LAGUNA STATE POLYTECHNIC UNIVERSITY

MIDTERM EXAMINATION
Auditing and Assurance: Concepts and Applications 1
1st Term SY 2020-2021

1. Janet Company reported sales revenue of P2,300,000 in the income statement for the year ended December 31,
2019. The entity wrote off uncollectible accounts totaling P25,000 during the current year. Additional information
are given below:

2018 2019
Accounts receivable P 500,000 P 650,000
Allowance for doubtful accounts 30,000 55,000
Advances from customers 100,000 150,0000

What amount should be reported as sales for 2019 under cash basis of accounting?

2. Ella Company experienced the following changes in selected accounts for the current year:

January 1 December 31
Advances from customers P 150,000 P 200,000
Accounts receivable 400,000 250,000
Sales – accrual 2,500,000

The entity showed a balance in accounts receivable of P840,000 at the end of the current year. What amount
should be reported as sales under cash basis of accounting?

3. Harry Company reported rent income for the current year of P300,000 under accrual basis of accounting.

Accrued rental income, December 31 P 20,000

Accrued rental income, January 1 15,000
Unearned rental income, December 31 37,500
Unearned rental income, January 1 25,000

What amount was received from rental in the current year?

4. Lito Company maintained accounting records on the cash basis but restated the financial statements to the accrual
basis of accounting. The entity had P3,000,000 in cash basis income for 2019.
The entity provided the following information at year-end:

2018 2019
Accounts payable P 750,000 P 1,500,000
Accounts receivable 2,000,000 1,000,000

What amount of income should be reported in the 2019 income statement under accrual basis of accounting?

5. Candy Company provided the following information at year-end:

Accounts payable:
January 1 P 750,000
December 31 925,000

Accounts receivable:
January 1 600,000
December 31 675,000

Additional information:
 Cash payments to trade creditors amounted to P2,500,000 after discounts of P100,000.
  Purchase returns amounted to P200,000, of which an amount of P50,000 was received from suppliers.
 Cash receipts from customers after P250,000 discounts totaled P4,000,000.
 Accounts written off amounted to P50,000 during 2019.
 Sales returns amounted to P125,000, of which an amount of P25,000 was paid to customers.

What is the anount of gross sales under accrual basis of accounting?

6. Use the information in question no. 5, what is the amount of net sales under accrual basis of accounting?

7. Use the information in question no. 5, what is the amount of gross purchases under accrual basis of accounting?

8. Use the information in question no. 5, what is the amount of net purchases under accrual basis of accounting?

9. Danny Company had total assets of P2,000,000 and shareholders’ equity of P1,040,000 at the beginning of the
year. During the year, assets increased by P260,000 and liabilities decreased by P410,000. What is the
shareholders’ equity at the end of the year?

10. Bong Company reported the following changes in the account balances for the current year, except for retained
earnings:

Cash – increased P 400,000

Accounts receivable, net – increased 125,000
Inventory – increased 625,000
Investments – decreased 250,000
Accounts payable – decreased 200,000
Bonds payable – increased 450,000
Share capital – increased 500,000
Share premium – increased 50,000

There are no entries in the retained earnings account except for net income and a dividend declaration of P150,000
which was paid in the current year. What was the net income for the current year?

11. Prince Company provided the following information for the current year:

January 1 December 31
Accounts payable P 265,000 P 240,000
Merchandise inventory 430,000 390,000
Accounts receivable 335,000 450,000
Cash 310,000 ?

Additional information:
 The sales and cost of goods sold were P3,990,000 and P2,915,000, respectively. All sales and purchases
were on credit.
 Various expenses of P535,000 were paid in cash.
 There were no other pertinent transactions during the current year.

For the current year, what is the amount of collections from customers?

12. Use the information in question no. 11, what is the payment of accounts payable for the current year?

13. Use the information in question no. 11, what is the cash balance on December 31?

14. In line with your audit of Sundae Company for the period ended December 31, 2019, your audit staff provided
you the following audit notes:

 The following information had been provided by the company’s accountant based on its cash records:
cash collections from customers, P22,890,000; cash payments to suppliers, P12,245,000; cash payment of
operating expenses, P4,325,000; cash payment for acquisition of an equipment, P2,500,000; cash
 collection from disposal of an equipment, P520,000; cash refunds received from purchase returns,
P320,000; cash refunds paid for sales returns, P415,000.
 Accounts receivables from customers increased during the year by P2,100,000. Total discounts taken by
customers was at P790,000 while total sales returns which included the customer refunds was at
P1,210,000.
 The allowance for doubtful accounts increase during the year by P420,000. During the year, the company
wrote-off P560,000 in doubtful accounts. While recovery of previous write-off (included in the cash
collections from customers) was at P210,000.
 Advances from customers decreased during the year by P950,000.
 Advances to suppliers increased during the year by P756,000.
 Accounts payable to suppliers increased during the year by P1,890,000. Total discounts taken by the
company for purchases was at P645,000 while total purchases returns which included the supplier refunds
was at P980,000.
 Inventories increased during the year by P1,345,000.
 The equipment account increased by P1,000,000 during the year while carrying value of the equipment
sold during the year was at P800,000.
 The accumulated depreciation account increased by P500,000 during the year.

What is the amount of gross sales under accrual basis of accounting?

