Cash & Cash Equivalents

Problem 1
You were able to gather the following from the December 31, 2006 trial balance of Mandaluyong Corporation
in connection with your audit of the company:
Cash on hand P 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000
Cash on hand includes the following items:
a. Customer’s check for P40,000 returned by bank on December 26, 2006 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 8, 2007.
b. Customer’s check for P20,000 dated January 2, 2007, received on December 29, 2006.
c. Postal money orders received from customers, P30,000.

The petty cash fund consisted of the following items as of December 31, 2006.
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with
names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Mandaluyong Corporation, payable to the
petty cashier 4,000
P10,100

Included among the checks drawn by Mandaluyong Corporation against the BPI current account and recorded
in December 2006 are the following:
a. Check written and dated December 29, 2006 and delivered to payee on January 2, 2007, P80,000.
b. Check written on December 27, 2006, dated January 2, 2007, delivered to payee on December 29, 2006,
P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the deposit
balance. These checks were still outstanding at December 31, 2006.
The savings account deposit in PNB has been set aside by the board of directors for acquisition of new
equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date.

1. Cash on hand
a. P410,000 c. P470,000
b. P530,000 d. P440,000

2. Petty cash fund

a. P6,000 c. P2,000
b. P7,200 d. P4,900

3. BPI current account

a. P1,000,000 c. P1,080,000
b. P1,120,000 d. P1,040,000

4. Cash and cash equivalents

a. P2,917,200 c. P3,052,000
b. P3,074,900 d. P3,066,000

Suggested Solution:
Question No. 1
Unadjusted cash on hand P500,000
NSF check (40,000)
Post dated check received (20,000)
Adjusted cash on hand P440,000

Question No. 2
Petty cash fund per total P10,100
Employees' vales (IOU) (1,600)
Currency in envelope marked "collections for charity" (1,200)
Unreplenished petty cash vouchers (1,300)
Petty cash fund, as adjusted P 6,000

Alternative computation:
Currency and coins P 2,000
Replenishment check 4,000
Petty cash fund, as adjusted P 6,000

Question No. 3
Unadjusted BPI current account P1,000,000
Unreleased check 80,000
Post dated check delivered 40,000
Adjusted BPI current account P1,120,000

Question No. 4
Cash on hand (see no. 1) P 440,000
Petty cash fund (see no. 2) 6,000
BPI current account (see no. 3) 1,120,000
Security Bank current account (net of
overdraft of P80,000) 1,000,000
PNB time deposit 500,000
Cash and cash equivalents, as adjusted P3,066,000

Answers: 1) D; 2) A; 3) B; 4) D

Problem 2
The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2006. The bank
statement as of December 31 showed a balance of P547,800. Additional information that might be useful in
reconciling the two balances follows:

(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored on
December 29 (maturity date). The bank charged Manila's account for P142,650, including a protest fee of
P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit of P27,000.
(d) Outstanding checks totaled P98,850 as of December 31.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee.

Questions:
Based on the above and the result of your audit, determine the following:
1. Adjusted cash in bank balance
a. P583,200 c. P589,200
b. P577,200 d. P512,400

2. Net adjustment to cash as of December 31, 2006

a. P104,370 c. P 98,370
b. P110,370 d. P175,170

Suggested Solution:
Question No. 1
Balance per bank statement, 12/31/06 P547,800
Add: Deposits in transit P134,250
Bank error-deposit not recorded 6,000 140,250
Total 688,050
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/06 P589,200
Balance per books, 12/31/06 P687,570
Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 748,860
Less: Dishonored note 142,650
Book error-improperly recorded
deposit 1,950
NSF check 12,960
Bank service charges 2,100 159,660
Adjusted book balance, 12/31/06 P589,200

Question No. 2
Unadjusted balance per books, 12/31/06 P687,570
Adjusted book balance, 12/31/06 589,200
Net adjustment to cash – credit P 98,370

Answers: 1) C; 2) C

Receivables

Problem 1
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:

ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

ALLOWANCE FOR BAD DEBTS

Jan. – Dec. Write-off of Jan. 1, 2002 P 95,000
last year’s receivables P 85,000 Dec. 31 provisions 315,000

Write-off of this year’s

Receivables 15,000
In your examination, you find that the balance of Accounts Receivable represents sales of the current audit year
only; that credit balances in the subsidiary ledger for accounts receivable totaled P80,000; and that the current
year’s provision for bad debts expense was 5% of sales (as compared with 41⁄2% last year, 4% of the year before,
and 31⁄2% the next previous year). Sequential to aging the accounts receivable, you and the company’s
treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to be sustained on
collection of the accounts receivable balance.

