CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

 735-9031 / 735-8901

AUDITING PROBLEM OCTOBER 2007 BATCH

2nd PRE-BOARD EXAMS AUGUTS 19, 2007
(SUN) 7:30 – 10:00am
INSTRUCTIONS: Select the correct answer for each of the following questions. Mark
only one answer for each item by shading the box corresponding to the letter of your
choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. USE
PENCIL No. 1 or No. 2 only.

PROBLEM 1 - You are a senior accountant on the staff of Alejo & Associates, CPAs. You are
conducting the annual audit of Harry Corporation for calendar year 2007. You are now
working on the audit of the accounts receivable and related allowance for doubtful
accounts.

ACCOUNTS RECEIVABLE – TRADE

Reconciliation between General Ledger Balance and
The Total of Subsidiary Ledger Balances
December 31, 2007
Total of subsidiary ledger balances P 5,635,700
Undelivered sales based on sales orders received up
to December 31, 2007 per journal voucher No. 1962 2,732,900*
Goods consigned to Robinsons Appliance Center and others 3,260,700**
Collections received from Cebu and Davao branches
on January 2 based on official receipts dated December
31, 2007 for sales made on December 16, 2007 ( 1,092,800)***
Balance per general ledger P10, 536,500
* Goods are physically segregated during inventory count. Sales invoices for these were
issued on January 2 and deliveries to customers were made on January 3, 2008.
**These goods were physically verified in customers’ stores. Under the terms of
consignment, goods are billed to customers, based upon their sales report.
***Subsequently deposited on January 3, 2008.
Customers are billed at 20% above cost. Term 30 days.

ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES

Analysis of Movement during the Year
December 31, 2007
Allowance, December 31, 2006 P1,020,000
Movement during the year
Provisions 3,425,625
Write-offs ( 4,164,370)
Allowance, December 31, 2007 P 281,255

1. Aging of accounts receivable – trade based on accounts receivable schedule as of

December 31, 2007, before considering any adjustments on the accounts:

Per Client Per Audit

Current P4,469,760 P4,067,320
31 – 60 days 267,320 402,440
61 – 90 days 455,440 267,320
91 days and over 443,180 898,620
P5,635,700 P5,635,700
2. A review of collectibility of each account disclosed the following:
a. A customer with an account balance of P568,000 classified as current in aging can
no longer be located by company lawyers. The customer’s check in payment of
this account was returned by the bank on May 15, 2007. He has no known assets
and his liabilities to other creditors totaled to P7,000,000. The other creditors
have the same experience as the company.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 2 of 7
b. The lawyers informed us that debtors with account balances totaling P790,450
(classified as 91 days and over in the client’s aging) were already found worthless.
They suggested that these accounts be written off next year.
c. It is the companies’ policy to provide monthly for accounts doubtful of collection,
based on aging schedule as follows: 2% for current, 5% for 31 to 60 days, 10% for
61 to 90 days and 30% for 91 days and over. Monthly write-offs are charged
against the allowance. At the end of the year a review of collectibility of each
account is undertaken by the credit and collection manager, the lawyers together
with a representative of its external auditor.
3. The balance of allowance for doubtful accounts should be adequate to cover possible
losses the company may incur in cases of non-collection: that is the account balance at
the end of the year should either be:
a. Total amount arrived at as doubtful by applying the percentage of possible
losses to the total of the account age classification or
b. Total amount arrived at as doubtful based upon the results of the review
of collectibility of each account: whichever is the higher of (1) and (2)
above.
Questions:
1. The gross amount of Trade Accounts Receivable to be reported in the audited balance
sheet at December 31, 2007 is
a. 1,019,500 b. 3,752,450 c. 10,536,500 d.
9,178,050
2. The Allowance for Doubtful Accounts to be reported in the audited balance sheet at
December 31, 2007 is
a. 138,795 b. 790,450 c. 568,000 d. 429,205
3. The Doubtful Accounts Expense to be reported in the audited income statement for
year 2007 is
a. 4,502,820 b. 3,993,625 c. 4,216,075 d.
3,564,420
4. The Allowance for Doubtful Accounts based on the aging of receivables is
a. 140,625 b. 138,795 c. 568,000 d. 139,798

PROBLEM 2 – Masagana Corporation purchased P100,000 8% bonds for P92,418 on January

1, 2007. Masagana classified the bonds as available for sale. The bonds were purchased to
yield 10% interest. Interest is payable annually every January 1. The bonds mature on
January 1, 2012. On January 2, 2009, Masagana classified the bonds as held to maturity.

