AUDIT OF SHAREHOLDERS’ EQUITY

PROBLEM NO. 1

iBELIEVE COMPANY began operations on January 1. Authorized were 120,000 shares of P10 par value ordinary shares
and 240,000 shares of 10%, P100 par value preference shares. The following transactions involving shareholders' equity
occurred during the first year of operations.

Jan. 1 Issued 30,000 ordinary shares to the corporation promoters in exchange for land valued at P1, 020,000
and services valued at P420, 000. The property had cost the promoters P540, 000 3 years before and was
carried on the promoters’ books at P300, 000.

Feb. 23 Issued 60,000 preference shares with a par value of P100 per share. The shares were issued at a price of
P150 per share, and the company paid P450, 000 to an agent for selling the shares.

Mar. 10 Sold 18,000 ordinary shares for P390 per share. Issue costs were P150, 000.

Apr. 10 24,000 ordinary shares were sold under share subscriptions at P450 per share. No shares are issued until a
subscription contract is paid in full. No cash was received.

July 14 Exchanged 4,200 ordinary shares and 8,400 preference shares for a building with a fair value of P3,
060,000. The building was originally purchased for P2, 280,000 by the investors and has a book value of
P1, 320,000. In addition, 3,600 ordinary shares were sold for P1, 440,000 in cash.

Aug.3 Received payments in full for half of the share subscriptions and payments on account on the rest of the
subscriptions. Total cash received was P8, 400,000. Share certificates were issued for the subscriptions
paid in full.

Nov. 2 Issued 5,000 ordinary shares for an outstanding bank loan of P2, 100,000, including accrued interest of
P100, 000. iBELIEVE’s ordinary shares are quoted at P410 per share on this date.

Dec. 31 Net income for the first year of operations was P3,600,000.

Dec. 31 Declared a cash dividend of P10 per share on preference shares and P20 per share on ordinary shares,
payable on February 10 to shareholders of record on January 15.

Based on the preceding information, calculate the balances of each of the following accounts:

1. Preference shares
A. P6, 000,000 B. P6, 840,000 C. P9, 930,000 D. P10, 770,000

2. Share premium preference shares

A. P540,000 B. P2,550,000 C. P3,090,000 D. P3,270,000

3. Ordinary Share
A. 366,000 B. P528,000 C. P678,000 D. P728,000

4. Share premium -ordinary share

A. P18,660,000 B. 21,432,000 C: 222,242,000 D. P23,432,000

5. Retained earnings
A. P1,220,000 B. P1,740,000 C. P2,000,000 D. P3,100,000
6. Total shareholders’ equity
A. P29,760,000 B. 32,160,000 C. 33,030,000 D. 33,900,000

PRQBLEM NO. 2

You were engaged by CITY CORPORATION, a publicly held company whose shares are traded on the Philippine Stock
Exchange, to conduct an audit of its 2019 financial statements. You were hold by the company‘s controller that there were
numerous equity transactions that took place in 2019. The shareholders’ equity accounts at December 31, 2018, had the
following balances:

Share capital--Preference,9100 par value, 6% cumulative;

9,000 shares authorized; 5,400 Shares issued and outstanding P540,000

Share capitaI-Ordinary, P1 par value, 540,000 shares authorized;

360,000 shares issued and outstanding 360,000
Share premium 720,000
Retained earnings 294,000
Total shareholders’ equity P1,914,000

You summarized the following transactions during 2019 and other information relating to the shareholders’ equity in
your working papers as follows:

 January 6, 2019- Issued 13,500 ordinary shares in exchange for land. On the date issued, the shares had a market
price of P16.50 per share. The land had a carrying value of P126,000.

 January 20. 2019- Issued 10,000 ordinary shares to Atty. A. Santiago as compensation for 500 hours of legal
services performed. Atty. Santiago usually bills P400 per hour for legal services. On the date of issuance, the share
was trading at P17.

 January 31, 2019- Sold 720, P1,000, 12% bonds due January 31. 2029, at 98 with one detachable share warrant
attached to each bond. Interest is payable annually on January 31. The fair value of the bonds without the share
warrants is 95. The detachable warrants have a fair value of P50 each and expire on January 31, 2020. Each warrant
entitles the holder to purchase 10 ordinary shares at P10 per share.

 February 22, 2019- Purchased 4,500 of its own ordinary shares to be held as treasury shares for P24 per share.

 February 28, 2019- Subscriptions for 12,600 ordinary shares were received at P26 per share, payable 50% down and
the balance by March 15.

 March 15, 2019- The balance due on 10,800 ordinary shares was received and those shares were issued. The
subscriber who defaulted on the 1,800 remaining shares forfeited the down payment in accordance with the
subscription agreement.

 August 30, 2019- Reissued 1,800 treasury shares for P20 per share.

 September 14, 2019- There were 567 warrants detached from the bonds and exercised.
 November 30, 2019- Declared a cash dividend of P0.50 per share to all ordinary shareholders of record December
15, 2019. The dividend was paid on December 30, 2019.

 December 15, 2019- Declared the required annual cash dividends on preference shares for 2019. The dividend was
paid on January 15, 2020.

