DE LA SALLE ARANETA UNIVERSITY

Malabon City
MIDTERM EXAMINATION – AUDITING PROBLEMS

Name: ________________________________________ Date: _____________ Score: _________

Instruction: Compute for the required for each of the following cases presented. Write the letter
of the correct answers on the answer sheet provided.

CASE 1
On December 31, 2017, Daenerys Company acquired the following three intangible assets:
a. A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.

b. Goodwill for P1,500,000. The goodwill is associated with Daenerys’s manufacturing reporting
unit.

c. A copyright for P220,000. By contract, Daenerys has exclusive use of the copyright for 5
years. Because of market conditions, it is expected that the copyright will have economic
value for just 3 years.

d. Patent for P175,000. The patent was for exclusive production of special love potion that is
expected to be used for 5 years.

On December 31, 2018, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:
a. Because of a decline in the economy, the trademark is now expected to generate cash flows
of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable
horizon. Interest rate to be used is 5%.

b. The cash flows expected to be generated by the Daenerys Manufacturing reporting unit is
P250,000 per year for the next 22 years. Interest rate to be used is 5%. Book values of the
assets and liabilities of the Daenerys Manufacturing reporting unit are as follows:

Book values
Identifiable assets P2,700,000
Goodwill 1,500,000
Liabilities 1,800,000

c. A stronger love potion had been invented at the end of 2018 that makes someone forget all
his/her heartaches in a day had deemed Daenerys’s current technology obsolete after
December 31, 2020.

Determine the following:

1. Impairment loss for the year 2018
a. P179,584 b. P133,333 c. P90,476 d. P100,000

2. Carrying value of Goodwill as of December 31, 2018

a. P1,800,000 b. P1,500,000 c. P1,890,476 d. P1,409,524

3. Total amortization expense for year 2018

a. P151,190 b. P108,333 c. P143,333 d. P160,833

4. Carrying value of intangible assets other than goodwill at the end of 2018
a. P434,167 b. P200,000 c. P486,667 d. P534,167

5. Total amortization expense for year 2019

a. P151,190 b. P108,333 c. P143,333 d. P160,833

CASE 2
The trial balance of Tamiya Company includes the following:

Cash on hand, P560,000; Petty cash fund, P7,000; Security Bank – CA, P1,750,000; Land bank – CA
No. 1, P1,500,000; Metro Bank – SA, P300,000 and Metro Bank – Time deposit ( purchased
11/15/18, due in 2 months), P650,000; Money market placement (purchased 10/31/18 due
2/15/19), P250,000 and Treasury bills (due in 2 months purchased 1 month ago), P340,000.

The cash on hand includes the following items:

Customers checks as follows:
Check payable to Tamiya dated 9/31/2018, P150,00
received 10/20/2018 0
Check payable to Tamiya dated 12/29/18, received 90,000
12/28/2018
Check payable to Tamiya dated 1/3/2019, received 110,000
12/28/2018
Check payable to Tamiya dated 12/14/2018, 70,000
received 12/28/2018
Check payable to Tamiya dated 11/30/2018, 80,000
received 12/2/2018

The petty cash fund consisted of the following items:

Currency and coins, P2,750; Employee advances, P1,200; currency in an envelope marked
“collection for charity” with names attached, P1,800; Un-replenished petty cash vouchers, P1,050
(of which P400 is dated 1/2/19); check drawn by the company payable to petty cash custodian,
P1,700.

Included in the checks drawn by the company against the Security Bank account and
recorded in December 2018 are as follows:
Check payable to a supplier dated 12/30/18, released P188,00
1/7/2019 0
Check payable to a supplier dated 1/3/2019, released 44,000
12/28/2018
Check payable to a supplier dated 12/24/2018, released 16,000
12/30/2018

Land Bank account

The land bank account is restricted only for use in disbursement of payroll of the employees. No
other expenses are disbursed in this account.

Metro Bank account

The savings account deposit in Metro Bank has been set aside by the management for payment of
income taxes due in the business.

Determine the following as of December 31, 2018 in Tamiya’s financial statement?

