Auditing Problems Midterm - 2021 - D

AUDITING PROBLEMS MIDTERM EXAMINATION
PROBLEM 1
You were assigned to audit the Stockholders' equity accounts and the related capital transactions for the period
ended December 31, 2020 of NOP Corp., In studying the said transactions you came across the following entries
made by the client:
Date Particulars Debit Credit

Jan. 15 Property and equipment 500,000
Share Capital 500,000
To record the issuance of 50,000 shares Of ordinary in exchange of a
real property.
Mar. 1 Subscription receivable 190,000

To record the subscription of 10,000 shares of ordinary at P19 per
share subscription price.
50,000
June 1 Share Capital 50,000
Cash
To record the acquisition of 2,000 shares of the company's own
ordinary shares.
Aug. 15 Cash 133,000

Subscription receivable 133,000
To record the collection for the full payment of 70% of the subscribed
shares on March 1.
Nov. 1 Share Capital 1,320,000

Gain from Share split 660,000
To record a 2 for 1 share split declared by the company's BOD.
Nov. 10 Cash 20,000

To record the reissuance of 1,000 of the shares reacquired on June 1.
Dec. 29 Accumulated profits 300,000

Ordinary Share Options Outstanding 300,000
To record the grant of 10 employees 2,000 share options valued at fair
value of options on the grant date computed as: (10*2,000*P15).
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Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.
Audit notes:
a. The company was authorized to issue 100,000 shares of ordinary at P10 par value.
b. The real property received on January 15, were fairly valued at P1,200,000, 30% of which is attributed to
the land.
c. The options were granted to key employees at beginning of the year and shall be exercisable after 3 years
provided that the employees stay with the company and that revenue reaches P50M by the end of the
third year. Additional 500, options shall be granted to each employee for every P10M in excess of the
original target revenue by the end of the third year. By the end of the current year the actual revenue
was 45M and is expected to increase for the next 2 years at the rate of 30% annually. The company also
expects that 3 employees will ultimately leave the company by the end of the third year.
d. On December 5, the Board of Directors approved a P2 per share cash dividends to stockholders of record
as of December 20 payable on January 30 of the subsequent year.
e. The unadjusted net income for the year is at P1,200,000. (Assume that there are no other errors)
Required:
1. What is total Share Capital as of December 31, 2020?
a. 500,000
b. 560,000
c. 570,000
d. 600,000
2. What is the correct balance of the Ordinary share options outstanding account as of December 31, 2020?
a. 70,000
b. 87,500
c. 105,000
d. 315,000
3. What is the total Additional-paid-in capital in excess of par as of December 31, 2020?
a. 790,000
b. 865,000
c. 935,000
d. 965,000
4. The correct entry for the reissuance of shares on November 10, 2020 involves:
a. debit to RE at P5,000
b. debit to APIC at P5,000
c. credit to APIC at P7,500
d. credit to APIC at P5,000
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5. How much is the cash dividends payable as of December 31, 2020?

a. 240,000
b. 237,000
c. 232,000
d. 234,000
6. What is the total Stockholders' equity to be reported in the 2020 statement of financial position?
a. 2,468,000
b. 2,431,000
c. 2,363,500
d. 1,666,000
PROBLEM 2
In your audit of KLM INC. for the calendar year ended December 31, 2020, you discovered the following charges
to the company's Retained Earnings account:
Balance, January 1 P7,800,000

