File 000038b

NFJPIA-Region X and CARAGA Council

RFJPIA Cup Level 5 – Auditing Problems ELIMINATION ROUND EASY ROUND RFJPIA CUP LEVEL 5 – Auditing Problems (EASY QUESTION #1) You were engaged to examine the accounts of Power Play Inc. as of December 31, 2010. Your audit disclosed that the cash counted on December 31, 2010 included two customers’ checks amounting to P5,000 both dated in January 2011. These checks were recorded in the books in December and were accepted for deposit by the bank on due dates. The adjusting entry is: Answer: Dr. Accounts Receivable 5,000 Cr. Cash 5,000 RFJPIA CUP LEVEL 5 – Auditing Problems (EASY QUESTION #2) As an auditor, you were asked by your client to examine its accounts as of December 31, 2010. Your audit disclosed that checks with a total of P10,000 as payment to suppliers were prepared and taken up as debits to accounts payable. One of these checks in the amount of P2,000 was cancelled on January 5, 2011 and replaced with another for the correct amount of P2,500. No entry was made for the cancellation. The adjusting entry is: Answer: None. No adjustment is necessary. RFJPIA CUP LEVEL 5 – Auditing Problems (EASY QUESTION #3) Your audit of Super Club Co. for the year ended December 31, 2010 disclosed that customers’ checks amounting to P4,500 were returned during December 2010 by the bank with the notation “NSF”. Of these checks P3,000 had been redeposited and cleared by the bank during the month. No entries were made for the return or redeposit. The adjusting entry is: Answer: Dr. Accounts Receivable 1,500 Cr. Cash 1,500 RFJPIA CUP LEVEL 5 – Auditing Problems (EASY QUESTION #4) You were engaged to audit the records of Generation, Inc. as of December 31, 2010. Your audit shows that goods costing P20,000 were excluded from the ending inventory. The selling price of these goods was P30,000. The goods were shipped by your client on December 29, 2010, FOB shipping point. The transaction was not recorded in 2010. The adjusting entry is: Answer: Dr. Accounts Receivable 30,000 Cr. Sales 30,000 RFJPIA CUP LEVEL 5 – Auditing Problems (EASY QUESTION #5)

Your audit of your client as of December 31, 2010 disclosed that merchandise costing P15,000 were still included in ending inventory although these were already invoiced and recorded as sales to customers on December 31. The sales invoices totaling P25,000 were no longer recorded when the goods were delivered on January 5, 2011. The adjusting entry is: Answer: Dr. Cost of Sales 15,000 Cr. Inventory 15,000

AVERAGE ROUND RFJPIA CUP LEVEL 5 – Auditing Problems (AVERAGE QUESTION #1) Just In Love Corp. decided that the allowance for bad debts should be adjusted to equal the estimated amount required based on aging the accounts as of December 31. Following data were gathered: Allowance for bad debts, January 1, 2010 P120,000 Provision for bad debts during 2010 at 2% 60,000 of P3,000,000 sales Bad debts written off in 2010 75,000 Estimated bad debts per aging of accounts on 80,000 December 31, 2010 What entry is necessary to adjust the bad debts provision? Answer: Dr. Allowance for Bad Debts 25,000 Cr. Bad Debts Expense 25,000 RFJPIA CUP LEVEL 5 – Auditing Problems (AVERAGE QUESTION #2) You completed your filed work for 2010 on April 10, 2011. Before issuance of your audit report on April 25, 2011, you were advised that on April 15, 2011 a large receivable from a customer who is facing bankruptcy was written off as uncollectible. What should you do about this fact? a. Disclose the loss in the 2010 statements. b. Adjust the 2010 financial statements. c. Date your report April 10, 2011. d. Take up the loss in the 2011 statements. e. Do nothing. RFJPIA CUP LEVEL 5 – Auditing Problems (AVERAGE QUESTION #3) The closing inventory of Gandhi Company amounted to P284,000 at December 31, 2010. This total includes two inventory lines about which the inventory taker is uncertain.  500 items which had cost P15 each and which were included at P7,500. These items were found to have been defective at the balance sheet date. Remedial work after the balance sheet date cost P1,800 and they were then sold for P20 each. Selling expenses were P400.  100 items that had cost P10 each but after the balance sheet date, these were sold for P8 each with selling expenses of P150. What figure should appear in Gandhi’s balance sheet for inventory? Answer: P283,650. RFJPIA CUP LEVEL 5 – Auditing Problems (AVERAGE QUESTION #4) Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2009 – 2010 fiscal year and still outstanding as of March 31, 2010, amounted to P252,000.

