Inventory

1. An overstatement in the value of closing stock overstates all of the following except;

a. Net income
b. Current assets
c. Capital of the business
d. Cost of goods sold

2. Which of the following are generally the inventories of a service business

a. Finished goods inventories

b. Purchased goods
c. Raw Material Inventories
d. Work in process inventories

3. All of the following are the methods of inventory costing except;

a. FIFO
b. LIFO
c. Average cost
d. stock take

4. Which one of the following methods of inventory costing yields highest taxable income?

a. FIFO
b. LIFO
c. Average cost
d. Standard cost method

5. Which of the following inventory costing systems is regarded as the most complex one?

a. Periodic inventory system

b. Perpetual inventory system
c. Average Method

6.Which one of the following double entries is passed when goods are purchased on credit under
perpetual inventory system?

a. Purchases Debit and Creditor Credit

b. Purchases Debit and Account payable Credit
c. Purchases Debit and Cash Credit
d. Inventory Debit and Account payable Credit

7. Gross profit is 25% on total sales and cost of goods sold amount to 750. Which of the following is the
amount of gross profit?
a.187.7
b.200
c.150
d.250

8. At the end of XYZ firm's accounting period, the closing stock was found to be 100,000. However, it was
realized that a fixed asset of cost 1000 was included in the stock account. Which of the following is the
correct amount of ending inventory or stock?

a. 10,000
b.11,000
c.9,000
d.8,000

10. NRV or net realizable value of inventory is the expected selling price or market value less

a. Carry value of the inventory

b. Expenses necessary to complete sale
c. Cost of the stock
d. Replacement cost

11.
Cost of an item in the closing inventory is 100 whereas the net realizable value is 85. at which one of the
following amounts the item should be shown in the financial statement?

a. 100
b. 115
c. 85
d. 185

12. An item of inventory was purchased for 100. It can be sold for 125 and company can replace the item
with the new one at the cost of 105. Which of the following is the historical cost of that item?

a. 125
b.105
c.100
d.95

13. Under which method of inventory costing a pre-determined cost is assigned to all items of inventory?

a. Replacement cost method

b. Standard cost method
c. AVCO method
d. FIFO method
14. Which of the following inventory systems is the most appropriate for a business that deals in a
precious metal such as gold?

a. Periodic Inventory system

b. Perpetual Inventory system
c. Average method
d. Weighted average method

15. Which one of the following inventory costing methods is supposed to issue the most recently
purchased goods?

a. FIFO method
b. Average cost method
c. LIFO method
d. Moving average

AUDIT OF RECEIVABLES
PROBLEM NO. 1-1
Your audit disclosed that on December 31, 2006, the accounts
receivable control account of Alilem Company had a balance of P2,865,000.
An analysis of the accounts receivable account showed the following:

Accounts known to be worthless P 37,500

Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances
arising from sales return
(225,000)
Interest receivable on bonds 150,000
 Other trade accounts receivable – unassigned 750,000
Subscriptions receivable for common stock due in 30 days 825,000
Trade accounts receivable - assigned
(Finance company’s equity in assigned
accounts is P150,000) 375,000
Trade instalment receivable due 1 – 18 months,
including unearned finance
charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held
(no entries were made on
receipts of checks) 75,000
P2,865,000
Questions:

Based on the above and the result of your audit, determine the adjusted balance of following:
1. The trade accounts receivable as of December 31, 2006 is
a. P1,147,500 c. P1,485,000
b. P1,522,500 d. P1,447,500

2. The current trade and other receivables net as of December 31, 2006 is
a. P2,647,500 c. P2,272,500
b. P2,610,000 d. P1,822,500

3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2006?
a. P1,200,000 c. P525,000
b. P 375,000 d. P 0

PROBLEM NO. 1-2

Your audit of Banayoyo Corporation for the year ended December 31, 2006 revealed that the Accounts
Receivable account consists of the following:

Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonoured 240,000
Consignment shipments – at cost
The consignee sold goods costing P96,000 for P160,000. A 10%
commission was charged by the consignee and remitted the balance to

Banayoyo. The cash was received in January, 2007. 320,000

Total P4,688,000
The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is
estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due
from the consignee who is bonded. The company has not provided yet for the 2006 bad debt expense.

Questions:
Based on the above and the result of your audit, determine the adjusted balance of following:

1. Trade accounts receivable

a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000
2. Allowance for doubtful accounts
a. P204,000 c. P172,000
b. P216,000 d. P179,200
3. Doubtful accounts expense
a. P264,000 c. P252,000
b. P220,000 d. P227,200

PROBLEM NO. 1-3

Presented below are a series of unrelated situations. Answer the following questions relating to each of
the independent situations as requested.
Bantay Company’s unadjusted trial balance at December 31, 2006, included the following accounts:
Debit Credit
Accounts receivable P1,000,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales returns and allowances 700,000

1.Bantay Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad
debt expense for 2006.
a. P225,000 c. P214,500
b. P254,500 d. P 55,000

An analysis and aging of Burgos Corp. accounts receivable at December 31, 2006, disclosed the
following:
Amounts estimated to be uncollectible P 1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000
2.What is the net realizable value of Burgos’ receivables at December 31, 2006?
a. P15,700,000 c. P16,250,000
b. P17,500,000 d. P14,450,000

Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are
available for 2006.
Credit sales during 2006 P21,000,000
Allowance for doubtful accounts 1/1/06 170,000
Collection of accounts written off in prior years (Customer credit was
reestablished) 80,000
Customer accounts written off as uncollectible during 2006 300,000

3.What is the balance in allowance for doubtful accounts at December 31, 2006?
a. P630,000 c. P500,000
b. P420,000 d. P580,000

At the end of its first year of operations, December 31, 2006, Caoayan, Inc. reported the following
information:
Accounts receivable, net of allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2006 240,000
Bad debts expense for 2006 840,000

4. What should be the balance in accounts receivable at December 31, 2006, before subtracting
the allowance for doubtful accounts?
a. P10,100,000 c. P 9,740,000
b. P10,340,000 d. P10,580,000

5. The following accounts were taken from Cervantes Inc.’s balance sheet at December 31, 2006.
Debit Credit
 Accounts receivable P4,100,000
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported for 2006.
a. P123,000 c. P223,000
b. P 23,000 d. P225,000

PROBLEM NO. 1-4

The adjusted trial balance of Galimuyod Company as of December 31, 2005 shows the following:
Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
a. Cash sales of the company represents 10% of gross sales.
b. 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
c. It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2006.
d. Sales returns in 2006 amounted to P400,000. All returns were from charge sales.
e. During 2006, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P3,000.
f. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate
used on December 31, 2005.

