SOLUTION - AUDITING PROBLEMS TEST BANK 2 PROBLEM 1 – AYALA MERCHANTS CORPORATION ADJUSTING JOURNAL ENRIES December 31, 2017 1. Operating expenses Petty cash fund (P37,250 – P9,510)
27,740 27,740
2. Accounts receivable (P107,400 + P63,000) Notes payable Finance cost (Interest expense) Other charges (Bank service charges) Accounts payable Cash in bank
170,400 700,000 10,000 2,750
3. Allowance for doubtful accounts Accounts receivable (write-off)
152,640
4. Other charges (Unrealized loss – Trading securities) Trading securities Bacnotan Cement (P16, 7,000) Fil-Estate (P19.75 x 10,000) Ionics (P24 x 2,400) La Tondena (P26 x 2,000) Selecta (P1.20 x 8,000) Union Bank (P27.50 x 1,600) Total market value, Dec. 21, 2017 Carrying value, Dec. 31, 2017 Unrealized loss – trading securities 5. Interest receivable Other income (Interest income) (P1,300,000 x 15% 2/12)
72,000 811,150 152,640 10,940 10,940 P112,000 197,500 57,600 52,000 9,600 44,000 P472,700 483,640 P 10,940 32,500 32,500
6. Operating expenses (Advertising expense) 325,000 Prepaid advertising Christmas promotion P100,000 Regular promotion (P640,000 – P100,000 = P540,000 x 5/12) 225,000 Total P325,000 7. Operating expenses (Rent expense) Prepaid rent (P420,000 x 2/3 or P140,000 x 2)
280,000
8. Operating expenses (Insurance expense) Prepaid insurance (P490,000 x 2/12)
81,667
9. Operating expenses (Office supplies expense) Office supplies inventory (P361,000 – P102,500)
325,000
280,000
81,667 258,500 258,500
10. Accounts receivable Sales
146,940
11. Cost of goods sold Inventories
356,000
12. Cost of goods sold Inventories
138,500
13. Inventories Cost of goods sold
153,800
146,940 356,000 138,500
153,800
Page 2 14. Delivery equipment Operating expenses
43,400 43,400
15. Operating expenses (Depreciation expense) Accumulated depreciation (P43,400/10 x 6/12)
2,170 2,170
16. Accumulated depreciation Operating expenses (Depreciation expense)
10,480
17. Accumulated depreciation (P138,620 – P10,480) Other charges (Loss) Delivery equipment
128,140 37,380
18. Operating expenses Accrued expenses
213,000
19. Finance cost (Interest expense) Interest payable (P2.6 million x 16% 3/12)
104,000
20. Retained earnings Dividends payable (P5,400,000 x 10%)
540,000
21. Operating expenses (Doubtful accounts expense) Allowance for doubtful accounts
130,317
Less than 3 months 3 to 6 months Over 6 months
10,480
165,520 213,000 104,000
540,000
Per Books P2,500,960 843,200 274,500
Adjustments P146,940 107,400 63,000 (152,460)
P3,618,660 Allowance before adjustment (P110,360 – P152,460) Required allowance Adjustment 1. D
2. D
3. D
4. C
Petty cash fund Per books AJE 1 Per audit Cash in bank Per books AJE 2 Per audit Trading securities Per books AJE 4 Per audit Accounts receivable Per books AJE 2 3 10 Per audit