Questions

1. The adjusted Accounts Receivable balance is:

a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000

2. The adjusted Allowance for Bad Debts is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

3. The adjusted Bad Debts account is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

4. The provision per record at December 31 is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000

* Beg. balance 95,000

+ Provisions 355,000 squeezed figure
- Write-off per book 100,000
- Additional write-off 50,000
Ending balance 300,000

Problem 2
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of December 31, 2006:

Unaudited Balances, 12/31/06

Selected Accounts Debit Credit
Cash P 500,000
Accounts receivable 1,300,000
Allowance for doubtful accounts 8,000
Net sales P 6,750,000

Additional information are as follows:

a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co., recorded on January 2, 2007
with terms of net, 60 days, FOB shipping point. The goods were shipped to Variety Store on December 30, 2006.
b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked “DAIF”, but no entry was
made.
c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one and one-half percent
(11⁄2%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006.

Questions
1. What is the adjusted balance of Accounts Receivable on December 31, 2006?
a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000
2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000
3. What is the adjusted amount of 2006 Bad Debts Expense?
a. P 12,325 b. P 20,325 c. P 28,325 d. P 36,325
Solution
(1) A 1,300,000 + 50,000 + 5,000 P1,355,000
(2) C P1,355,000 x 1 1⁄2% P20,325
(3) C P20,325 + P8,000 debit balance P28,325
Inventories
Problem 1

You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year
ended December 31, 2005. The company is engaged in the wholesale business and makes all sales at 25% over
cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P5,200,000 Balance forwarded P2,800,000
Dec. 27 SI No. 965 40,000 Dec. 28 RR No. 1059 24,000
Dec. 28 SI No. 966 150,000 Dec. 30 RR No. 1061 70,000
Dec. 28 SI No. 967 10,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 969 46,000 Dec. 31 RR No. 1063 64,000
Dec. 31 SI No. 970 68,000 Dec. 31 Closing entry (3,000,000)
Dec. 31 SI No. 971 16,000 P -
Dec. 31 Closing entry (5,530,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P500,000

Inventory 600,000
Accounts payable 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report
which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number
is larger than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost
was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report
No. 1063. The freight was paid by the vendor.
 Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January
2. This order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks
Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB
Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the
freight was deducted from the purchase price of P800,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2005
a. P5,250,000 b. P5,400,000 c. P5,150,000 d. P5,350,000
2. Purchases for the year ended December 31, 2005
a. P3,000,000 b. P3,018,000 c. P3,754,000 d. P3,818,000
3. Inventory as of December 31, 2005
a. P864,000 b. P968,000 c. P800,000 d. P814,000
4. Accounts receivable as of December 31, 2005
a. P350,000 b. P370,000 c. P220,000 d. P120,000
5. Accounts payable as of December 31, 2005
a. P418,000 b. P400,000 c. P354,000 d. P1,218,000

Problem 2

The work-in-process inventories of Parañaque Company were completely destroyed by fire on June 1, 2005. You
were able to establish physical inventory figures as follows:

January 1, 2005 June 1, 2005

Raw materials P60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on
purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance adjusters than
an average gross profit rate of 35% based on cost be used and that direct labor cost was 160% of factory
overhead.

