AUDITING AND ASSURANCE CONCEPT – LONG QUIZ

Prepared by: April Mae E. Vitanzos BSA III

Problem 1
Irene Inc., holds a valuable patent on a precipitator that prevents certain types of air pollution. Irene does not
manufacture or sell the products and process it develops. Instead, it conducts research and develops products
and processes which its patents, and then assigns to manufactures on a royalty basis. Occasionally it sells
patents. The following presents the summary of the activities in relation to the aforementioned patent:
2021-2022 Research aimed at the discovery of the new technology 3,840,000
1/1/2023 Design and construction of a prototype 876,000
3/15 Testing the prototype models 420,000
1/2/2024 Legal and other professional fees to process the patent 
Application (useful life = 18 yrs) 558,000
12/10/2026 Legal fees paid to successfully defending the device patent 357,000
1/1/2028 Acquisition of a competitive patent aimed at protecting old 
Patent that resulted in an increased revenue 406,000
1/1/2029 Acquisition of the related patent which extended the life 
Of the patents for additional 2 years 420,000
12/31/2031 Legal fees paid in unsuccessful patents infringement suit 
Against a competitor 250,000
Compute for:
a. Cost of the patent upon initial recognition (P 620,000)
b. Carrying value of the patent on December 31 2024 (P 589,000)
c. Carrying value of the patent on December 31 2028 (P 845,625)
d. Carrying value of the patent on December 31 2030 (P 1,323,529)
e. Amount in total to be recognized in the P/L in 2031 in relation to the patent (P 1,235,294)

Solution:
a. Cost of the patent upon initial recognition = P 620,000
b. Carrying value of the patent on December 31 2024

Cost of obtaining patent 2024 620,000

Amortization 2024 (19,000)
Carrying Value, Dec 31, 1999 P 589,000

Cost of Patent 620,000

Legal Life of Patent /20
Amortization P 19,000

c. Carrying value of the patent on December 31 2028

Carrying Value of Patent, Jan. 01, 2024 589,000

2025 Amortization (31,000)
 2026 Amortization (31,000)
2027 Amortization (31,000)
Carrying Value of Patent, Dec. 31, 2027 496,000

Acquisition of the related patent Jan. 3, 2028 406,000

902,000
2028 Amortization 56,375
Carrying Value of Patent, Dec. 31, 2003 P 845,625

d. Carrying value of the patent on December 31 2030 (P 1,323,529)

Carrying value of Patent, Jan. 1, 2029 845,625
Acquisition of the related patent Jan. 5, 2029 654,375
Total 1,500,000
2029 Amortization 88,235
2030 Amortization 88,235
Carrying value of Patent, Dec. 31, 2030 P 1, 323,529

e. Amount in total to be recognized in the P/L in 2031 in relation to the patent

P 1,323,529 P 1,323,529
/15 88,235
P 88,235 P 1,235,294

Problem 2 
A count of the undeposited receipts under the custody of Irene, cashier of IMC Company, on September 30,
2020 showed the ff composition:
Currency and coins 12,310
Unused postage and documentary stamps 110
Checks:
Date Payee Drawer
3/24/2020 Cash Irene 1,000
9/20/20 IMC Surigao Corp 2,350
9/27/20 IMC Mae 1,960
9/30/20 Smart IMC 900
Cash advance voucher paid out of receipts 1,500
Total per count 20,130
Cashier’s accountability to be 18,470.
Compute:  what was the amount of shortage/overage on Sept 30, 2020?

Solution:

Currency and Coins P12,310

Unused Postage and Documentary Stamp 110
Check Payable to IMC Company:
9/20/20 IMC Surigao Corp 2,350
9/27/20, IMC IMC Mae 1,960 4,310
 Cash advance voucher paid out of receipts 1,500
Total per count 18,230
Less: Cashier’s Accountability 18,470
Cash Shortage ( P 240 )

Problem 3 
Irene Corporation was organized on Jan 15, 2024 and started operation soon thereafter. The company cashier
who acted also as the bookkeeper had kept the accounting records very haphazardly. The manager suspects of
him of defalcation and engaged you to audit his account to find out the extent of the fraud, if there is any. On
November 15, when you started the examination of the accounts, you find the cash on hand to be 25,700. From
inquiry at the bank, it was ascertained that the balance of the Company’s bank deposit in current account on the
same due was 131,640. Verification revealed that the check issued for 9,260 is not yet paid by the bank. The
corporation sells at 40% above cost.
Your examination of the available records disclosed the ff information:
a. Share capital issued at par for cash 1,600,000
b. Real estate purchased and paid in full 1,000,000
c. Mortgage liability secured by real estate 400,000
d. Furniture and fixture (gross) brought on which 
There is still balance unpaid of 30,000 145,000
e. Outstanding notes due to bank 160,000
e. Total amount owed to creditors on open account 231,420
e. Total sales 1,615,040
e. Total amount still due from customers 426,900
e. Inventory of merchandise on November 15 at cost 469,600
e. Operating expenses paid 303,780
Based on the above and result of your audit, compute the ff as of November 15, 2024
a. Collections from sales
b. Payments for purchases
c. Total cash disbursements
d. Adjusted cash balance
e. Cash shortage
Solution:
Sales P1,615,040
Less: accounts receivable, 11/15 426,900
Collections from sales P1,188,140

