obtained the following information:

a. Included in the physical inventory were goods purchased and received on RR No. 904 but the
invoice of which was received on January 3, 2018. Cost was P89,000.

b. In the warehouse at December 31, 2017 were goods and paid for by the customer but were held
pending shipping instructions from the customer. The good are covered by SI No. 706 and were not included
in the inventory.

c. The company uses the railroad facilities of PNR for its purchases and sales shipments. In the
evening of December 31, 2017, there were three (3) cars on the Aude Company siding:

1. Car No. 1 was unloaded on January 2, 2018 and received on RR No. 905. The freight was
paid by the vendor.

2. Car No. 2 was loaded and sealed on December 31, 2017, and was switched off the
company’s siding on January 2, 2018. These goods were billed on SI No. 708 and the freight was paid by
Aude Company.

3. Car No. 3 was loaded and sealed on December 31, 2017, and was switched off the
company’s siding on January 2, 2018. The sales price was P12,700 and the freight was paid by the
customer. This order was covered by SI No. 707.

d. The tracks were damaged in Quezon Province, thus temporarily stranding at December 31, 2017,
train trip No. 143. In the train, cars were goods in transit to a customer in Bicol. The goods were billed on SI
No. 709 and the terms FOB destination.

e. In transit to Aude Company on December 31, 2017, were goods received on RR No. 910. The
freight of P3,000 was paid by Aude Company on January 4, 2018. However, the freight was properly deducted
from the purchase from the purchase price of P31,000.

f. Included in the physical inventory were damaged goods which were exposed to rain while in
transit and deemed unsalable. The invoice cost was P10,000, and freight charges of P700 were paid by Aude.

g. In transit to Aude on December 31, 2017 were goods acknowledged on RR No. 915. The freight of
P2,500 was paid by the supplier. The supplier’s invoice shows a total price of P37,500.

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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
Based on the preceding information, determine the following:

26. Total purchases for the year ended December 31, 2017
a. P3,704,000 b. P3,714,000 c. P3,814,000 d. P3,725,000

27. Total sales for the year ended December 31, 2017
a. P4,072,700 b. P4,152,700 c. P4,195,700 d. P4,060,000

28. Net increase (decrease) in accounts payable

a. (P117,000) b. P89,000 c. (P89,000) d. P117,000

29. The physical inventory count should be increased by

a. P201,000 b. P101,300 c. P229,300 d. P190,300

30. Amount of claims receivable from freight company

a. P10,000 b. P10,700 c. P700 d. P 0

Solution:
Adjusting Journal entries
December 31, 2017

a. Purchases 89,000
Accounts payable 89,000

b. Sales (SI No. 708) 80,000

Accounts receivable 80,000
c. Accounts receivable 12,700
Sales (SI. No. 707) 12,700

d. Sales (SI No. 709) 50,000

Accounts receivable 50,000

e. Claims receivable – Freight Co. 10,700

Purchases 10,000
Freight in 700

f. Sales (SI No. 710, 711, and 712) 123,000

Accounts receivable 123,000

1. C Total purchases (P3,735,000 + P89,000 – P10,000) P3,814,000

2. A Total sales (P4,313,000 – P80T + P12,700 – P50T – P123T) P4,072,700

3. B Net increase in accounts payable (see AJE a) P 89,000

4. D Adjustments to physical inventory count:

RR No. 905 P 110,000
SI No. 708 (P80,000 x 70%) 56,000
SI No. 709 (P50,000 x 70%) 35,000
Damaged items (10,700)

5. B Claims receivable from freight company (see AJE e) P 10,700

Problem 7
The general ledger trial balance of Marcos Corporation includes the following balance sheet accounts at
December 31, 2016:

Cash P1,056,000
Accounts receivable 1,220,000
Inventory 441,000
Listed investment held for trading purposes at fair value 200,000
Available for sale investment 500,000
Prepaid insurance 50,000
Deferred tax asset 150,000
Bank overdraft 100,000

Additional information:

Cash

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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
 The sales book was left open up to January 5, 2017, and cash sales totaling P150,000 were
considered as sales in December.
 Checks of P93,000 in payment of liabilities were prepared before December 31, 2016, recorded in
the books, but not mailed or delivered to payees.
 Post-dated checks totaling P78,000 are being held by the Cashier as part of Cash. The company’s
experience shows that post-dated checks are eventually realized.
 Customer’s checks for P15,000 deposited with but returned by Bank, “NSF” on December 27,
2016. Return was recorded in the books.
 The cash account includes P400,000 of compensating balance against a short-term bank loan. The
compensating balance is legally restricted as to withdrawal.

