SOLUTION - AUDITING PROBLEMS TEST BANK 2

PROBLEM 1 AYALA MERCHANTS CORPORATION

ADJUSTING JOURNAL ENRIES

December 31, 2017

1. Operating expenses 27,740

Petty cash fund 27,740
(P37,250 P9,510)

2. Accounts receivable (P107,400 + P63,000) 170,400

Notes payable 700,000
Finance cost (Interest expense) 10,000
Other charges (Bank service charges) 2,750
Accounts payable 72,000
Cash in bank 811,150

3. Allowance for doubtful accounts 152,640

Accounts receivable (write-off) 152,640

4. Other charges (Unrealized loss Trading securities) 10,940

Trading securities 10,940
Bacnotan Cement (P16, 7,000) P112,000
Fil-Estate (P19.75 x 10,000) 197,500
Ionics (P24 x 2,400) 57,600
La Tondena (P26 x 2,000) 52,000
Selecta (P1.20 x 8,000) 9,600
Union Bank (P27.50 x 1,600) 44,000
Total market value, Dec. 21, 2017 P472,700
Carrying value, Dec. 31, 2017 483,640
Unrealized loss trading securities P 10,940

5. Interest receivable 32,500

Other income (Interest income) 32,500
(P1,300,000 x 15% 2/12)

6. Operating expenses (Advertising expense) 325,000

Prepaid advertising 325,000
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) 280,000

Prepaid rent 280,000
(P420,000 x 2/3 or P140,000 x 2)

8. Operating expenses (Insurance expense) 81,667

Prepaid insurance 81,667
(P490,000 x 2/12)

9. Operating expenses (Office supplies expense) 258,500

Office supplies inventory 258,500
(P361,000 P102,500)

10. Accounts receivable 146,940

Sales 146,940

11. Cost of goods sold 356,000

Inventories 356,000

12. Cost of goods sold 138,500

Inventories 138,500

13. Inventories 153,800

Cost of goods sold 153,800
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14. Delivery equipment 43,400

Operating expenses 43,400

15. Operating expenses (Depreciation expense) 2,170

Accumulated depreciation 2,170
(P43,400/10 x 6/12)

16. Accumulated depreciation 10,480

Operating expenses (Depreciation expense) 10,480

17. Accumulated depreciation (P138,620 P10,480) 128,140

Other charges (Loss) 37,380
Delivery equipment 165,520

18. Operating expenses 213,000

Accrued expenses 213,000

19. Finance cost (Interest expense) 104,000

Interest payable 104,000
(P2.6 million x 16% 3/12)

20. Retained earnings 540,000

Dividends payable 540,000
(P5,400,000 x 10%)

21. Operating expenses (Doubtful accounts expense) 130,317

Allowance for doubtful accounts 130,317

Required
Per Books Adjustments Per Audit % Allowance
Less than 3 months P2,500,960 P146,940
107,400 P2,755,300 1 P27,553
3 to 6 months 843,200 843,200 5 42,160
Over 6 months 274,500 63,000
(152,460) 185,040 10 18,504
P3,618,660 P3,783,540 P88,217

Allowance before adjustment (P110,360 P152,460) P 42,100 debit

Required allowance 88,217
Adjustment P130,317

1. D Petty cash fund

Per books P60,000
AJE 1 (27,740)
Per audit P32,260

2. D Cash in bank
Per books P1,056,000
AJE 2 (811,150)
Per audit P 244,850

3. D Trading securities
Per books P483,640
AJE 4 (10,940)
Per audit P472,700

4. C Accounts receivable
Per books P3,618,660
AJE 2 170,400
3 (152,460)
10 146,940
Per audit P3,783,540
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5. D Allowance for doubtful accounts
Per books P110,360
AJE 3 (152,460)
21 130,317
Per audit P 88,217

6. C Notes and interest receivable

Per books P1,300,000
AJE 5 32,500
Per audit P1,332,500

7. A Inventories
Per books P7,274,900
AJE 11 (356,000)
12 (138,500)
13 153,800
Per audit P6,934,200

8. B Prepaid insurance
Per books P490,000
AJE 8 (81,667)
Per audit P408,333

9. A Prepaid rent
Per books P420,000
AJE 7 (280,000)
Per audit P140,000

10. D Prepaid advertising

Per books P640,000
AJE 6 (325,000)
Per audit P315,000

11. D Office supplies inventory

Per books P361,000
AJE 9 (258,500)
Per audit P102,500

12. C Petty cash fund P 32,260

Cash in bank 244,850
Trading securities 472,700
Accounts receivable (P3,783,540 P88,217) 3,695,323
Notes and interest receivable 1,332,500
Inventories 6,934,200
Prepaid insurance 408,333
Prepaid rent 140,000
Prepaid advertising 315,000
Office supplies inventory 102,500
Total current assets P13,677,666