Cost of sales (P1,615,040/1.4) P1,153,600

Add: Merchandise inventory, 11/15 469,600
Purchases 1,623,200
Less: Accounts payable, 11/15 231,420
Payments for purchases P1,391,780

Purchase of real estate P1,000,000

 Payment for furniture and fixtures (P145,000 - P30,000) 115,000
Expenses paid 303,780
Payments for purchases (see no. 2) 1,391,780
Total cash disbursements P2,810,560

Proceeds from issuance of common stock P1,600,000

Proceeds from mortgage note payable 400,000
Proceeds from notes payable – bank 160,000
Collections from sales (see no. 1) 1,188,140
Total cash receipts 3,348,140
Less: cash disbursements (see no. 3) 2,810,560
Unadjusted cash balance P537,580

Cash accountability P537,580

Less:
Unadjusted bank balance P131,640
Deposit in transit 25,700
Add: Outstanding checks 9,260
Cash shortage P389,500

Problem 4 
On Jan 1 2020, Irene Mfg. Co. began construction of a building to be used as its office headquarters. The building
was completed on June 30, 2026.   
Expenditures on the project were as follows
1/1/ 2,500,000
3/31 3,000,000
6/30 4,000,000
10/31 3,000,000
1/31/2021 1,500,000
3/31/2021 2,500,000
5/31/2021 3,000,000
On Jan 3, 2021 the company obtained a 5 million construction loan with a 10% interest rate. The loan was
outstanding all of 2020 and 2021. The company’s other interest-bearing debts included a long-term note of P 25
million with an 8% interest rate, and a mortgage of 15 million on another building with an interest rate of 6%.
Both debts were outstanding during all of 2020 and 2021. The company’s fiscal year end is December 31.
a. Capitalizable interest in 2020
b. Capitalizable interest in 2021
c. Interest Expense in 2020
d. Interest Expense in 2021
e. Total cost of the building including interest capitalized in 2020 and 2021

Problem 5
Information pertaining to Irene Corporation’s property, plant and equipment for 2021 is presented below:
Account balances at Jan 1, 2021
Debit Credit
Land 150,000
Building 1,200,000
Accum depn 263,100
Machinery and Equipment 900,000
Accum depn 250,000
Automotive equipment 115,000
Accum depn 84,600
Depreciation methods used and useful life
Building – 150% declining balance; 25 years 
Machinery and equipment – SL; 10 years
Automotive equipment – SYD; 4 years
The salvage value of the assets is immaterial. Dep’n is computed to the nearest month.
Transactions during 2021 and other information”
a. On Jan 1, 2021, Irene purchased a new car for 10,000 cash and trade in of a two year old car with a cost
of 9,000 and a book value of 2,700. The new car has a cash price of 12,000; market value of trade ins is
not known.
b. On April 1 2021, a machine purchased for 23,000 on April 1 2016 was destroyed by fire. Irene recovered
15,500 from its insurance company.
c. On July 1, 2021 machinery and equipment were purchased at a total invoice cost of 280,000; additional
costs of 5,000 for freight and 25,000 for installation were incurred.
d. Irene determined that the automotive equipment comprising the 115,000 balance at Jan 1, 2021 would
have been depreciated at a total amount of 18,000 for the year ended December 31, 2021/

Compute for:
a. Depreciation expense for 2021 – Building
b. Depreciation expense for 2021 – Machinery and equipment
c. Depreciation expense for 2021 – Automotive equipment
d. Accumulated Depreciation as of Dec 31, 2021 – Building
e. Accumulated Depreciation as of Dec 31, 2021 – Machinery and equipment
f. Accumulated Depreciation as of Dec 31, 2021 – Automotive equipment

Problem 6
Irene Factory started operations in 2020. Irene manufactures both towels 60% of the production are “ABC”
which sell for 500 per dozen and 40% are “XYZ” which sell for 250 per dozen. During 2020, 6,000 dozens were
produced at an average cost of 360 per dozen. The inventory at the end of the year was as follows:
220 dozens “ABC” @ 360 79,200
300 dozens “XYZ” @ 360 108,000

Using relative sales value method, which management considers as a more equitable basis of cost distribution.
a. How much of the total cost should be allocated to Class ABC
b. How much of the total cost should be allocated to Class XYZ
c. How much is the value of inventory as of December 31, 2020
d. How much is the cost of sales for the year 2020
e. How much is the gross profit for the year 2020