The prevailing interest rates of the bonds are as follows:

December 31, 2006 10%

December 31, 2007 11%
December 31, 2008 12%
December 31, 2009 11.5%

Questions:
5. Interest income for year 2008
a. 8,000 b. 9,366 c. 9,242 d. 9,818
6. Market value of investment as of December 31, 2008.
a. 95,026 b. 90,393 c. 93,240 d. 90,973
7. Unrealized gain or loss on AFS as of December 31, 2009.
a. (1,786) b. (4,053) c. 4,053 d. (4,633)
8. Unrealized gain on loss as of December 31, 2009.
a. (3,289) b. (2,709) c. 3,289 d. (2,519)
9. Carrying value of investment as of December 31, 2009.
a. 97,240 b. 96,429 c. 93,240 d. 110,000

PROBLEM 3 – Marimar Corportion, a securities investor, had the following transactions on

Margarita Corporation common stock during the year 2007:

February 8 - Purchased 200 shares of Margarita common stock at

P360 per share, plus brokerage charge of P720.
June 10 - Received a 100% stock dividend and a cash dividend
of P5 per share.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 3 of 7
November 3 - Received stock rights entitling him to purchase one
new share at P50 for every four shares held. On this
date, rights were quoted at P10 each and stock was
quoted ex-rights at P170 each share.
November 21 – Exercised 300 rights and sold remaining rights at P12
each.
December 15 - Sold 100 shares at P150 each.

Marimar classified the investment as Trading Securities.

Questions:
10.The gain or loss on sale of stock rights on November 21, 2007 is
a. 1,200 gain b. 2,840 loss c. 2,000 loss d. 200 gain
11.The gain or loss on sale of stock on December 15, 2007 using the first-in, first-out basis
of assigning costs to sales is
a. 2,170 loss b. 3,180 loss c. 2,000 loss d.
3,180 gain
12.The cost of the stock rights received on November 3 is
a. 4,000 b. 4,040 c. -0- d. 8,040
13.The cost of additional shares acquired on November 21 amounted to
a. 6,780 b. 3,750 c. 6,750 d. 6,000
14.The cost of shares held as of December 31 2007 is
a. 52,290 b. 57,750 c. 51,110 d. 58,290

PROBLEM 4 --- Geoffrey and Jekell are partners in the operation of a retail store. They are
concerned about the apparent discrepancy between their income and their volume of sales.
Although they maintain incomplete accounting records, their experience in the business
told them that there is a possible theft or larceny on the part of their staff.

The partners have asked you, in connection with your initial audit covering the calendar
year 2007 to apply such tests as you can to determine whether there is any indication of
shortage.

In the course of your examination you obtain the following facts having a bearing on the
problem.

a. The physical inventory taken December 31, 2007, under your observation, amounted to
P25,000 cost, P23,000 market. The inventory of December 31, 2006, was P38,000 cost,
P36,500 market. It has been the firm’s practice to value inventory at “lower of cost or
net realizable value” treating any loss or decline in market value as “other expense”.
b. Using the treatment of “loss or decline in Net realizable value” of inventory as
mentioned in (a) above, the average gross profit in recent periods has been 35 percent
of net sales. The partners inform you that this percentage seems reasonable and that
they expected the same results for 2007, since their mark-up per cent was
approximately the same as in the past.
c. The December 31, 2006, balance-sheet shows accounts receivable of P48,000. Notes
payable to banks and trade accounts payable were combined on the December 31,
2006 balance sheet. They totaled P26,000. The firm records accounts payable at the
net figure, as cash discounts are seldom missed. Purchases have been shown net in
past income statements. Sales discounts have been treated as deduction from sales in
the past.
d. During 2007, accounts were written off in the amount of P8,000 and an account for
P6,000 written off in 2006 was collected and recorded as a regular collection on
account.
e. Unpaid sales slips show that customers owed P55,000 on December 31, 2007.
f. Unpaid invoices indicate that the firm owed trade creditors P12,000 at the end of 2007.
Record of notes outstanding indicates that P10,000 was owed to banks on December
31, 2007.
g. Sales returns amounted to P3,000 and purchase returns amounted to P4,000.
h. Of the items in the cash records, the following are pertinent:
Receipts:
From customers (after P4,000 discounts) P105,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 4 of 7
From bank loan (net of 60 day, 6% discount) 9,900

Disbursements:
To trade creditors (after P8,000 cash discounts) P 70,000
To bank loans 12,000
To customers for returned goods 1,000
Questions:
15. Gross Sales for calendar year 2007
a. 113,000 b. 108,000 c. 120,000 d. 121,000
16. Net Purchases for calendar year 2007
a. 68,000 b. 70,000 c. 76,000 d. 82,000
17. Balance of Accounts Payable as of December 31, 2006
a. 12,000 b. 10,000 c. 16,000 d. 14,000
18. Estimated ending inventory as of December 31, 2007
a. 31,000 b. 35,800 c. 27,350 d. 32,550
19. Possible inventory shortage as of December 31, 2007
a. 2,350 b. 7,550 c. 10,800 d. 6,050