Questions:
Based on the above and the result of your audit, answer the following:
1. The accounts receivable as of December 31, 2006 is
a. P3,000,000 c. P 333,333
b. P 300,000 d. P2,444,000
2. The allowance for doubtful accounts as of December 31, 2006 is
a. P 20,000 c. P180,000
b. P120,000 d. P146,640

3. The net realizable value of accounts receivable as of December 31, 2006 is

a. P 307,340 c. P2,874,000
b. P2,814,000 d. P2,291,360
4. The doubtful account expense for the year 2006 is
a. P181,000 c. P 21,000
b. P121,000 d. P147,640
PROBLEM NO. 1-5
In your audit of Lidlidda Plastic Products Co., you noted that the company’s balance sheet shows the
accounts receivable balance at December 31, 2005 as follows:
Accounts receivable P3,600,000
Allowance for doubtful accounts 72,000
P3,528,000

During 2006, transactions relating to the accounts were as follows:

a) Sales on account, P38,400,000.
b) Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000
were allowed for prompt payment.
c) Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
d) Bad accounts previously written off prior to 2005 amounting to P40,000 were recovered.
e) The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the
year.
f) Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000.
Collections of P1,200,000 were made on these receivables (not included in the collections previously
given) and applied as partial payment to the loan.

Questions:
Based on the above and the result of your audit, answer the following:
1. The accounts receivable as of December 31, 2006 is
a. P8,680,000 c. P4,240,000
b. P9,840,000 d. P8,640,000
2. The allowance for doubtful accounts as of December 31, 2006 is
a. P 8,000 c. P184,000
b. P136,000 d. P176,000
3. The net realizable value of accounts receivable as of December 31, 2006 is
a. P8,544,000 c. P8,504,000
b. P8,456,000 d. P4,104,000

AUDIT OF RECEIVABLES - answer

PROBLEM NO. 1-1 – Alilem Company

Answers: 1)B; 2)A; 3)B

Suggested Solution:

Question No. 1
Other trade accounts receivable – unassigned P 750,000
Trade accounts receivable - assigned 375,000
Trade installment receivable due 1 – 18 months, net of unearned finance
charges of P30,000 300,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held 75,000
Trade accounts receivable P1,522,500
Question No. 2
Trade accounts receivable (see no. 1) P1,522,500
Advance payments to creditors on purchase orders 150,000
Interest receivable on bonds 150,000
Subscriptions receivable, due in 30 days 825,000
Current trade and other receivables P2,647,500

Question No. 3
Advances to affiliated companies P375,000

Note: Advances to affiliated companies are normally presented under noncurrent assets.

PROBLEM NO. 1-2 – Banayoyo Corporation

Answers: 1)C; 2)B; 3)A

Suggested Solution:

Question No. 1
Trade receivables (current) P3,440,000
Past due trade accounts 640,000
Notes receivable dishonored 240,000
Consignment goods already sold (P160,000 x 90%) 144,000
Adjusted trade receivables P4,464,000

Question No. 2
Adjusted trade receivables P4,464,000
Less due from consignee 144,000
Basis of allowance for doubtful accounts 4,320,000
Bad debt rate 5%
Required allowance for doubtful accounts P 216,000

Question No. 3
Required allowance for doubtful accounts P216,000
Add write-off of uncollectible accounts 128,000
Total 344,000
Less allowance account before adjustment 80,000
Doubtful accounts expense P264,000

PROBLEM NO. 1- 3
Answers: 1)C; 2)A; 3)D; 4)A, 5)C
Question No. 4
Suggested Solution:
Bad debt expense for 2006 P840,000
Question No. 1
Customer
Sales accounts written off as uncollectible P15,000,000
during 2006 and allowances
Less sales returns (240,000)
700,000
Allowance
Net sales for doubtful accounts, 12/31/06 P600,000
14,300,000
Accounts receivable, net of allowance for doubtful
Multiply by bad debt rate 1 1/2%
Bad debt expense P 214,500
accounts P 9,500,000
Question No. 2for doubtful accounts, 12/31/06
Allowance 600,000
Accounts receivable, before deducting allowance for
Accounts receivable
doubtful accounts P17,500,000
P10,100,000
Amount estimated to be uncollectible (1,800,000)
Net realizable
Question No. 5 value P15,700,000
Accounts receivable P4,100,000
Question No. 3
Percentage 3%
Allowance for doubtful
Bad debt expense, accounts
before 1/1/06
adjustment 123,000 P170,000
Establishment of accounts written off inbalance)
Allowance for doubtful accounts (debit prior years 100,000 80,000
Customer accounts written off in 2006 (300,000)
Bad debt expense for 2006 P 223,000
Bad debt expense for 2006 (P21,000,000 X 3%) 630,000
Allowance for doubtful accounts 12/31/06 P580,000
PROBLEM NO. 1-4 - Galimuyod Company

Answers: 1)A; 2)C; 3)B; 4)A

Suggested Solution:

Question No. 1
Expected cash discounts P 6,000
Divide by percentage of cash discount 0.02
Portion of AR that will be granted cash discounts 300,000
Divide by percentage of total AR estimated to take
advantage of the discount 0.10
Accounts receivable, 12/31/06 P3,000,000

Question No. 2
Accounts receivable, 12/31/06 P3,000,000
Multiply by bad debt rate
[(P40,000/P1,000,000) x 1.5] 0.06
Allowance for doubtful accounts, 12/31/06 P 180,000

Question No. 3
Accounts receivable, 12/31/06 P3,000,000
Less: Allowance for doubtful accounts P180,000
Allowance for sales discounts 6,000 186,000
Net realizable value, 12/31/06 P2,814,000

Question No. 4
Allow. for doubtful accounts, 12/31/06 P180,000
Add accounts written off 44,000
Total 224,000
Less: Allow. for doubtful accounts, 12/31/05 P40,000
Bad debt recoveries 3,000 43,000
 Doubtful accounts expense for 2006 P181,000

PROBLEM NO. 1-5Lidlidda Plastic Products Co

Answers: 1)D; 2)B; 3)C; 4)A

2
AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PROBLEM NO. 2-1

Aliaga Corporation was incorporated on January 2, 2006. The following items relate to the Aliaga’s
property and equipment transactions:

Cost of land, which included an old apartment building P3,000,000

appraised at P300,000
Apartment building mortgage assumed, including related 80,000
interest due at the time of purchase 30,000
Deliquent property taxes assumed by the Aliaga 20,000
Payments to tenants to vacate the apartment building 40,000
 Cost of razing the apartment building 10,000
Proceeds from sale of salvaged materials 60,000
Architects fee for new building 40,000
Building permit for new construction 25,000
Fee for title search 20,000
Survey before construction of new building 100,000
Excavation before construction of new building 10,000,000
Payment to building contractor 15,000
Assessment by city for drainage project 50,000
Cost of grading and leveling 80,000
Temporary quarters for construction crew 50,000
Temporary building to house tools and materials
Cost of changes during construction to make new building 90,000
more energy efficient
Interest cost on specific borrowing incurred during 360,000
construction
Payment of medical bills of employees accidentally injured 18,000
while inspecting building construction 60,000
Cost of paving driveway and parking lot 12,000
Cost of installing lights in parking lot 30,000
Premium for insurance on building during construction
Cost of open house party to celebrate opening of new 50,000
building
Cost of windows broken by vandals distracted by the 12,000
celebration 12,000