130,317 Per Audit
%
Required Allowance
P2,755,300 843,200
1 5
P27,553 42,160
185,040 P3,783,540
10
18,504 P88,217
P 42,100 debit 88,217 P130,317
P60,000 (27,740) P32,260 P1,056,000 (811,150) P 244,850 P483,640 (10,940) P472,700 P3,618,660 170,400 (152,460) 146,940 P3,783,540
Page 3 5. D
6. C
7. A
8. B
9. A
10. D
11. D
Allowance for doubtful accounts Per books AJE 3 21 Per audit
P110,360 (152,460) 130,317 P 88,217
Notes and interest receivable Per books AJE 5 Per audit
P1,300,000 32,500 P1,332,500
Inventories Per books AJE 11 12 13 Per audit
P7,274,900 (356,000) (138,500) 153,800 P6,934,200
Prepaid insurance Per books AJE 8 Per audit
P490,000 (81,667) P408,333
Prepaid rent Per books AJE 7 Per audit
P420,000 (280,000) P140,000
Prepaid advertising Per books AJE 6 Per audit
P640,000 (325,000) P315,000
Office supplies inventory Per books AJE 9 Per audit
P361,000 (258,500) P102,500
12. C
Petty cash fund Cash in bank Trading securities Accounts receivable (P3,783,540 – P88,217) Notes and interest receivable Inventories Prepaid insurance Prepaid rent Prepaid advertising Office supplies inventory Total current assets
13. C
Property, plant, and equipment (PPE) Per books AJE 14 17 Per audit
P4,068,400 43,400 (165,520) P3,946,280
Accumulated depreciation Per books AJE 15 16 17 Per audit
P1,177,500 2,170 (10,480) (128,140) P1,041,050
Accounts payable Per books
P2,356,320
14. B
15. B
P 32,260 244,850 472,700 3,695,323 1,332,500 6,934,200 408,333 140,000 315,000 102,500 P13,677,666
AJE 2 Per audit
72,000 P2,428,320
Page 4 16. A
Interest payable Per books AJE 19 Per audit
17. C
Accounts payable – trade Notes payable Accrued expenses Interest payable Dividends payable Total current liabilities
18. C
Sales Per books AJE 10 Per audit
19. C
20. D
P0 104,000 P104,000 P2,428,320 2,600,000 382,040 104,000 540,000 P6,054,360 P13,078,000 146,940 P13,224,940
Cost of goods sold Per books AJE 11 12 13, Per audit
P8,034,000 356,000 138,500 (153,800) P8,374,700
Operating expenses Per books AJE 1 6 7 8 9 14 15 16 18 21 Per audit
P3,357,000 27,740 325,000 280,000 81,667 258,500 (43,400) 2,170 (10,480) 213,000 130,317 P4,621,514
PROBLEM 2 – LUKAS COMPANY 21. A
Sales returns and allowance Accounts receivable
90,000
Inventory Cost of sales (P90,000 x 80%)
72,000
90,000 72,000
Net decrease in income (P90,000 – P72,000) 22. A
Sales Accounts receivable
P18,000 30,000 30,000
Income overstated by
P30,000
23. D
Overstatement of receivable Lazaro (P150 x 320 units)
P48,000
24. A
Correctly stated because the goods are considered sold in 2017.
25. D
Accounts payable Accounts receivable
PROBLEM 3 – CROCODILE, INC.