 January 8, 2020- Before closing the accounting records for 2019, CITY became aware that no depreciation had been
recorded for 2018 for a machine purchased on July 1, 2018. The machine was properly capitalized at P288,000 and
had an estimated useful life of eight years when purchased. The appropriate correcting entry was recorded on the
same date.

 Adjusted net income for 2019 was P252,000.

Based on the foregoing and the result of your audit, answer the following: (Ignore income tax implications.)

1. Share capitaI-ordinary at December 31, 2019, is

A. P394,300 B. P397,270 C. P399,970 D. P401,770

2. How much is the total share premium as of December 31, 20197

A. P1,379,530 B. P1,431,880 C. P1,455,280 D. P1,468,960

3. The unappropriated retained earnings on December 31, 2019, is

A. P181,765 B. P224,965 C. P232,165 D. P289,765

4. How much is the total shareholders' equity on December 31, 2019?

A. P2,555,415 B. P2,615,625 C. P2,620,215 D. P2,622,015

PROBLEM N0. 3

BEBE CO. was formed on July 1, 2016. It was authorized to issue 600,000 shares of P10 par value ordinary shares and
200,000 shares of 8 percent P25 par value, cumulative and nonparticipating preference shares. BEBE CO. has a July 1-
June 30 fiscal year.

The following information relates to the shareholders' equity accounts of BEBE CO.:

Ordinary Shares

Prior to the 2018-2019 fiscal year, BEBE CO. had 220,000 ordinary shares issued as follows:

1. 170,000 shares were issued for cash on July 1, 2016, at P35 per share.

2. On July 24, 2016, 10,000 shares were exchanged for a plot of land which cost the seller P140,000 in 2010 and had a fair
value of P1,200,000 on July 24, 2016.

3. 40,000 shares were issued on March 1, 2017, for P35 per share.

During the 2018-2019 fiscal year, the following transactions regarding ordinary shares took place:

November 30, 2018 BEBE CO. purchased 4,000 of its own shares on the open market at P39 per share.

December 15, 2018 BEBE CO. declared a 5% share dividend for shareholders of record on January 15, 2019, to be
issued on January 31, 2019. BEBE CO. was having a liquidity problem and could not afford a
 cash dividend at the time. BEBE CO.’s ordinary shares were selling at P55 per share on
December 15, 2018.

June 20, 2019 BEBE CO. sold 1,000 of its own ordinary shares that it had purchased on November 30, 2018, for
P42,000.

Preference Shares

BEBE CO. issued 80,000 preference shares at P44 per share on July 1, 2017.

Cash Dividends

BEBE CO. has followed a schedule of declaring cash dividends in December and June, with payment being made to
shareholders of record in the following month. The cash dividends which have been declared since inception of the
company through June 30, 2019, are shown below:

Declaration Date Share Capital-Ordinary Share CapitaI-Preference

12/15/17 P030 per share P1.00 per share
06/15/18 P030 per share P1.00 per share
12/15/19 --- P1.00 per share

No cash dividends were declared during June 2019 due to the company’s liquidity problems:

Retained Earnings

As of June 30, 2018, BEBE CO’s retained earnings account had a balance of P1,380,000. For the fiscal year ending June
30, 2019, BEBE CO. reported net income of P80,000.

Required:

Compute the adjusted balances of the following as of June 30, 2019:

1. Preference share capital

2. Ordinary share capital
3. Total share premium
4. Retained earnings (before appropriation for treasury shares)
5. Total shareholders’ equity

PROBLEM NO. 4

A CPA was engaged by BIRDIE Company in 2019 to examine its books and records and to make whatever corrections
are necessary. An examination of the accounts discloses the following:

a) Dividends had been declared on December 15 in 2017 and 2018 but had not been entered in the books until
paid.

b) Improvements in buildings and equipment of P97,200 had been debited to expense at the end of April 2016.
Improvements are estimated to have 12-year life. The company uses the straight-line method in recording
depreciation and computes depreciation to the nearest month.

c) The physical inventory of merchandise had been overstated by P28,800 at the end of 2017 and by P42,750 at
the end of 2018.
 d) The merchandise inventories at the end of 2018 and 2019 did not include merchandise that was then in transit
and to which the company had title. These shipments of P18,900 and P26,100 were recorded as purchases in
January of 2019 and 2020, respectively.

e) The company had failed to record sales commissions payable of P32,400 and P9,900 at the end of 2018 and
2019, respectively.

f) The company had failed to recognize supplies on hand of P7,650 and P15,480 at the end of 2018 and 2019,
respectively.

The retained earnings account appeared as shown below on the date the CPA began the examination.