REQUIRED:
Based on the above and the result of your audit, you are to determine:
1. Raw materials used
a. P290,000 b. P140,000 c. P260,000 d. P170,000
2. The total value of goods put in process
a. P786,000 b. P600,000 c. P630,000 d. P430,000
3. The value of goods manufactured and completed as of June 1, 2003
a. P365,000 b. P315,388 c. P445,000 d. P420,000
4. The work in process inventory destroyed as computed by the adjuster
a. P314,612 b. P185,000 c. P366,000 d. P265,000

Investments
Problem 1

The following transactions appear on the “Trading Securities” account of CHICKER Corporation:

Date Particulars Debit Credit

03/1/05 Purchased 40,000 shares of PLDT at
P30.75/share and 20,000 shares of Benpres at P23/share P1,690,000
07/3/05 Purchased PAG-IBIG 15% bonds, face value P4,000,000.
Interest dates July 1 and Jan 1.
Maturity date July 1, 2009 4,000,000
11/5/05 Sold 14,400 shares of PLDT at P30/share and
4,000 shares of Benpres at P25/share P532,000
12/31/05 Sold PAG-IBIG bonds at 98 plus accrued interest 4,220,000

Your audit revealed the following additional information:

1. CHICKER received on Oct. 1, 2005, 8,000 shares of PLDT as stock dividend.

2. Benpres declared a 15% stock dividend to all stockholders of record as of November 15, 2005 payable
December 1, 2005.

Note: Disregard broker’s commission and stock transfer tax in your solution.

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

1. How much is the adjusted balance of CHICKER’s “trading securities” as of December 31, 2005?
a. P935,200 b. P1,155,200 c. P1,158,000 d. P1,229,000
2. How much is the average cost per share of PLDT’s stocks as of December 31, 2005?
a. P23.43 b. P25.63 c. P29.50 d. P30.75
3. How much is the average cost per share of Benpres stocks as of December 31, 2005?
a. P20.00 b. P22.50 c. P23.00 d. P25.00
4. How much is the total gain (loss) on sale of trading securities for the year 2005?
a. P291,000 b. P3,000 c. (P82,800) d. (P9,000)

Problem 2

In connection with your audit of the financial statements of the Pin Shop Company for the year 2005, the
following Available for Sale Securities and Dividend Income accounts were presented to you:

Available for Sale Securities

Date Description Ref. Debit Credit
01/15/2005 10,000 shares common,
par value P50, SPIKES Co. VR-18 390,000
04/30/2005 5,000 shares SPIKES Co.
received as stock dividend CJ-7 250,000

05/20/2005 Sold 5,000 shares @ P25 CR-21 125,000

12/10/2005 Sold 2,000 shares @ P60 CR-S2 120,000
 Dividend Income
Date Description Ref. Debit Credit
04/30/2005 Stock dividend SJ-7 250,000
11/30/2005 SPIKES Company common CR-22 50,000

The following information was obtained during your examination:

1. From independent sources, you determine the following dividend information:

Date Declared Date of Date of

Record Payment Rate
Type of Dividend
Stock 03/15/2005 04/01/2005 04/30/2005 50%
Cash 11/01/2005 11/15/2005 11/28/2005 P5/share
Cash 12/01/2005 12/15/2005 01/02/2006 20%

2. Closing market quotation as at December 31, 2005:

Bid Asked
SPIKES Company common 13-3/4 16-1/2

QUESTIONS:

Based on the above and the result of your audit, answer the following:
1. How much is the gain (loss) on the May 20, 2005 sale?
a. (P5,000) b. (P70,000) c. P5,000 d. P0
2. How much is the gain on the December 10, 2005 sale?
a. P68,000 b. P42,000 c. P48,000 d. P0
3. How much is the total dividend income for the year 2005?
a. P300,000 b. P50,000 c. P400,000 d. P150,000
4. How much is the adjusted balance of Available for Sale Securities as of December 31, 2005?
a. P145,000 b. P110,000 c. P132,000 d. P208,000
5. How much is the Unrealized Loss on AFS as of December 31, 2005?
a. P98,000 b. P76,000 c. P35,000 d. P0

PPE – Intangibles

Problem 1

On January 1, 2005, Cabiao Corporation purchased a tract of land (site number 101) with a building for
P1,800,000. Additionally, Cabiao paid a real state broker’s commission of P108,000, legal fees of P18,000 and
title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and
the building value was P300,000. Shortly after acquisition, the building was razed at a cost of P225,000.

Cabiao entered into a P9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on March 1, 2005 for the
construction of an office building on the land site 101. The building was completed and occupied on September
30, 2006. Additional construction costs were incurred as follows:

Plans, specifications and blueprints P 36,000

Architect’s fees for design and supervision 285,000
The building is estimated to have a forty-year life from date of completion and will be depreciated using the
150%-declining-balance method.