135,000 135,000
26. B
27. C
28. B
29. B
30. D
Page 5 PROBLEM 4 – SPARK COMPANY 31. B
Cash balance, Dec. 31, 2016 Sales (SQUEEZE) Cash paid for operating expenses Cash paid on accounts payable Collections on notes receivable Cash balance, Dec. 31, 2017
P100,000 920,000 (220,000) (471,700) 25,000 P353,300
Units sold (P920,000/P50) 32. D
18,400
Accounts payable: Balance, Dec. 31, 2016 Purchases Cash payments on accounts payable Balance, Dec. 31, 2017
*Purchases: Month January February March April May June July August September October November December Total purchases
Unit Cost P32.60 32.70 32.80 32.90 33.00 33.10 33.20 33.30 33.40 33.50 33.60 33.70
Units 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 18,000
P75,000 596,700* (471,700) P200,000 Total Cost P48,900 49,050 49,200 49,350 49,500 49,650 49,800 49,950 50,100 50,250 50,400 50,550 P596,700
Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700
33. A
Inventory, Dec. 31, 2016 (P199,875/P32.50) Purchases Units sold Inventory, Dec. 31, 2017
34. C
FIFO cost of inventory, Dec. 31, 2017: December purchases 1,500 x P33.70 November purchase 1,500 x P33.60 October purchase 1,500 x P33.50 September purchase 1,250 x P33.40 5,750
P 50,550 50,400 50,250 41,750 P192,950
Inventory, Jan. 1, 2017 Purchases Goods available for sale Inventory, Dec. 31, 2017 Cost of goods sold
P199,875 596,700 796,575 (192,950) P603,625
35. D
6,150 18,000 (18,400) 5,750
Page 6 PROBLEM 5 – ISIDRO MANUFACTURING COMPANY 36. B
37. A
Depreciation expense for 2014: Truck #1 (P180,000/5) Truck #2 (P220,000/5) Truck #3 (P300,000/5 x ½) Truck #4 (P240,000/5) Truck #5 (P400,000/5 x ½) Total
P 36,000 44,000 30,000 48,000 40,000 P198,000
Trade-in value of Truck #3 (P400,000-P220,000) Book value of Truck #3: Cost A/D, 1/1/2013 -0 7/1/2014 (P300,000/5 x1.5) Loss on trade-in
38.A Truck #2
Truck #1 Truck #2 Truck #3 Truck #4 Truck #5 Truck #6 Correct Per client Over 40. B
P300,000 (90,000)
210,000 P 30,000
P220,000
Truck #5 Truck #6 Accumulated depreciation: Truck #2 (fully depreciated 7/1/2016) Truck #5, 7/1/2014 – 12/31/2017 (P400,000/5 x 3.5) Truck #6, 7/1/2016 – 12/31/2017 (P420,000/5 x 1.5) Book value, 12/31/2017 39. C
P180,000
2014 P36,000 44,000 30,000 48,000 40,000 -P198,000 210,000 P 12,000
2015 -P44,000 -48,000 80,000 -P172,000 225,000 P 53,000
2016 -P22,000 -24,000 80,000 42,000 P168,000 250,500 P82,500
400,000 420,000 P220,000 280,000 126,000
2017 ----P80,000 84,000 P164,000 304,000 P140,000
P1,040,000
626,000 P414,000 Total P 36,000 110,000 30,000 120,000 280,000 126,000 P702,000 989,500 P287,500
Page 7 PROBLEM 6 – NUNAL COMPANY 41. B
42. A
Outstanding checks, November 30: Check no. 792 799 Total
P 7,500 21,150 P28,650
Outstanding checks, December 31: Check no. 806 807 810 812 817
P 57,000 78,000 21,000 48,000 33,000 819
21,000 822 823 824 825 826
36,000 39,000 87,000 6,000 33,000 P459,000
43. D
Deposit in transit, November 30
P25,500
44. A
Deposit in transit, November 30 Collections Total Deposits Deposit in transit, December 31
P 25,500 2,121,900 2,147,400 2,033,400 P 114,000
Total
Nov. 30 Unadjusted book balances P345,000 Bank service charges: November 30 (150) December 31 Notes collected by bank: November 30 30,000 December 31 Unrecorded disbursement (815) Adjusted book balances P374,850 Unadjusted bank balances Outstanding checks: November 30 December 31 Deposits in transit: November 30 December 31 Error corrected Erroneous bank charge Adjusted bank balances 45. D
46. C
Nov. 30 P342,000
Receipts P2,297,400
(150) 360 (30,000) 36,000
36,000 P374,850 47. B
Dec. 31 P1,414,170 (360)
P2,303,400
18,000 P1,246,400
36,000 (18,000) P1,431,810
Receipts P2,493,900
Disbursements P1,059,090
Dec. 31 P1,776,810
(28,650) 25,500
Disbursements P1,228,230
(28,650) 459,000 (25,500) 114,000 (243,000) (36,000) P2,303,400 48. C
(459,000) 114,000
(243,000) P1,246,440 49. D
P1,431,810 50. B
Page 8 PROBLEM 7 – MINA MINING CO.