The warranty costs on sales made from April 1, 2010 to March 31, 2011, are estimated at P630,000. The actual warranty costs incurred during 2010 – 2011 fiscal year are as follows: Warranty claims honored on 2009 – 2010 sales P252,000 Warranty claims honored on 2010 – 2011 sales 285,000 Total P537,000 Being Cavaliers’ auditor, determine the adjusted balances of the estimated warranty payable as of March 31, 2011. Answer: P345,000. RFJPIA CUP LEVEL 5 – Auditing Problems (AVERAGE QUESTION #5) On January 1, 2010, Rostrum Company purchased debt securities with a face value of P500,000. The securities mature in 7 years and are to be classified as a held to maturity investment. The securities have a stated interest rate of 8% and interest is paid semiannually, on January 1 and July 1. The prevailing market interest rate on these debt securities is 12% compounded semiannually. The following present value factors are taken from the present value tables: Present value of 1 12% for 7 periods 0.45235 6% for 14 periods 0.44230 8% for 7 periods 0.58349 4% for 14 periods 0.57748 Present value of an ordinary annuity of 1 12% for 7 periods 4.56376 6% for 14 periods 9.29498 8% for 7 periods 5.20637 4% for 14 periods 10.56312 Determine the fair value of the debt securities on January 1, 2010. Answer: P407,050.

DIFFICULT ROUND RFJPIA CUP LEVEL 5 – Auditing Problems (DIFFICULT QUESTION #1) Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? a. Culmination of events affecting the realization of accounts receivable owned as of the end of the period. b. Culmination of events affecting the realization of inventories owned as of the end of the period. c. Material changes in the settlement of liabilities which were estimated as of the end of the period. d. Material changes in the quoted market prices of listed investment securities since the end of the period. e. None of the above. RFJPIA CUP LEVEL 5 – Auditing Problems (DIFFICULT QUESTION #2) All items of income and expense recognized in a period must be included in profit or loss unless a standard or an interpretation requires otherwise. Therefore, the auditor is unlikely to question the exclusion of the following from profit or loss, except: a. Changes in revaluation surplus.

b. c. d. e.

Gains and losses on remeasuring available for sale financial assets. Gains and losses arising from translating the financial statements of a foreign operation. The ineffective portion of gains and losses on hedging instruments in a cash flow hedge. None of the above.

RFJPIA CUP LEVEL 5 – Auditing Problems (DIFFICULT QUESTION #3) On January 1, 2009, Luke Company, a financial services entity which is also involved in real estate development, has purchased a lot of land in Makati City for P2,000,000 which it intends to develop and eventually sell. On July 1, 2009, Luke Company purchased 10 passenger vehicles for a total consideration of P2,500,000. Luke Company’s intention was to use the passenger vehicles to transport Luke Company’s employees. Luke Company uses the straight-line depreciation method for the passenger vehicles with no expected salvage value and an estimated useful life of 8 years. On December 31, 2010, Luke Company entered in a lease agreement with John Company for its land in Makati City and its passenger vehicles. Development cost incurred until December 31, 2010 was P700,000. The fair values of the land in Makati City and the 10 passenger vehicles were P2,950,000 and P2,181,250 respectively. Assets classified by Luke Company as investment properties are presented at fair value. At the end of 2011, the fair values of land and 10 passenger vehicles were P3,100,000 and P2,201,250 respectively. The gain (loss) to be reported in 2010 in relation to the reclassification to investment property is: Answer: P250,000. RFJPIA CUP LEVEL 5 – Auditing Problems (DIFFICULT QUESTION #4) On January 1, 2009, Luke Company, a financial services entity which is also involved in real estate development, has purchased a lot of land in Makati City for P2,000,000 which it intends to develop and eventually sell. On July 1, 2009, Luke Company purchased 10 passenger vehicles for a total consideration of P2,500,000. Luke Company’s intention was to use the passenger vehicles to transport Luke Company’s employees. Luke Company uses the straight-line depreciation method for the passenger vehicles with no expected salvage value and an estimated useful life of 8 years. On December 31, 2010, Luke Company entered in a lease agreement with John Company for its land in Makati City and its passenger vehicles. Development cost incurred until December 31, 2010 was P700,000. The fair values of the land in Makati City and the 10 passenger vehicles were P2,950,000 and P2,181,250 respectively. Assets classified by Luke Company as investment properties are presented at fair value. At the end of 2011, the fair values of land and 10 passenger vehicles were P3,100,000 and P2,201,250 respectively. The revaluation surplus balance at December 31, 2011 is: Answer: P150,000. RFJPIA CUP LEVEL 5 – Auditing Problems (DIFFICULT QUESTION #5) The year-end audit of the records of Stamina Farms disclosed a shortage in cash amounting to P600,000. The treasurer had concealed the fraud by increasing inventories by P300,000, land by P100,000 and accounts receivable by P200,000. Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares owned by him. The board of directors accepted the offer, with the agreement that the treasurer would pay any deficiency between the shortage and the book value of the shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any, of the book value over the shortage. As of December 31, 2010, there were 40,000 common shares issued and outstanding with a par value of P100; Retained earnings as of January 1, 2010 was P1,600,000 and net income from 2010 operations was P1,400,000.