Retained Earnings

Date Item Debit Credit Balance

2017
Jan. Balance P585, 000
1
Dec. Net Income for year P252, 000 837, 000
31
2018
Jan. Dividends paid P139, 500 697, 500
10
Mar. Stock sold – excess over par 189, 000 886, 500
6
Dec. Net loss for year 160, 200 726, 300
31
2019 Debit Credit Balance
Jan. Dividends paid 139, 500 586, 800
10
Dec. Net loss for year 173, 700 413, 100
31

1. What is the corrected 2017 net income?

A. P215,100 B. P272,700 C. P364500 D. P372,600

2. What is the corrected 2018 net loss?

A. P160,200 B. P179,100 C. P198,000 D. P207,000

3. What is the corrected 2019 net loss?

A. P108,720 B. P168,120 C. P194220 D. P213,120

4. What is the corrected retained earnings on December 31, 2018?

A. P405,900 B. P491,400 C. P549,180 D. P678,600

5. What is the corrected retained earnings on December 31, 2019?

A. P108,180 B. P189,000 C. P278,280 D. P297,180

PROBLEM N0. 5
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales department.
The share options will vast at the end of year 3, provided that the employees remain in the entity’s employ, and provided
that the volume of sales of a particular product increases by at least an average of 5 percent per year. If the volume of
sales of the product increases by an average of between 5 percent and 10 percent per year, each employee will receive 100
share options. If the volume of sales increases by an average of between 11 percent and 15 percent each year, each
employee will receive 200 share options. If the volume of sales increases by an average of 16 percent or more, each
employee will receive 300 share options.

On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity A also estimates that
the volume of sales of the product will increase by an average of between 11 percent and 15 percent per year, and
therefore expects that, for each employee who remains in service until the end of year 3, 200 share options will vest. The
entity also estimates, on the basis of a weighted average probability, that 20 percent of employees will leave before the
end of year 3.

By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by the
end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-year period. Product sales
have increased by 12 percent and the entity expects this rate of increase to continue over the next 2 years.

By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects only three
more employees will leave during year 3, and therefore expects a total of 85 employees will remain at the end of year 3.
Product sales have increased by 20 percent, resulting in an average of 16 percent over the two years to date. The entity
now expects that sales will average 16 percent or more over the three-year period, and hence expects each sales employee
to receive 300 share options at the end of year 3.

By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year period, and
86 employees remain. The entity’s sales have increased by an average of 16 percent over the three years.

Based on the preceding information, answer the following:

1. What is the compensation expense for year 1?

A. P53,333 B. P106,667 C. P160,000 D. P172,000

2. What is the compensation expense for year 2?

A. P168,000 B. P180,000 C. P233333 D. P286,667

3. What is the compensation expense for year 3?

A. P114,667 B. P176,000 C. P188,000 D. P282,667

4. What is the cumulative compensation expense for years 1, 2, and 3?

A. P172,000 B. P320,000 C. P344,000 D. P516,000

5. At the end of year 2, the entity should report share options outstanding of
A. P226,667 B. P286,667 C. P?28,000 D. P340,000

PROBLEM NO. 6
On January 1, Year 1, Entity B grants share options to each of its 100 employees working in the sales department. Each of
these employees receives 10 share options. The share options will vest on December 31, Year 3, provided that the
employees remain in the entity’s employ. On January 1, Year 1, fair value: per option is P30.

On December 31, Year 1, it is expected that during the whole vesting period of three years, 10% of the employees will
leave entity 8 On December 31, Year 2, this expectation is revised to 30%. Finally, by December 31, Year 3, 20% of the
employees left entity B.

There is also a performance condition in addition to the service condition. According to the performance condition, the
options only vest if entity B’s share price on December 31, Year 3 exceeds its share price on January 1, Year 1 by at least
20%. On December 31, Year 1 and on December 31, Year 2, it is expected that this target Will be met. However, the
target is not met by December 31, Year 3.

Based on the preceding information, answer the following:

1. What amount of compensation expense should be recognized in Year 1?

A. P9,000 B. P14,000 C. P10,000 D. P 0

2. What amount of compensation expense should be recognized in Year 2?

A. P0 B. P9,000 C. P5,000 D. P10,000

3. What amount of compensation expense should be recognized in Year 3?

A. P14,000 B. P10,000 C. 99,000 D. P 0

PROBLEM NO. 7

An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the employees
remain in its employ for the next three years.

During year 1, 35 employees have left. The entity estimates that a further 60 will leave during years 2 and 3. During year
2, 40 employees have left and the entity estimates that a further 25 will leave during year 3. During year 3, 22 employees
have left. At the end of year 3, 150 employees exercised their SARs, another 140 employees exercised their SARs at the
end of year 4 and the remaining 113 employees exercised their SARs at the end of year 5.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the
end of year 3, all SARs held by the remaining employees vested. The intrinsic values of the SARs at the date of exercise
(which equal the cash paid out) at the end of years 3, 4, and 5 are also shown below.

Year Fair Value Intrinsic Value

1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00

REQUIRED:

Compute the amounts of compensation expense and liability that the entity should report in years 1 to 5.

PROBLEM NO. 8

1. An audit program for the audit of the retained earnings account should include a step that requires verification of
A. Market value used to charge retained earnings to account for a 2-for-l stock split.
 B. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
C. Authorization for both cash and stock dividends.
D. Gain or loss resulting from disposition of treasury shares.

2. In an examination of shareholders’ equity, an auditor is most concerned that

A. Capital stock transactions are properly authorized.
B. Stock splits are capitalized at par or stated value on the dividend declaration date.
C. Dividends during the year under audit were approved by the shareholders.
D. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent.