Accounts Receivable
The accounts receivable consists of the following:
Trade accounts receivable P 650,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Marcos on
consignment at 130% of cost (included in
Marcos’ ending inventory at cost) 260,000
Security deposit on lease of warehouse used for storing
some inventories 300,000
Total P1,220,000

Inventory
A physical count of inventory at December 31, 2018 revealed that Marcos had inventory on hand at that with a
cost of P441,000. The annual audit identified that the following items were excluded from this amount and the
related transactions were not recorded:
 Merchandise of P61,000 is held by Marcos on consignment. The consignor is Padua Ltd.
 Merchandise costing P38,000 was shipped by Marcos FOB destination to a customer on
December 31, 2016. The customer was expected to receive the goods on January 6, 2017.
 Merchandise costing P46,000 was shipped by Marcos FOB shipping to a customer on December
29, 2016. The customer was scheduled to receive the goods on January 2, 2017.
 Merchandise costing P83,000 shipped by a vendor FOB destination on December 31, 2006 was
received by Marcos on January 4, 2007.
 Merchandise costing P51,000 purchased FOB shipping by the supplier on December 31, 2006 and
received by Marcos on January 5, 2007.

Questions:
Based on the above and the result of the audit, determine the adjusted amounts of the following:

31. Cash
a. P 921,000 b. P 584,000 c. P 521,000 d. P 506,000

32. Net accounts receivable

a. P 630,000 b. P 767,800 c. P 782,800 d. P 754,000

33. Trade and other receivables, net

a. P 797,800 b. P 784,000 c. P 812,000 d. P 660,000

34. Inventory
a. P 730,000 b. P 530,000 c. P 451,000 d. P 340,000

35. Current assets

a. P 2,361,000 b. P 2,485,000 c. P 2,498,000 d. P 2,513,800

Cash AR Other Receiv Inventory

1,056,000 1,220,000 441,000
(150,000)
93,000
(78,000) 78,000
(400,000)
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Final Exam – Audtg 421: Applied Auditing 1 Sem SY 2017-2018 aguilar
 (30,000) 30,000
(260,000)
(300,000)
38,000
59,800
- - - 51,000

521,000 767,800 30,000 530,000

Problem 8
The following investment in trading securities account appear in the books of Letecia, Inc.

Date Particular Debit Credit

2016
1/1 Balance 5,349,000
1/31 Sold Edgar ordinary 640,920
3/31 Bought Darwin ordinary 365,000
6/30 Dividend on Cleeneth ordinary 300,000
7/31 Sold Cleeneth ordinary 262,500
8/1 Sold Charmaine bonds 675,000

The audit work papers of the preceding year show that the account balance as of January 1, 2016, consisted of the
following:

Edgar Company ordinary

30,000 shares, purchased in June 2013, P20 per share 600,000
60,000 shares, purchased in August 2014, P16 per share 960,000
45,000 shares, purchased in May 2015, P22 per share 990,000

Darwin Company ordinary

60,000 shares, purchased in January 2015, P33 per share 1,980,000

Cleeneth Company ordinary

3,000 shares, purchased in August 2014, P73 per share (par P100) 219,000

Charmaine Company 15% bonds

600 bonds, P1,000 each, purchased in July 2015, at par
Interest dates February 1 and August 1 600,000

Your examination discloses the following:

a. On January 31, 2016, 30,000 ordinary shares of the Edgar Company purchased in May 2015 were sold for
P640,920, net of brokerage fees.
b. On March 31, 2016, 15,000 ordinary shares of Darwin Company were purchased at P24.25 per share plus
brokerage fee, for P365,000.
c. In June 2016, the Cleeneth Company paid a 100% ordinary share dividend.
d. In July 2016, Letecia, Inc., sold to its president, for P125 per share, 3,000 shares ordinary of Cleeneth
Company, for which the president gave his check for P262,500 and a letter in which he agreed to pay the
balance upon demand of the treasurer of the company.
e. On August 1, 2016, Letecia, Inc., sold its Charmaine Company 15% bonds at 110 plus accrued interest.
f. The total market value of the securities at year-end amounted to P4,500,000.