Considering the above information, answer the following, what would be the book value per share for purposes of the agreement? Answer: P175.

CLINCHER QUESTIONS RFJPIA CUP LEVEL 5 – Auditing Problems (CLINCHER QUESTION #1) 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. No 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. e. Confirm the transaction with the Securities and Exchange Commission. RFJPIA CUP LEVEL 5 – Auditing Problems (CLINCHER QUESTION #2) In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of: Answer: Valuation. RFJPIA CUP LEVEL 5 – Auditing Problems (CLINCHER QUESTION #3) On January 2, 2010, a tract of land that originally cost P800,000 was sold by Heavenly Corporation. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate of interest for a note of this type is 10%. The present value table shows the following present value factors of 1 at 10%. Present value factor of 1 for 3 periods 0.75132 Present value factor of 1 for 2 periods 0.82645 Present value factor of 1 for 1 period 0.90909 Present value of an ordinary annuity of 1 for 3 periods 2.48685 What is the effective interest income on the note receivable for the year ended December 31, 2010? Answer: P107,685. RFJPIA CUP LEVEL 5 – Auditing Problems (CLINCHER QUESTION #4) 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. e. None of the above. RFJPIA CUP LEVEL 5 – Auditing Problems (CLINCHER QUESTION #5) On October 31, 2010, Beta Company engaged in the following transactions:  Obtained a P500,000, six-month loan from City Bank, discounted at 12%. The company pledged P500,000 of accounts receivable as security for the loan.

Factored P1,000,000 of accounts receivable without recourse on a non notification basis with Hype Company. Hype charged a factoring fee of 2% of the amount of receivables factored and withheld 10% of the amount factored. What is the total cash received from the financing of receivables? Answer: P1,350,000. 

FINAL ROUND EASY QUESTIONS RFJPIA CUP LEVEL 5 – Auditing Problems (SPUS) ACE QUESTION Information pertaining to Trace Company for the month of August appears below: Balance per bank statement P310,000 Balance per books 187,500 Deposit in transit 70,000 Service charges 2,500 Note collected by bank 75,000 Outstanding checks ? An analysis of the cancelled checks returned with the bank statement reveals the following:  Check for the purchase of merchandise was drawn for P155,000 but was recorded as P150,000.  The management wrote a check for traveling expenses of P25,000 while out of town. The check was not recorded. What is the amount of outstanding checks on August 31, 2010? Answer: P150,000. RFJPIA CUP LEVEL 5 – Auditing Problems (NFJPIA) JOKER QUESTION . Ten Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2010. The interest rate on the loan is 10% payable annually starting December 31, 2010. The loan matures in five years on December 31, 2014. Ten Bank incurs P39,400 of direct loan origination cost and P10,000 of indirect loan origination cost. In addition, Ten Bank charges the borrower an 8-point nonrefundable loan origination fee. Determine the carrying amount of the loan as of January 1, 2010, Answer: P4,639,400. RFJPIA CUP LEVEL 5 – Auditing Problems (FCC) 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 what management’s assertion? Answer: Presentation and disclosure RFJPIA CUP LEVEL 5 – Auditing Problems (LC) On September 1, 2010, Howe Company offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump sum and periodic future payments. Additionally, the employees accepting the company offer receive the usual