To finance the construction cost, Cabiao borrowed P9,000,000 on March 1, 2005. The loan is payable in ten
annual installments of P900,000 plus interest at the rate of 14%. Cabiao used part of the loan proceeds for
working capital requirements. Cabiao’s average amounts of accumulated building construction expenditures
were as follows:

For the period March 1 to December 31, 2005 P2,700,000

For the period January 1 to September 31, 2006 6,900,000

Cabiao is using the allowed alternative treatment for borrowing cost.

QUESTIONS:

Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
a. P1,905,000 c. P2,205,000
b. P1,800,000 d. P2,151,000
2. Cost of office building
a. P10,581,000 c. P10,329,000
b. P10,360,500 d. P10,960,500
3. Depreciation of office building for 2006
a. P96,800 c. P102,800
b. P97,130 d. P 99,197

Problem 2

Gabaldon Company’s property, plant and equipment and accumulated depreciation balances at December 31,
2005 are:
Cost Accumulated Depreciation
Machinery and equipment P1,380,000 P 367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000

Additional information follows:

Depreciation methods and useful lives:
Machinery and equipment – straight line; 10 years.
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2001.
Leasehold improvements – straight line

Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks which have estimated salvage values equal to
15% of cost.

Other additional information:

a. Gabaldon entered into a 12-year operating lease starting January 1, 2003. The leasehold improvements were
completed on December 31, 2002 and the facility was occupied on January 1, 2003.
b. On July 1, 2006, machinery and equipment were purchased at a total invoice cost of P325,000. Installation
cost of P44,000 was incurred.
c. On August 30, 2006, Gabaldon purchased new automobile for P25,000.
d. On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31,
2005 was sold for P23,500.
e. On December 20, 2006, a machine with a cost of P17,000, a carrying amount of P2,975 on date of disposition,
was sold for P4,000.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
1. The gain on sale of truck on September 30 is
a. P2,680 c. P250
b. P6,500 d. P 0
2. The gain on sale of machinery on December 20, 2006 is
a. P1,025 c. P13,000
b. P2,725 d. P 0
3. The adjusted balance of the property, plant and equipment as of December 31, 2006 is
a. P1,919,000 c. P2,307,000
b. P2,388,500 d. P2,351,000
4. The total depreciation expense for the year ended December 31, 2006 is
a. P185,402 c. P138,000
b. 245,065 d. P221,402
5. The carrying amount of the property, plant and equipment as of December 31, 2006 is
a. P1,567,497 c. P1,578,547
b. P1,290,547 d. P1,617,322

Liabilities

Problem 1

Problem 1
In conjunction with your December 31, 2007, annual audit of the financial statements of SweetHeart Company,
you have obtained and examined the December 31, 2007, accounts payable trial balance. Your examination of
this trial balance disclosed the following open vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a cash transfer to the
factory payroll bank account for the pay period ended December 28, 2007. The payroll cash transfer was made
January 3, 2008, and payroll checks covering this pay period were distributed to factory employees on January
4, 2008.
b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit covered the principal
and interest due on a ten-year installment loan. The loan was granted to SweetHeart Company on January 1,
2007. Terms of the loan agreement call for ten equal annual installment payments of P100,000, each plus
interest at 8 percent. Principal and interest payments are due January 5, 2008 – 2017. The voucher indicated
that the Loan Payable and Interest Expense accounts had been properly charged.
c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on invoice from AC
Company for a new computer machine. The computer machine was installed December 10, 2007, and the Office
Equipment account was properly charged.
d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This voucher covered income
taxes withheld from employees during December 2007.
e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the total interest and
principal due on a 180-day P40,000 note payable to the CJ Company. Charges to the Note Payable and Interest
Expense had been properly handled.
f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented a P200,000
advance payment to SS Company for a special order of ten boxes. The P200,000 check was mailed to SS Company
on January 2, 2008.