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of Land
a. P2,980,000 c. P3,185,000
b. P3,270,000 d. P3,205,000
2. Cost of Building
a. P10,810,000 c. P10,875,000
b. P10,895,000 d. P11,110,000
3. Cost of Land Improvements
a. P12,000 c. P122,000
b. P72,000 d. P 0
4. Amount that should be expensed when incurred
a. P 80,000 c. P62,000
b. P110,000 d. P50,000

5. Total depreciable property and equipment

a. P11,182,000 c. P10,947,500
b. P10,967,000 d. P10,882,000
PROBLEM NO. 2-2
The following items relate to the acquisition of a new machine by Bongabon Corporation in 2006:

Invoice price of machinery P2,000,000 P2,000,000

Cash discount not taken 40,000 40,000
Freight on new machine 10,000 10,000
Cost of removing the old machine 12,000 12,000
Loss on disposal of the old machine 150,000 150,000
Gratuity paid to operator of the old machine who was
laid off 70,000 70,000
 Installation cost of new machine 60,000 60,000
Repair cost of new machine damaged in the process
of installation 8,000 8,000
Testing costs before machine was put into regular 15,000 15,000
operation
Salary of engineer for the duration of the trial run 40,000 40,000
Operating cost during first month of regular use 250,000 250,000
Cash allowance granted because the new machine
proved to be of inferior quality 100,000 100,000

Question:

How much should be recognized as cost of the new machine?

a. P1,985,000 c. P1,930,000
b. P1,993,000 d. P2,025,000

PROBLEM NO. 2-3

On January 1, 2005, Cabiao Corporation purchased a tract of land (site number 101) with a building for
P1,800,000. Additionally, Cabiao paid a real state broker’s commission of P108,000, legal fees of P18,000
and title guarantee insurance of P54,000. The closing statement indicated that the land value was
P1,500,000 and the building value was P300,000. Shortly after acquisition, the building was razed at a
cost of P225,000.

Cabiao entered into a P9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on March 1, 2005
for the construction of an office building on the land site 101. The building was completed and occupied
on September 30, 2006. Additional construction costs were incurred as follows:
Plans, specifications and blueprints P 36,000 P 36,000
Architect’s fees for design and supervision 285,000 285,000

The building is estimated to have a forty-year life from date of completion and will be depreciated using
the 150%-declining-balance method.

To finance the construction cost, Cabiao borrowed P9,000,000 on March 1, 2005. The loan is payable in
ten annual installments of P900,000 plus interest at the rate of 14%. Cabiao used part of the loan
proceeds for working capital requirements. Cabiao’s average amounts of accumulated building
construction expenditures were as follows:
For the period March 1 to December 31, 2005 P2,700,000 P2,700,000
For the period January 1 to September 31, 2006 6,900,000 6,900,000

Cabiao is using the allowed alternative treatment for borrowing cost.

Questions:
Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
a. P1,905,000 c. P2,205,000
b. P1,800,000 d. P2,151,000
2. Cost of office building
a. P10,581,000 c. P10,329,000
b. P10,360,500 d. P10,960,500
3. Depreciation of office building for 2006
a. P96,800 c. P102,800
b. P97,130 d. P 99,197
PROBLEM NO. 2-4
You noted during your audit of the Carranglan Company that the company carried out a number of
transactions involving the acquisition of several assets. All expenditures were recorded in the following
single asset account, identified as Property and equipment:

Property and equipment

Acquisition price of land and building P 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage
during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000

Property and equipment

Utilities paid since acquisition of building 20,800 P 1,828,480
Based on property tax assessments, which are believed to fairly represent the relative values involved,
the building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which
was taken and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and
land purchased and P10,000 related to those not purchased. The old machinery was sold at book value.

Questions:
Based on the above and the result of your audit, determine the adjusted balance of the following:
1. Land
a. P644,000 c. P326,000
b. P322,000 d. P424,000

2. Building
a. P 644,000 c. P1,044,000
b. P1,040,000 d. P 722,000
3. Machinery
a. P317,032 c. P323,400
b. P318,512 d. P321,832

PROBLEM NO. 2-5

In connection with your audit of Cuyapo Company’s financial statements for the year 2006, you noted the
following transactions affecting the property and equipment items of the company:

Jan. 1 Purchased real property for P5,026,000, which included a charge of P146,000 representing
property tax for 2006 that had been prepaid by the vendor; 20% of the purchase price is
deemed applicable to land and the balance to buildings. A mortgage of P3,000,000 was
assumed by Cuyapo on the purchase. Cash was paid for the balance.

Jan. 15 Previous owners had failed to take care of normal maintenance and repair requirements on the
buildings, necessitating current reconditioning at a cost of P236,800.

Feb. 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber
salvage. The company proceeded to construct a warehouse. The cost of such warehouse
was P540,800, which was P90,000 less than the average bids made on the construction by
 independent contractors. Upon completion of construction, city inspectors ordered
extensive modifications to the building as a result of failure on the part of the company to
comply with building safety code. Such modifications, which could have been avoided, cost
P76,800.

Mar. 1 The company exchanged its own stock with a fair value of P320,000 (par P24,000) for a patent
and a new equipment. The equipment has a fair value of P200,000.

Apr. 1 The new machinery for the new building arrived. In addition, a new franchise was acquired from
the manufacturer of the machinery. Payment was made by issuing bonds with a face value of P400,000
and by paying cash of P144,000. The value of the franchise is set at P160,000 while the machine’s fair
value is P360,000.

May 1 The company contracted for parking lots and waiting sheds at a cost P360,000 and P76,800,
respectively. The work was completed and paid for on June 1.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time, required
redecorating and repairs were completed at a cost of P60,000.

Questions:
Based on the above and the result of your audit, determine the cost of the following:
1. Land
a. P 940,000 c. P 976,000
b. P1,005,200 d. P1,052,800
2. Buildings
a. P4,645,600 c. P4,762,400
b. P5,005,600 d. P4,681,600
3. Machinery and equipment
a. P360,000 c. P576,615
b. P560,000 d. P659,692
4. Land improvements
a. P360,000 c. P436,800
b. P 76,800 d. P 0
5. Total property, plant and equipment
a. P6,764,400 c. P6,718,092
b. P6,731,200 d. P6,618,400

2
AUDIT OF PROPERTY, PLANT AND EQUIPMENT - answer

PROBLEM NO. 2-1Aliaga Corporation

Answers: 1)B; 2)A; 3)B; 4)A, 5)D

Suggested Solution:

PAS 16 par. 6 defines “Property, plant and equipment” as tangible items that:
i. are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
ii. are expected to be used during more than one period.

Par. 15 and 16 further state that an item of property, plant and equipment that qualifies for recognition of
an asset shall be measured at its cost. The cost of an item of PPE comprises:
a) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
c) the initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located, the obligation for which an entity incurs either when the item is acquired or as
a consequence of having used the item during a particular period for purposes other than to
produce inventories during that period.