Questions:

36. What is the gain on sale of Cleeneth Company shares on July 31, 2016?
a. P 109,500 b. P 153,000 c. P 156,000 d. P 265,500

37. What is the gain on sale of Charmaine Company bonds on August 1, 2016?
a. P 0 b. P 45,000 c. P 60,000 d. P 75,000

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38. The adjusting entry for the sale of Edgar Company ordinary shares on January 31, 2016, should include a
a. Debit to loss on sale for P19,080.
b. Credit to gain on sale for P19,080.
c. Debit to cash for P640,920.
d. Credit to investment in trading securities for P660,000.

39. The December 31, 2016, carrying amount (before market adjustment) of Letecia, Inc.’s investment in
trading securities is
a. P 4,233,750 b. P 4,343,250 c. P 4,344,500 d. P 4,500,000

40. What amount of unrealized gain should be reported in the income statement for the year ended
December 31, 2016?
a. P 155,500 b. P 156,750 c. P 158,000 d. P 206,250

Edgar Company

30,000 600,000
60,000 960,000
45,000 990,000

(30,000) (660,000) SP 640,920

1,890,000 CV (660,000)

Loss… (19,080)
Darwin Company

60,000 1,980,000

15,000 363,750

2,343,750

Cleeneth Company

3,000 + 3,000 219,000

(3,000) (109,500) SP 375,000

109,500 CV (109,500)

Gain… 265,500

Charmaine Bonds

600 600,000

(600) (600,000) SP 660,000

- CV (600,000)

Gain… 60,000

Total FMV of trading sec. 4,500,000

Total Trading Sec. per book 4,343,250

Unrealized holding gain - PL 156,750

Problem 9
At the beginning of 2014, Kathleen Corporation purchased 40% of the ordinary shares outstanding of Puerto
Incorporated for P15,000,000 when the net assets of Puerto Incorporated amounted to P30,000,000. At
acquisition date, the carrying amounts of the identifiable assets and liabilities of Puerto Incorporated were equal
to their fair value, except for the following:

a. Equipment whose fair value was P7,000,000 greater than its carrying amount.
b. Inventory whose fair value was P2,500,000 greater than its carrying amount.

The equipment has a remaining life of 4 years and the inventory was all sold during 2013.

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Puerto Incorporated has two classes of shares: Ordinary shares (par value, P100), 300,000 shares outstanding;
15% cumulative preference shares (par value, P50), 100,000 shares outstanding.

The investee reported the following net income (inclusive of enter-company transactions) and payment of cash
dividend:
2014 2015
Net Income 20,000,000 35,000,000
Dividend payment 5,000,000 8,000,000

The following were the inter-company transactions between the investor and the associates:

a. In 2014, the Puerto Incorporated sold inventory to Kathleen Corporation for P750,000. The cost of the
inventory was P500,000. 50% of these inventory was still unsold at the end of 2013 and the remainder were
sold in 2015.
b. On July 1, 2015, Kathleen Corporation sold an equipment for P900,000 to Puerto Incorporated. The carrying
amount of the equipment is P500,000 at the time of sale. The remaining life of the equipment is 5 years and
Puerto Incorporated uses the straight-line method of depreciating the equipment.

On January 1, 2016, Kathleen Corporation sold 70,000 shares of Puerto Incorporated at P260 per share. The
company incurred broker’s fee of P200,000. The sale resulted to loss of significant influence of Kathleen
Corporation over the operation of Puerto Incorporated. Kathleen designate the investment at fair value through
profit or loss on this date.

During 2014, Puerto Incorporated earned P25,000,000 net income and P10,000,000 cash dividend.

The following are the market value of Puerto Incorporated shares at year-end:

2014 - P 156.00
2015 - P 162.00
2016 - P 163.50

Questions:
41. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at December 31,
2014?
a. P 18,900,000 b. P 18,950,000 c. P 19,700,000 d. P 19,750,000

42. How much is the total investment income of Kathleen Corporation at December 31, 2014?
a. P 6,750,000 b. P 6,850,000 c. P 7,050,000 d. 7,650,000

43. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at December 31,
2015?
a. P 28,656,000 b. P 29,456,000 c. P 29,731,000 d. P 29,759,000

44. How much is the total investment income of Kathleen Corporation at December 31, 2015?
a. P 12,906,000 b. P 13,181,000 c. P 13,206,000 d. P 13,606,000

45. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at December 31,
2016?
a. P 8,100,000 b. P 8,175,000 c. P 12,273,333 d. P 14,773,333

Cash paid 15,000,000

NAA 12,000,000
Excess 3,000,000
Equipment 2,800,000
Inventory 1,000,000
Gain on acquisition (800,000)

