NATIONAL UNIVERSITY

MF Jhocson St. Sampaloc, Manila

College of Business and Accountancy
__________________________________________________________________________________________________

BAPAUD2X: Auditing and Assurance: Concepts and Applications 2

Quiz No. 2
rd
3 Term SY 2020-2021
Prepared by: Prof. Francis O. Mateos, CPA

VILLA, MARY CRIS M.

ACT181
QUIZ#2: FINALS

1. ____________ 6. ____________ 11. ____________ 16. ____________ 21. ____________

2. ____________ 7. ____________ 12. ____________ 17. ____________ 22. ____________

3. ____________ 8. ____________ 13. ____________ 18. ____________ 23. ____________

4. ____________ 9. ____________ 14. ____________ 19. ____________ 24. ____________

5. ____________ 10. ____________ 15. ____________ 20. ____________ 25. ____________

__________________________________________________________________________________________

PROBLEM 1
Andrea Corp. has been producing quality disposable diapers 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 Andrea as of March 31, 2017.

BONDS PAYABLE
Andrea issued P10,000,000 of 10% bonds on July 1, 2015. The prevailing market rate of interest for
these bonds was 12% on the date of issue. The bonds will mature on July 1, 2025. Interest is paid
semi-annually on July 1 and January 1. Andrea uses the effective interest rate method to amortize
bond premium or discount. The following present value factors are taken from the PV tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12% 5.65022
for 10 periods
Present value of an ordinary annuity of 1 at 6% 11.46992
for 20 periods

NOTES PAYABLE
Andrea 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, 2017.

Due Date Amount Due

April 1, 2017 P 400,000
July 1, 2017 600,000
October 1, 2017 300,000
January 1, 2018 300,000
April 1, 2018 – March 31, 2019 1,200,000
April 1, 2019 – March 31, 2020 1,000,000
April 1, 2020 – March 31, 2021 1,400,000
April 1, 2021 – March 31, 2022 800,000
 April 1, 2022 – March 31, 2023 1,000,000

ESTIMATED WARRANTIES
Andrea has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2015-2016 fiscal year and still outstanding as of March 31,
2016, amounted to P180,000. The warranty costs on sales made from April 1, 2016, through March 31,
2017, are estimated at P520,000. The actual warranty costs incurred during the current 2016-2017
fiscal year are as follows:

Warranty claims honored on 2015-2016 sales P 180,000

Warranty claims honored on 2016-2017 sales 178,000
Total warranty claims honored P 358,000

OTHER INFORMATION

1. Trade Payable
Accounts payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2017.

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, 2017.

4. Dividends
On March 15, 2017, Andrea’s board of directors declared a cash dividend of P0.20 per ordinary
share and a 10% share dividend. Both dividends were to be distributed on April 12, 2017, to
the shareholders of record at the close of business on March 31, 2017. Data regarding Andrea
ordinary share capital are as follows:
Par value P5.00 per share
Number of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares:
March 15, 2017 P22.00 per share
March 31, 2017 21.50 per share
April 12, 2017 22.50 per share

Required:

1. How much was received by Andrea from the sale of the bonds on July 1, 2015?₱8,852, 960

2. What is the current portion of Andrea’s note payable at March 31, 2017?
₱1,600,000
3. The balance of the estimated warranties payable at March 31, 2017 is
₱342, 000
4. On March 31, 2017, Andrea’s statement of financial position would report total current liabilities
of
₱5,286,000

5. On March 31, 2017, Andrea’s statement of financial position would report total non-current
liabilities of
₱14,370, 783

PROBLEM 2
Information of Panday Corporation’s property, plant and equipment for 2017 is as follows:

Account balances at January 1, 2017:

 Debit Credit
Land P 450,000
Building 3,600,000
Accumulated depreciation – building P 789,300
Machinery and equipment 2,700,000
Accumulated depreciation – machinery and equipment 750,000
Automotive equipment 345,000
Accumulated depreciation – automotive equipment 253,800
Depreciation method and useful life:
Building 150% declining balance; 25 years
Machinery and equipment Straight-line; 10 years
Automotive equipment SYD; 4 years
Leasehold improvements Straight-line

The residual value of the depreciable assets is immaterial. It is the company’s policy to compute
depreciation to the nearest month.