PROBLEM 5 – Prepayments in the amount of P363,000 is broken down into Prepaid

Insurance of P120,000, Office Supplies Unused of P18,000 and Advance Rental and Deposit
on Lease of P225,000.
In the year 2007, your client purchased two insurance coverage, one for four (4) motor
vehicles and the other one to cover the cost of the inventory against fire. The face value of
Motor policy is P2,000,000 while that of inventory is P4,000,000. The coverage for both is a
period of one year counting from the date the policy premium was paid for. The motor
policy coverage was taken August 31, 2007 for a premium of P90,000, while that of the
inventory was taken last October 1, 2007 for a premium of P30,000.
To be able to save on costs, the purchasing manager sees to it that the office supplies are
brought not from the regular bookstore but from the retailers of the same located in the
Quiapo areas of the City of Manila. They realized that this arrangement could lead to
savings of around 25% to 30%. You asked for an inventory of supplies as of December 31,
2007 and found out that P11,600 were still unused at year-end.
In the year 2007, the company renewed the lease contract, this time for 3 years with
Palmera Corporation subject to renewal every 3 years with a priority right to buy the
property in the case the owner decides to sell later on. A deposit equivalent to 3 months
rental and advance rental for a year was given and the rest was in the form of postdated
checks to cover the rental for the last two years of the lease contract. The lease contract
states a monthly rental of P15,000, and became effective July 1, 2007.
Questions:
20.Prepaid insurance as of December 31, 2007
a. 82,500 b. 37,500 c. 60,000 d. 22,500
21.Office supplies expense
a.11,600 b. 18,000 c. 6,400 d. 1,900
22.Prepaid rent as of December 31, 2007
a. 90,000 b. 180,000 c. 112,500 d. 120,000
23.Prepaid expense as of December 31, 2007 is
a. 90,000 b. 184,100 c. 172,500 d. 192,100

PROBLEM 6 – You are engaged to audit the records of Western Company, which has not
previously been audited. The trial balance at December 31, 2007, follows:

Debits Home Office Branch

Cash 15,000 2,000

Accounts receivable 20,000 17,000

Inventory - December 31, 2007 30,000 8,000

Fixed assets – net 150,000
Branch office current account 44,000
Cost of sales 220,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 5 of 7
93,000

Expenses 70,000 41,000

161,00
Total 549,000 0
Credits
Accounts payable 23,000
Mortgage payable 50,000
Capital stock 100,000
Retained earnings - January 1,
2007 26,000

150,00
Sales 350,000 0

Accrued expenses 2,000

Home office current account 9,000

161,00
Total 549,000 0
The following additional information is to be considered:
1. The branch receives all of its merchandise from the home office. The home office bills
goods to the branch at 125% of cost. During 2007 the branch was billed for P105,000 on
shipments from the home office.
2. The home office credits sales for the invoice price of goods shipped to the branch.
3. On January 1, 2007, the inventory of the home office was P25,000. The branch books
showed a P6,000 inventory.
4. The home office billed the branch for P12,000 on December 30, 2007, representing the
branch’s share of expenses paid at the home office. The branch has not recorded this
billing.
5. All cash collections made by the branch are deposited in a local bank to the account of
the home office. Deposits of this nature included the following:
Amoun Date Deposited by Date recorded by Home
t Branch Office

5,000 December 28, 2007 December 30, 2007

3,000 December 29, 2007 January 2, 2008

7,000 December 30, 2007 January 3, 2008

2,000 January 2, 2008 January 5, 2008

6. Expenses incurred locally by the branch are paid from an imprest bank account that is
reimbursed periodically by the home office. Just prior to the end of the year, the home
office forwarded a reimbursement check in the amount of P3,000, which was not
received by the branch office until January 2008.
7. It is not necessary to make provisions for income tax.

Questions:
24.The combined cash amounted to
a. 17,000 b. 30,000 c. 20,000 d. 27,000
25.The combined inventories will be
a. 36,400 b. 44,400 c. 48,000 d. 38,400
26.The corrected Home Office and Branch Accounts amounted to
a. 21,000 b. 19,000 c. 31,000 d. 34,000
27.Shipments in transit as of December 31, 2007 amounted to
a. 10,000 b. -0- c. 25,000 d. 20,000
28.The combined sales will be
a. 500,000 b. 434,000 c. 395,000 d. 350,000
29.The combined cost of sales will be
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 6 of 7
a. 210,400 b. 294,400 c. 313,000 d. 219,800
30.The adjusted Branch profit, before tax, amounted to
a. 13,700 b. 20,600 c. 16,000 d. 22,600
31.The combined net income amounted to
a. 51,600 b. 58,400 c. 76,000 d. 61,600
32.The combined operating expenses amounted to
a. 111,000 b. 70,000 c. 123,000 d. 73,000

PROBLEM 7 - The general ledger accounts showed the following cash balances at December
31, 2007:
BDO current account P210,000
EPCI savings account 90,000
Working Fund 10,000
Total per WBS P310,000

BDO Current – The following bank reconciliation as of December 31, 2007, was given to you
by the accountant:

Balance per books, December 31, 2007 P210,000

Add: Deposit in transit 8,000
Debit memo for customer’s check returned unpaid 10,000
Less: Checks drawn but not paid by bank,
per schedule below P18,000
Error for an accounts payable entered on books
as P7,000 but drawn and paid by bank as P12,000 5,000 (23,000)
Computed balance 202,000
Unlocated difference 6,000
Balance per bank, December 31, 2007 208,000

Check drawn but not paid by bank

Check No. 346 P 2,250
490 4,960
509 7,490
615 3,710
805 1,550
950 __1,040
P18,000

You traced the balance per books to the general ledger and the balance per bank to the
bank confirmation reply.