Investment in Associates
Beg. Bal. 15,000,000 Dividend 2014 2,000,000
Share of Inc. ’14 7,650,000 Amort. – 2014 700,000
Gain on acquisition 800,000 Amort. – 2014 1,000,000
Bal. 2014 19,750,000 Dividend 2015 3,200,000
Share of inc. ‘ 15 13,606,000 Amort. – 2015 700,000

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Ba. 2015 29,456,000 Sale 17,182,667
Bal. 12,273,333

2014 2015
Unadjusted NI 20,000,000 35,000,000
Unrealized profit ( 250,000)
Realized profit 125,000 125,000
Unrealized profit ( 400,000)
Realized profit _________ 40,000
Adjusted NI 19,875,000 34,765,000
PS dividend ( 750,000) ( 750,000)
19,125,000 34,015,000
X 40% x 40%
Share of Income 7,650,000 13,606,000

Cash 18,200,000
Investment in associate 17,182,667
Gain on sale 1,017,333

Fair value of shares remaining (50,000 x 162) 8,100,000

CV of retained investment 12,273,333
Loss from remeasurement of investment 4,173,333

2016 investment income

Gain on sale 1,017,333
Loss from remeasurement ( 4,173,333)
Dividend income 1,666,667
Unrealized holding gain 75,000
Total investment loss (1,414,333)

Problem 10
Lee Company operates a chain of exotic restaurants. On January 1, 2007, Lee determined that it will need to
purchase 2,000 kilos of an exotic fish on January 1, 2008. On January 1, 2007, because of the volatile fluctuation
in the price of exotic fish, Lee negotiated a forward contract with Davao Bank to purchase 2,000 kilos of exotic fish
on January 1, 2008 at a price of P800 per kilo or P1,600,000. On December 31, 2007 and January 1, 2008, the
prevailing market price for fish is P820 per kilo. Lee purchases the exotic fish and settles the forward contract on
January 1, 2008. Assume that all conditions for hedge accounting are met and the appropriate discount rate is
12%.
Questions:

46. The amount to be recognized as derivative asset/liability on December 31, 2007 is

a. P 40,000 asset c. P 35,714 asset
b. P 40,000 liability d. P 0

47. The amount to be recognized in 2007 profit or loss related to this forward contract is
a. P 40,000 loss c. P 35,714 gain
b. P 40,000 gain d. P 0

48. If the prevailing market price is P750 per kilo on December 31, 2007, the amount to be recognized as
derivative asset/liability on December 31, 2007 is
a. P 100,000 asset c. P 89,286
b. P 100,000 liability d. P 0

Problem 11
Eddie Agriculture sells approximately 100,000 bushels of corn each month. On January 1, 2017, Eddie purchased
an option to sell 100,000 bushels of corn on January 1, 2018, at a price of P100 per bushel. The marker price on
January 1, 2017 is P100 per bushel. Eddie had to pay P200,000 to purchase this corn put option, which it
designated as a hedge against price decreases for its January 2018 sale of corn.

Question:
49. If the price of the corn on January 1, 2008 is P105 per bushel, Eddie shall recognize a gain or loss on put
option in 2008 at
a. P 300,000 gain c. P 500,00 gain
b. P 200,000 loss d. P 500,000 loss

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50. If the price of the corn on January 1, 2008 is P90 per bushel, Eddie shall recognize a gain or loss on put
option in 2008 at
a. P 800,000 gain c. P 1,000,000 gain
b. P 800,000 loss d. P 200,000 loss

Problem 12
In your initial audit of Asidoy Finance Co., you find the following ledger account balances.

Debit Credit
12%, 25-year Bonds Payable, 2013 issue
01/01/2013 P6,400,000

Treasury Bonds
10/01/2017 P864,000

Bond Premium
01/01/2013 320,000

Bond interest Expense

01/01/2017 384,000
07/01/2017 384,000

The bonds were redeemed for permanent cancellation on October 1, 2017 at 105 plus accrued interest.