6. How much is the adjusted balance of cash on hand (excluding pcf)?
a. P300,000 b. P370,000 c. P450,000 d. P480,000

7. How much is the total cash in bank?

a. P3,482,000 b. P3,782,000 c. P1,892,000 d. P3,766,000

8. How much is the adjusted balance of the petty cash fund?

a. P4,850 b. P4,000 c. P5,500 d. P4,450

9. How much is the total cash equivalents?

a. P250,000 b. P650,000 c. P900,000 d. P1,200,000

10.How much is the total cash and cash equivalents?

a. P5,136,450 b. P3,276,450 c. P3,947,850 d. P5,136,850

CASE 3
The records of Chest Retailers Company revealed the following information on December 31,
2018:

COST RETAIL
P900,0 P1,782,
Inventory, Jan 1 00 000
5,380,0 10,652,4
Purchases 00 00
85,
Freight in 000
40,0
Freight out 00
 12,000,0
Sales 00
62, 122,7
Purchase returns 000 60
64,3
Sales allowance 00
37,
Purchase allowance 000
135,0
Sales returns 00
48,0
Sales discounts 00
39,
Purchase discounts 000
54,00
Normal shrinkages 0
100,0
Normal shoplifting losses 00
Discount granted to 43,0
employees 00
65, 128,7
Departmental transfer in 000 00
Departmental transfer 49, 97,0
out 000 20
280,0
Net mark down 00
365,0
Net mark up 00

A disastrous fire completely destroyed the inventory on December 31, 2018. (Round off the Cost-
To-Retail ratio into 2 decimal places e.g 88.88%).

Determine the following in relation to your audit:

11.How much is the ending inventory at cost under FIFO method?
a. P183,843 b. P184,010 c. P179,956 d. P191,379

12.How much is the ending inventory at cost under average method?

a. P183,843 b. P184,010 c. P179,956 d. P191,379

13.How much is the loss on fire on December 31, 2018 using conventional method?
a. P183,843 b. P184,010 c. P179,956 d. P191,379

14.How much is the cost of sales under FIFO?

a. P6,151,621 b. P6,153,079 c. P6,153,664 d. P6,059,157

15.The cost-to-retail ration under average method is?

a. 49.86% b. 50.23% c. 51% d. 52%

CASE 4
Tamaraw Corp. had the following portfolio of financial instrument as of December 31, 2018. All
securities were acquired at the beginning of 2018:
Face Recorded acquisition
Security value/Denomination cost
Basted shares 160,000 shares P9,000,000
Holi Sprite shares 60,000 shares 3,600,000
10% USLE bonds, 3
years P2,000,000 par ?
Audit notes:
a. Basted shares were acquired and designated as financial asset at fair value through profit or
loss. The shares were acquired at P60 per share which included P3 per share transaction cost.
Half of the Basted shares were sold at P62 per share on July 1, 2019.
b. Holi Sprite shares were acquired and designated as financial asset at fair value through other
comprehensive income. The shares were acquired at P60 per share which included P2 per
share transaction cost. 20,000 of these shares were sold on August 1, 2019 at P59 per share.
c. The USLE bonds were acquired when the prevailing market rate of interest was at 12%.
Interests are collectible every December 31. Half of the USLE bonds were sold on June 30,
2019 at total proceeds of P1,650,000.
d. Additional information on the securities are as follows:
Security FV 12/31/18 FV 12/31/19
Basted shares P58 per share P63 per share
Holi Sprite shares 61 per share 66 per share
10% USLE bonds, 3 11% yield;
years 9% yield; ? P?