3. In an audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the
least amount of audit time?
A. Owner’s equity B. Assets C. Revenue D. Liabilities

4. When a corporate client maintains its own stock records, the auditor primarily will rely upon
A. Confirmation with the company secretary of shares outstanding at year-end.
B. Review of the corporate minutes for data as to shares outstanding.
C. Confirmation of the number of shares outstanding at year-end with the appropriate state official.
D. Inspection of the stock book at year-end and accounting for all certificate numbers.

5. When a client company does not maintain its own stock records, the auditor should obtain written continuation from the
transfer agent and registrar concerning
A. Restrictions on the payment of dividends.
B. The number of shares issued and outstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreement to repurchase.

6. With respect to treasury shares, the auditor should not object to which of the following?
A. Restrictions on retained earnings have not been met.
B. Dividends have been paid on treasury shares.
C. The treasury share certificates have been destroyed.
D. Treasury shares are recorded at cost rather than par value.

7. A client company declared and paid a stock dividend. Its independent external auditor should determine that
A. Shareholders received their additional shares by confirming year-end holdings with them.
B. The stock dividend was properly recorded by means of a memorandum entry only.
C. The officers authorized the issuance of the stock dividend.
D. Appropriate amounts were transferred from retained earnings to share capital and share premium.

8. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are restrictions on
retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify
management's assertion of
A. Existence
B. Completeness
C. Valuation
D. Presentation and disclosure

9. If the auditee has a material amount of treasury stock on hand at year-end, the auditor should
A. Count the certificates at the same time other securities are counted.
B. Count the certificates only if the company had treasury stock transactions during the year.
C. Not count the certificates if treasury stock is a deduction from shareholders’ equity.
D. Count the certificates only if the company classifies treasury stock with other assets.

10. In performing tests concerning the granting of stock options, an auditor should
A. Confirm the transaction with the Securities and Exchange Commission.
B. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
 C. Determine that sufficient treasury stock is available to cover any new stock issued.
D. Trace the authorization for the transaction to a vote of the board of directors.

11. The auditor does not expect the client to debit retained earnings for which of the following transactions?
A. A 10% stock dividend.
B. An appropriation of retained earnings for treasury shares.
C. A large stock dividend.
D. A four-for-one stock split.

12. Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains
stock records, cancelled stock certificates should
A. Not be defaced, but segregated from other stock certificates and retained in a cancelled certificates file.
B. Be destroyed to prevent fraudulent reissuance.
C. Be defaced and sent to the Secretary of the Department of Finance.
D. Be defaced to prevent reissuance and attached to their corresponding stubs.

AUDIT 0F LIABILITIES

PROBLEM NO. 1

PUKPOK, INC. is a manufacturer and retailer of household furniture. Your audit of the company’s financial statements
for the year ended December 31, 2019, discloses the following debt obligations of the company at the end of its reporting
period. Pukpok’s financial statements are authorized for issuance on March 31, 2020.

1. A P1,000,000 short-term obligation due on March 1, 2020. Its maturity could be extended to March 1, 2022,
provided Pukpok agrees to provide additional collateral. 0n February 12, 2020, an agreement is reached to extend the
loan’s maturity to March 1, 2022.

2. A short-term obligation of P1,350,000 in the form of notes payable due February 5, 2020. The company issued 7,500
ordinary shares for P120 per share on January 25, 2120. The proceeds from the issuance, plus P450,000 cash, were
used to fully settle the debt on February 5, 2020.

3. A P1,500,000 note payable due July 31, 2020. Pukpok intends to refinance the note on issuing long-term bonds. On
January 10, 2020, the company prepaid P200,000 of the not because the company temporarily had excess cash. A
P2,000,000 bond offering was completed in March 2020. The proceeds will be used to repay the note payable at
maturity.

4. Deferred serial bonds, issued at face value of P5,000,000, and bearing interest at 2%. The bonds are payable in
semiannual installment of P500,000 due April 1 and October 1 of each year. The last bond is to be paid on October 1,
2025. The interest is also paid semiannually.

5. A long-term obligation of P4,000,000. The loan is maturing over 8 years in the mount of P500,000 per year. The loan is
dated September 1, 2019, and the first maturty date is September 1, 2020.

6. A debt obligation of P600,000 maturing on December 31, 20 22. The debt is callable on demand by the lender at any
time.

7. A P2,000,000,10% mortgage note issued October 1, 2018 with a term of 10 years. The terms of the note give the holder
the right to demand immediate payment if the entity fails to make a monthly interest payment within 10 days of the
date the payment is due. On December 31, 2019, Pukpok is three months behind in making the required interest
payment. An agreement was reached to provide a waiver of the breach on January 31, 2020.
8. Bank notes payable which include two separate notes payable to Beckla Bank:

a. A P3,000,000, 10% note issued March 1, 2018, payable on demand. Interest is payable every 6 months.

b. A one year, P5,000,000, 11% note issued January 2, 2019. On December 31, 2019, Pukpok negotiated a written
agreement with Beckla Bank to replace the note with a 5year, P5,000,000, 10% note to be issued January 2, 2020.

9. A P4,000,000, 10-year, 8% bonds issued at par on June 30, 2010. Interest is payable annually on June 30 and December
31.