13. C Property, plant, and equipment (PPE)

Per books P4,068,400
AJE 14 43,400
17 (165,520)
Per audit P3,946,280

14. B Accumulated depreciation

Per books P1,177,500
AJE 15 2,170
16 (10,480)
17 (128,140)
Per audit P1,041,050

15. B Accounts payable

Per books P2,356,320
 AJE 2 72,000
Per audit P2,428,320

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16. A Interest payable
Per books P0
AJE 19 104,000
Per audit P104,000

17. C Accounts payable trade P2,428,320

Notes payable 2,600,000
Accrued expenses 382,040
Interest payable 104,000
Dividends payable 540,000
Total current liabilities P6,054,360

18. C Sales
Per books P13,078,000
AJE 10 146,940
Per audit P13,224,940

19. C Cost of goods sold

Per books P8,034,000
AJE 11 356,000
12 138,500
13, (153,800)
Per audit P8,374,700

20. D Operating expenses

Per books P3,357,000
AJE 1 27,740
6 325,000
7 280,000
8 81,667
9 258,500
14 (43,400)
15 2,170
16 (10,480)
18 213,000
21 130,317
Per audit P4,621,514

PROBLEM 2 LUKAS COMPANY

21. A Sales returns and allowance 90,000

Accounts receivable 90,000

Inventory 72,000
Cost of sales 72,000
(P90,000 x 80%)

Net decrease in income (P90,000 P72,000) P18,000

22. A Sales 30,000

Accounts receivable 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 135,000

Accounts receivable 135,000

PROBLEM 3 CROCODILE, INC.

26. B 27. C 28. B 29. B 30. D

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PROBLEM 4 SPARK COMPANY

31. B Cash balance, Dec. 31, 2016 P100,000

Sales (SQUEEZE) 920,000
Cash paid for operating expenses (220,000)
Cash paid on accounts payable (471,700)
Collections on notes receivable 25,000
Cash balance, Dec. 31, 2017 P353,300
Units sold (P920,000/P50) 18,400
32. D Accounts payable:
Balance, Dec. 31, 2016 P75,000
Purchases 596,700*
Cash payments on accounts payable (471,700)
Balance, Dec. 31, 2017 P200,000
*Purchases:
Month Unit Cost Units Total Cost
January P32.60 1,500 P48,900
February 32.70 1,500 49,050
March 32.80 1,500 49,200
April 32.90 1,500 49,350
May 33.00 1,500 49,500
June 33.10 1,500 49,650
July 33.20 1,500 49,800
August 33.30 1,500 49,950
September 33.40 1,500 50,100
October 33.50 1,500 50,250
November 33.60 1,500 50,400
December 33.70 1,500 50,550
Total purchases 18,000 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) 6,150

Purchases 18,000
Units sold (18,400)
Inventory, Dec. 31, 2017 5,750
34. C FIFO cost of inventory, Dec. 31, 2017:
December purchases 1,500 x P33.70 P 50,550
November purchase 1,500 x P33.60 50,400
October purchase 1,500 x P33.50 50,250
September purchase 1,250 x P33.40 41,750
5,750 P192,950
35. D Inventory, Jan. 1, 2017 P199,875
Purchases 596,700
Goods available for sale 796,575
Inventory, Dec. 31, 2017 (192,950)
Cost of goods sold P603,625
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PROBLEM 5 ISIDRO MANUFACTURING COMPANY

36. B Depreciation expense for 2014:

Truck #1 (P180,000/5) P 36,000
Truck #2 (P220,000/5) 44,000
Truck #3 (P300,000/5 x ) 30,000
Truck #4 (P240,000/5) 48,000
Truck #5 (P400,000/5 x ) 40,000
Total P198,000

37. A Trade-in value of Truck #3 (P400,000-P220,000) P180,000

Book value of Truck #3:
Cost P300,000
A/D, 1/1/2013 -0 7/1/2014 (P300,000/5 x1.5) (90,000) 210,000
Loss on trade-in P 30,000

38.A Truck #2 P220,000

Truck #5 400,000
Truck #6 420,000 P1,040,000
Accumulated depreciation:
Truck #2 (fully depreciated 7/1/2016) P220,000
Truck #5, 7/1/2014 12/31/2017 (P400,000/5 x 3.5) 280,000
Truck #6, 7/1/2016 12/31/2017 (P420,000/5 x 1.5) 126,000 626,000
Book value, 12/31/2017 P414,000

39. C 2014 2015 2016 2017 Total

Truck #1 P36,000 -- -- -- P 36,000
Truck #2 44,000 P44,000 P22,000 -- 110,000
Truck #3 30,000 -- -- -- 30,000
Truck #4 48,000 48,000 24,000 -- 120,000
Truck #5 40,000 80,000 80,000 P80,000 280,000
Truck #6 -- -- 42,000 84,000 126,000
Correct P198,000 P172,000 P168,000 P164,000 P702,000
Per client 210,000 225,000 250,500 304,000 989,500
Over P 12,000 P 53,000 P82,500 P140,000 P287,500