early retirement pension benefits. The offer expired on November 30, 2010. Actual or reasonably estimated amounts on December 31, 2010 relating to the employees accepting the offer are as follows:  Lump sum payments on January 1, 2011, P475,000  Present value of periodic payments, P155,000  Reduction of accrued pension costs on December 31, 2010 for the terminating employees, P45,000 Howe should report total loss on termination benefits at what amount? Answer: P585,000. RFJPIA CUP LEVEL 5 – Auditing Problems (SEC) The following totals are taken from the December 31, 2010, balance sheet of Streamer Company: Current assets P350,000 Long-term assets 800,000 Current liabilities 240,000 Long-term liabilities 270,000 Additional information:  Cash of P38,000 has been placed in a fund for the retirement of long-term debt. The cash and longterm debt have been offset and are not reflected in the financial statements.  Long-term assets include P50,000 in treasury shares.  Cash of P14,000 has been set aside to pay taxes due. The cash and taxes payable have been offset and do not appear in the financial statements.  Advances on salespersons' commissions in the amount of P21,000 have been made. Also, sales commissions payable total P24,000. The net liability of P3,000 is included in Current Liabilities. After making any necessary changes, compute for the totals of Streamer's current assets. Answer: P385,000. RFJPIA CUP LEVEL 5 – Auditing Problems (SMC) ChingChing has been employed as an accountant by Iran, Inc. for a number of years. She handles all accounting duties, including the preparation of financial statements. The following is a statement of earned surplus presented by ChingChing: Iran, Inc. STATEMENT OF EARNED SURPLUS 2010 Balance, 1/1/09 P365,000 Increase in 2010 amortization expense 5,000 Gain on sale of trading securities (3,000) Interest revenue 2,000 Net income for 2010 150,000 Decreased depreciation due to increased life 13,000 Dividends paid (20% still unpaid) 80,000 Loss on sale of equipment 2,500 Loss on earthquake 83,000 Balance, 12/31/10 P700,500 Based on the foregoing information, determine the amount of net income that ChingChing should report in its income statement for 2010? Answer: P77,500.

RFJPIA CUP LEVEL 5 – Auditing Problems (SFXC) Field Company’s shareholders’ equity balances at January 1, 2010 were as follows: Share capital P1,500,000 Share premium 3,000,000 Retained earnings 2,000,000 The following 2010 transactions and other information relate to the shareholders’ equity accounts:  Field had 400,000 authorized shares of P5 par, of which 300,000 shares were issued and outstanding.  On March 5, 2010, Field acquired 50,000 shares for P10 per share to be held as treasury. The shares were originally issued at P15 per share. Field uses the cost method to account for treasury share.  On July 15, 2010, Field declared and distributed a property dividend of inventory. The inventory had a P500,000 carrying value and a P600,000 fair market value.  Field’s net income for 2010 was P500,000. Given the information above and as a result of your audit, Field Company should report total shareholder’s equity on December 31, 2010 at what amount? Answer: P6,000,000.

AVERAGE QUESTIONS RFJPIA CUP LEVEL 5 – Auditing Problems (AKIC) ACE QUESTION The following information relates to Sonic Company’s accounts payable as of December 31, 2010. Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in suppliers’ accounts. The unpaid voucher file included the following items that not had been recorded as of December 31, 2010:  A Company – P224,000 merchandise shipped on December 31, 2010, FOB destination; received on January 10, 2011.  B, Inc. – P192,000 merchandise shipped on December 26, 2010, FOB shipping point; received on January 16, 2011.  C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2011.  MERALCO – P67,200 electric bill covering the period December 16, 2010 to January 15, 2011. On December 28, 2010, a supplier authorized Sonic to return goods billed at P160,000 and shipped on December 20, 2010. The goods were returned by Sonic on December 28, 2010, but the P160,000 credit memo was not received until January 6, 2011. Determine the amount if any, that should be reported as current liability in Sonic’s December 31, 2010 balance sheet. Answer: P5,841,600. RFJPIA CUP LEVEL 5 – Auditing Problems (CTKC) JOKER QUESTION 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 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 loss associated with it. e. Neither agree nor disagree as it is the assistant’s responsibility and it is at his discretion. RFJPIA CUP LEVEL 5 – Auditing Problems (MU) You were able to gather the following in connection with your audit to the Chona Ann Company for the year ended December 31, 2010: 1/1/2010 12/31/2010 Accounts receivable P6,400,000 P4,000,000 Unpaid merchandise invoices ? 2,621,000 Accrued wages 85,000 125,000 Advertising supplies inventory 35,000 75,000 Accrued advertising 14,250 40,000 Prepaid Insurance 25,000 Unexpired insurance 41,000 During the year, Chona Ann Company had the following transactions: Amount collected from customers Total payments to suppliers of merchandise Total payments to suppliers of merchandise of prior years Wages paid Advertising paid which includes P40,000 applicable in 2008 Insurance premium paid What is the net purchases for 2010? Answer: P11,607,000.