1. What amount of current liabilities should be reported on the December 31, 2019, statement of financial position?
A. P13,950,000 B. P14,250,000 C. P10,250,000 D. P15,250,000

2. What amount of noncurrent liabilities should be reported on the December 31, 2019, statement of financial position?
A. P3,500,000 B. P5,000,000 C. P8,500,000 D P13,500,000

PROBLEM NO. 2

In connection with the audit of the TIKI-TIKI COMPANY for the year ended December 31, 2019, you are called upon to
verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all
merchandise purchases in a Purchases Journal, from which postings are made to a subsidiary accounts payable ledger. The
subsidiary ledger balance of P1,500,000 as of December 31, 2019, agrees with the accounts payable balance in the
company’s general ledger. An analysis of the account disclosed the following:

Trade creditors, credit balances P1,363,000

Trade creditors, debit balances 63,000
Net 1,300,000
Estimated warranty on products sold 100,000
Customers’ deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P1,500,000

A further analysis of the "Trade Creditors" debit balances indicates:

Date Item Amount

Miscellaneous debit balances prior to 2015.
No information available due to loss of records in a fire. P 3,000

03/03/17 Manila Co. Merchandise returned for credit,

but the company is now out of business. 8,000
 06/10/18 Cebu Corp. Merchandise returned, but
Cebu says "never received." 7,000

07/10/19 Jolo Distributors Allowance granted on

defective merchandise after the invoice was paid. 5,000

10/10/19 Bulacan Co. Overpayment of invoice. 12,000

12/05/19 Advance to Zambales Co. This company agrees

to supply certain articles on a cost-plus basis. 24,000

12/05/ 19 Goods returned for credit and adjustments on

price after the invoices were paid; credit
memos from suppliers not yet received. 4,000
P63,000

Your next step is to check the invoices in both the paid and the unpaid invoices files against ledger accounts. In this
connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2019, marked "Duplicate" which was
entered in the Purchases Journal in January 2020. Upon inquiry, you discover that the merchandise covered by this
invoice was received and sold, but that the original invoice apparently has not been received.

In the bank reconciliation working papers, there is a notation that five checks totalling P63, 000 were prepared and entered
in the Cash Disbursements Journal of December, but these checks were not issued until January 10,2020.

The inventory analysis summary discloses goods in transit of P6,000 at December 31, 2019 not taken up by the company
under audit during the year 2019. These goods are included in your adjusted inventory.

1. The Accounts payable-Trade balance at December 31, 2019, should be

A. P1,471,000 B. P1,614,000 C. P1,214,000 D. P1,477,000

2. The net adjustment to Purchases should include a

A. Net debit of P51,000. B. Net credit of P41,000. C. Net debit of P10,000. D. Net debit of P73,000.

3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
Miscellaneous losses of
A. P18,000 B. P23,000 C. P35,000 D. P39,000

4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A. Miscellaneous losses of P23,000.
B. Advances to suppliers of P24,000.
C. Suppliers’ debit balances of P18,000.
D. Purchases of P21,000.

5. Auditor confirmation of accounts payable balances at the end of the reporting period may be unnecessary because
A. There is likely to be other reliable external evidence to support the balances.
B. Correspondence with the audit client’s attorney will reveal all legal action by vendors for non-payment.
C. This is a duplication of cut-off test.
D. Accounts payable at the end of the reporting period may not be paid before the audit is completed.

PROBLEM N0. 3
In the audit process, the following data were obtained from the books of the ZUMBA COMPANY which uses a voucher
system. All invoices are subject to terms 2/ 10, n/30 and are entered net with the discount entered in Purchase Discounts
column of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New
Jersey. A fresh accountancy graduate has been assigned to record the transactions. At year-end, the substitute accountant
finds that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the
matter.

A schedule of unpaid vouchers as of December 31, 2019, all of which are net of discount, is presented to you.

Date Voucher No. Supplier Amount

Nov. 27 797 Donita Supply Co. P 78,400
Dec. 02 821 Golden Distributors 19,600
11 829 Panulsa Sales 44,100
20 836 Mukasim Dealers 17,150
21 842 Boom Merchandising 22,050
22 856 Holen Mercantile 80,850
31 865 Baletonq Traders 78,400
P340,550

Vouchers PayabIe (control account)

Cash disbursements P1,309,500 Purchases journal P1,645,000

Purchase returns journal 36,7505 ‘

* Voucher Nos. 821 and 836 cancelled as goods were returned In December.

Based on the above and me result of your audit, compute for the following as of December 31, 2019:

1. Adjusted balance of Vouchers Payable

A. P310,000 B. P306,750 C. P303,800 D. P344,250

2. Purchase discounts lost on unpaid vouchers

A. P6,200 B. P2,950 C. P3,700 D. P0

3. Purchase discounts lost on paid vouchers

A. P28,750 B. P8,000 C. P5,050 D. P41,800

4. The adjusting entry or entries to correct the accounts will include

A. A deb t to Purchase Discounts Lost of P11,250.
B. A debit to Purchase Discount Lost of P5,050.
C. A credit to Vouchers Payable of P8000.
D. A credit to Vouchers Payable of P11,250.

PROBLEM NO. 4

LAPAYAT CORPORATION, a client, requests that you compute the appropriate balance of its estimated liability for
product warranty account for a statement as of June 30, 2019.