Mineral property Building Machinery (1/2) Machinery (1/2) 1 2
Depletable/Depreciable Cost P48,450,000 1 12,000,000 1,800,000 1,800,000
Estimated Reserves 150,000 150,000 150,000 150,000
Depletion/Depreciation P323 80 12 24 2
P50,000,000 – P1,550,000 (P1,800,000/150,000) x 2
51. C Mineral property (P323 x 7,500) Building (P80 x 7,500) Machinery (1/2) (P12 x 7,500) Machinery (1/2) (P24 x 7,500)
Year 1 Depletion P2,422,500
P2,422,500 52. D Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2) (P24 x 15,000)
Year 5 Depletion P4,845,000
P4,845,000 53. C Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2) (P24 x 7,500)
Year 6 Depletion P4,845,000
P4,845,000 54. C Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2)
Year 7 Depletion P4,845,000
P4,845,000 55. D Mineral property (P323 x 7,500) Building (P80 x 7,500) Machinery (1/2) (P12 x 7,500) Machinery (1/2)
Depreciation P600,000 90,000 180,000 P870,000 Depreciation P1,200,000 180,000 360,000 P1,740,000 Depreciation P1,200,000 180,000 180,000 P1,560,000
Depreciation P1,200,000 180,000 -P1,380,000
Year 11 Depletion Depreciation P2,422,500 P600,000 90,000 --P2,422,500 P690,000
Page 9 PROBLEM 8 – HVR Company 56. D
Present value of principal (P3,600,000 x 0.7514) Present value of interest (P3,600,000 x 5% x 2.4860) Consultation service fee revenue
57. D
Interest 12/31/2017 (P7.2M x 4%) P288,000 12/31/2018 (P4.8M x 4%) 192,000 12/31/2019 (P2.4M x 4%) 96,000 Present value of note Carrying amount of equipment Gain on sale of equipment
Principal P2,400,000 2,400,000 2,400,000
Note receivable from sale of land: Date Interest Income 1/1/2017 --12/31/2017 P218,196 12/31/2018 239,844**
P2,705,040 447,480 P3,152,520 Total P2,688,000 2,592,000 2,496,000
PVF 0.8772 0.7695 0.6750
Present Value P2,357,914 1,994,544 1,684,800 P6,037,258 4,800,000 P1,237,258
Carrying Amount P2,181,960* 2,400,156 2,640,000
* P2,640,000 principal x 0.8265 PVF at 10% for 2 periods. ** P2,640,000 - P2,400,156
Note receivable from consultation: Effective Date Interest 1/1/2017 --12/31/2017 P315,252 12/31/2018 328,777 12/31/2019 343,451**
Nominal Interest --P180,000 180,000 180,000
Discount Amortization --P135,252 148,777 163,451*
Carrying Amount P3,152,520 3,287,772 3,436,549 3,600,000
* P3,600,000 – P3,436,549 = P163,451 ** P163,451 + P180,000 = P343,451
Note receivable from sale of equipment: Effective Nominal Date Interest Interest 1/1/2017 ----12/31/2017 P845,216 P288,000 12/31/2018 587,226 192,000 12/31/2019 306,300* 96,000
Amortization --P557,216 395,226 210,300
Principal Collection ---P2,400,000 2,400,000 2,400,000
Carrying Amount P6,037,258 4,194,474 2,189,700 ---
* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300
58. C
Note receivable from consultation Note receivable from sale of equipment Noncurrent notes receivable, Dec. 31, 2017
P3,287,772 2,189,700 P5,477,472
59. C
Note receivable from sale of land Note receivable from sale of equipment (P4,194,474 – P2,189,700) Total current notes receivable, Dec. 31, 2017
P2,400,156 2,004,774 P4,404,930
60. C
Note receivable from sale of land Note receivable from consultation Note receivable from sale of equipment Total interest income on notes receivable for 2017
P218,196 315,252 845,216 P1,378,664
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