P10,000,000 13,618,000 4,632,000 3,050,000 300,000 125,000

RFJPIA CUP LEVEL 5 – Auditing Problems (PCC) On January 1, 2010, Charmaine Corporation decided to dispose of an item of plant that is carried in its records at a cost of P900,000, with accumulated depreciation of P160,000. Depreciation on the plant since it was originally acquired has been charged of P10,000 per month. The plant will continue to be operated until it is sold, at which time the operations of the plant will be outsourced. The company undertook all the necessary actions to be able to classify the asset as held for sale. It is estimated that it could sell the plant for its fair value, P720,000, incurring P20,000 selling costs in the process. The plant has been depreciated at an amount of P10,000 per month. On March 31, 2010, the plant had not been sold but, due to shortage of this type of plant, there had been an increase in the fair value to P770,000. On June 30, 2010, Charmaine sold the plant for P785,000 incurring P25,000 selling costs. The depreciation expense to be recognized in 2010 is: Answer: P0. RFJPIA CUP LEVEL 5 – Auditing Problems (MSUM) The following information is available from your client, San Company for the year ended December 31, 2010: Cash received from customers P5,000,000 Rent received 100,000 Interest received 50,000 Cash paid to suppliers and employees 3,000,000 Taxes paid 200,000

Interest paid on long-term debt 400,000 Cash dividends paid 500,000 Based on your audit, how much is the net cash provided by operating activities? Answer: P1,550,000. RFJPIA CUP LEVEL 5 – Auditing Problems (MVC) In 2010, Mount Corporation acquired land by paying P375,000 down and signing a note with a maturity value of P5,000,000. On the note’s due date, December 31, 2010, Mount owed P200,000 of accrued interest and P5,000,000 principal on the note. Mount was in financial difficulty and was unable to make any payments. Mount and the bank agreed to amend the note as follows:  The P200,000 of interest due on December 31, 2010 was forgiven.  The principal of the note was reduced from P5,000,000 to P4,750,000 and the maturity date extended 1 year to December 31, 2011.  Mount would be required to make one interest payment totaling P150,000 on December 31, 2010. As a result of the troubled debt restructuring, Mount should report a gain, before taxes, in its 2010 income statement of: Answer: P300,000. RFJPIA CUP LEVEL 5 – Auditing Problems (JPI) Taal Company is a calendar year entity. Its financial statements for 2009 and 2010 contained error as follows: 12/31/09 Inventory understated P35,000 12/31/10 Inventory understated 10,000 2009 Depreciation overstated 25,000 2010 Depreciation understated 8,000 12/31/09 Prepaid Insurance overstated 5,000 12/31/10 Unearned Rent overstated 4,000 12/31/10 Accrued Salaries understated 20,000 By how much would the retained earnings at December 31, 2008 be under or overstated? Answer: P 11,000 understated. RFJPIA CUP LEVEL 5 – Auditing Problems (FSUU) The retained earnings account for Gondola Company shows the following charges and credits for the year 2010: Balance, 1/1/10 P2,600,000 Loss from fire 50,000 Goodwill impairment 250,000 Stock dividend 700,000 Loss on sale of equipment 200,000 Compensation of 2009 not accrued 500,000 Loss on retirement of preference share 350,000 Share premium 600,000 Gain on early retirement of bonds 100,000 Gain on life insurance settlement 450,000 Prior period error correction – credit 400,000 Net income for the year 3,000,000

Treasury share appropriation for 2010 1,000,000 How much is Gondola’s unappropriated retained earnings at December 31, 2010? Answer: P3,500,000.