Lapayat Corporation manufactures television components and sells them with a 6-month warranty under which defective
components will be replaced without charge. On December 31, 2018. Estimated Liability for Product warranty had a
balance of P620,000. By June 30, 2019, this balance had been reduced to P120,400 by debits for estimated net cost of
components returned that had been sold in 2018.

The corporation started out in 2019 expecting 7% of the peso volume of sales to be returned. However, due to the
introduction of new models during the year, this estimated percentage of returns was increased to 10% on May 1. It is
assumed that no components sold during a given month are returned in that month. Each component is stamped with a
date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the
likely pattern of sales returns during the 6-month period of the warranty, starting with the month following the sale of
components.

Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth--10% each month 30
100%

Gross sales of components were as follows for the first six months of 2019:

Month Amount Month Amount

January 94,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The corporation's warranty also covers the payment of freight cost on defective components returned and on the new
components sent out as replacements. This freight cost runs approximately 5% of the sales price of the components
returned. The manufacturing cost of the components is roughly 70% of the sales price and the salvage value of returned
components averages 10% of their sales price. Returned components on hand at December 31, 2018, were thus valued in
inventory at 10% of their original sales price.

Based on the given information, determine the following:

1. Total estimated returns from the sales Made during the First 6 months of 2019
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500

2. Total estimated returns subsequent to June 30, 2019

A. P678,250 B. P648,850 C. P591,850 D. P615,950

3. Estimated loss on component replacement (in percentage of sales price)

A. 65% B. 75% c. 70% D. 80%

4. Required Estimated Liability for Product Warranty balance at June 30, 2019
A. P301,353 B. P421,753 C. P120,400 D. P77,847

5. Required adjustment to liability account

A. P301,353 debit C. P421,753 debit
B. P301,353 credit D. P421,753 credit

PROBLEM N0. 5
FEEL NA FEEL, INC. has been producing quality appliances for more than two decades. The company’s fiscal year runs
from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of March 31, 2019.

BONDS PAYABLE

Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2017. The prevailing market rate of interest for these bonds was
12% on the date of issue. The bonds wiII mature on July 1, 2027.

Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize
bond premium or discount.

NOTES PAYABLE

Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the
schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2019.

Due Date Amount Due

April 1, 2019 P 400,000
July 1, 2019 600,000
October 1, 2019 300,000
January 1, 2020 300,000
April 1, 2020 - March 31, 2021 1,200,000
April 1, 2021- March 31, 2022 1,000,000
April 1, 2022- March 31, 2023 1,400,000
April 1, 2023- March 31, 2024 800,000
April 1, 2024- March 31, 2025 1,000,000

ESTIMATED WARRANTIES

Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty Iiability
on sales made during the 2017-2018 fiscal year and still outstanding as of March 31, 2018, amounted to P100000. The
warranty costs on sales made from April 1, 2018, through March 31, 2019, are estimated at P520, 000. The actual
warranty cost incurred during the current 2018-2019 fiscal year are as follows:

Warranty claims honored on 2017-2018 sales P 180,000

Warranty claims honored on 20182019 sales 178,000
Total warranty claims honored P 358,000

OTHER INFORMATION

1. TRADE PAYABLES

Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as of March
31, 2019.

2. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000

Withholding taxes payable 94,000
Other payroll deductions 10,000

3. MISCELLANEOUS ACCRUALS
 Other accruals not separately classified amount to P150,000 as of March 31, 2019.

4. DIVIDENDS

On March 15, 2019, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a
10% ordinary stock dividend. Both dividends were to be distributed on April 12, 2019, to the ordinary shareholders of
record at the close of business on March 31, 2019. Data regarding Feel Na Feel ordinary shares are as follows:

Par value P 5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market values of ordinary shares:

March 15, 2019 P22 .00 per share
March 31, 2019 21.50 per share
April 12, 2019 22.50 per share

1. How much was received by Feel na Feel from the bonds issued on July 1, 2017?
A. P8,852,960 B. P10,000,000 C. P10,500,000 D. P10,647,040

2. On March 31, 2019, Feel na Feel’s statement of financial position would report total current liabilities of
A. P5,286,000 B. P4,386,000 C. P5,336,000 D. P5,642,000

3. On March 31, 2019, Feel na Feel’s statement of financial position would report total noncurrent liabilities of
A. P14,389,350 B. P14,352,217 C. P14,370,783 D. P14,252,960

PROBLEM NO. 6

The following two (2) independent situations relate to the audit of liabilities.

On January 1, 2018, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value of P1,000 per bond. Interest
is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder's option, into 200
P2 par value ordinary shares at any time up to maturity. On the date of issuance, the prevailing market interest rate for
similar debt without the conversion privilege was 9%. On the same date, the market price of one ordinary share was P3.
The bonds were converted on December 31, 2019.

1. The equity component of the convertible client is

A. P303, 768 B. P1, 973, 621 C. P1, 600, 000 D. P2 400, 000

2. The interest expense to be reported on Dias Company’s income statement for the year ended December31, 2019, is
A. P101, 000 B. P110,107 C. P240,000 D. P341,000

3. The entry to record the bond conversion on December 31, 2019, should include a credit to share premium issuance of
A. P2,289,893 B. P2,400,000 C. P2,593,661 D. P 0

On December 31, 2018, BAIKAL COMPANY acquired a piece of equipment from Seller Company by issuing a
P1,200,000 note, payable in full on December 31, 2022. Baikal’s credit rating permits it to borrow funds from its several
lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000 salvage value.