Determine the following:

16.What is the realized gain or (loss) on sale of Basted shares?
a. (P75,000) b. P320,000 c. P460,000 d. P0

17.What is the realized gain or loss from sale of Holi Sprite shares in 2019 under IFRS 9, Financial
Instruments?
a. (P20,000) b. P10,000 c. P30,000 d. P0

18.Assuming that the company’s business model has an objective of holding the debt securities
to collect contractual cash flows, what is the realized gain on sale of USLE bonds?
a. P682,829 b. P675,829 c. P625,829 d. P662,829

19.Assuming that the company’s business model has no objective of holding the debt securities
to collect contractual cash flows, what is the realized gain on sale of USLE bonds?
a. P582,409 b. P632,409 c. P672,033 d. P581,221

20.Assuming that the company’s business model has no objective of holding the debt securities
to collect contractual cash flows and to sell, what is the total carrying value of investments
that shall be presented in the 2019 financial statement as financial asset at fair value at the
end of 2019?
a. P8,100,000 b. P7,680,000 c. P9,661,982 d. P7,650,982

CASE 5
In connection with your audit of Badyang Sheeran Company for the year ended December 31,
2018, you were able to gather the following accounts from the unadjusted trial balance of the
company as of December 31, 2018:

Cash (Note 1) P630,000

Accounts receivable (Note 2) 1,500,000
Allowance for uncollectible accounts (Note 3) 29,000
Inventory (Note 4) 750,000
Financial Asset at fair value through PL (Note 5) 600,000

Note 1: Cash
Cash in bank per bank statement (upon inspection of records there P620,00
is an outstanding check, P50,000) 0
Petty cash fund (including un-replenished petty cash vouchers of 10,00
P7,200) 0
P630,00
Total 0

Note 2: Accounts receivable

Upon inspection of the records and related invoices, you found out that the accountant recorded
an accounts receivable for P312,000 representing selling price of goods sent out on consignment
on December 27 (all goods were mark to sell at 30% more than its cost) these goods were not
included in the inventory. Total collections during the period includes P10,000 representing
collection of accounts previously written off, the accountant overlooked and forgot to record the
entries for the recovery.

Note 3: Allowance for uncollectible accounts

The company provides allowance for uncollectible accounts based on the assumption that 2% of
outstanding accounts receivable will not be collected. Upon inquiry and inspection, the balance
of the allowance above represents the January 1 balance.

Note 4: Inventories
a. The above balance of inventory is the result of physical count made by the entity at
December 28, 2018. You observe the physical count of inventory and noted that the client
follows its policy of counting inventory.
b. You performed a cut-off test and noted the following:
  Accounts payable includes P56,000 cost of purchases in transit with terms FOB Shipping
point, shipment was made on December 26, 2018 and was received on December 27,
2018.
 Goods were shipped to a customer costing P130,000, terms FOB destination, n/30 on
December 24, 2018. The goods were received by the customer on January 2, 2019. At the
date of shipment, the company’s accountant recorded the transaction as sales on account.

Note 5: Equity Investments at FV

In 2018, the company purchased 30,000 shares at P20 per share. The shares at December 31
are selling at P25 per share.

Based on the result of your audit, compute the amount that should be reported in the
company’s financial statement for the year ended December 31, 2018:
21.Cash:
a. P622,800 b. P572,800 c. P592,800 d. P620,800

22.Accounts receivable – net:

a. P988,820 b. P1,164,240 c. P998,620 d. P1,036,840

23.How much is the balance of allowance for bad debts?

a. P21,160 b. P20,380 c. 19,840 d. P22,160

24.Inventory:
a. P1,116,000 b. P990,000 c. P1,120,000 d. P880,000

25.Financial asset at fair value:

a. P600,000 b. P750,000 c. P900,000 d. P1,000,000

CASE 6
Versace Inc., a manufacturer of face powder incurred the following cost during the year ended
December 31, 2018, in relation to your audit of property, plant, and equipment:

P10,000,0
Land and old building (Note A) 00
400,00
Realtor commission for land 0
200,00
Legal fees, realty taxes and documentation expense for land 0
120,00
Cost of removal of old building (Note B) 0
400,00
Grading and drainage on land site 0
Cost of new building (Note C) 20,000,000
200,00
Building permit fee 0
300,00
Excavation 0
260,00
Cost of paving driveways and parking lot 0
260,00
Cost of trees, shrubs, and other landscaping 0
130,0
Cost of installing lights in parking lot 00
260,00
Architect fee 0
Payment of medical bills of employees accidentally injured while 60,00
inspecting building Construction 0
440,00
Cost of fencing the property 0
Invoice price of the machine acquired (Note D) 8,000,000
240,00
Freight, unloading, and delivery charges for machinery acquired 0
360,00
Custom duties and other charges for machinery acquired 0
Allowances and hotel accommodation paid to foreign 550,00
technicians during installation and test run of machine 0
 Estimated dismantling cost to be incurred as required at the end
of the contract (Note E) 149,020
150,0
Cost of training for personnel who will use the machine 00
200,00
Cost of open house party to celebrate opening of building 0

Audit notes:
a. On February 1, 2018, purchased land and building (6 years estimated useful life) at a single
cost of 10,000,000. On this date, it was determined that the land and building had a fair
value of P13,281,250 and P6,250,000 respectively. The entity also incurred the following cost
to purchase the land, legal fees for purchase contract (including documentation expenses),
recording ownership and realtor commission. On April 30, 2018, the entity demolished the
building to make way for construction of a new building to be used as owner-occupied.

b. On April 30, 2018, the company negotiated a price of P120,000 to tear down the old building
to make room for construction of new building. The contractor retains all salvageable
materials estimated to be worth P20,000.

c. The company paid P20,000,000 in expenditures to construct its own building which excludes
payments for interest. The following were noted during the course of your audit.
 Capitalization period: January 1, 2018 to December 31, 2019
 Expenditures during construction on the project (incurred during each period and
excluding capitalized interest from previous years)
2018 4,600,000 January 1
4,600,000 December 31

2019 10,800,000 June 30

 Amounts borrowed and outstanding during construction period:

P3 million borrowed at 6%, specifically for the project.
P6 million borrowed on July 1, 2017 at 10%, general
P12 million borrowed on January 1, 2017 at 7%, general

 The construction of the building is completed on December 31, 2019. The new building is
estimated to have 20 years of useful life.

d. On April 1, 2018, Versace purchased a machine from a supplier which trade discount of 5%
was given. An additional 2% cash discount if the account is paid in 30 days. Based on inquiry,
the company usually avails the discount. The invoice for machinery purchased was paid on
April 30, 2018 which is also the date when the machinery was fully installed and ready for
intended use. The machinery will be used for 5 years.

e. The entity is required to dismantle the machine at the end of its expected 5 year life.
Discount rate applicable on this item is 10%.

f. The company uses straight-line method to depreciate its property, plant and equipment. Land
improvements were ready for used in the operation as intended by the management starting
June 30, 2018 which is expected to last for 8 years.

Based on the above information and audit, answer the following:

26.What is the cost of the land improvement?
a. P1,090,000 b. P1,000,000 c. P1,2000,000 d. P1,209,000 e. P1,290,000

27.What is the cost of the machine?

a. P9,230,000 b. P9,242,530 c. P8,690,530 d. P9,082,530 e. P8,838,000

28.How much is the interest expense recognized in 2108 related to self-constructed asset?
a. P1,132,640 b. P832,000 c. P1,312,000 d. P1,192,000 e. P1,012,000

29.What is the cost of the building constructed?

a. P25,500,640 b. P22,300,640 c. P22,320,530 d. P22,400,562 e. P20,000,000

30.How much is the total depreciation expense recognized in 2018?

a. P1,563,838 b. P1,412,462 c. P1,279,129 d. P1,430,505 e. P1,531,388

CASE 7
Osaka Retailing wholesales bicycles. It uses perpetual inventory system. The company’s
reporting date is December 31. At December 1, 2018, inventory on hand consisted of 500
bicycles at P850 each and 100 bicycles at P840 each. During the month ended December 31,
2018, the following inventory transactions took place (all purchases and sales transactions are on
credit):

Dec. 05 Sold 500 bicycles for P1,200 each.

09 Purchased 180 bicycles at P790 each.
15 Sold 190 bicycles for P1,350 each.
19 Purchased 290 bicycles at P880 each.
21 Returned seven damaged bicycles to the supplier. This bicycle had been purchased
on December 9.
28 Sold 150 bicycles for P1,370 each.