DIFFICULT QUESTIONS RFJPIA CUP LEVEL 5 – Auditing Problems (SIC) ACE QUESTION In the course of your examination of the December 31, 2011, financial statements of Aquino Inc., you discovered certain errors that had occurred during 2010 and 2011. No errors were corrected during 2010. The errors are summarized below:  Beginning merchandise inventory in 2010 was understated by P259,200.  Merchandise costing P72,000 was sold for P120,000 to James Corp. on December 28, 2010, but the sale was recorded in 2011. The merchandise was shipped FOB shipping point and was included in ending inventory. Aquino uses the periodic inventory system.  A two-year fire insurance policy was purchased on May 1, 2010, for P172,800. The whole amount was charged to Prepaid Insurance. No adjusting entry was prepared in 2010 and 2011.  A one-year note receivable of P288,000 was held by Aquino Inc. beginning October 1, 2010. Payment of the 10% note and accrued interest was received upon maturity. No adjusting entry was made on December 31, 2010.  Equipment with a 10 year useful life was purchased on January 1, 2010, for P1,176,000. No depreciation expense was recorded during 2010 or 2011. Assume that the equipment has no residual value and that Aquino Inc. uses the straight-line method for recording depreciation.  The company reported a P1,500,000 net income in 2010 and a P1,750,000 net income in 2011. Based on the information above and as a result of your audit, what is the correct net income in 2010? Answer: P363,000. RFJPIA CUP LEVEL 5 – Auditing Problems (STC) JOKER QUESTION The inventory on hand at December 31, 2010 for Fair Company valued at a cost of P947,800. The following items were not included in this inventory amount:  Purchased goods, in transit, shipped FOB destination invoice price P32,000 which included freight charges of P1,600.  Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of the sales price.  Goods sold to Garcia Company, under terms FOB destination, invoiced for P18,500 which includes P1,000 freight charges to deliver the goods. Goods are in transit.  Purchased goods in transit, terms FOB shipping point, invoice price P48,000, freight cost, P3,000.  Goods out on consignment to Manil Company, sales price P36,400, shipping cost of P2,000. Assuming that the company's selling price is 140% of inventory cost, the adjusted cost of Fair Company's inventory at December 31, 2010 should be: Answer: P1,039,300. RFJPIA CUP LEVEL 5 – Auditing Problems (XU) Atkins bought five identical plots of development land for P2 million in 2010. On January 2, 2012 Atkins sold three of the plots of land to an investment company, Landbank, for a total of P2.4 million. This price was based

on 75% of the fair market value of P3.2 million as determined by an independent surveyor at the date of sale. The terms of the sale contained two clauses:  Atkins can re-purchase the plots of land for the full fair value of P3.2 million (the value determined of the date of sale) any time until December 31, 2014; and  On 1 January 2015, Landbank has the option to require Atkins to re-purchase the properties for P3.2 million. You may assume that Landbank seeks a return on its investments of 10% per annum. If Atkins recorded the legal form of the transaction instead of its substance, profit for 2012 will be overstated by: Answer: P1,440,000. RFJPIA CUP LEVEL 5 – Auditing Problems (COC) Potter Company is in its first year of operation and is using the cash basis of accounting. The company presented the following cash receipts and disbursement records for 2010: Cash receipts P384,000 Cash disbursements (247,500) P136,500 The management requested you to compute its income under accrual basis. The following information are deemed relevant in your analysis:  Depreciation of plant assets for 2010 computed by straight-line method is P31,500.  Prepaid insurance of P5,400, two-thirds of which relates to 2011, is included in the 2010 cash disbursement figure. This amount was recognized as insurance expense when it was paid.  Porter Company received P36,000 in advance rent for space in its building. The entire amount is included in the cash receipts figure and was recognized as rent revenue when received. However, P21,000 of it was space that will be provided in 2011.  Employees are due P8,400 at the end of 2010.  Interest amounting to P9,510 from investment is receivable at the end of 2010.  You estimate that your 2010 fee for accounting services that have not been billed will be P1,500. What is the total liabilities to be reported as of the balance sheet date under the accrual basis? Answer: P30,900. RFJPIA CUP LEVEL 5 – Auditing Problems (IIT) Upon inspection of the records of Everybody's Company, the following facts were discovered for the year ended December 31, 2010:  A fire premium of P4,000 was paid and charged as insurance expense in 2010. The fire insurance policy covers one year from April 1, 2010.  Inventory on January 1, 2010 was understated by P8,000.  Inventory on December 31, 2010 was understated by P12,000.  Business taxes of P5,500 for the fourth quarter of 2010 were paid on January 20, 2011 and charged as expense in 2011.  On December 5, 2010, a cash advance of P10,000 by a customer was received for goods to be delivered in January 2011. The P10,000 was credited to sales. The company's gross profit on sales is 40%.  The net income of Everybody's Company on the income statement for the year ended December 31, 2010, before any adjustments for the above information, is P155,000. What is the adjusted net income of Everybody’s Company for the year ended for the December 31, 2010? Answer: P144,500.

