Solution AP Test Bank 2

SOLUTION - AUDITING PROBLEMS TEST BANK 2 PROBLEM 1 – AYALA MERCHANTS CORPORATION ADJUSTING JOURNAL ENRIES December 31, 2017 1. Operating expenses Petty cash fund (P37,250 – P9,510)

27,740 27,740

2. Accounts receivable (P107,400 + P63,000) Notes payable Finance cost (Interest expense) Other charges (Bank service charges) Accounts payable Cash in bank

170,400 700,000 10,000 2,750

3. Allowance for doubtful accounts Accounts receivable (write-off)

152,640

4. Other charges (Unrealized loss – Trading securities) Trading securities Bacnotan Cement (P16, 7,000) Fil-Estate (P19.75 x 10,000) Ionics (P24 x 2,400) La Tondena (P26 x 2,000) Selecta (P1.20 x 8,000) Union Bank (P27.50 x 1,600) Total market value, Dec. 21, 2017 Carrying value, Dec. 31, 2017 Unrealized loss – trading securities 5. Interest receivable Other income (Interest income) (P1,300,000 x 15% 2/12)

72,000 811,150 152,640 10,940 10,940 P112,000 197,500 57,600 52,000 9,600 44,000 P472,700 483,640 P 10,940 32,500 32,500

6. Operating expenses (Advertising expense) 325,000 Prepaid advertising Christmas promotion P100,000 Regular promotion (P640,000 – P100,000 = P540,000 x 5/12) 225,000 Total P325,000 7. Operating expenses (Rent expense) Prepaid rent (P420,000 x 2/3 or P140,000 x 2)

280,000

8. Operating expenses (Insurance expense) Prepaid insurance (P490,000 x 2/12)

81,667

9. Operating expenses (Office supplies expense) Office supplies inventory (P361,000 – P102,500)

325,000

280,000

81,667 258,500 258,500

10. Accounts receivable Sales

146,940

11. Cost of goods sold Inventories

356,000

12. Cost of goods sold Inventories

138,500

13. Inventories Cost of goods sold

153,800

146,940 356,000 138,500

153,800

Page 2 14. Delivery equipment Operating expenses

43,400 43,400

15. Operating expenses (Depreciation expense) Accumulated depreciation (P43,400/10 x 6/12)

2,170 2,170

16. Accumulated depreciation Operating expenses (Depreciation expense)

10,480

17. Accumulated depreciation (P138,620 – P10,480) Other charges (Loss) Delivery equipment

128,140 37,380

18. Operating expenses Accrued expenses

213,000

19. Finance cost (Interest expense) Interest payable (P2.6 million x 16% 3/12)

104,000

20. Retained earnings Dividends payable (P5,400,000 x 10%)

540,000

21. Operating expenses (Doubtful accounts expense) Allowance for doubtful accounts

130,317

Less than 3 months 3 to 6 months Over 6 months

10,480

165,520 213,000 104,000

540,000

Per Books P2,500,960 843,200 274,500

Adjustments P146,940 107,400 63,000 (152,460)

P3,618,660 Allowance before adjustment (P110,360 – P152,460) Required allowance Adjustment 1. D

2. D

3. D

4. C

Petty cash fund Per books AJE 1 Per audit Cash in bank Per books AJE 2 Per audit Trading securities Per books AJE 4 Per audit Accounts receivable Per books AJE 2 3 10 Per audit

130,317 Per Audit

%

Required Allowance

P2,755,300 843,200

1 5

P27,553 42,160

185,040 P3,783,540

10

18,504 P88,217

P 42,100 debit 88,217 P130,317

P60,000 (27,740) P32,260 P1,056,000 (811,150) P 244,850 P483,640 (10,940) P472,700 P3,618,660 170,400 (152,460) 146,940 P3,783,540