Question No. 1
Cost of land P3,000,000
Apartment building mortgage assumed, including
related interest due at the time of purchase 80,000
Deliquent property taxes assumed by the Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of raising the apartment building 40,000

Proceeds from sale of salvaged materials (10,000)

Fee for title search 25,000
Survey before construction of new building 20,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Total cost of Land P3,270,000

Question No. 2
Architects fee for new building P60,000
Building permit for new construction 40,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred during
construction 360,000
Premium for insurance on building during construction 30,000
Total cost of Building P10,810,000

Question No. 3
Cost of paving driveway and parking lot P60,000
Cost of installing lights in parking lot 12,000
Total cost of Land Improvements P72,000

Question No. 4
Payment of medical bills of employees P18,000
Cost of open house party 50,000
Cost of windows broken by vandals 12,000
Total cost amount that should be expensed P80,000

Question No. 5
Building (see no. 2) P10,810,000
Land improvements (see no. 3) 72,000
Total depreciable PPE P10,882,000
PROBLEM NO. 2-2Bongabon Corporation

Answer: A

Suggested Solution: PROBLEM

NO. 2-
Invoice price of machinery P2,000,000 3Cabiao Corp
Cash discount not taken (40,000) Answers: 1)C;
Freight on new machine 10,000 2)B; 3)B
Installation cost of new machine 60,000
Testing costs 15,000
Salary of engineer for the duration of the trial run 40,000
Cash allowance (100,000)
Cost of the new machine P1,985,000

Suggested Solution:

Question No. 1
Acquisition cost P1,800,000
Real estate broker's commission 108,000
Legal fees 18,000
Title guarantee insurance 54,000 PROBLEM NO. 2-
Cost of razing the existing building 225,000 4Carranglan
Company
Total cost of land site 101 P2,205,000
Answers: 1)B; 2)C;
Question No. 2
3)A
Suggested Solution:
Fixed-price contract cost P 9,000,000
Questions No. 1 and 2 and blueprints
Plans, specifications 36,000
Architect's fees and design supervision 285,000
Capitalizable borrowing cost: Land Building
Mar. 1 to
Allocation ofDec. 31, 2005
acquisition price:
Land (P960,000x x14%
(P2,700,000 1/3)x 10/12) P315,000
P320,000
Jan. 1 to(960,000
Building Sept. 30,x2006
2/3) P 640,000
Option(P6,900,000 x 14%acquired:
paid on property x 9/12) 724,500 1,039,500
Total
Landcost(6,000
of office building
x 1/3) 2,000 P10,360,500
Building (6,000 x 2/3) 4,000
Question
Cost No. 3
of building remodelling 400,000
Depreciation expense [P10,360,500 x (1/40x1.5) x 3/12] P97,130
 Adjusted balances P322,000 P1,044,000

Question No. 3
Net purchase price of machinery (P318,400 x .98) P312,032
Freight on machinery purchased 5,000
Adjusted balance P317,032

PROBLEM NO. 2-5Cuyapo Company

Answers: 1)C; 2)A; 3)B; 4)C, 5)D

Notes:
Suggested Solution:
1) The
Question No. 1
Total contract price P5,026,000
Less property taxes for 2006 146,000
Adjusted cost of land and building 4,880,000
Percentage applicable to land 20%
Cost of Land P 976,000

Question No. 2
Cost allocated to building (P4,880,000 x 80%) P3,904,000
Reconditioning costs prior to use 236,800
Salvage proceeds from demolition of garages (36,000)
Construction cost of warehouse 540,800
Cost of Buildings P4,645,600
savings on construction of P90,000 should be ignored.
The modification costs of P76,800 and the redecorating and repair costs of P60,000 should be expensed.

Question No. 3
Fair value of equipment acquired on Mar. 1 P200,000
Fair value of machine acquired on Apr. 1 360,000
Cost of Machinery and equipment P560,000

Question No. 4
Parking lots P360,000
Waiting sheds 76,800
Cost of Land improvements P436,800

Question No. 5
Land P 976,000
Buildings 4,645,600
Machinery and equipment 560,000
Land improvements 436,800
Total cost of property, plant and equipment P6,618,400
4
AUDIT OF INVENTORIES

PROBLEM NO. 4-1

The Anda Company is on a calendar year basis. The following data were found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2005.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase order
set forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P170,000 had been included in the inventory
count, but no entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.

Further inspection of the client’s records revealed the following December 31, 2006 balances: Inventory,
P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, P5,050,000; Net
purchases, P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of following as of
December 31, 2006:
1. Inventory
a. P1,230,000 c. P1,550,000
b. P1,650,000 d. P1,480,000
2. Accounts payable
a. P710,000 c. P810,000
b. P540,000 d. P760,000
3. Net sales
 a. P4,550,000 c. P4,730,000
b. P4,650,000 d. P4,970,000
4. Net purchases
a. P2,370,000 c. P2,150,000
b. P2,420,000 d. P2,320,000
5. Net income
a. P220,000 c. P540,000
b. P290,000 d. P550,000
PROBLEM NO. 4-2
You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year
ended December 31, 2006. The company is engaged in the wholesale business and makes all sales at
25% over cost.

Date Reference Amount

Balance forwarded P7,800,000
12/27 SI No. 965 60,000
12/28 SI No. 966 225,000
12/28 SI No. 967 15,000
12/31 SI No. 969 69,000
12/31 SI No. 970 102,000

12/31 SI No. 971 24,000

12/31 Closing entry
(8,295,000)

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it
was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving
Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices
whose number is larger than No. 968. You also obtained the following additional information:

a. Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not received
until the following year. Cost was P27,000.
b. On the evening of December 31, there were two trucks in the company siding:
Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving
Report No. 1063. The freight was paid by the vendor.
Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for P150,000 per Sales Invoice No. 968.
c. Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966
terms FOB Destination, the next day.
d. Enroute to the client on December 31 was a truckload of goods, which was received on Receiving
Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by
the client. However, the freight was deducted from the purchase price of P800,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2006
a. P8,100,000 c. P7,875,000
b. P7,725,000 d. P8,025,000

2. Purchases for the year ended December 31, 2006

a. P4,500,000 c. P5,631,000
b. P5,727,000 d. P4,527,000
3. Accounts receivable as of December 31, 2006
a. P330,000 c. P525,000
b. P555,000 d. P180,000
4. Inventory as of December 31, 2006
a. P1,452,000 c. P1,200,000
b. P1,221,000 d. P1,296,000
5. Accounts payable as of December 31, 2006
a. P600,000 c. P 531,000
b. P627,000 d. P1,827,000

PROBLEM NO. 4-3

Balungao Company engaged you to examine its books and records for the fiscal year ended June 30,
2006. The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2006
but also the copy of company’s balance sheet and income statement as at said date. The following data
appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2005 P 500,000
Add Purchases 3,600,000
Total goods available for sale 4,100,000
Less Inventory, June 30, 2006 700,000
Cost of goods sold P3,400,000

The beginning and ending inventories of the year were ascertained thru physical count except that no
reconciling items were considered. Even though the books have been closed, your working paper trial
balance show all account with activity during the year. All purchases are FOB shipping point. The
company is on a periodic inventory basis.