RFJPIA CUP LEVEL 5 – Auditing Problems (LDCU) On May 6, 2010 a flash flood caused damage to the merchandise stored in the warehouse of Cabanatuan Company. You were asked to submit an estimate of the merchandise destroyed in the warehouse. The following data were established:  Net sales for 2009 were P800,000, matched against cost of P560,000.  Merchandise inventory, Jan. 1, 2010 was P200,000, 90% of which was in the warehouse and 10% in downtown showrooms.  For Jan. 1, 2010 to date of flood, you ascertained invoice value of purchases (all stored in the warehouse), P100,000; freight inward, P4,000; purchases returned, P6,000.  Cost of merchandise transferred from the warehouse to show-rooms was P8,000, and net sales from January 1 to May 6, 2010 (all warehouse stock) were P320,000. Assuming gross profit rate in 2010 to be the same as in the previous year, the estimated merchandise destroyed by the flood was: Answer: P46,000. RFJPIA CUP LEVEL 5 – Auditing Problems (BSU) John Corp. has the following data relating to accounts receivable for the year ended December 31, 2010: Accounts receivable, January 1, 2010 P480,000 Allowance for doubtful accounts, January 1, 2010 19,200 Sales during the year, all on account, terms 2/10, 1/15, n/60 2,400,000 Cash received from customers during the year 2,560,000 Accounts written off during the year 17,600 An analysis of cash received from customers during the year revealed that P1,411,200 was received from customers availing the 10-day discount period, P792,000 from customers availing the 15-day discount period, P4,800 represented recovery of accounts written-off, and the balance was received from customers paying beyond the discount period. The allowance for doubtful accounts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2010 is 125% of the rate used on December 31, 2009. The doubtful accounts expense for the year ended December 31, 2010 is: Answer: P7,120. RFJPIA CUP LEVEL 5 – Auditing Problems (CMU) The Evita Company uses cash basis accounting for their records. During 2010, Evita collected P500,000 from its customers, made payments of P200,000 to its suppliers for inventory, and paid P140,000 for operating costs. Evita wants to prepare accrual basis statements. In gathering information for the accrual basis financial statements, Evita discovered the following:  Customers owed Evita P50,000 at the beginning of 2010 and P35,000 at the end of 2010.  Evita owed suppliers P20,000 at the beginning of 2010 and P27,000 at the end of 2010.  Evita's beginning inventory was P42,000, and its ending inventory was P44,000.  Evita had prepaid expenses of P5,000 at the beginning of 2010 and P7,400 at the end of 2010.  Evita had accrued expenses of P12,000 at the beginning of 2010 and P19,000 at the end of 2010.  Depreciation for 2008 was P51,000. Determine the accrual basis net income of Evita Company for the year ended December 31, 2010. Answer: P84,400.

RFJPIA CUP LEVEL 5 – Auditing Problems (MTIM) Syosset Company is a Philippine corporation that purchases inventory from US manufacturers. A recent inventory purchase involved the following events:  Nov. 12 – Purchased raw materials from Hampton Bays Company, a US manufacturer, amounting to US 250,000, payable in 60 days. Current exchange rate is P50.45. Syosset uses perpetual inventory system and debits inventory account.  Dec. 31 – Made year-end adjusting entry relating to the $250,000 accounts payable to Hampton Bays. Current exchange rate is P50.89.  Jan. 11 – Issued a check amounting to $250,000 in full payment of the accounts payable to Hampton Bays and recorded a gain amounting to P122,500. What is the exchange rate of the Philippine peso to US dollar on January 11? Answer: P50.40. RFJPIA CUP LEVEL 5 – Auditing Problems (LSU) In confirming with an outside agent, such as financial institutions, that the agent is holding investment securities in the client’s name, an auditor most likely gathers evidence in support of management’s financial statement assertion of existence or occurrence and what other assertion? Answer: Rights and obligations.