Page 3 5. D

6. C

7. A

8. B

9. A

10. D

11. D

Allowance for doubtful accounts Per books AJE 3 21 Per audit

P110,360 (152,460) 130,317 P 88,217

Notes and interest receivable Per books AJE 5 Per audit

P1,300,000 32,500 P1,332,500

Inventories Per books AJE 11 12 13 Per audit

P7,274,900 (356,000) (138,500) 153,800 P6,934,200

Prepaid insurance Per books AJE 8 Per audit

P490,000 (81,667) P408,333

Prepaid rent Per books AJE 7 Per audit

P420,000 (280,000) P140,000

Prepaid advertising Per books AJE 6 Per audit

P640,000 (325,000) P315,000

Office supplies inventory Per books AJE 9 Per audit

P361,000 (258,500) P102,500

12. C

Petty cash fund Cash in bank Trading securities Accounts receivable (P3,783,540 – P88,217) Notes and interest receivable Inventories Prepaid insurance Prepaid rent Prepaid advertising Office supplies inventory Total current assets

13. C

Property, plant, and equipment (PPE) Per books AJE 14 17 Per audit

P4,068,400 43,400 (165,520) P3,946,280

Accumulated depreciation Per books AJE 15 16 17 Per audit

P1,177,500 2,170 (10,480) (128,140) P1,041,050

Accounts payable Per books

P2,356,320

14. B

15. B

P 32,260 244,850 472,700 3,695,323 1,332,500 6,934,200 408,333 140,000 315,000 102,500 P13,677,666

AJE 2 Per audit

72,000 P2,428,320

Page 4 16. A

Interest payable Per books AJE 19 Per audit

17. C

Accounts payable – trade Notes payable Accrued expenses Interest payable Dividends payable Total current liabilities

18. C

Sales Per books AJE 10 Per audit

19. C

20. D

P0 104,000 P104,000 P2,428,320 2,600,000 382,040 104,000 540,000 P6,054,360 P13,078,000 146,940 P13,224,940

Cost of goods sold Per books AJE 11 12 13, Per audit

P8,034,000 356,000 138,500 (153,800) P8,374,700

Operating expenses Per books AJE 1 6 7 8 9 14 15 16 18 21 Per audit

P3,357,000 27,740 325,000 280,000 81,667 258,500 (43,400) 2,170 (10,480) 213,000 130,317 P4,621,514

PROBLEM 2 – LUKAS COMPANY 21. A

Sales returns and allowance Accounts receivable

90,000

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

72,000

90,000 72,000

Net decrease in income (P90,000 – P72,000) 22. A

Sales Accounts receivable

P18,000 30,000 30,000

Income overstated by

P30,000

23. D

Overstatement of receivable Lazaro (P150 x 320 units)

P48,000

24. A

Correctly stated because the goods are considered sold in 2017.

25. D

Accounts payable Accounts receivable

PROBLEM 3 – CROCODILE, INC.

135,000 135,000

26. B

27. C

28. B

29. B

30. D

Page 5 PROBLEM 4 – SPARK COMPANY 31. B

Cash balance, Dec. 31, 2016 Sales (SQUEEZE) Cash paid for operating expenses Cash paid on accounts payable Collections on notes receivable Cash balance, Dec. 31, 2017

P100,000 920,000 (220,000) (471,700) 25,000 P353,300

Units sold (P920,000/P50) 32. D

18,400

Accounts payable: Balance, Dec. 31, 2016 Purchases Cash payments on accounts payable Balance, Dec. 31, 2017

*Purchases: Month January February March April May June July August September October November December Total purchases

Unit Cost P32.60 32.70 32.80 32.90 33.00 33.10 33.20 33.30 33.40 33.50 33.60 33.70

Units 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 18,000

P75,000 596,700* (471,700) P200,000 Total Cost P48,900 49,050 49,200 49,350 49,500 49,650 49,800 49,950 50,100 50,250 50,400 50,550 P596,700

Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700

33. A

Inventory, Dec. 31, 2016 (P199,875/P32.50) Purchases Units sold Inventory, Dec. 31, 2017