In your examination of inventory cut-offs at the beginning and end of the year, you took note of the
following:

July 1, 2005

a. June invoices totaling to P130,000 were entered in the voucher register in June. The corresponding
goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received during
June.

June 30, 2006

a) Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and the
goods were received in July. The invoices, however, were date June.
b) June invoices totaling P74,000 were entered in the voucher register in June but the goods were not
received until July.

 Invoices totaling P108,000 (the corresponding goods for which were received in June) were entered
the voucher register, July.
 Sales on account in the total amount of P176,000 were made on June 30 and the goods delivered at
 that time. Book entries relating to the sales were made in June.

 QUESTIONS:

Based on the above and the result of your cut-off tests, answer the following:

  1. How much is the adjusted Inventory as of July 1, 2005?
a. P500,000 c. P576,000
b. P630,000 d. P370,000
2. How much is the adjusted Purchases for the fiscal year ended June 30, 2006?
a. P3,840,000 c. P3,894,000
b. P3,600,000 d. P3,914,000
3. How much is the adjusted Inventory as of June 30, 2006?
a. P784,000 c. P892,000
b. P500,000 d. P960,000
4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30, 2006?
a. P3,316,000 c. P3,510,000
b. P3,970,000 d. P3,564,000

 5. The necessary compound adjusting journal entry as of June 30, 2006 would include a net
adjustment to Retained Earnings of?

a. P130,000 c. P76,000
b. P184,000 d. P54,000

PROBLEM NO. 4-4

The following accounts were included in the unadjusted trial balance of Bani Company as of December
31, 2006:
Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500

During your audit, you noted that Bani held its cash books open after year-end. In addition, your audit
revealed the following:
 Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book.
The receipts of P180,050 represent cash sales and P147,250 represent collections from
customers, net of 5% cash discounts.
 Accounts payable of P186,200 was paid in January 2007. The payments, on which discounts of
P6,200 were taken, were included in the December 2006 check register.

 Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following

information has been found relating to certain inventory transactions.
o Goods valued at P137,500 are on consignment with a customer. These goods are not
included in the inventory figure.
o Goods costing P108,750 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.
 o Goods costing P318,750 were shipped on December 31, 2006, and were delivered to the
customer on January 3, 2007. The terms of the invoice were FOB shipping point. The
goods were included in the 2006 ending inventory even though the sale was recorded in
2006.

o A P91,000 shipment of goods to a customer on December 30, terms FOB destination are
not included in the year-end inventory. The goods cost P65,000 and were delivered to the
customer on January 3, 2007. The sale was properly recorded in 2007.
o The invoice for goods costing P87,500 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.
o Goods valued at P306,400 are on consignment from a vendor. These goods are not
included in the physical inventory.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2006:
1. Cash
a. P481,600 c. P334,300
b. P340,500 d. P346,700
2. Accounts receivable
a. P1,454,300 c. P1,127,000
b. P1,282,000 d. P1,274,250
3. Inventory
a. P3,017,500 c. P2,930,000
b. P3,040,000 d. P2,505,000
4. Accounts payable
a. P2,395,450 c. P2,286,500
b. P2,307,950 d. P2,301,750
5. Current ratio
a. P2.00 c. P1.84
b. P1.83 d. P2.01

PROBLEM NO. 4-5

The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The
inventory accounts at December 31, 2005, had the following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000

The following are some of the transactions that affected the inventory of the Bolinao Company during
2006.

Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of
20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price

Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in making payment.
The unpaid balance on the sale is P15,200. The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can be sold for P24,000 after
estimated refinishing costs of P6,800. The normal profit for this item is considered to be
 P3,200.

Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.

Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.

Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost
P38,400. A reduction of P8,000 off the list price was granted as a trade-in allowance. The
trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of
inventory is 25% of the sales price.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Assume the client is
usingperpetual inventory system)
1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 c. P141,120
b. P144,000 d. P196,000
2. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000 c. P17,200
b. P24,000 d. P14,400
3. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
4. The trade-in inventory on Aug. 30 is most likely to be valued at?
a. P8,000 c. P6,000
b. P4,800 d. P6,400

5. How much will be recorded as Sales on Aug. 30?

P51,200 c. P57,200
P56,000 d. P57,600
AUDIT OF INVENTORIES - answer

PROBLEM NO. 4-1Anda Company

Answers: 1) C 2) A 3) B 4) D 5) C

Suggested Solution:

Questions No. 1 to 5
Accounts Net Net
Inventory Payable Net Sales Purchases Income
Unadjusted
balances P1,100,000 P690,000 P5,050,000 P2,300,000 P510,000
(a) - (100,000) - (100,000) 100,000
(b) (50,000) (50,000) - (50,000) -
(c) 250,000 - (320,000) - (70,000)
(d) 70,000 - (80,000) - (10,000)
(e) (120,000) - - - (120,000)
(f) 100,000 - - - 100,000
(g) - 170,000 - 170,000 (170,000)
(h) 200,000 - - - 200,000
Adjusted
balances P1,550,000 P710,000 P4,650,000 P2,320,000 P540,000

PROBLEM NO. 4-2Asingan Corporation

Answers: 1)C; 2)D; 3)A; 4)D, 5) B

Suggested Solution:

Questions No. 1 to 5

Sales Purchases AR Inventory AP

Unadjusted
P600,00
balances P8,295,000 P4,500,000 P750,000 P900,000 0
AJE No. 1 (195,000) - (195,00) - -
27,00
AJE No. 2 - 27,000 - - 0
AJE No. 3 - - - 96,000 -
AJE No. 4 - - - 120,000 -
AJE No. 5 (225,000) - (225,00) - -
AJE No. 6 - - - 180,000 -
Adjusted P7,875,000 P4,527,000 P330,000 P1,296,000 P627,000
balances
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000) P195,000
Accounts receivable P195,000
 To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)

2) Purchases P27,000
Accounts payable P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory P96,000
Cost of sales P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25) P120,000
Cost of sales P120,000
To take up unshipped goods under SI No. 968
5) Sales P225,000
Accounts receivable P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) P180,000
Cost of sales P180,000
To take up goods under SI No. 966

PROBLEM NO. 4-3Balungao Company

Answers: 1)B; 2)A; 3)D; 4)C, 5)C

Suggested Solution:
Questions No. 1 to 3
Inventory Inventory
7/1/05 Purchases 6/30/06
Unadjusted balances P500,000 P3,600,000 P700,000
Add (deduct) adj.:
Item a 130,000 - -
Item b - (54,000) -
Item c - 186,000 186,000
Item d - - 74,000
Item e - -
Item f - 108,000 -
Net adjustments 130,000 240,000 260,000
Adjusted balances P630,000 P3,840,000 P960,000

Question No. 4
Inventory, July 1, 2005 P 630,000
Add Purchases 3,840,000
Total goods available for sale 4,470,000
Less Inventory, June 30, 2006 960,000
Cost of goods sold P3,510,000

Question No. 5
Compound adjusting entry:
Inventory, 7/1/05 P130,000
Purchases 240,000
Inventory, 6/30/06 260,000
Retained earnings (P130,000 - P54,000) P76,000
Vouchers payable (P186,000 + P108,000) 294,000
Cost of sales 260,000