Transactions during 2017 and other information were as follows:

1. On January 2, 2017, Panday purchased a new car for P30,000 cash and a trade-in of a 2 year old car with a
cost of P27,000 and a book value of P8,100. The new car has a cash price of P36,000; the market value of the
trade-in is not known.
2. On April 1, 2017, a machine purchased for P69,000 on April 1, 2012 was destroyed by the fire.
Panday recovered P46,500 from its insurance company.
3. On May 1, 2017, costs of P504,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease, which terminates on December 31,
2023, is renewable for an additional 6-year term. The decision to renew will be made in 2023 based
on office space needs at that time.
4. On July 1, 2017, machinery and equipment were purchased at a total invoice cost of P840,000;
additional costs of P15,000 for freight and P75,000 for installation were incurred.
5. Panday determined that the automotive equipment comprising the P345,000 balance at January 1,
2017 would have been depreciated at a total amount of P54,000 for the year ended December 31,
2017.

Required:

6. What is the depreciation expense on machinery and equipment for 2017?

₱311,325

7. What is the total depreciation expense for the year ended December 31, 2017?
₱588, 867

8. What is the total accumulated depreciation balance on December 31, 2017?

₱2,328,567

9. What is the net gain or loss on asset disposals for 2017?

₱2,100 NET LOSS

10. What is the total book value of Panday Corporation’s property, plant and equipment at December
31, 2017?
₱6,140, 433

PROBLEM 3
In connection with your audit of Pagbilao Corporation, you gathered the following liability and
equity account balances as of December 31, 2016:

11% bonds payable at face value P 10,000,000

Premium on bonds payable 704,760
Share capital 16,000,000
 Share premium 4,590,000
Retained earnings 4,930,000
Treasury shares, at cost 650,000

Transactions during 2017 and other information relating to the Corporation’s liability and equity
accounts were as follows:
a. The bonds were issued on December 31, 2014, for P10,756,000 to yield 10%. The bonds mature
on December 31, 2029. Interest is payable annually on December 31. The Corporation uses the
effective interest method to amortized bond premium.
b. At December 31, 2016, the Corporation had 4,000,000, P10 par, authorized ordinary shares.
c. On January 15, 2017, the Corporation reissued 30,000 of its 50,000 treasury shares for P550,000.
The treasury shares had been acquired on February 28, 2016.
d. On November 2, 2017, the Corporation borrowed P8,000,000 at 9% evidenced by a note
payable to ABC Bank. The note is payable in five equal annual principal instalments of
P1,600,000. The first principal and interest payment is due on November 2, 2018.
e. On December 31, 2017, the Corporation owned 20,000 ordinary shares of Awoo Corp. which
represented a 1% ownership interest Pagbilao accounts for this as available for sale securities.
The shares were purchased on May 4, 2016 at P20 per share. The market price was P21 per
share on December 31, 2016, and P18 per share on December 31, 2017.

Requirements:

11. How much is the carrying amount of the bonds payable on December 31, 2017?
₱10, 675, 236
12. How much is the treasury shares balance as of December 31, 2017?
₱260,000
13. How much is the noncurrent portion of the note payable to bank as of December 31, 2017?
₱6,400,000
14. How much is the 2017 total interest expense?
₱1,190, 476
15. How much is the net unrealized loss on available for sale securities as of December 31, 2017?
₱40,000
PROBLEM 4
Hilbay Corporation, meat processing company, reported the following balances on the liability portion of its
Statement of Financial Position as of December 31, 2017:

Current Liabilities:
Accounts payable – trade P 1,250,000
Estimated Premiums Liability ?
Accrued Compensated Absences 360,000
Deferred Tax Liability 124,000

Additional information:
a. The result of your purchases cut-off revealed the following results:

December, 2017 Purchase Journal Entries

Receiving Invoice Receiving Amount Remarks
Report No. date/Shipment Report Date
date
100294 12/20 12/23 P20,000 FOB Destination
100295 12/22 12/26 50,000 FOB Destination
100296 12/27 12/30 70,000 On Consignment
100297 12/28 1/2 55,000 FOB Shipping point
100298 12/29 1/3 60,000 FOB Destination
100299 12/30 1/4 80,000 FOB Shipping point

January, 2018 Purchase Journal Entries

Receiving Invoice Receiving Amount Remarks
Report No. date/Shipment Report Date
date
100300 12/29 1/4 40,000 FOB Destination
100301 12/30 1/4 50,000 FOB Shipping point
 100302 12/30 1/5 70,000 On Consignment
100303 1/2 1/6 75,000 FOB Shipping point