EPCI Savings Account – The balance in this account represents funds set aside for the
purchase of a computer, per resolution of the Board of Directors.

Working Fund – This fund was replenished as of December 31, 2007.

Questions:
33.How much is the adjusted and reconciled balance of the BDO current account as of
December 31, 2007?
a. 200,000 b. 210,000 c. 198,000 d. 195,000
34.After considering all audit adjustments, what should be the correct total of outstanding
checks?
a. 21,000 b. 18,000 c. 16,000 d. 13,000
35.The amount of cash to be reported in the audited balance sheet at December 31, 2007
is
a. 195,000 b. 295,000 c. 205,000 d. 310,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 7 of 7

AUDITING PROBLEMS

1 B 11 C 21 C 31 D
2 C 12 A 22 A 32 C
3 A 13 C 23 B 33 D
4 B 14 B 24 B 34 A
5 B 15 C 25 B 35 C
6 B 16 A 26 D
7 D 17 D 27 A
8 A 18 D 28 C
9 C 19 B 29 A
10 D 20 A 30 D
 CRC-ACE REVIEW SCHOOL
The Professional CPA Review School
 735-9031 / 735-8901

AUDITING PROBLEM OCTOBER 2007 BATCH

2nd PRE-BOARD EXAMS AUGUTS 19, 2007
(SUN) 7:30 – 10:00am
INSTRUCTIONS: Select the correct answer for each of the following questions. Mark
only one answer for each item by shading the box corresponding to the letter of your
choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. USE
PENCIL No. 1 or No. 2 only.

PROBLEM 1 - You are a senior accountant on the staff of Alejo & Associates, CPAs. You are
conducting the annual audit of Harry Corporation for calendar year 2007. You are now
working on the audit of the accounts receivable and related allowance for doubtful
accounts.

ACCOUNTS RECEIVABLE – TRADE

Reconciliation between General Ledger Balance and
The Total of Subsidiary Ledger Balances
December 31, 2007
Total of subsidiary ledger balances P 5,635,700
Undelivered sales based on sales orders received up
to December 31, 2007 per journal voucher No. 1962 2,732,900*
Goods consigned to Robinsons Appliance Center and others 3,260,700**
Collections received from Cebu and Davao branches
on January 2 based on official receipts dated December
31, 2007 for sales made on December 16, 2007 ( 1,092,800)***
Balance per general ledger P10, 536,500
* Goods are physically segregated during inventory count. Sales invoices for these were
issued on January 2 and deliveries to customers were made on January 3, 2008.
**These goods were physically verified in customers’ stores. Under the terms of
consignment, goods are billed to customers, based upon their sales report.
***Subsequently deposited on January 3, 2008.
Customers are billed at 20% above cost. Term 30 days.

ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES

Analysis of Movement during the Year
December 31, 2007
Allowance, December 31, 2006 P1,020,000
Movement during the year
Provisions 3,425,625
Write-offs ( 4,164,370)
Allowance, December 31, 2007 P 281,255

1. Aging of accounts receivable – trade based on accounts receivable schedule as of

December 31, 2007, before considering any adjustments on the accounts:

Per Client Per Audit

Current P4,469,760 P4,067,320
31 – 60 days 267,320 402,440
61 – 90 days 455,440 267,320
91 days and over 443,180 898,620
P5,635,700 P5,635,700
2. A review of collectibility of each account disclosed the following:
a. A customer with an account balance of P568,000 classified as current in aging can
no longer be located by company lawyers. The customer’s check in payment of
this account was returned by the bank on May 15, 2007. He has no known assets
and his liabilities to other creditors totaled to P7,000,000. The other creditors
have the same experience as the company.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 2 of 7
b. The lawyers informed us that debtors with account balances totaling P790,450
(classified as 91 days and over in the client’s aging) were already found worthless.
They suggested that these accounts be written off next year.
c. It is the companies’ policy to provide monthly for accounts doubtful of collection,
based on aging schedule as follows: 2% for current, 5% for 31 to 60 days, 10% for
61 to 90 days and 30% for 91 days and over. Monthly write-offs are charged
against the allowance. At the end of the year a review of collectibility of each
account is undertaken by the credit and collection manager, the lawyers together
with a representative of its external auditor.
3. The balance of allowance for doubtful accounts should be adequate to cover possible
losses the company may incur in cases of non-collection: that is the account balance at
the end of the year should either be:
a. Total amount arrived at as doubtful by applying the percentage of possible
losses to the total of the account age classification or
b. Total amount arrived at as doubtful based upon the results of the review
of collectibility of each account: whichever is the higher of (1) and (2)
above.
Questions:
1. The gross amount of Trade Accounts Receivable to be reported in the audited balance
sheet at December 31, 2007 is
a. 1,019,500 b. 3,752,450 c. 10,536,500 d.
9,178,050
2. The Allowance for Doubtful Accounts to be reported in the audited balance sheet at
December 31, 2007 is
a. 138,795 b. 790,450 c. 568,000 d. 429,205
3. The Doubtful Accounts Expense to be reported in the audited income statement for
year 2007 is
a. 4,502,820 b. 3,993,625 c. 4,216,075 d.
3,564,420
4. The Allowance for Doubtful Accounts based on the aging of receivables is
a. 140,625 b. 138,795 c. 568,000 d. 139,798