Questions

1. Accounts payable at year-end is

a. Overstated by P716,940 c. Overstated by P516,940
b. Overstated by P666,940 d. Overstated by P466,940
2. The entry to adjust Voucher # 778 is
a. Accounts payable 180,000 c. Loans payable 100,000
Loans payable 100,000 Interest expense 80,000
Interest payable 80,000 Accounts payable 180,000
b. Accounts payable 180,000 d. Loans payable 100,000
Loans payable 100,000 Interest payable 80,000
Interest expense 80,000 Accounts payable 180,000
3. The entry to adjust Voucher # 741 is
a. Accounts payable – others 50,000
Accounts payable 50,000
b. Accounts payable 50,000
Accounts payable – others 50,000
c. Accounts payable – others 50,000
Machinery 50,000
d. No adjustment
4. The current liability of the company at year-end is
a. Overstated by P340,000 c. Understated by P200,000
b. Overstated by P140,000 d. Understated by P 60,000

Problem 2

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of P1,000,000 due January 1,
2015. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to
accept an effective interest of 6%.

Questions
1. The bonds were issued on January 1, 2007 at
a. A premium c. Book value
b. An amortized value d. A discount
2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective interest amortization
method, LACEA COMPANY recorded interest expense for the 6 months ended June 30, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884
3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6 months ended
December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791

Shareholders’ Equity

Problem 1

Alcain COMPANY’s shareholders’ equity account balance at December 31, 2003, were as
follows:

Ordinary share 800,000

Additional paid-in capital 1,600,000
Retained earnings 1,845,000

The following 2004 transactions and other information relate to the shareholders’ equity accounts:

a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares
were issued and outstanding.
b. On March 5, 2004, Alcain acquired 5,000 shares of its ordinary share for P10 per share to hold as treasury
share. The shares were originally issued at P15 per share. ALCAIN uses the cost method to account for treasury
share. Treasury share is permitted in Alcain’s state of incorporation.
c. On July 15, 2004, Alcain declared and distributed a property dividend of inventory. The inventory had a
P75,000 carrying value and a P60,000 fair market value.
d. On January 2, 2002, Alcain granted share options to employees to purchase 20,000 share of Alcain’s ordinary
share at P18 per share, which was the market on that date. The option may be exercised within a three year
period beginning January 2, 2004. The measurement date is the same as the grant date. On October 1, 2004,
employees exercised all 20,000 options when the market value of the share was P25 per share. ALCAIN issued
new shares to settle the transaction.
e. Alcain’s net income for 2004 was P240,000.

Questions

Based on the information above and other analysis as necessary, answer the following question:

1. Alcain’s Ordinary share balance at December 31, 2004 is:

a. P 1,300,000 b. P 1,160,000 c. P 900,000 d. P 800,000
2. Alcain’s Additional paid-in capital balance at December 31, 2004 is:
a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000
3. Alcain’s Retained Earnings balance at December 31, 2004 is:
a. P 2,085,000 b. P 2,025,000 c. P 2,010,000 d. P 1,770,000
4. Alcain’s Treasury Share balance at December 31, 2004 is:
a. P 0 b. P 50,000 c. P 75,000 d. P 125,000
5. Alcain’s Shareholders’ Equity balance at December 31, 2004 is:
a. P 4,910,000 b. P 4,820,000 c. P 4,735,000 d. P 4,720,000
Problem 2

Ashary COMPANY is a publicly held company whose shares are traded in the over the counter market. The
shareholders’ equity account at December 31, 2003, had the following balances:
Preference share, P100 par value. 6% cumulative;
5,000 shares authorized; 2,000 shares issued
and outstanding P 200,000
Ordinary share, P1 par value; 150,000 shares
authorized; 100,000 issued and outstanding 100,000
Additional paid-in capital 800,000
Retained earnings 1,586,000

Transactions during 2004 and other information relating to the shareholders’ equity account were as follows:
 February 1, 2004 – Issued 13,000 shares of ordinary share to Keith Company in exchange for land. On
the date issued, the share had a market price of P11 per share. The land had a carrying value on Keith’s
books of P135,000, and the assessed value for property taxes of P90,000.
 March 1, 2004 – Purchased 5,000 shares of its own ordinary share to be held as treasury for P14 per
share. Ashary uses the cost method to account for treasury share. Transactions in treasury share are
legal in Ashary’s state of incorporation.
 May 10, 2004 – Declared a property dividend of marketable securities held by Ashary to ordinary
shareholders. The securities had a carrying value of P600,000, fair value on relevant dates were:

Date of declaration (May 10, 2004) P 720,000

Date of record (May 25, 2004) 758,000
Date of distribution (June 1, 2004) 736,000

 October 1, 2004 – Reissued 2,000 shares of treasury share for P16 per share.
 November 4, 2004 – Declared a cash dividend of P1.50 per share to all ordinary shareholders of record
November 15, 2004. The dividend was paid on November 25, 2004.
 December 20, 2004 – Declared the required annual cash dividend on preference share for 2004. The
dividend was paid on January 5, 2005.
 January 16, 2005 – Before closing the accounting records for 2004, Ashary became aware that no
amortization had been recorded for 2004 for a patent purchased on July 1, 2003. The patent was
properly capitalized at P320,000 and had an estimated useful life of eight years when purchased.
Ashary’s income tax rate is 30%.
 Net income after tax for 2004 was P838,000.

Questions

1. The total additional paid-in capital at year-end is:

a. P 881,000 b. P 877,000 c. P 922,000 d. P 934,000
2. The total fundamental errors is
a. P 14,000 b. P 20,000 c. P 27,200 d. P 40,000
3. The total cash dividends – ordinary at year-end is:
a. P 172,500 b. P 169,500 c. P 165,000 d. P 162,000
4. The total property dividends – ordinary at year-end is:
a. P 600,000 b. P 720,000 c. P 736,000 d. P 758,000
Correction of Errors

Problem 1

Tuburan Company was organized during 2002 by three technical experts to assemble (parts to be purchased
from suppliers) and market an electronic device that they had previously patented. No products were sold
during 2002; however, 2003 and 2004 produced significant sales, but modest profits. During 2003, the company
hired bookkeeper who, although very industrious, had very little knowledge of accounting. Realizing this
competency problem, the company is considering engaging an outside independent CPA to as they said
“straighten things out and make recommendations.” Among numerous other accounting problems, adjusting
entries have never been made. The bookkeeper stated that “the transactions are recorded in the right way when
they occur.”

The following 2005 transactions, and the way in which the bookkeeper recorded or explained them, are being
discussed:

a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count).
Inventory of parts 17,000
Purchases 17,000
b. Depreciation – equipment (purchased at the beginning of 2004) cost, P80,000; estimated useful life, 10 years;
manufacturer’s recommended value at end of 5 years, P10,000.
Depreciation expense 7,000
Equipment 7,000
c. Unpaid wages at year-end 2004, P3,000; 2005, P11,000.
Record when paid, because that is when the wages requires the payment of resources and “it all events out
anyway.”
d. Note payable, P60,000, five-year, 15%, interest payable each October 31; signed November 1, 2004.
Interest expense 9,000
Cash 9,000
Because this is the correct amount of interest each year
e. Contract to deliver six electronic devices, signed October 15, 2005, pending assembly, P45,000.
Due from customers 45,000
Sales 45,000
f. Property taxes for 2005, billed in November 2005, payable without penalty up to February 15, 2004, P9,000.
Paid on February 14, 2006.
February 14, 2006:
Property taxes 9,000
Cash 9,000
g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the 30- day credit period, on
January 26, 2006.
January 26, 2006:
Advertising 17,000
Cash 17,000

Questions:

Based on the information given, answer the following:

1. Interest expense of the P60,000 note at December 31, 2005 is
a. P 10,500 b. P 9,000 c. P 7,500 d. P 1,500
2. Interest payable at December 31, 2005 is
a. P 9,000 b. P 7,500 c. P 1,500 d. P 750
3. Inventory at December 31, 2005 is
a. P 64,000 c. P 30,000
b. P 47,000 d. Cannot be determined
4. Wages expense at December 31, 2005 is
a. Understated by P 14,000 c. Understated by P 8,000
b. Understated by P 11,000 d. Correctly stated
5. Accrued expenses at December 31, 2005 is understated by
a. P 38,500 b. P 12,500 c. P 11,750 d. P 11,000