Note: Inventory has been correctly set-up based on an inventory count conducted on December 31,
2017 with appropriate reconciliation and adjustments.

b. The company inaugurated a Premium Promotional Plan at the beginning of 2016. Under the said
promotional program, customers are given frying pan for every 30 product label that they may be able
to present plus P40. The customers may be able to redeem their premiums within 2 years from date of
purchase. In anticipation for the premium’s redemption, the company acquired 20,000 units of frying
pan at P100 per pan in 2016 (3,500 of which remained on hand at the end of 2016) and additional 15,000
units in 2017 (the ending inventory of premiums at the end of 2017 is 6,000 units). The company sales
volume in 2016 and in 2017 were 1,500,000 and 1,800,000, respectively. The company further estimates
that only 60% of the product labels will be presented for premiums redemption. The premium liability
per books, represented the balance of the premiums liability at the end of 2016. Adjustments are yet to
be made for the current year for the said liability account.
c. Employees are entitled 15 day vacation leaves and 15 day sick leaves every year. At the beginning of
2017, the liability for compensated absences (as presented per books) was for 1,200 days combined
vacation and sick leaves forwarded from the previous years, as employees are allowed to carry over
unused sick leaves and vacation leaves up to two years, upon which any unused leaves are forfeited. In
2017, additional 900 days unused leaves were forwarded to the subsequent year. From the unused
leaves prior to 2017, 450 were used in 2017 and 300 were forfeited. There was a 10% increase in
employees salaries during the current year. The unadjusted balance of the accrued liability for
compensated absences per books reflected the beginning balance of the account. Adjustment for accrual
at year-end is yet to be made.
d. The deferred tax liability balance is the net deferred tax consequence of the company’s premiums
expense which is tax deductible when actual redemption occurs and prepayments which are tax
deductible upon payment. Prepayments had adjusted balances of P1,120,000 and P970,000 at the end of
2016 and 2017, respectively.
e. The key officers of the company are given incentives in the form of 10% of net income after bonus but
before 40% income tax. The unadjusted net income of the company as reported per books was at
P5,450,000.

Requirements:
16. What is the correct balance of the Accounts Payable-trade as of December 31, 2017?

₱1,170,000

17. What is the balance of the Estimated Premiums Liabilities as of December 31, 2016?
a. ₱810,000

18. What is the correct Premium Expense to be reported in 2017?

₱2,160,000

19. What is the correct Accrued Liability for Compensated Absences as of December 31, 2017?
₱445,500
20. What is the correct Deferred tax liability as of December 31, 2017?
₱388,000
21. What is the correct Accrued Bonus to key officers as of December 31, 2017?
₱366, 773

PROBLEM 5
The draft balance sheet of Rural Corporation as of December 31, 2019 reported the net property, plant and equipment at
P6,270,000. Details of the amount follow:

Land at cost P 1,000,000

Building at cost P 4,000,000
Less: Accumulated depreciation
at 12/31/2018 ( 800,000) 3,200,000
Plant at cost 5,200,000
Less: Accumulated depreciation
at 12/31/2018 ( 3,130,000) 2,070,000
Total P 6,270,000
Audit notes:
a. The company policy for all depreciation is that a full year’s charge is made in the year of acquisition or
completion and note in the year of disposal.
b. Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30,
2019. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2018.
Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have
been made. All plant is depreciated at 25% per annum on the reducing balance basis.
c. On September 30, 2019, the company completed the construction of a new warehouse. The construction was
achieved using the company’s own resources as follows:
Purchased materials P 150,000
Direct labor 800,000
Supervision 65,000
Design and planning costs 20,000

Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due
to the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The
building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-
line depreciation).
d. At the beginning of the current year, the company had an open market basis valuation of its properties (excluding
the newly constructed warehouse). Land was valued at P1,200,000 and the property at P4,800,000. The directors
wish these values to be incorporated into the financial statements. The properties had an estimated remaining life
of 20 years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to
retained earnings in respect of the excess depreciation on revalued assets.
e. Depreciation for the year 2019 has not yet been accounted for the in the draft financial statements.

Requirements:
22. The carrying amount of the new warehouse as of December 31, 2019 is ₱950,000

23. The carrying amount of plant as of December 31, 2019 is

₱1,350,000

24. The total depreciation for the year ended December 31, 2019 is
₱740,000

25. The revaluation surplus as of December 31, 2019 is

₱1,720,000

****END of Quiz****