ACCOUNTING 502 7.

Recognizing a loan received as revenue instead of a liability has a positive effect on the
QUIZ 1 – MIDTERMS reported financial statements for all of the following except:
A. It understates liabilities C. It overstates revenues
B. It overstates net income D. It overstates assets
SET A
8. If the objective of a test of detail of transaction is to detect overstatement of sales, the
(for exclusive use by the School of Accountancy, Saint Louis University, 2600 Baguio City, Philippines)
auditor’s direction of testing should be from:
A. Cash receipts journal to sales journal
B. Sales journal to cash receipt journal
C. Source documents to accounting records
Multiple Choice D. Accounting records to source documents
Instructions: Write the letter of your answer in the DATE COLUMN, and follow the numbering,
of your worksheet. Erasures, superimpositions, or any form of alterations will invalidate your 9. In auditing inventories, a major objective relates to the existence assertion. Of the following
answer. (2 points each) audit procedures relating to inventories, which does not support the existence assertion?
A. The auditor reviews the client's inventory-taking instructions for such matters as proper
1. While observing a client’s annual physical inventory, an auditor recorded test counts for arrangement of goods, separation of consigned goods, and limits on movements of goods
several items and noticed that certain test counts were higher than the recorded quantities during inventory.
in the client’s perpetual records. The situation could be the result of the client’s failure to B. The auditor observes the client's inventory and performs test counts as appropriate.
record C. The auditor confirms inventories not on the premises.
A. Purchase discounts C. Purchase returns D. The auditor performs a lower of cost or market test for major categories of inventory.
B. Sales D. Sales returns
10. Which of the following items should not be included in a physical inventory?
2. An auditor most likely would analyze inventory turn-over rates to obtain evidence A. Materials in transit from vendors, F.O.B. shipping point.
concerning management assertion about B. Goods in a private warehouse.
A. Rights and obligation C. Completeness C. Goods received for repairs under warranty.
B. Existence D. Valuation D. Consignment to an agent.

3. The auditor is most likely to learn of slow-moving inventory through: 11. If there is evidence that an impairment loss on a loan receivable has been incurred, the loss
A. Inquiry of sales personnel is equal to the
B. Inquiry of the warehouse personnel A. Excess of the carrying amount of the loan receivable over the present value of the cash
C. Observation of the physical count of inventories flows related to the loan.
D. Review of the perpetual inventory records B. Excess of the present value of cash flows related to the loan over the carrying amount
of the loan receivable
4. Cut-off tests designed to detect credit sales made before the end of the year that have been C. Excess of the carrying amount of the loan over the principal amount of the loan
recorded in the subsequent year provide assurance about management’s assertion of D. Excess of the principal amount of the loan over its carrying amount.
A. Existence C. Completeness
B. Rights and Obligations D. Valuation 12. ABC Bank loaned an amount on January 1, 2016. The carrying amount of the loan on initial
recognition exceeded the proceeds received by the debtor. Which of the following situations
5. Purchase cutoff procedures should be designed to test whether or not all inventory could have caused this?
A. Purchased and received before the year-end was recorded. A. The direct origination costs incurred were less than the origination fees charged.
B. Was carried at the lower of cost or market on the year-end balance sheet. B. The indirect origination costs incurred, which were less than the loan origination fees
C. Was paid for by the company on the year-end balance sheet. charged, were more than the direct origination costs incurred.
D. Owned by the company is in the possession of the company. C. The origination fees charged were less than the direct origination costs incurred.
D. The origination fees charged were more than the indirect origination costs incurred.
6. Which of the following manipulations would understate receivables on the financial E. The indirect origination costs incurred were more than the direct origination costs
statements? incurred
A. Understatement of cash sales
B. Closing the sales journal prior to yearend 13. Purchase cutoff procedures should be designed to test that merchandise is included in the
C. Closing the cash receipts journal prior to yearend inventory of the client company, if the company:
D. Underestimating the allowance for doubtful accounts A. Has paid for the merchandise
ACCOUNTING 502 – MIDTERMS QUIZ 1 April 3, 2018