PROBLEM 2 – Masagana Corporation purchased P100,000 8% bonds for P92,418 on January

1, 2007. Masagana classified the bonds as available for sale. The bonds were purchased to
yield 10% interest. Interest is payable annually every January 1. The bonds mature on
January 1, 2012. On January 2, 2009, Masagana classified the bonds as held to maturity.

The prevailing interest rates of the bonds are as follows:

December 31, 2006 10%

December 31, 2007 11%
December 31, 2008 12%
December 31, 2009 11.5%

Questions:
5. Interest income for year 2008
a. 8,000 b. 9,366 c. 9,242 d. 9,818
6. Market value of investment as of December 31, 2008.
a. 95,026 b. 90,393 c. 93,240 d. 90,973
7. Unrealized gain or loss on AFS as of December 31, 2009.
a. (1,786) b. (4,053) c. 4,053 d. (4,633)
8. Unrealized gain on loss as of December 31, 2009.
a. (3,289) b. (2,709) c. 3,289 d. (2,519)
9. Carrying value of investment as of December 31, 2009.
a. 97,240 b. 96,429 c. 93,240 d. 110,000

PROBLEM 3 – Marimar Corportion, a securities investor, had the following transactions on

Margarita Corporation common stock during the year 2007:

February 8 - Purchased 200 shares of Margarita common stock at

P360 per share, plus brokerage charge of P720.
June 10 - Received a 100% stock dividend and a cash dividend
of P5 per share.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 3 of 7
November 3 - Received stock rights entitling him to purchase one
new share at P50 for every four shares held. On this
date, rights were quoted at P10 each and stock was
quoted ex-rights at P170 each share.
November 21 – Exercised 300 rights and sold remaining rights at P12
each.
December 15 - Sold 100 shares at P150 each.

Marimar classified the investment as Trading Securities.

Questions:
10.The gain or loss on sale of stock rights on November 21, 2007 is
a. 1,200 gain b. 2,840 loss c. 2,000 loss d. 200 gain
11.The gain or loss on sale of stock on December 15, 2007 using the first-in, first-out basis
of assigning costs to sales is
a. 2,170 loss b. 3,180 loss c. 2,000 loss d.
3,180 gain
12.The cost of the stock rights received on November 3 is
a. 4,000 b. 4,040 c. -0- d. 8,040
13.The cost of additional shares acquired on November 21 amounted to
a. 6,780 b. 3,750 c. 6,750 d. 6,000
14.The cost of shares held as of December 31 2007 is
a. 52,290 b. 57,750 c. 51,110 d. 58,290

PROBLEM 4 --- Geoffrey and Jekell are partners in the operation of a retail store. They are
concerned about the apparent discrepancy between their income and their volume of sales.
Although they maintain incomplete accounting records, their experience in the business
told them that there is a possible theft or larceny on the part of their staff.

The partners have asked you, in connection with your initial audit covering the calendar
year 2007 to apply such tests as you can to determine whether there is any indication of
shortage.

In the course of your examination you obtain the following facts having a bearing on the
problem.

a. The physical inventory taken December 31, 2007, under your observation, amounted to
P25,000 cost, P23,000 market. The inventory of December 31, 2006, was P38,000 cost,
P36,500 market. It has been the firm’s practice to value inventory at “lower of cost or
net realizable value” treating any loss or decline in market value as “other expense”.
b. Using the treatment of “loss or decline in Net realizable value” of inventory as
mentioned in (a) above, the average gross profit in recent periods has been 35 percent
of net sales. The partners inform you that this percentage seems reasonable and that
they expected the same results for 2007, since their mark-up per cent was
approximately the same as in the past.
c. The December 31, 2006, balance-sheet shows accounts receivable of P48,000. Notes
payable to banks and trade accounts payable were combined on the December 31,
2006 balance sheet. They totaled P26,000. The firm records accounts payable at the
net figure, as cash discounts are seldom missed. Purchases have been shown net in
past income statements. Sales discounts have been treated as deduction from sales in
the past.
d. During 2007, accounts were written off in the amount of P8,000 and an account for
P6,000 written off in 2006 was collected and recorded as a regular collection on
account.
e. Unpaid sales slips show that customers owed P55,000 on December 31, 2007.
f. Unpaid invoices indicate that the firm owed trade creditors P12,000 at the end of 2007.
Record of notes outstanding indicates that P10,000 was owed to banks on December
31, 2007.
g. Sales returns amounted to P3,000 and purchase returns amounted to P4,000.
h. Of the items in the cash records, the following are pertinent:
Receipts:
From customers (after P4,000 discounts) P105,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 4 of 7
From bank loan (net of 60 day, 6% discount) 9,900