15. Use the information in question no. 14, what is the amount of gross purchases under accrual basis of accounting?

16. Use the information in question no. 14, what is the amount of cost of goods sold under accrual basis of
accounting?

17. Use the information in question no. 14, what is the correct amount of doubtful accounts expense for the year?

18. Use the information in question no. 14, what is the correct amount of depreciation expense for the year?

Use information below for questions 19 to 23

The following balances have been excerpted from Chloe’s Statement of Financial Position for the year:
Interest payable – increase P 17,000
Prepaid interest – decrease 11,000
Unearned rent income – decrease 80,000
Rent receivables – increase 28,000
Notes receivable, trade – increase 200,000
Accounts payable – decrease 400,000
Merchandise inventory – decrease 50,000
Accounts receivable – decrease 200,000

Additional information:
 Accounts receivable written off during the year amounting to P20,000.
 Cash received from customers, P8,400,000.
 Cash paid to creditors, P5,600,000.
 Sales discounts, P60,000.
 Sales returns and allowances, P40,000.
 Purchase discounts, P80,000.
 Purchase returns, P20,000.
 Cash received from tenants, P800,000.
 Interest paid, P200,000.

Requirements: Based on the above information, answer the following questions:

19. What is the amount of gross sales?

20. What is the amount of gross purchases?

21. What is the amount of the cost of sales for the year?
22. What amount of rent income should the company report for the year?

23. How much interest expense should the company report for the year?

Use information below for questions 24 to 25

Puppy Company provided the following information in relations to its property, plant and equipment account:

January 1 December 31
Equipment P 200,000 P 240,000
Accumulated depreciation 30,000 36,000

Additional information:
 At the start of the year, Puppy Company acquired an equipment and at the same time disposed of an
equipment with a carrying amount of P50,000, accumulated depreciation of P30,000 for P70,000.
 Depreciation rate per annum is 15%.

Requirements:
24. How much is the cost of the machine disposed?

25. How much is the cost of the machine acquired?

Use information below for questions 26 to 31

You discovered the following errors in connection with your examination of the financial statements of Analou
Corporation:
 On December 31, 2018, the ending inventory was overstated by P40,000.
 Sale of merchandise on account on December 30, 2018 amounting to P160,000 was not recorded until it was
collected in January 2019. The merchandise was properly excluded in the ending inventory in 2018.
 Purcases of mechandise on account on December 25, 2018 amounting to P120,000 was not recorded until it
was paid in January 2019. The merchandise was properly included in the ending inventory in 2018.
 The following data were extracted from the financial statements of Analou Corporation:

2018 2019
Retained earning, ending P 400,000 P 720,000
Net income 400,000 320,000
Working capital 360,000 520,000

Requirements: Based on the data above, determine the following:

26. Net income in 2018

27. Net income in 2019

28. Retained earnings, ending of 2018

29. Retained earnings, ending of 2019

30. Working capital in 2018

31. Working capital in 2019

Use information below for questions 32 to 36

Andrew Inc., is a calendar year corporation. Its financial statements for the years ended 2018 and 2019 contained
errors as follows:

2018 2019
Unearned income P 2,400 understated -
Accrued income - P 6,000 understated
Prepaid expenses 10,000 understated 24,000 understated
Accrued expenses 9,000 understated 15,000 understated
 Depreciation expense 22,000 overstated 14,000 overstated
Ending inventory 12,000 understated 20,000 overstated

Requirements: Based on the data above, answer the following (ignore effect of taxes)
32. What is the total effect of the errors on the 2018 net income?

33. What is the total effect of the errors on the company’s working capital at December 31, 2018?

34. What is the total effect of the errors on the 2019 net income?

35. What is the total effect of the errors on the company’s working capital at December 31, 2019?

36. What is the total effect of the errors on the balance of the company retained earnings at December 31, 2019?

Use information below for questions 37 to 40

Shane Company began operations on January 1, 2019. The financial statements contained the following errors:

2019 2020
Ending inventory P160,000 understated P150,000 overstated
Depreciation expense 60,000 understated
Insurance expense 100,000 overstated 100,000 understated
Prepaid insurance 100,000 understated
On December 31, 2020, fully depreciated machinery was sold for P108,000 cash but the sale was not recorded until
2021. No corrections have been made for any of the errors.

Requirements: Ignoring income tax, what is the total effect of the errors on
37. Net income for 2019

38. Net income for 2020

39. Retained earnings on December 31, 2020

40. Working capital on December 31, 2020?

Use information below for questions 41to 45

Tela Company revealed the following errors in the financial statements:
December 31, 2019 inventory overstated P 35,000
December 31, 2020 inventory understated 10,000
Depreciation for 2019 overstated 25,000
Depreciation for 2020 understated 8,000
December 31, 2019 prepaid insurance understated 5,000
December 31, 2020 unearned rent income overstated 4,000
December 31, 2020 accrued salaries understated 20,000
Requirements: Ignoring income tax
41. What is the effect of the errors on net income for 2019?

42. What is the effect of the errors on net income for 2020?

43. What is the effect of the errors on retained earnings on December 31, 2020?

44. What is the effect of the errors on working capital on December 31, 2020?

45. Malaya Company showed income before income tax of P6,500,000 on December 31, 2019. The year-end
verification of the transactions revealed the following errors:
 Insurance premium covering the period from July 1, 2019 to July 1, 2020 amounting to P200,000 was
paid and recorded as expense on July 31, 2019. The entity did not make any adjustment at the end of
the year.
 Rent P300,000 on an equipment applicable for six months was received on November 1, 2019. The
entire amount was reported as income upon receipt.
  Advertising for December 2019, amounting to P500,000, was recorded when payment was made in
January 2020.
 A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-end. Since
the merchandise was still at the port area, it was inadvertently omitted from the inventory on
December 31, 2019.
 Merchandise worth P1,000,000 was purchased in 2019 and included in the ending inventory.
However, the purchase was recorded only in 2020.

What is the corrected income before tax for 2019?