40. B
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PROBLEM 6 NUNAL COMPANY

41. B Outstanding checks, November 30:

Check no. 792 P 7,500
799 21,150
Total P28,650

42. A Outstanding checks, December 31:

Check no. 806 P 57,000
807 78,000
810 21,000
812 48,000
817 33,000
819
21,000
822 36,000
823 39,000
824 87,000
825 6,000
826 33,000
Total P459,000

43. D Deposit in transit, November 30 P25,500

44. A Deposit in transit, November 30 P 25,500

Collections 2,121,900
Total 2,147,400
Deposits 2,033,400
Deposit in transit, December 31 P 114,000

Nov. 30 Receipts Disbursements Dec. 31

Unadjusted book balances P345,000 P2,297,400 P1,228,230 P1,414,170
Bank service charges:
November 30 (150) (150)
December 31 360 (360)
Notes collected by bank:
November 30 30,000 (30,000)
December 31 36,000 36,000
Unrecorded disbursement (815) 18,000 (18,000)
Adjusted book balances P374,850 P2,303,400 P1,246,400 P1,431,810

Nov. 30 Receipts Disbursements Dec. 31

Unadjusted bank balances P342,000 P2,493,900 P1,059,090 P1,776,810
Outstanding checks:
November 30 (28,650) (28,650)
December 31 459,000 (459,000)
Deposits in transit:
November 30 25,500 (25,500)
December 31 114,000 114,000
Error corrected (243,000) (243,000)
Erroneous bank charge 36,000 (36,000)
Adjusted bank balances P374,850 P2,303,400 P1,246,440 P1,431,810

45. D 46. C 47. B 48. C 49. D 50. B

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PROBLEM 7 MINA MINING CO.

Depletable/Depreciable Cost Estimated Reserves Depletion/Depreciation

Mineral property P48,450,000 1 150,000 P323
Building 12,000,000 150,000 80
Machinery (1/2) 1,800,000 150,000 12
Machinery (1/2) 1,800,000 150,000 24 2
1
P50,000,000 P1,550,000
2
(P1,800,000/150,000) x 2

51. C Year 1
Depletion Depreciation
Mineral property (P323 x 7,500) P2,422,500
Building (P80 x 7,500) P600,000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) (P24 x 7,500) 180,000
P2,422,500 P870,000
52. D Year 5
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 15,000) 360,000
P4,845,000 P1,740,000
53. C Year 6
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) (P24 x 7,500) 180,000
P4,845,000 P1,560,000

54. C Year 7
Depletion Depreciation
Mineral property (P323 x 15,000) P4,845,000
Building (P80 x 15,000) P1,200,000
Machinery (1/2) (P12 x 15,000) 180,000
Machinery (1/2) --
P4,845,000 P1,380,000
55. D Year 11
Depletion Depreciation
Mineral property (P323 x 7,500) P2,422,500
Building (P80 x 7,500) P600,000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) ---
P2,422,500 P690,000
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PROBLEM 8 HVR Company

56. D Present value of principal (P3,600,000 x 0.7514) P2,705,040

Present value of interest (P3,600,000 x 5% x 2.4860) 447,480
Consultation service fee revenue P3,152,520

57. D Interest Principal Total PVF Present Value

12/31/2017 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/2018 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/2019 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 1,684,800
Present value of note P6,037,258
Carrying amount of equipment 4,800,000
Gain on sale of equipment P1,237,258

Note receivable from sale of land:

Date Interest Income Carrying Amount
1/1/2017 --- P2,181,960*
12/31/2017 P218,196 2,400,156
12/31/2018 239,844** 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 Nominal Discount Carrying
Date Interest Interest Amortization Amount
1/1/2017 --- --- --- P3,152,520
12/31/2017 P315,252 P180,000 P135,252 3,287,772
12/31/2018 328,777 180,000 148,777 3,436,549
12/31/2019 343,451** 180,000 163,451* 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 Principal Carrying
Date Interest Interest Amortization Collection Amount
1/1/2017 --- --- --- ---- P6,037,258
12/31/2017 P845,216 P288,000 P557,216 P2,400,000 4,194,474
12/31/2018 587,226 192,000 395,226 2,400,000 2,189,700
12/31/2019 306,300* 96,000 210,300 2,400,000 ---

* P2,400,000 P2,189,700 = P210,300 + P96,000 = P306,300

58. C Note receivable from consultation P3,287,772

Note receivable from sale of equipment 2,189,700
Noncurrent notes receivable, Dec. 31, 2017 P5,477,472

59. C Note receivable from sale of land P2,400,156

Note receivable from sale of equipment (P4,194,474 P2,189,700) 2,004,774
Total current notes receivable, Dec. 31, 2017 P4,404,930

60. C Note receivable from sale of land P218,196

Note receivable from consultation 315,252
Note receivable from sale of equipment 845,216
Total interest income on notes receivable for 2017 P1,378,664

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