Disbursements:
To trade creditors (after P8,000 cash discounts) P 70,000
To bank loans 12,000
To customers for returned goods 1,000
Questions:
15. Gross Sales for calendar year 2007
a. 113,000 b. 108,000 c. 120,000 d. 121,000
16. Net Purchases for calendar year 2007
a. 68,000 b. 70,000 c. 76,000 d. 82,000
17. Balance of Accounts Payable as of December 31, 2006
a. 12,000 b. 10,000 c. 16,000 d. 14,000
18. Estimated ending inventory as of December 31, 2007
a. 31,000 b. 35,800 c. 27,350 d. 32,550
19. Possible inventory shortage as of December 31, 2007
a. 2,350 b. 7,550 c. 10,800 d. 6,050

PROBLEM 5 – Prepayments in the amount of P363,000 is broken down into Prepaid

Insurance of P120,000, Office Supplies Unused of P18,000 and Advance Rental and Deposit
on Lease of P225,000.
In the year 2007, your client purchased two insurance coverage, one for four (4) motor
vehicles and the other one to cover the cost of the inventory against fire. The face value of
Motor policy is P2,000,000 while that of inventory is P4,000,000. The coverage for both is a
period of one year counting from the date the policy premium was paid for. The motor
policy coverage was taken August 31, 2007 for a premium of P90,000, while that of the
inventory was taken last October 1, 2007 for a premium of P30,000.
To be able to save on costs, the purchasing manager sees to it that the office supplies are
brought not from the regular bookstore but from the retailers of the same located in the
Quiapo areas of the City of Manila. They realized that this arrangement could lead to
savings of around 25% to 30%. You asked for an inventory of supplies as of December 31,
2007 and found out that P11,600 were still unused at year-end.
In the year 2007, the company renewed the lease contract, this time for 3 years with
Palmera Corporation subject to renewal every 3 years with a priority right to buy the
property in the case the owner decides to sell later on. A deposit equivalent to 3 months
rental and advance rental for a year was given and the rest was in the form of postdated
checks to cover the rental for the last two years of the lease contract. The lease contract
states a monthly rental of P15,000, and became effective July 1, 2007.
Questions:
20.Prepaid insurance as of December 31, 2007
a. 82,500 b. 37,500 c. 60,000 d. 22,500
21.Office supplies expense
a.11,600 b. 18,000 c. 6,400 d. 1,900
22.Prepaid rent as of December 31, 2007
a. 90,000 b. 180,000 c. 112,500 d. 120,000
23.Prepaid expense as of December 31, 2007 is
a. 90,000 b. 184,100 c. 172,500 d. 192,100

PROBLEM 6 – You are engaged to audit the records of Western Company, which has not
previously been audited. The trial balance at December 31, 2007, follows:

Debits Home Office Branch

Cash 15,000 2,000

Accounts receivable 20,000 17,000

Inventory - December 31, 2007 30,000 8,000

Fixed assets – net 150,000
Branch office current account 44,000
Cost of sales 220,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 5 of 7
93,000

Expenses 70,000 41,000

161,00
Total 549,000 0
Credits
Accounts payable 23,000
Mortgage payable 50,000
Capital stock 100,000
Retained earnings - January 1,
2007 26,000

150,00
Sales 350,000 0

Accrued expenses 2,000

Home office current account 9,000

161,00
Total 549,000 0
The following additional information is to be considered:
1. The branch receives all of its merchandise from the home office. The home office bills
goods to the branch at 125% of cost. During 2007 the branch was billed for P105,000 on
shipments from the home office.
2. The home office credits sales for the invoice price of goods shipped to the branch.
3. On January 1, 2007, the inventory of the home office was P25,000. The branch books
showed a P6,000 inventory.
4. The home office billed the branch for P12,000 on December 30, 2007, representing the
branch’s share of expenses paid at the home office. The branch has not recorded this
billing.
5. All cash collections made by the branch are deposited in a local bank to the account of
the home office. Deposits of this nature included the following:
Amoun Date Deposited by Date recorded by Home
t Branch Office

5,000 December 28, 2007 December 30, 2007

3,000 December 29, 2007 January 2, 2008

7,000 December 30, 2007 January 3, 2008

2,000 January 2, 2008 January 5, 2008

6. Expenses incurred locally by the branch are paid from an imprest bank account that is
reimbursed periodically by the home office. Just prior to the end of the year, the home
office forwarded a reimbursement check in the amount of P3,000, which was not
received by the branch office until January 2008.
7. It is not necessary to make provisions for income tax.