34. C

FIFO cost of inventory, Dec. 31, 2017: December purchases 1,500 x P33.70 November purchase 1,500 x P33.60 October purchase 1,500 x P33.50 September purchase 1,250 x P33.40 5,750

P 50,550 50,400 50,250 41,750 P192,950

Inventory, Jan. 1, 2017 Purchases Goods available for sale Inventory, Dec. 31, 2017 Cost of goods sold

P199,875 596,700 796,575 (192,950) P603,625

35. D

6,150 18,000 (18,400) 5,750

Page 6 PROBLEM 5 – ISIDRO MANUFACTURING COMPANY 36. B

37. A

Depreciation expense for 2014: Truck #1 (P180,000/5) Truck #2 (P220,000/5) Truck #3 (P300,000/5 x ½) Truck #4 (P240,000/5) Truck #5 (P400,000/5 x ½) Total

P 36,000 44,000 30,000 48,000 40,000 P198,000

Trade-in value of Truck #3 (P400,000-P220,000) Book value of Truck #3: Cost A/D, 1/1/2013 -0 7/1/2014 (P300,000/5 x1.5) Loss on trade-in

38.A Truck #2

Truck #1 Truck #2 Truck #3 Truck #4 Truck #5 Truck #6 Correct Per client Over 40. B

P300,000 (90,000)

210,000 P 30,000

P220,000

Truck #5 Truck #6 Accumulated depreciation: Truck #2 (fully depreciated 7/1/2016) Truck #5, 7/1/2014 – 12/31/2017 (P400,000/5 x 3.5) Truck #6, 7/1/2016 – 12/31/2017 (P420,000/5 x 1.5) Book value, 12/31/2017 39. C

P180,000

2014 P36,000 44,000 30,000 48,000 40,000 -P198,000 210,000 P 12,000

2015 -P44,000 -48,000 80,000 -P172,000 225,000 P 53,000

2016 -P22,000 -24,000 80,000 42,000 P168,000 250,500 P82,500

400,000 420,000 P220,000 280,000 126,000

2017 ----P80,000 84,000 P164,000 304,000 P140,000

P1,040,000

626,000 P414,000 Total P 36,000 110,000 30,000 120,000 280,000 126,000 P702,000 989,500 P287,500

Page 7 PROBLEM 6 – NUNAL COMPANY 41. B

42. A

Outstanding checks, November 30: Check no. 792 799 Total

P 7,500 21,150 P28,650

Outstanding checks, December 31: Check no. 806 807 810 812 817

P 57,000 78,000 21,000 48,000 33,000 819

21,000 822 823 824 825 826

36,000 39,000 87,000 6,000 33,000 P459,000

43. D

Deposit in transit, November 30

P25,500

44. A

Deposit in transit, November 30 Collections Total Deposits Deposit in transit, December 31

P 25,500 2,121,900 2,147,400 2,033,400 P 114,000

Total

Nov. 30 Unadjusted book balances P345,000 Bank service charges: November 30 (150) December 31 Notes collected by bank: November 30 30,000 December 31 Unrecorded disbursement (815) Adjusted book balances P374,850 Unadjusted bank balances Outstanding checks: November 30 December 31 Deposits in transit: November 30 December 31 Error corrected Erroneous bank charge Adjusted bank balances 45. D

46. C

Nov. 30 P342,000

Receipts P2,297,400

(150) 360 (30,000) 36,000

36,000 P374,850 47. B

Dec. 31 P1,414,170 (360)

P2,303,400

18,000 P1,246,400

36,000 (18,000) P1,431,810

Receipts P2,493,900

Disbursements P1,059,090

Dec. 31 P1,776,810

(28,650) 25,500

Disbursements P1,228,230

(28,650) 459,000 (25,500) 114,000 (243,000) (36,000) P2,303,400 48. C

(459,000) 114,000

(243,000) P1,246,440 49. D

P1,431,810 50. B

Page 8 PROBLEM 7 – MINA MINING CO.