PROBLEM NO. 4-4

Answers: 1)C; 2)B; 3)A; 4)B, 5) C

Suggested Solution:

Questions No. 1 to 4

Accounts Accounts

Cash Receivable Inventory Payable

Unadjusted balances P481,600 P1,127,000 P3,025,000 P2,100,500

Add (deduct):

AJE No. 1 (327,300) 155,000 - -

AJE No. 2 180,000 - - 186,200

AJE No. 3.a - - 137,500 -

AJE No. 3.b - - 108,750 108,750

AJE No. 3.c - - (318,750) -

AJE No. 3.d - - 65,000 -

AJE No. 3.e - - - (87,500)

Adjusted balances P334,300 P1,282,000 P3,017,500 P2,307,950

Adjusting entries:
Accounts receivable
1) (P147,250/.95) P155,000
Sales 180,050
Cash P327,300
Sales discount (P147,250/.95
x .05) 7,750
2) Cash P180,000
Purchase discount 6,200
Accounts payable P186,200
3.a) Inventory P137,500
Cost of sales P137,500
3.b) Inventory P108,750
Accounts payable P108,750
3.c) Cost of sales P318,750
Inventory P318,750

3.d) Inventory P 65,000

Cost of sales P 65,000
 3.e) Accounts payable P 87,500
Cost of sales P 87,500
3.f) No adjusting entry

Question No. 5
Current assets
Cash P 334,300
Accounts receivable 1,282,000
Inventory 3,017,500 P4,633,800
Divide by current liabilities
Accounts payable 2,307,950
Accrued expenses 215,500 2,523,450
Current ratio 1.84

PROBLEM NO. 4-5

Answers: 1)C; 2)A; 3)D; 4)B, 5)B

Suggested Solution:
Question No. 1
Amount to be debited to Raw Materials Inventory
(P200,000 x .8 x .9 x .98) P141,120

Question No. 2
Estimated selling price P24,000
Less refinishing costs 6,800
Net realizable value 17,200
Less normal profit 3,200
Valuation of repossessed inventory P14,000
Repossessed inventory is valued at fair value or best possible approximation of fair value. Since fair
value of the item is not given, the item was valued at net realizable value less the normal profit.
Incidentally, this is the valuation of trade-in inventory.

Question No. 3
Journal entries on April 3, 2006:
Cash (P24,000 x 20%) P 4,800
Accounts receivable (P24,000 – P4,800) 19,200
Sales – Repossessed inventory P24,000
Cost of Repossessed Goods Sold (P14,000+P6,400) P20,400
Repossessed Inventory P20,400

Question No. 4
Estimated selling price (net realizable value) P6,400
Less normal profit (P6,400 x 25%) 1,600
Valuation of trade-in inventory P4,800

Question No. 5
 Accounts receivable (P59,200 - P8,000) P51,200
Trade-in inventory (see no. 4) 4,800
Amount to be recorded as sales P56,000

3
AUDIT OF INVESTMENTS
PROBLEM NO. 3-1
The following transactions of the Angat Company were completed during the year 2006:

Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P4,500.
These shares were classified as trading securities.

Feb. 1 Purchased 20,000 shares of Malolos Company common stock at P125 per share plus brokerage
fees of P19,000. Angat classifies this stock as and available-for-sale security.

Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P35,000.
In addition, the company paid brokerage fees of P18,000. Angat classified these bonds as a
trading security.

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1 Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2006, are as follows:

Bulacan Auto Co. P45 per share

Malolos Company P130 per share
RP Treasury 7% bonds 102

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006

a. P15,000 gain c. P2,000 loss

b. P 2,500 gain d. P7,500 loss
2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2006
a. P18,150 loss c. P 2,000 gain
b. P18,150 gain d. P21,000 gain

3. What amount of unrealized gain should be shown as component of income in 2006?

 a. P92,500 c. P74,500
b. P97,000 d. P80,000

4. What amount of unrealized gain should be shown as component of

equity as of December 31, 2006?
a. P68,850 c. P66,000
b. P85,000 d. P 0

PROBLEM NO. 3-2

You were engaged by Balagtas Company to audit its financial statements for the year 2006. During the
course of your audit, you noted that the following trading securities were properly reported as current
assets at December 31, 2005:

Cost Market
France Corporation, 5,000 shares,
convertible preferred shares P 450,000 P 487,500
Ces, Inc., 30,000 shares of common stock 675,000 742,500
Coo Co., 10,000 shares of common stock 618,750 450,000
P1,743,750 P1,680,000

The following sale and conversion transactions transpired during 2006:

Mar. 1 Sold 12,500 shares of Ces for P33.75 per share.

April 1 Sold 2,500 shares of Coo for P45 per share.

Sept. 21 Converted 2,500 shares of France’s preferred stock into

7,500 shares of France’s common stock, when the market price was P78.75 per share
for the preferred stock and P47.25 per share for the common stock.

The following 2006 dividend information pertains to stocks owned by Balagtas:

Jan. 2 Coo issued a 10% stock dividend when the market price of Coo’s common stock was P49.50
per share.

March 31 France paid dividends of P2.50 per share on its preferred and Sept. 30 stock, to
stockholders of record on March 15 and September 15, respectively. France did not paydividends on
its common stock during 2006.

July 1Ces paid a P2.25 per share dividend on its commonstock.

Market prices per share of the securities were as follows:

12/31/2006 12/31/2005
France Corp., preferred 92.25 97.50
France Corp., common 42.75 38.25
Ces, Inc., common 22.50 24.75
Coo Co., common 40.50 45.00

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost
would not be considered permanent.

QUESTIONS:
Based on the above and the result of your audit, you are to provide the answers to the following:
1. How much is the gain on sale of 12,500 Ces shares?
a. P112,500 c. P140,625
b. P281,250 d. P 0
2. How much is the gain or loss on sale of 2,500 Coo shares?

a. P28,125 gain c. P28,125 loss

b. P10,227 gain d. P 0
3. How much is the gain or loss on conversion of 2,500 France preferred
stock into 15,000 common stock?
a. P 28,125 loss c. P46,875 loss
b. P129,375 gain d. P 0
4. How much is the total dividend income for the year 2006?
a. P 64,375 c. P 51,875
b. P101,375 d. P364,375
5. How much should be reported as unrealized gain on trading securities in the company’s income
statement for the year 2006?
a. P 4,500 c. P59,250
b. P67,773 d. P 0

PROBLEM NO. 3-3

You were able to obtain the following ledger details of Trading Securities in connection with your audit of
the Bocaue Corporation for the year ended December 31, 2006:

Particulars Date Ref. DR CR

Purchase of GOOD Co. – 1-14 CV P 960,000
4,000 shares
Purchase of LUCK Co. –
4,800 shares 2-20 CV 1,200,000
Sale of LUCK Co. – 1,600 shares 3-01 CR 360,000
Receipt of GOOD Stock Dividend
– Offsetting Credit to retained
earnings 5-31 JV 88,000
Sale of GOOD Stocks –
3,200 shares 8-15 CR 784,000
Sale of GOOD Stocks –
800 shares 10-1 CR 184,000