Questions:
24.The combined cash amounted to
a. 17,000 b. 30,000 c. 20,000 d. 27,000
25.The combined inventories will be
a. 36,400 b. 44,400 c. 48,000 d. 38,400
26.The corrected Home Office and Branch Accounts amounted to
a. 21,000 b. 19,000 c. 31,000 d. 34,000
27.Shipments in transit as of December 31, 2007 amounted to
a. 10,000 b. -0- c. 25,000 d. 20,000
28.The combined sales will be
a. 500,000 b. 434,000 c. 395,000 d. 350,000
29.The combined cost of sales will be
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 6 of 7
a. 210,400 b. 294,400 c. 313,000 d. 219,800
30.The adjusted Branch profit, before tax, amounted to
a. 13,700 b. 20,600 c. 16,000 d. 22,600
31.The combined net income amounted to
a. 51,600 b. 58,400 c. 76,000 d. 61,600
32.The combined operating expenses amounted to
a. 111,000 b. 70,000 c. 123,000 d. 73,000

PROBLEM 7 - The general ledger accounts showed the following cash balances at December
31, 2007:
BDO current account P210,000
EPCI savings account 90,000
Working Fund 10,000
Total per WBS P310,000

BDO Current – The following bank reconciliation as of December 31, 2007, was given to you
by the accountant:

Balance per books, December 31, 2007 P210,000

Add: Deposit in transit 8,000
Debit memo for customer’s check returned unpaid 10,000
Less: Checks drawn but not paid by bank,
per schedule below P18,000
Error for an accounts payable entered on books
as P7,000 but drawn and paid by bank as P12,000 5,000 (23,000)
Computed balance 202,000
Unlocated difference 6,000
Balance per bank, December 31, 2007 208,000

Check drawn but not paid by bank

Check No. 346 P 2,250
490 4,960
509 7,490
615 3,710
805 1,550
950 __1,040
P18,000

You traced the balance per books to the general ledger and the balance per bank to the
bank confirmation reply.

EPCI Savings Account – The balance in this account represents funds set aside for the
purchase of a computer, per resolution of the Board of Directors.

Working Fund – This fund was replenished as of December 31, 2007.

Questions:
33.How much is the adjusted and reconciled balance of the BDO current account as of
December 31, 2007?
a. 200,000 b. 210,000 c. 198,000 d. 195,000
34.After considering all audit adjustments, what should be the correct total of outstanding
checks?
a. 21,000 b. 18,000 c. 16,000 d. 13,000
35.The amount of cash to be reported in the audited balance sheet at December 31, 2007
is
a. 195,000 b. 295,000 c. 205,000 d. 310,000
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 7 of 7

AUDITING PROBLEMS

1 B 11 C 21 C 31 D
2 C 12 A 22 A 32 C
3 A 13 C 23 B 33 D
4 B 14 B 24 B 34 A
5 B 15 C 25 B 35 C
6 B 16 A 26 D
7 D 17 D 27 A
8 A 18 D 28 C
9 C 19 B 29 A
10 D 20 A 30 D
 ACCOUNTING FOR BUSINESS COMBINATION

BUSINESS COMBINATION- CONSOLIDATION

PROBLEM I – Wholly and Partially-owned Subsidiary: Determination of Goodwill/Bargain Purchase Gain

and Working Paper Eliminating Entries
Assume the following independent cases:
Fair Value of Subsidiary / P5 par Paid-in capital Retained
Consideration Transferred plus % of earnings/
Contingent Performance Obligation Stock Common in excess of par
Owned Accumulated
Case Stock / or Share Profit & Loss
Premium
Ordinary Share

1 P300,000 cash + P15,000* 100 P90,000 P80,000 P20,000

2 80 FV of NCI Not Given

P237,500 cash
3 60 FV of NCI with Control Premium
P239,400 cash **
4 75 FV of Subsidiary Given
P322,525 cash ***
5 P205,200 cash **** 60 Step Acquisition:

Fair value of Non-controlling Interest of the

acquiree/subsidiary

Fair value of any previously held equity

interest in the acquiree/subsidiary

6 P205,000 cash ***** 80 Bargain Purchase Gain / Gain on Acquisition

*In connection with the acquisition, PP paid P10,000 in indirect combination costs and agreed to pay P50,000 to the
former owners of SS contingent on meeting certain revenue goals during 20x4. PP estimated the present value of its
probability adjusted expected payment for the contingency at P15,000.

**SS Company has 40% of its share publicly traded on an exchange. PP Company purchases the 60% non-publicly traded
shares in one transaction, paying P239,400. Based on the trading price of the shares of SS Company at the date of
gaining control a value of P152,000 assigned to the 40% non-controlling interest (or fair value of non-controlling interest),
indicating that Smart Company has paid a control premium of P11,400.