Mineral property Building Machinery (1/2) Machinery (1/2) 1 2

Depletable/Depreciable Cost P48,450,000 1 12,000,000 1,800,000 1,800,000

Estimated Reserves 150,000 150,000 150,000 150,000

Depletion/Depreciation P323 80 12 24 2

P50,000,000 – P1,550,000 (P1,800,000/150,000) x 2

51. C Mineral property (P323 x 7,500) Building (P80 x 7,500) Machinery (1/2) (P12 x 7,500) Machinery (1/2) (P24 x 7,500)

Year 1 Depletion P2,422,500

P2,422,500 52. D Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2) (P24 x 15,000)

Year 5 Depletion P4,845,000

P4,845,000 53. C Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2) (P24 x 7,500)

Year 6 Depletion P4,845,000

P4,845,000 54. C Mineral property (P323 x 15,000) Building (P80 x 15,000) Machinery (1/2) (P12 x 15,000) Machinery (1/2)

Year 7 Depletion P4,845,000

P4,845,000 55. D Mineral property (P323 x 7,500) Building (P80 x 7,500) Machinery (1/2) (P12 x 7,500) Machinery (1/2)

Depreciation P600,000 90,000 180,000 P870,000 Depreciation P1,200,000 180,000 360,000 P1,740,000 Depreciation P1,200,000 180,000 180,000 P1,560,000

Depreciation P1,200,000 180,000 -P1,380,000

Year 11 Depletion Depreciation P2,422,500 P600,000 90,000 --P2,422,500 P690,000

Page 9 PROBLEM 8 – HVR Company 56. D

Present value of principal (P3,600,000 x 0.7514) Present value of interest (P3,600,000 x 5% x 2.4860) Consultation service fee revenue

57. D

Interest 12/31/2017 (P7.2M x 4%) P288,000 12/31/2018 (P4.8M x 4%) 192,000 12/31/2019 (P2.4M x 4%) 96,000 Present value of note Carrying amount of equipment Gain on sale of equipment

Principal P2,400,000 2,400,000 2,400,000

Note receivable from sale of land: Date Interest Income 1/1/2017 --12/31/2017 P218,196 12/31/2018 239,844**

P2,705,040 447,480 P3,152,520 Total P2,688,000 2,592,000 2,496,000

PVF 0.8772 0.7695 0.6750

Present Value P2,357,914 1,994,544 1,684,800 P6,037,258 4,800,000 P1,237,258

Carrying Amount P2,181,960* 2,400,156 2,640,000

* P2,640,000 principal x 0.8265 PVF at 10% for 2 periods. ** P2,640,000 - P2,400,156

Note receivable from consultation: Effective Date Interest 1/1/2017 --12/31/2017 P315,252 12/31/2018 328,777 12/31/2019 343,451**

Nominal Interest --P180,000 180,000 180,000

Discount Amortization --P135,252 148,777 163,451*

Carrying Amount P3,152,520 3,287,772 3,436,549 3,600,000

* P3,600,000 – P3,436,549 = P163,451 ** P163,451 + P180,000 = P343,451

Note receivable from sale of equipment: Effective Nominal Date Interest Interest 1/1/2017 ----12/31/2017 P845,216 P288,000 12/31/2018 587,226 192,000 12/31/2019 306,300* 96,000

Amortization --P557,216 395,226 210,300

Principal Collection ---P2,400,000 2,400,000 2,400,000

Carrying Amount P6,037,258 4,194,474 2,189,700 ---

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

58. C

Note receivable from consultation Note receivable from sale of equipment Noncurrent notes receivable, Dec. 31, 2017

P3,287,772 2,189,700 P5,477,472

59. C

Note receivable from sale of land Note receivable from sale of equipment (P4,194,474 – P2,189,700) Total current notes receivable, Dec. 31, 2017

P2,400,156 2,004,774 P4,404,930

60. C

Note receivable from sale of land Note receivable from consultation Note receivable from sale of equipment Total interest income on notes receivable for 2017

P218,196 315,252 845,216 P1,378,664

---END---