Unrealized holding loss on financial assets held at fair value
through profit or loss (400,000)
Inventory fire loss (150,000)
Impairment loss on Property Plant and Equipment (750,000)
25% Stock dividends declared (100,000 shares outstanding) (1,500,000)
Gain on sale of equipment 200,000
Loss on retirement of ordinary shares as treasury (1,050,000)
Gain on sale of ordinary shares as excess over par 1,000,000
Gain on premature retirement of bonds 300,000
Unrealized holding gain on financial asset held as available for
sale 800,000
Proceeds from sale of donated shares 800,000
Fair value of donated asset from a non-related party without
restrictions 1,200,000
Net income for the year 9,000,000
Reserve for plant expansion (3,000,000)
Total P14,250,000
Audit Notes
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a. The 25% stock dividends were declared on November 1, 2020 distributable to stockholders as of
December 1, 2020 distributable on January 15, 2021. KLM's stocks which had a P50 par value were selling
at P60 on November 1, P55 on December 1 and P62 on December 31, 2020.
b. The company's Share premium from treasury stock transaction account amounted to P550,000 as of
January 1, 2020. No transactions affected the account for the current year per records.
c. The following items were consistently omitted at the end of each year:
2018 2019 2020
Accrued Expense 55,000 60,000 57,000
Unearned Income 100,000 80,000 90,000
Prepaid Expense 20,000 30,000 40,000
Depreciation Expense 20,000 20,000 20,000
d. The company's management decided to change its inventory costing method from the weighted average
to the FIFO approach during the current year. The inventory balances under the two methods are as
follows:
AVERAGE FIFO
Beginning 2,500,000 2,600,000
Ending 1,900,000 2,200,000
The company, however, is yet, to effect the said change in its current financial statements.
Using the information above, answer the following:

7. What is the net adjustment to the retained earnings account for the declaration of the stock dividends?
a. no adjustment
b. 150,000
c. 200,000
d. 250,000
8. What is the correct net income for the year 2020?

a. 9,283,000
b. 9,383,000
c. 9,483,000
d. 9,583,000
9. What is the restated beginning retained earnings in 2020?

a. 7,750,000
b. 7,730,000
c. 7,650,000
d. 7,630,000
10. What is the correct retained earnings, unappropriated as at the end of 2020?
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a. 12,583,000
b. 12,783,000
c. 10,583,000
d. 11,588,000
11. Based on the information above, what is the net adjustment to Additional-paid-in capital?
a. 2,450,000 credit
b. 550,000 debit
c. 1,250,000 credit
d. 950,000 credit
PROBLEM 3
ABC Corporation reported Current payables in its December 31, 2020 Statement of Financial Position amounting
to Php5,081,000 and comprising of the following items:
Accounts payable-trade P1,235,500
Provision for warranties 505,500
Provision for premiums 600,000
Provision for compensated absences 1,190,000
Deferred tax liabilities 550,000
Notes payable, due December 31, 2025 1,000,000
a. The result of your purchases cut-off procedures for purchases transaction from December 16, 2020 to
January 15, 2021 revealed the following information:
December 16 - 31, 2020 Purchase Journal entries:

RR number RR date Amount Terms
23005 12/16/2020 P25,000 FOB Shipping Point
23006 12/18/2020 30,000 FOB Shipping Point
23007 12/21/2020 29,000 FOB Destination
23008 12/24/2020 30,000 Shipment from a consignor
January 1 to 15, 2021 Purchase Journal entries:

RR number RR date Amount Terms
23010 1/2/2021 P27,000 FOB Destination
23012 1/4/2021 32,000 FOB Destination
23013 1/9/2021 27,000 Shipment from a consignor
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Further investigations revealed that shipments for RR numbers 23010 to 23012 were in transit as of
December 31, 2020 and goods covered by RR number 23007 to 23009 were still on hand as of December
31, 2020.
b. The company had been providing for a one-year warranty on its products. The company estimates that
40% of the units sold shall be returned by customers for repairs. It estimates further that it shall incur
approximately P250 per unit in parts and labor in repairing goods returned to them. The following
summarizes relevant information necessary for your audit of provisions for warranties:
Year of Sale Total sales in units Total sales in Pesos Actual warranty costs
2018 7,500 P9,750,000 P512,500
2019 8,200 11,480,000 742,000
2020 9,100 13,650,000 720,000
You further discovered that from the actual warranty costs incurred for the current year, P205,000
relates to parts and labor for repairing goods from sales of the previous year. (Assume sales were made
evenly through-out the year.)
c. The company also promotes its product by offering premiums to customers who can present P1,000
worth of accumulated receipts from purchase of the company's product and remittance of P20. The
distribution cost per premium amounts to P5. Data regarding this promotional campaign are:
2019 2020
Premium purchased at P80 10,000u 15,000u
Premiums distributed 7,000 10,500
Premiums expected to be distributed next period 2,500 4,000
Your investigation revealed the following: a) company debits premiums purchases to premiums inventory
account; b) upon actual distribution, the company debits premium expense and credits premiums
inventory at the cost of premiums distributed, any net cash received is ,credited to other income
account; and, c) the Provision for premiums at year end reflects the cost of the premiums undistributed
by the balance sheet date which the company sets up as a debit to premiums expense and credit to
Provision for premiums account (the same is reversed by the beginning of the subsequent year).
d. The company provides employees 15 days vacation and 15 days sick leaves and allows them to carry over
unused leaves earned for the year over the subsequent year, thereafter, any unused leaves shall be
forfeited. The following summarizes the information about unused leaves for the past 3 years:
Year Number of Average daily Total absences paid Absences from prior
employees salary rate during the year year paid this year
2018 250 P300 6,100 days 1,500 days
2019 240 325 6,250 days 1,740 days
2020 260 340 6,183 days 1,883 days
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You have ascertained that the accrual for compensated absences should be adjusted so that, for the year
ended December 31, 2020, the liability should be based on the average exercise rate (of carried over
absences) of employees for the past 2 years.
e. The notes payable due on December 15, 2025 was from a bank that required the company to maintain a
working capital ratio of 2 is to 1 as at each reporting date. The company is however in violation of this
covenant as of December 31, 2020. On January 3, 2021 the bank agreed to provide ABC Company a grace
period up to January 3, 2022 at which time the company should have brought up its working capital ratio
to 2 is to 1.
Requirements:
12. How much is the correct Accounts Payable-trade as of December 31, 2020?
a. 1,205,500
b. 1,239,500
c. 1,266,500
d. 1,299,500
13. What is the net adjustment to be Provision for Warranties account as a result of your audit?
a. 395,000
b. 110,500
c. 237,500
d. None
14. What is the correct Provision for Premiums as of December 31, 2020?
a. 320,000
b. 600,000
c. 260,000
d. 487,500
15. What is the correct Premiums expense for the year ended December 31, 2020?
a. 780,000
b. 960,000
c. 942,500
d. 975,000
16. What is the correct Provision for Compensated Absences as of December 31, 2020?
a. 773,500
b. 714,000
c. 1,190,000
d. 549,780
17. What is the correct total Current Liabilities as of December 31, 2020?
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a. 2,668,000
b. 3,218,000
c. 3,668,000
d. 4,218,000
PROBLEM 4
DEF Corporation presented the following Liabilities in its 2020 Statement of Financial Position as of December
31, 2020:
Current Liabilities
Accounts Payable - trade 2,245,000
Accrued expenses 875,000
10% Notes Payable - bank 4,000,000
Deferred Taxes (credit balance) 100,000
Rent Payable 1,250,000
Total P8,470,000
Non Current Liability

Bonds Payable P8,494,369
Audit Notes:
a. The 10% notes payable to the bank was originated on September 1, 2020 and is repayable at P1M
annually every August 31 starting next year. Interests are also payable every August 31. Interest is yet to
be accrued by the reporting date.
b. The deferred taxes are from the company's prepayments and accruals of expenses (excluding interest
accruals) which had the following balances.
Year end Prepayments Accrued Net Prep Net Deferred
December 31, Expenses (Accr) Tax Ass(Liab)
2019 P1,050,000 P800,000 P250,000 (P100,000)
2020 1,250,000 875,000 375,000 ?
Adjustment is yet to be made for current year changes in the tax bases. There was no change in tax rate
for the current year nor will there be any expected changes in the succeeding years.
c. The rent payable is related to a Building Lease Agreement with XYZ Corp. which has commenced on April
1, 2020 and requiring the company to pay annual periodic rentals of P1,250,000 every April 1 starting
2021 to 2031. The agreement further required the company to pay XYZ Corp. P1M by the end of the
lease term to convey ownership over the asset. The said amount is expected to be substantially lower
than the building's value by 2031. The building has an estimated useful life of 15 years. At the inception
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of the lease, DEF could borrow from the bank at an annual rate of 15%. The implicit lease rate however
which is known to both parties is at 12%.
d. The Bonds Payable having a face value of P1OM was issued on June 31, 2017 during which time the
prevailing effective interest for similar securities was at 15%. The Bonds which pay a 12% annual interest
every June 31 shall mature 10 years after its issuance. DEF accounted for the issuance as a debit to Cash
and credit to Bonds Payable for the total issue price. No entry has been made by the company related to
the bonds since then except for the periodic interest payment which the company debits to interest
expense.
Requirements:
18. How much is the correct Deferred tax liability to be presented in the Statement of Financial Position as of
December 31, 2020?
a. 150,000
b. 350,000
c. 420,000
d. 500,000
19. How much should any assets related to the lease agreement be initially recognized?
a. Zero
b. 7,384,752
c. 6,520,645
d. 7,709,600
20. What is the current portion of any long-term liabilities arising from the lease agreement with XYZ?
a. Zero
b. 363,830
c. 271,903
d. 324,848
21. What is the correct Depreciation Expense from the leased asset for the year ended December 31, 2020?
a. Zero
b. 385,480
c. 738,475
d. 513,973
22. Excluding the unaccrued interest in 2017, what is the retroactive adjustment to the Retained Earnings,
beginning, if there are any in connection to your audit of DEF’s Bonds Payable?
a. 257,505 credit
b. 313,896 credit
c. 159,434 credit
d. 208,469 credit
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23. What is the correct interest expense on the Bonds Payable for the year ended December 31, 2020?
a. 1,298,070
b. 1,305,426
c. 1,312,781
d. 1,200,000
24. How much accrued interests should be included in DEF's current liabilities portion of the 2020 Statement
of Financial Position?
a. 1,525,152
b. 1,293,864
c. 1,658,485
d. 1,427,197
25. What is the total noncurrent liabilities of DEE as of December 31, 2020?
a. 19,693,017
b. 19,193,017
c. 16,693,017
d. 16,193,017
PROBLEM 5
You are auditing for the first time, the Financial Statements of QRS Inc. for the period ended December 31, 2020.
In the course of your audit you discovered the following:
a. The following items were consistently omitted for each year:

2017 2018 2019 2020
Prepayments P25,000 P22,000 P27,000 P26,000
,Accrued Expenses 30,000 35,000 32,000 34,000
Unearned Income 10,000 12,000 13,000 15,000.
Accrued Income 20,000 18,000 16,000 19,000
b. Deliveries of merchandise to Customers on December 31 of each year, were recorded as sales upon
collection the following year:
Selling Price
2018 P126,000
2019 147,000
2020 133,000
The physical count of inventories was done to all merchandise on hand as of December 31 (before any
deliveries) of each year. Goods were priced to sell at 40% mark-up based on cost.
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c. Organization cost amounting to P400,000 at the beginning of 2017 was capitalized and amortized over 5
years starting 2017.
d. The company received a building as a donation from the city government on April 30, 2018 with a
condition that the company shall use the building as a manufacturing plant for twenty years employing
local personnel from the area. The fair value of the said asset was P3M by the time of the donation. The
company incurred P500,000 in remodelling cost bringing the asset to a useful condition by July 1, 2018.
The company is yet to recognize the building donated and has simply charged to 2008 expense the
remodelling cost.
e. The co registered. the following net income from its inception of operations to the current year:
2017 2018 2019 2020
Net income P2,500,000 P1,850,000 P2,250,000 P2,700,000
Requirements:
26. What is the correct net income in 2019?
a. 2,166,000
b. 2,316,000
c. 2,322,000
d. 2,416,000
27. What is the correct net income in 2020?

a. 2,599,000
b. 2,649,000
c. 2,749,000
d. 2,799,000
28. What is the correct Retained Earnings, end in 2018?

a. 4,639,000
b. 4,614,000
c. 4,126,500
d. 4,626,500
29. What is the effect of the errors to the 2020 working capital?
a. 4,000 over
b. 124,000 under
c. 34,000 under
d. 4,000 under
30. What is the retroactive adjustment to the Retained Earnings beginning 2020 as a result of your audit of
the Organization Cost?
a. 240,000 debit
b. 160,000 debit
c. 80,000 debit
d. 400,000 debit
31. What is the retroactive adjustment to the Retained Earnings beginning 2020 as a result of our audit of the
government grant?
a. 37,500 debit
b. 252,500 debit
c. 437,500 credit
d. 462,500 credit
PROBLEM 6
The December 31, 2020, unaudited income statement of TUV Inc. contained the following condensed
information:
Net sales (audit note 1) P5,900,000
Cost of sales 2,600,000
Gross profit 3,300,000
Operating expenses (audit note 2) 2,100,000
Net income 1,200,000
The comparative balance sheets contained the following selected information:

2019 2020
Accounts receivable P220,000 P250,000
Merchandise inventory 510,000 400,000
Allowance for doubtful accounts (audit note 3) 50,000 50,000
Accounts payable 300,000 400,000
Notes payable - bank 1,000,000 1,500,000
Other accrued operating expenses 100,000 90,000
Audit Note 1: Net sales was computed based on the following:

Gross sales P6,300,000
Less: Sales discount (150,000)
Sales returns and allowances* (250,000)
Net sales P5,900,000
*Credit memos issued for customer returns amounted to P190,000.
Audit Note 2: Operating expenses exclude provision for doubtful accounts and include a P200,000 rent expense
paid annually every December 31, starting the current year, for a ten-year lease term (starting January 1) of a
Delivery equipment having a useful life of 15 years. The delivery equipment had a P1,200,000 fair value at the
inception of the lease. The incremental borrowing rate prevailing on the same date was 14% while the implicit
interest rate was at 12%.
Audit Note 3: Adjustment to the allowance for doubtful accounts is yet to be made. There were no other entries
affecting the account during the year. It is the company's policy to provide a 50% allowance for past due
accounts and 10% allowance for current account. P150,000 of the receivable balance are currently collectible
while P40,000 of the past due accounts are definitely uncollectible and are to be written off.
Audit Note 4: Other relevant information includes:

Purchase discounts 120,000
Purchase returns and allowances** 200,000
**Credit memos received from suppliers P170,000.
32. How much was received from customers in 2020?

a. 5,870,000
b. 5,930,000
c. 5,970,000
d. 6,270,000
33. How much was paid to suppliers of merchandise in 2020?

a. 2,390,000
b. 2,420,000
c. 2,450,000
d. 2,490,000
34. What is the Depreciation expense on the equipment in 2020?

a. 113,000
b. 120,000
c. 200,000
d. none
35. What is the balance of the Lease Liability as of December 31, 2020?
a. 1,065,600
b. 1,144,000
c. 1,000,000
d. none
36. How much is the Bad debt expense in 2020?

a. 20,000
b. 35,000
c. 40,000
d. 45,000
37. How much is the correct net income for 2020?

a. 1,252,000
b. 1,116,400
c. 1,287,000
d. 1,151,400
PROBLEM 7
The following data are obtained from the single-entry records kept by Copper Merchandising for 2019:
December 31 January 1
Cash 1,600,000 1,200,000
Accounts receivable 2,000,000 1,600,000
Notes receivable 1,200,000 400,000
Merchandise Inventory 960,000 1,600,000
Equipment 1,120,000 1,200,000
Notes payable 480,000 720,000
Accounts payable 1,040,000 1,200,000
Accrued interest payable 40,000 80,000
Unearned rent income 40,000 120,000
The cashbook shows the following information
Balance, January 1 1,200,000
Receipts:
Accounts receivable (after discounts of P100, 000) 3,000,000
Notes receivable 960,000
Cash sales 800,000
Rent income 80,000
Sale of equipment costing P200, 000 and book value
of 100, 000 120,000
Addition cash investment by owner 600,000 5,560,000
Payments:
Accounts payable 1,520,000
Notes payable 1,280,000
Cash purchases 600,000
Interest expense 160,000
Expense 800,000
Equipment 400,000
Withdrawals by owner 400,000 5,160,000
Balance, December 31, P1,600,000
Audit notes:
a. Accounts receivable of P120, 000 were written off as uncollectible
b. Returns of P320, 000 were made on merchandise sales.
c. Allowances for P80, 000 were received on merchandise purchases.
Required: Determine the audited balances of the following:
38. Net sales

a. 8,500,000
b. 6,500,000
c. 6,400,000
d. 6,080,000
39. Net purchases

a. 3,400,000
b. 3,080,000
c. 3,000,000
d. 2,920,000
40. Cost of sales

a. 3,720,000
b. 3,640,000
c. 3,560,000
d. 2,360,000
41. Rent income

a. 0
b. 80,000
c. 160,000
d. 200,000
42. Interest expense

a. 120,000
b. 160,000
c. 200,000
d. 210,000
43. Depreciation expense

a. 0
b. 80,000
c. 380,000
d. 480,000
44. Net income

a. 1,200,000
b. 1,260,000
c. 1,320,000
d. 1,280,000
PROBLEM 8
The ABC Company is an importer and wholesaler. Its merchandise is purchased from a number of suppliers and is
warehoused until sold to customers.
In conducting his audit for the year ended December 31, 2020, the company’s CPA determined that the system of
internal control was good. Accordingly, he observed the physical inventory at an interim date, November 30, 2020,
instead of at year end.
The following information was obtained from the general ledger:
Inventory, January 1, 2020 P 90,000