Questions:
Based on the above and the result of your audit, determine the following: (use straight line method to amortize
premium or discount)

51. The adjusted balance of bonds payable as of December 31, 2017 is

a. P5,536,000 b. P6,400,000 c. P5,600,000 d. P4,000,000

52. The unamortized bond premium on December 31, 2017 is

a. P320,000 b. P224,000 c. P256,000 d. P235,200

53. The total bond interest expense for the year 2017 is
a. P756,400 b. P755,200 c. P731,600 d. P731,200

54. The gain or loss on partial bond redemption is

a. P 7,600 loss b. P72,400 loss c. P 7,600 gain d. P72,400 gain

Problem 13
The following information pertains to Letecia Nicole Company’s intangible assets:

a. On January 1, 2017, Letecia Nicole signed an agreement to operate as a franchise of CLEA’s World of
Waffle for an initial franchise fee of P1,500,000. Of this amount, P300,000 was paid when the agreement was
signed and the balance is payable in 4 annual payments of P300,000 each, beginning January 1, 2018. The
agreement provides that the down payment is not refundable and no future services are required of the
franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 14% (the implicit
rate for a loan of this type) is P874,000. The agreement also provides that 5% of the revenue from the
franchise must be paid to the franchisor annually. Letecia Nicole Company estimates the useful life of the
franchise to be 10 years.

b. Letecia Nicole incurred P1,300,000 of experimental and development costs in its laboratory to develop a
patent which was granted on January 2, 2017. Legal fees and other costs associated with registration of the
patent totaled P272,000. Letecia Nicole estimates that the useful life of the patent will be 8 years.

c. A trademark was purchased from XFactor Advertising for P640,000 on July 1, 2014. Expenditures for
successful litigation is defense of the trademark totaling P163,200 were paid on July 1, 2016. Letecia Nicole
Company estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Questions:
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55. What is the carrying value of the franchise at December 31, 2017?
a. P 1,056,600 b. P 1,174,000 c. P 1,350,000 d. P 1,500,000

56. What is the carrying value of the patent at December 31, 2017?
a. P 238,000 b. P 258,400 c. P 272,000 d. P 1,375,000

57. What is the carrying value of the trademark at December 31, 2017?
a. P 528,000 b. P 544,000 c. P 686,400 d. P 707,200

Problem 14
The accounting records of Garliet Corporation was organized in 2013 include only one account for all intangible
assets. The following is a summary of the items debited to the said account in 2014 and 2015:

Date Particulars Amount

July 1, 2014 Franchise (indefinite term) 1,260,000
Oct. 1, 2014 Lease advance payments (2-year term, starting Oct. 1, 2014) 840,000
Dec. 31, 2014 Net loss for 2014 including organization fees, P30,000, and
related legal fees of organizing the business, P150,000 480,000
Jan. 2, 2015 Purchased patent (10-year life) 2,220,000
Mar. 1, 2015 Cost of developing a recipe 2,250,000
Apr. 1, 2015 Purchased goodwill 8,352,000
July 1, 2015 Legal fees for successful defense of the patent purchased
in January 1, 2015 379,500

Audit notes:

a. On December 31, 2014, the management estimates that the annual net future cash flows from the franchise’s
continued use was P180,000. On December 31, 2015, this estimate was revised due to decline in product
demand to P150,000 annually.

b. On December 31, 2015, the estimated annual net future cash flows from the patent’s continued use was at
P337,822 for its remaining life.

c. The prevailing market rate of interest as of December 31, 2014 and 2015 was consistent at 12%.

Questions: Based on the above information and on your audit, answer the following questions:

58. What is the correct carrying value of the franchise as of December 31, 2015?
a. P 1,200,00 b. P 1,250,000 c. P 1,260,000 d. P 1,310,000

59. What is the correct carrying value of the patent as of December 31, 2015?
a. P 1,800,000 b. P 1,880,000 c. P 1,900,000 d. P 1,998,000

60. What is the total amount chargeable to expense for the current year (2015) as a result of your audit?
a. P 2,861,500 b. P 3,049,500 c. P 3,059,500 d. P 3,479,500

Solution:
Franchise:
CV – no definite life 1,260,000
Recoverable cost – 180,000/12% 1,500,000
Impairment loss in 2014 240,000

CV 1,260,000
Recoverable cost – 150,000/12% 1,250,000
Impairment loss 10,000

Patent:
Cost – 1/1/15 2,220,000
Amortization 222,000
CV – 12/31/15 1,998,000
Recoverable cost (337,822 * 5.32825) 1,800,000

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Impairment loss 198,000

2014 expenses:
Rent expense (840,000 / 2) x 3/12 105,000
Net loss for the year 480,000
Retroactive adjustment to RE, beg. 585,000

2015 expenses:
Impairment loss on franchise 10,000
Rent expense for 2015 420,000
Amortization on patent 422,000
Impairment loss on patent 198,000
Cost of developing a recipe 2,250,000
Legal fees on patent defense 379,500
Total expense 3,479,500

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