4. What is the equipment’s book value on December 31, 2020?

A. P551,767 B. P630,000 . C. P491,767 D. P341,767
5. What is the carrying value of the note at December 31, 2020?
A. P1,090,903 B. P991,730 C. 91,200,003 D. P819.612

PROBLEM NO. 7

The following data were obtained from the initial audit of BIBI COMPANY:

15%, 10-year, Bonds Payable, dated January 1, 2018

Debit Credit Balance

Cash proceeds from Issue on January 1, 2018,
of 1,000, P1,000 bonds The market rate of
of interest on the date of Issue was 12% P1,172,044 P1,172, 044

Bond Interest Expense

Cash paid, 1/2/19 P 75,000 P 75,000

Cash paid, 7/1/19 75,000 150,000
Accrual, 12/31/19 75,000 225,000

Accrued Interest on Bonds

Balance, 1/1/19 P 75,000 P 75,000

Accrual, 12/31/19 75,000 150,000

Treasury Bonds

Redemption price and interest to date on

200 bonds permanently retired on 12/31/19 P265,000 P265, 000

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2019

A. P831,110 B. P800,000 C. P1,151,583 D. P921,266

2. Loss on Bond Redemption

A. P4,683 B. P19,683 C. P15,000 D. P34,683

3. Accrued Interest on Bonds at December 31, 2019

A. P75,000 B. P135,000 C. P60,000 D. P52,500

4. Bond Interest Expense for the year ended December 31, 2019
A. P150,000 B. P139,174 C. P69,745 D. P160,826

PROBLEM NO. 8

Select the best answer for each of the following:

1. In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of
A. Existence C. Completeness
B. Presentation and disclosure D. Valuation and allocation

2. An auditor performs a test to determine tether all merchandise for which the client was billed was received. The
population for this test consists of all
A. Merchandise received C. Cancelled checks
B. Vendors’ invoices D. Receiving reports

3. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable.
B. Vouching accounts payable to supporting documentation.
C. An analytical procedure.
D. Verification that accounts payable was deported as a current liability in the balance sheet

4. Which of the following procedures is least likely to be performed before the balance sheet date?
A. Observation of inventory count.
B. Testing of internal control over cash.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.

5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order was dated
after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for
materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but
was unconcerned about lack of receiving report. The audit director should
A. Agree with the assistant because the amount of the purchase order exception was considerably larger than the
receiving report exception.
B. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the
failure to fill out a report didn't happen very often.
C. Disagree with the assistant because two problems have an equal risk of loss associated with them.
D. Disagree with the assistant because the lack of a receiving report has a greater risk of Ioss associated with it.

6. When using confirmation to provide evidence about completeness assertion for accounts payable, the appropriate
population most likely is

A. Vendors with whom the entity has previously done business.

B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year end.
D. Invoices filed in the entity’s open invoice file.

7. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and
valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for.
B. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded
vendor's invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.

8. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
A. Unpaid bills C. Bills of lading
B. Shipping records D. Unmatched sales invoices

9. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related
payables apply to the prior period.
 B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether
they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received just prior to the
balance sheet date.

10. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely
to the client’s employees?
A. Test footings in the accounts payable ledger.
B. Reconcile unpaid invoices to vendors’ statements.
C. Prepare a schedule of accounts payable.
D. Mail confirmations for selected account balances.

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 1

JARAN CO. started operations on September 1,2015. Jaran’s accounts at December 31, 2018, included the following
balances:

Machinery (at cost) P 910,000

Accumulated depreciation-machinery 482,000
Vehicles (at cost; purchased November 21, 2017) 468,000
Accumulated depreciation- vehicles 195,550
Land (at cost; purchased October 25, 2015) 810,000
Building (at cost; purchased October 25, 2015) 1,857,200
Accumulated depreciation building 286,140

Details of machines owned at December 31 2018, are as follows:

Machine Purchase Date Cost Useful Life Residual Value

1 October 7, 2015 P430,000 5 years P25,000
2 February 4,2016 P480000 6 years P30,000

Additional information:

 Jaran calculates depreciation to the nearest month and balance; the records at month-end. Recorded amounts are
rounded to the nearest peso, and the reporting date is December 31.
 Jaran uses straight-iine depreciation for all depreciable assets except vehicles, which are depreciated on the
diminishing balance at 40% per annum.
 The vehicles account balance reflects the total paid for two identical delivery-vehicles, each of which cost
P234,000.
 On acquiring the land and building, Jaran estimated the building’s useful life and residual value at 20 years and
P50,000, respectively.

The following transactions occurred in January 1, 2019:

2019

Jan. 03 Bought a new machine (machine 3) for P590,000 with 2/10, n/30 credit terms. Payment was made on Jan. 15.
Freight charges of P4,300 and installation costs of P2,500 were paid in cash. The useful life and
residual value were estimated at five years and P30,000, respectively.
June 22 Bought a second-hand vehicle for P152,000 cash. Repainting costs of P6,550 and four new tires costing
P3,450 were paid for in cash.

Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P125,000 at the date of exchange. The fair
value of machine 1 at the date of exchange was P115,000. The office furniture originally cost P360,000
and, to the date of exchange, had been depreciated by P241,000 in the previous owner’s books. Jaran
estimated the office furniture’s useful life and residual value at eight years and P5,400, respectively.

Dec. 31 Recorded depreciation.

2020

April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.

May 25 Sold one of the vehicles bought on November 21, 2017, for P66,000 cash.

June 26 Installed a fence around the property at a cash cost of P55,000. The fence has an estimated useful life of 10
years and zero residual value. (Debit the cost to a land improvements asset account.)

Dec. 31 Recorded depreciation.

2021

Jan. 05 Overvauled machine 2 at a cash cost of P120,000, after which Jaran estimated its remaining useful life at one
additional year and revised its residual value to P50,000.

June 20 Traded in the remaining vehicle bought on November 21, 2017, for a new vehicle. A trade-in allowance of
P37,000 was received and P233,000 was paid In cash.

Oct. 04 Scrapped the vehicle bought on June 22, 2019, as it had been so badly damaged in a traffic accident that it was
not worthwhile repairing it.

Dec. 31 Recorded depreciation.

Questions:

1. What should be the depreciation expense for the vehicles for 2019?
A. P140,976 B. P138376 C. P139,666 D. P140,286

2. What should be the depreciation expense for the machinery for 2019?
A. P235,600 B. P240,000 C. P242350 D. P267,000

3. What should be the balance of the Accumulated depreciation Office furniture account at December 31, 2020?
A. P19,933 B. P18,267 C. P19,833 D. P58,083

4. What should be the depreciation expense for the machinery for 2021?
A. P198,000 B. P200,360 C. P206,000 D. P222,000

5. What should be the total depreciation expense for 2021?

A. P394,660 B. P397,020 C. P409,612 D. P403,832

PROBLEM NO. 2
Shown below are the Machinery and Equipment and Delivery Equipment accounts of the ARIEL COMPANY. One-half
year's depreciation is charged in the year of acquisition and or disposition for these assets. The client uses the straight-line
method of depreciation.

The following transactions occurred during 2019:

a) A 2019 Isuzu Truck was purchased for P1,200,000 in June. In the same month, a 2013 Fuso Truck was sold for
P150,000. The truck was purchased in April 2015 at a cost of P630,000.

b) In June, a drill press was purchased for P33,000. Freight-in was P3,000. A drill press which had been purchased by
the client in March 2015 for P30,000 was sold in June at a gain of P7,000.

c) One milling machine was purchased in July at a cost of P225,000. Installation cost which was paid by the client and
charged to Miscellaneous Expenses amounted to P10,500.

d) While analyzing the Miscellaneous Income account, your assistant found that the proceeds of P1,500 from the sale
of an electric welding machine had been credited to this account. The machine, acquired in March 2014 had a cost of
P12,000. The machine was sold in September 2019.

Machinery and Equipment

01/01/19 Bal. 450,000 June CR 30,000
June VR 36,000
July VR 225,000

Accumulated Depreciation Machinery and Equipment 10% annual rate

01/01/19 Bal. 207,000

Delivery Equipment
01/01/19 Bal. 2,850,000 June 7 CR 150,000
June3 VR 1,200,000

Accumulated Depreciation Delivery Equipment 20% annual rate

01/01/19 Bal 1,650,000

Based on the preceding information, determine the following:

1. Proceeds from sale of drill press in June 2019

A. P7,000 B. P0 C. P11,000 D.P25,000

2. Machinery and Equipment account balance at December 31, 2019

A. P676500 B. P669,000 C P679,500 D.P1,879,500

3. Total depreciation expense for the year ended December 31, 2019
A. P683,475 B. P882,150 C. P484300 D.P682,800

4. Carrying value of machinery and equipment at December 31. 2019

A. P428,025 B. P416025 C. P434025 D.P422,025

5. Accumulated Depreciation- Delivery Equipment at December 31, 2019

A. P1,773,000 B. P2,277,000 C. P1,836,000 D.P1,647,000

PROBLEM NO. 3
On January 1, 2019, LUMCBO Corporation contracted with Mega Construction Company to construct a building for
P40,000,000 on land that Lumobo purchased several years ago. The contract provices that Lumobo is to make five
payments in 2019, with the last payment scheduled for the date of completion. The building was completed on December
31, 2019.

Lumobo made the following payments during 2019:

January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000

Lumobo had the following debt outstanding at December 31, 2018:

a) A 12%, 4-year note dated January 1, 2019, with interest compounded

quarterly. Both principal and interest are payable on December 31, 2022.
This loan relates specificaliy to the building project. P17,000,000

b) A 10% year note dated December 31, 2015, with simple interest;
interest payable annually on December 31 12,000,000

c) A 12% 5-year note dated December 31, 2016, with simple interest;
interest payable annually on December 31 14,000,000

1. The amount of interest to be capitalized during 2019 is

A. P5,012,680 B. P2,133,680 C. P2,277,710 D. P0

2. The amount of interest that would be expensed for 2019 is

A. P2,735,960 B.P5,013,680 C.P2,277,720 D.P0