Inventory, November 30, 2020 225,000
Sales for 11 months ended November 30, 2020 800,000
Sales for year ended December 31, 2020 950,000
Purchase for 11 months ended November 30, 2020 (before audit adjustments) 720,000
Purchase for year ended December 31, 2020 (before audit adjustments) 810,000
Additional information is as follows:
a. Goods received on November 28 but recorded as purchases in December 10,000
b. Deposits made in October 2020 for purchases to be made in 2021 but charged to Purchases 14,000
c. Defective merchandise returned to suppliers:

Total at November 30, 2020 5,000
Total at December 31, 2020, excluding November items 7,000
The returns have not been recorded pending receipt of credit memos from the suppliers. The defective
goods were not included in the inventory.
d. Goods shipped in November under FOB destination and received in December were recorded as purchases
in November 18,500
e. Through the carelessness of the client’s warehouseman, certain goods were damaged in
December and sold in the same month at its cost 20,000
f. Audit of the client’s November inventory summary revealed the ff:

Items duplicated P3,000
Purchase in Transit:
Under FOB shipping point 12,000
Under FOB destination 18,500
Items counted but not included in the inventory summary 7,000
Errors in extension that overhauled the items 4,000
45. The correct amount of net purchases up to November 30, 2020, is
46. The correct amount of net purchases up to December 31, 2020, is
47. What is the correct amount of net purchases for the month of December 2020?
48. The correct inventory on November 30, 2020, is
49. What is the gross income for 11 months ended December 31, 2020?
50. What is the cost of sales ratio for 11 months ended November 30, 2020?
51. What is the total cost of goods for the month of December 2020?
52. What is the estimated inventory on December 31, 2020?

Auditing Problems Midterm - 2021 - D

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Auditing Problems Midterm - 2021 - D

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AUDITING PROBLEMS MIDTERM EXAMINATION

Date Particulars Debit Credit

Mar. 1 Subscription receivable 190,000

Aug. 15 Cash 133,000

Nov. 1 Share Capital 1,320,000

Nov. 10 Cash 20,000

Dec. 29 Accumulated profits 300,000

5. How much is the cash dividends payable as of December 31, 2020?

Balance, January 1 P7,800,000

Using the information above, answer the following:

8. What is the correct net income for the year 2020?

9. What is the restated beginning retained earnings in 2020?

December 16 - 31, 2020 Purchase Journal entries:

January 1 to 15, 2021 Purchase Journal entries:

Non Current Liability

a. The following items were consistently omitted for each year:

27. What is the correct net income in 2020?

28. What is the correct Retained Earnings, end in 2018?

The comparative balance sheets contained the following selected information:

Audit Note 1: Net sales was computed based on the following:

Audit Note 4: Other relevant information includes:

32. How much was received from customers in 2020?

33. How much was paid to suppliers of merchandise in 2020?

34. What is the Depreciation expense on the equipment in 2020?

36. How much is the Bad debt expense in 2020?

37. How much is the correct net income for 2020?

The cashbook shows the following information

Balance, January 1 1,200,000

Required: Determine the audited balances of the following:

38. Net sales

39. Net purchases

40. Cost of sales

41. Rent income

42. Interest expense

43. Depreciation expense

44. Net income

The following information was obtained from the general ledger:

Inventory, January 1, 2020 P 90,000

Additional information is as follows:

a. Goods received on November 28 but recorded as purchases in December 10,000

c. Defective merchandise returned to suppliers:

f. Audit of the client’s November inventory summary revealed the ff:

45. The correct amount of net purchases up to November 30, 2020, is

46. The correct amount of net purchases up to December 31, 2020, is

48. The correct inventory on November 30, 2020, is

52. What is the estimated inventory on December 31, 2020?

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