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:
Kind Declared Record Payment Rate
Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share

At December 31, 2006, GOOD and LUCK shares were selling at P210 and P240 per share, respectively.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2006
 a. P360,000 gain c. P40,000 loss
b. P200,000 loss d. P40,000 gain
2. Gain on sale of 3,200 GOOD shares on August 15, 2006
a. P 48,000 c. P16,000
b. P144,000 d. P 0
3. Gain or loss on sale of 800 GOOD shares on October 1, 2006
a. P 8,000 gain c. P 8,000 loss
b. P24,000 loss d. P24,000 gain
4. Dividend income for the year 2006
a. P132,000 c. P212,000
b. P300,000 d. P 0
5. Carrying value of Trading Securities as of December 31, 2006
a. P768,000 c. P880,000
b. P852,000 d. P768,000

PROBLEM NO. 3-4

In connection with your audit of the financial statements of the Guiguinto Company for the year 2006, the
following Available for Sale Securities and Dividend Income accounts were presented to you:
Available for Sale Securities
Date Description Ref. Debit Credit
01/08 Purchased 20,000 shares
common, par value P50,
BUSTOS Co. VR-69 780,000
03/3010,000 shares BUSTOS Co.
received as stock dividend CJ-30 500,000
04/03Sold 10,000 shares @ P25 CR-44 250,000
12/02Sold 4,000 shares @ P60 CR-65 240,000

Dividend Income
Date Description Ref. Debit Credit
03/30 Stock dividend SJ-8 500,000
08/30 BUSTOS Company common CR-52 100,000

The following information was obtained during your examination:

1. From independent sources, you determine the following dividend information:

Type of Date Date of Date of
Dividend Declared Record Payment Rate
Stock 02/14/2006 02/28/2006 03/30/2006 50%
Cash 08/01/2006 08/15/2006 08/30/2006 P5/share
Cash 12/01/2006 12/15/2006 01/02/2007 20%

2. Closing market quotation as at December 31, 2006:

Bid Asked
BUSTOS Company common 13-3/4 16-1/2

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the gain or loss on the April 3, 2006 sale?
a. P10,000 loss c. P140,000 loss
b. P10,000 gain d. P0
2. How much is the gain on the December 2, 2006 sale?

a. P136,000 c. P84,000

b. P 96,000 d. P 0
3. How much is the total dividend income for the year 2006?
a. P600,000 c. P100,000
b. P800,000 d. P300,000
4. How much is the adjusted balance of Available for Sale Securities as of
December 31, 2006?
a. P290,000 c. P220,000
b. P264,000 d. P416,000
5. How much is the Unrealized Loss on AFS as of December 31, 2006?
a. P196,000 c. P152,000
b. P 70,000 d. P 0

PROBLEM NO. 3-5

Your audit of the Baliuag Corporation disclosed that the company owned the following securities on
December 31, 2005:

Trading securities:
Security Shares Cost Market
Sputnik, Inc. 4,800 P 72,000 P92,000
Explorer, Inc. 8,000 216,000 144,000
10% , P100,000 face value ,
Vanguard bonds (interest payable
semiannually on Jan. 1 and Jul. 1) 79,200 81,720
Total P367,200 P317,720

Available-for-sale securities:
Security Shares Cost Market
Score Products 16,000 P688,000 P 720,000
Tiros, Inc. 120,000 3,120,000 2,920,000
Midas, Inc. 40,000 480,000 640,000
Total P4,288,000 P4,280,000

Held to maturity:
Cost Book value
12%, 1,000,000 face value, Discoverer bonds
(interest payable annually every Dec. 31) P950,000 P963,000
During 2006, the following transactions occurred:
Jan. 1 Receive interest on the Vanguard bonds.
Mar. 1 Sold 4,000 shares of Explorer Inc. stock for P76,000.
May 15 Sold 1,600 shares of Midas, Inc. for P15 per share.
July 1 Received interest on the Vanguard bonds.
Dec. 31 Received interest on the Discoverer bonds.
31 Transferred the Discoverer bonds to the available-for-sale
portfolio. The bonds were selling at 101 on this date. The
bonds were purchased on January 2, 2005. The discount was
amortized using the effective interest method.
The market values of the stocks and bonds on December 31, 2006, are as follows:

Sputnik, Inc. P22 per share

Explorer, Inc. P15 per share
10% Vanguard bonds P75,600
Score Products P42 per share
Tiros, Inc. P28 per share
Midas, Inc. P18 per share

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2006
a. P4,000 loss c. P32,000 loss
b. P4,000 gain d. P32,000 gain
2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15, 2006

a. P4,800 loss c. P1,600 loss

b. P4,800 gain d. P1,600 gain
3. Total interest income for the year 2006?
a. P130,000 c. P144,820
b. P125,560 d. P143,000
4. The amount that should be reported as unrealized gain in the statement of changes in equity regarding
transfer of Discoverer bonds
to AFS?
a. P47,000 c. P61,820
b. P32,180 d. P 0

5. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2006 should
be
Trading securities Available-for-sale securities
a. P241,200 P5,733,200
b. P301,200 P4,723,200
c. P241,200 P5,762,000
d. P301,200 P5,720,800
3
AUDIT OF INVESTMENTS - answer
PROBLEM NO. 3-1Angat Company

Answers: 1)B; 2)B; 3)A; 4)A

Suggested Solution: * PAS 39

par. 43
Question No. 1 states that
Sales proceeds (P500,000 x 1.03) P515,000 when a
Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500 financial
Gain on sale of P500,000 RP Treasury Bonds P 2,500 asset or
financial
liability is recognized initially, an entity shall measure it at its fair value plus, in the case of a financial
asset or financial liability not at fair value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of financial asset or financial liability. Therefore, the transaction
costs (e.g. brokerage fees) should be expensed for trading securities.

Question No. 2

Sales proceeds (3,000 shares x P132) P396,000

Less cost of shares sold

{[(20,000 x P125) + P19,000] x 3/20} 377,850

Gain on sale of 3,000 Malolos shares P 18,150

Question No. 3

Cost of Bulacan Auto Co. shares (20,000 x P40) P 800,000

Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000

Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,500)

Trading securities, 12/31/06 before mark-to-market 2,337,500

Fair value of trading securities, 12/31/06 (see below) 2,430,000

Unrealized gain on TS to be reported on the IS P 92,500

Bulacan Auto Co. (20,000 x P45) P 900,000

RP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,200

Fair value of trading securities, 12/31/06 P2,430,000

Question No. 4
Cost of Malolos Company shares
[(20,000 x P125) + P19,000] P2,519,000
Cost of 3,000 shares sold (see no. 2) (377,850)
AFS, 12/31/06 before mark-to-market 2,141,150
Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130] 2,210,000
 Unrealized gain-AFS, 12/31/06 to be reported under SHE P 68,850