Under First-in, First-out (FIFO) method:

31. The cost of ending inventory is?
a. P196,330 b. P195,750 c. P197,850 d. P196,240

32.The cost of sales for the month of December is?

a. P704,630 b. P704,540 c. P705,120 d. P703,020

Under Moving Average method: (round of the unit cost to 2 decimal places. e.g.
90.93)
33. The cost of ending inventory is?
a. P193,662 b. P192,587 c. P193,785 d. P192,895

34.The cost of sales for the month of December is?

a. P707,208 b. P707,975 c. P707,085 d. P708,013

35.Assuming that the actual count of inventory was only 200 units on hand, how much is the
balance of ending inventory?
a. P172,724 b. P162,166 c. P169,666 d. P173,000

CASE 8
Shown below is the bank reconciliation for Marikina Company for November 2018:
Balance per bank, Nov. 30, 2018 P150,000
Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks P28,00
0
Bank credit recorded in error 10,00 38,000
0
Cash balance per books, Nov. 30, 2018 P136,000

The bank statement for December 2018 contains the following data:
Total deposits P110,000
Total charges, including an NSF check of
P8,000 and a service charge of P400 96,000

All outstanding checks on November 30, 2018, including the bank credit, were cleared in the
bank 1n December 2018. There were outstanding checks of P30,000 and deposits in transit of
P38,000 on December 31, 2018.

Based on the above result of your audit, determine the following:

36.How much is the cash balance per bank on December 31, 2018?
a. P172,400 b. P164,000 c. P150,000 d. P154,000

37.How much is the December receipts per books?

a. P148,000 b. P110,000 c. P96,000 d. P124,000

38.How much is the December disbursements per books?

a. P98,000 b. P89,600 c. P79,600 d. P96,000

39.How much is the cash balance per books on December 31, 2018?
a. P162,000 b. P180,400 c. P170,400 d. P150,000

40.The adjusted cash in bank balance as of December 31, 2018 is?

 a. P196,000 b. P172,000 c. P162,000 d. P141,600

CASE 9
The balance sheet of True Love Corporation reported the following long-term receivables as of
December 31, 2017:

Note receivable from sale of P12,000,0

plant 00
Note receivable from officer 3,500,000

In connection with your audit, you were able to gather the following transactions during 2018
and other information pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum and dated August 31,
2017. The note is payable in 3 equal annual installments in principal of P4,000,000 plus
interest on the unpaid balance every August 31. The initial principal and interest payment
was made on August 31, 2018.

b. The note receivable from officer is dated December 31, 2016, earns interest at 9% per
annum, and is due after four years. Interest is collected every year end. The rate effective
when the note was received was at 10%.

c. The corporation sold a piece of equipment to Heartaches Inc. on May 1, 2018, in exchange for
a P1,800,000 non-interest bearing note due on May 1, 2021. The note had no ready market,
and there was no established exchange price for the equipment. The prevailing interest rate
for a note of this type at May 1, 2018, was 11%.

Based on the above and the result of your audit, determine the following:
41.Noncurrent portion of long term notes receivable as of December 31, 2018
a. P8,791,652 b. P8,899,672 c. P8,851,918 d. P8,911,988

42.Current portion of long-term notes receivable as of December 31, 2018

a. P4,000,000 b. P8,000,000 c. P10,000,000 d. P12,000,000

43.Accrued interest receivable as of December 31, 2018

a. P300,000 b. P320,000 c. P350,000 d. P420,000

44.Interest income for the year 2018

a. P1,766,072 b. P1,724,789 c. P1,7801,924 d. P1,717,813

45.Interest income for the year 2019

a. P1,209,819 b. P1,289,788 c. P1,301,789 d. P1,299,318

**** END OF EXAMINATION ****

DE LA SALLE ARANETA UNIVERSITY

Malabon City
QUIZ 2 – AUDITING PROBLEMS

Name: ________________________________________ Date: _____________ Score: _________

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