***PP Company acquires 75% (13,500 ordinary shares) of SS Company for P229,500 (P17 per share). In the period around
the acquisition date, SS Company’s shares are trading at about P13.60 per share. PP Company pays a premium over
market because of the synergies it believes it will get. It its therefore reasonable to conclude that the fair value of SS’s as
a whole may not be P332,500. In fact, an independent valuation shows that the value of SS Company is P322,525 (fair
value of SS Company).

****PP Company acquires 15 percent of SS Company’s common stock for P47,500 cash and carries the investment using
the cost model. A few months later, PP purchases another 60 percent of SS Company’s stock for P205,200. At that date,
SS Company reports identifiable assets with a book value of P370,500 and a fair value of P484,500, and it has liabilities

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 with a book value and fair value of P180,500. The fair value of the 25% non-controlling interest in SS Company is
P85,500.
*****PP Company acquires 75 percent of SS Company’s common stock for P205,000 cash. At that date, the non-controlling
interest in SS has a book value of P47,500 and a fair value of P74,200. Also on that date, SS reports identifiable assets
with a book value of P362,000 and a fair value of P462,000, and it has liabilities with a book value and fair value of
P172,000.

Additional information:

All other assets and liabilities of SS Company had book value approximated their fair market value except the
following:

Book value Fair value

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 30,000 P 20,000
Buildings and equipment . . . . . . . . . . . . . . . . . . . . . . . . 50,000 76,000

 It has developed a customer list appraised at P5,000, although it is not recorded in its financial records.
 Favorable lease agreements, valued at P3,000
 Signed customer contracts for product development, valued at P2,000
 It has research and development activity in process with an appraised fair value of P5,000. However, the
project has not yet reached technological feasibility and the assets used in the activity have no alternative
future use.

Required:
1. Under each of the above assumptions, prepare the entry to record the investment in subsidiary in books
of the Porter Company (the parent) on the date of acquisition.
2. Under each of the above assumptions, prepare schedule for determination (of goodwill and gain) and
allocated excess , using
a. Partial Goodwill (Proportionate Basis) Approach
b. Full-Goodwill (Fair Value Basis) Approach
3. Under each of the above assumptions, prepare working paper eliminating entry to eliminate the investment
in Sewell Company in preparation of a consolidated balance sheet at date of acquisition, using:
a. Partial Goodwill (Proportionate Basis) Approach
b. Full-Goodwill (Fair Value Basis) Approach

PROBLEM 2. Wholly and Partially-owned Subsidiary: Bargain Purchase Gain with FV of NCI
Pakistan Company issued 12,000 shares of its P1 par common stock for 80% interest in Syria Company.
The fair value of Pakistan Company stock is P25. Syria Company had been plagued by many troubles, including a
lawsuit from a competitor for patent infringement. In view of the uncertainty of the outcome of the lawsuit and its
impact on the future viability of Syria Company, the existing owner of Syria Company was willing to sell the
company at a discount to its net fair value. The fair value of the identifiable net assets, non-controlling interests
and the consideration transferred were reassessed and deemed to be reliably determined. Fair value of the non-
controlling interests as at acquisition date was P90,000.

The separate balance sheets of the two companies immediately before the consolidation with acquiree’s fair value
were presented as follows:
Syria Syria
Pakistan
Assets Book value Book value Fair value

Page | 2
 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 334,800

Accounts receivable . . . . . . . . . . . . . . . . . . 86,400 P 24,000 P 24,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000 60,000 66,000

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 48,000 84,000

Buildings and equipment (net) . . . . . . . . . . 744,000 222,000 372,000

Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . _________ -0- 60,000

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . P1,381,200 P 354,000 P 606,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . P 96,000 P 42,000 P 42,000

Estimated liability for contingencies . . . . . . - 6,000

Bonds payable . . . . . . . . . . . . . . . . . . . . . . 240,000 120,000 120,000

Common stock, P1 par . . . . . . . . . . . . . . . . . . . . 32,160 12,000

Paid in capital in excess of par . . . . . . . . . . 435,840 108,000

Retained earnings . . . . . . . . . . . . . . . . . . . . 577,200 72,000 ________

Stockholders’ Equity . . . . . . . . . . . . . . . . . . P1,381,200 P 354,000 P438,000

Required:
1. Prepare journal entry to record investment in the books of the acquirer company.
2. Prepare schedule for determination and allocated excess:
a. Proportionate Basis Approach
b. Fair Value Basis Approach
3. Determine the following:
a. Consolidated total assets
b. Consolidated total liabilities
c. Ordinary share/Common stock
d. Share premium/additional paid-in capital
e. Accumulated profit/loss (Retained earnings).
f. Consolidated stockholders’ equity
g. Non-controlling interests (if any)
4. Prepare the working paper eliminating entries for purposes of preparing consolidated balance sheet.
a. Proportionate Basis Approach
b. Fair Value Basis Approach
5. Prepare a consolidated working paper on January 1, 20x4.
a. Proportionate Basis Approach
b. Fair Value Basis Approach
6. Prepare the consolidated balance sheet immediately after acquisition.
a. Proportionate Basis Approach
b. Fair Value Basis Approach

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