PROBLEM NO. 3-2Balagtas Company

Answers: 1)A; 2)B; 3)C; 4)A; 5)B

Suggested Solution:

Question No. 1

Sales proceeds (12,500 shares x P33.75) P421,875

Less CV of Ces shares sold (12.5/30 x P742,500) 309,375

Gain on sale of 12,500 Ces shares P112,500

Question No. 2
Sales proceeds (2,500 shares x P45) P112,500
Less CV of Coo shares sold (P450,000 x 2,500/11,000*) 102,273
Gain on sale of 2,500 Coo shares P 10,227
* total number of shares after 10% stock dividends (10,000 x 1.1)

Question No. 3
Fair value of preferred stock (2,500 shares x P78.75) P196,875
Less CV of shares converted (P487,500 x 2.5/5) 243,750
Loss on conversion of 2,500 France preferred shares P 46,875

Question No. 4
From France (5,000 shares x P2.50 x 2) P25,000
From Ces [(30,000 - 12,500) x P2.25) 39,375
Total dividend income in 2006 P64,375

Question No. 5
Trading securities, 1/1/06 P1,680,000
CV of Ces shares sold (see no. 1) (309,375)
CV of Coo shares sold (see no. 2) (102,273)
CV of France preferred shares converted (see no. 3) (243,750)
Cost of 7,500 France common shares received (see no. 3) 196,875
Trading securities, 12/31/06 before mark-to-market 1,221,477
Fair value of trading securities, 12/31/06 (see below) 1,289,250
Unrealized gain on trading securities P 67,773

France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625

France Corp. – Common (7,500 x P42.75) 320,625
Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750
Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250
Fair value of trading securities, 12/31/06 P1,289,250

PROBLEM NO. 3-3Bocaue Corporation

Answers: 1)C; 2)A; 3)D; 4)A, 5) B

Suggested Solution:
Question No. 1
Sales proceeds P360,000
Less CV of shares sold (P1,200,000 x 1,600/4,800) 400,000
Loss on sale of 1,600 Luck shares on 3/1/06 P 40,000

Question No. 2
Total proceeds P784,000
Less dividends sold (3,200 shares x P30) 96,000
Sales proceeds 688,000
Less CV of investment sold
(P880,000* x 3,200/4,400**) 640,000
Gain on sale of 3,200 Good shares on 9/15/06 P 48,000

Computation of adjusted cost of Good Co. shares

Total cash paid P960,000

Less purchased dividend (4,000 x P20) 80,000

Adjusted cost P880,000 *
**After 10% stock dividend

Question No. 3
Sales proceeds P184,000
Less CV of investment sold (P880,000 x 800/4,400) 160,000
Gain on sale of 800 Good shares on 10/1/06 P 24,000

Question No. 4
Dividend income - Declared Aug. 1 (4,400 shares x P30) P132,000

Question No. 5

Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 P 84,000

Luck Co. (4,800 - 1,600) = 3,200 x P240 768,000
Carrying value of trading securities, 12/31/06 P852,000

PROBLEM NO. 3-4Guiguinto Company

Answers: 1)A; 2)B; 3)D; 4)C, 5)A

Question No. 1
Sales proceeds (10,000 shares x P25) P250,000
Less CV of investment sold (P780,000 x 10/30*) 260,000
Loss on sale of AFS on 4/3/06 P 10,000
*After 50% stock dividend

Question No. 2

Total proceeds (4,000 shares x P60) P240,000

Less dividends sold (4,000 shares x P50 x 20%) 40,000
Net sales proceeds 200,000
Less CV of investment sold (P780,000 x 4/30) 104,000
Gain on sale of AFS on 12/2/06 P 96,000
Question No. 3
Cash dividends declared, 8/1/2006 P100,000
(20,000 shares x P5)
Cash dividends declared, 12/1/2006 200,000
(20,000 shares x P50 x 20%)
Total dividend income P300,000

Question No. 4
Shares purchased, 1/08 20,000
Shares received as stock dividend 10,000
Sold, 4/3 (10,000)
Sold, 12/2 Balance (4,000)
12/31/06 16,000
Multiply by market value/share, 12/31/06 13.75
Carrying value of AFS, 12/31/06 P220,000
Note: Application guidance par. 72 of PAS 39 states that the appropriate market price for an asset
held or liability to be issued is usually the current bid price and, for an asset to be acquired or
liability held, the asking price.

Question No. 5
Acquisition cost P780,000
CV of 10,000 shares sold, 4/3 (see no. 1) (260,000)
CV of 4,000 shares sold, 12/2 (see no. 2) (104,000)
AFS, 12/31/06 before mark-to-market 416,000
Fair value of AFS, 12/31/06 220,000
Unrealized loss on AFS, 12/31/06 P196,000

PROBLEM NO. 3-5Baliuag Corporation

Answers: 1)B; 2)B; 3)C; 4)B, 5)A

Suggested Solution:

Question No. 1

Sales proceeds P76,000

Less CV of shares sold (P144,000 x 4/8) 72,000

Loss on sale of 4,000 Explorer, Inc. shares P 4,000

Question No. 2

Sales proceeds (1,600 shares x P15) P24,000

Unrealized gain on the shares sold(P160,000 x
1.6/40) 6,400

Total 30,400

Less CV of shares sold (P640,000 x 1.6/40) 25,600

Realized gain on sale of 1,600 Midas, Inc.
shares P 4,800

Alternative computation:
 Sales proceeds (1,600 shares x P15) P24,000

Cost of shares sold (P480,000 x 1.6/40) 19,200

Realized gain on sale of 1,600 Midas, Inc.
shares P 4,800

Question No. 3

Vanguard bonds (P100,000 x 10%) P 10,000

Discoverer bonds (P963,000 x 14%*) 134,820

Total interest income for 2006 P144,820

*Computation of effective interest rate:

Carrying value, 12/31/05 P963,000

Less carrying value, 1/2/05 (Cost) 950,000

Discount amortization for 2005 13,000

Add nominal interest (P1,000,000 x 12%) 120,000

Effective interest 133,000

Divide by carrying value, 1/2/05 950,000

Effective interest rate 14%

Question No. 4
P
Carrying value, 12/31/05 963,000
Add discount amortization in 2006:

Effective interest (P963,000 x 14%) P134,820

Nominal interest (P1,000,000 x 12%) (120,000) 14, 820
Carrying value, 12/31/06 977,820
Fair value of Discoverer bonds on
12/31/06 (P1,000,000 x 1.01) 1,010,000
Unrealized gain on transfer of securities
to be reported under SHE P 32,180

Question No. 5
Trading securities
Sputnik, Inc. (4,800 x P22) P105,600
Explorer, Inc. [(8,000 - 4,000) x P15] 60,000
10% , P100,000 face value , Vanguard bonds 75,600
Total market value P241,200
Available-for-sale securities
Score Products (16,000 x P42) P 672,000
Tiros, Inc. (120,000 x P28) 3,360,000
Midas, Inc. [(40,000 - 1,600) x P18] 691,200
Discoverer bonds (P1,000,000 x 1.01) 1,010,000
Total market value P5,733,200