B. Has physical possession of the merchandise A count of all inventories within the premises was made in the morning of December 31, 2017
C. Holds legal title to the merchandise prior to any shipment made during the day. The total cost of the count was recorded as
D. Holds the shipping documents for the merchandise issued in the company’s name inventories as of December 31, 2017. The goods shipped to consignees are still unsold on
December 31.
14. An inventory turnover analysis is useful to the auditor because it may detect:
A. Inadequacies in inventory pricing
The unadjusted ledger balances show the following:
B. Methods of avoiding cyclical holding cost
C. The optimum automatic reorder points
D. The existence of obsolete merchandise Accounts receivables P376,500
Inventories 525,000
15. After being held for 30 days, a 120-day 12% interest-bearing note receivable was discounted Sales 1,520,000
at a bank at 15%. The amount received from the bank is equal to Cost of sales 942,000
A. Maturity value at 15% less discount at 12% Determine the adjusted balances of the following:
B. Maturity value at 12% less discount at 15%
C. Maturity value at 12% less discount at 12% A B C D
D. Maturity value at 15% less discount at 15% 16. Accounts receivable 350,620 329,620 361,120 389,320
17. Inventories 506,800 520,440 547,440 549,500
18. Sales 1,522,320 1,504,620 1,494,120 1,551,500
Use the following information for items #16 to #19 19. Cost of sales 946,560 928,360 917,500 973,560
As part of your audit of inventories of AA Merchandising, you performed a cut-off test of sales.
Results of the cut-off test revealed the following: Use the following information for items #20 to #22
You were assigned to test the reasonableness of the inventory account balance as reported by
your client, BB Corp. The following information is made available by BB Corp.’s accountant:
Recorded as Sales in December 2017
Cost Retail
Selling price Cost Terms Shipment Received by Beginning inventory P598,400 P1,500,000
Date customers Purchases 3,048,400 5,500,000
P18,000 P16,500 FOB shipping point 12/26/2017 12/29/2016 Freight In 80,000
12,500 10,200 FOB destination 12/26/2017 12/29/2016 Purchase returns 140,000 180,000
8,680 7,240 FOB destination 12/28/2017 01/02/2017 Mark-ups 600,000
14,200 12,500 Shipped to consignee 12/29/2017 01/02/2017 Mark-up cancellations 100,000
9,000 7,500 FOB shipping point 12/30/2017 01/02/2017 Mark-downs 1,300,000
10,000 7,750 FOB destination 12/31/2017 01/03/2017 Mark-down cancellations 385,000
7,800 6,100 FOB shipping point 12/31/2017 01/02/2017 Sales 4,470,000
14,000 12,000 Shipped to consignee 12/31/2017 01/02/2017 Sales returns 150,000
Sales discounts 200,000
Employee discount 400,000
Recorded Sales in January 2018
Ending inventory as a result of the physical count conducted on December 31, was at P649,600.
Selling price Cost Terms Shipment Received by
Date customers Requirements:
P21,000 P18,200 FOB shipping point 12/31/2017 01/03/2017 What is the amount of estimated ending inventory shortage, if any, as a result of your test of
10,500 8,800 FOB destination 12/31/2017 01/03/2017 reasonableness under the following assumed cost formula? (round off cost percentage to whole
4,500 3,200 FOB destination 01/02/2018 01/03/2017 numbers)
6,500 5,000 FOB shipping point 01/02/2018 01/05/2017

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ACCOUNTING 502 – MIDTERMS QUIZ 1 April 3, 2018

20. Conservative approach

A. none B. P 176,050 C.P327,700 D. P479,350 Sales for eleven months ended May 31, 2017 P1,344,000
Sales for the fiscal year ended June 30, 2017 1,536,000
21. Average approach Purchases for eleven months ended May 31, 2017
A. none B. P176,050 C. P294,000 D. P327,700 (before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2017 1,280,000
22. FIFO retail approach Inventory, July 1, 2016 140,000
A. P176,050 B. P294,000 C. P378,250 D. P479,350 Physical inventory, May 31, 2017 220,000

Use the following information for items #23 to #26:
ABC Company had the following receivable financing transactions during the year:
 On May 1, 2017, ABC Corp. assigned P800,000 of its outstanding accounts receivable to
BPI in consideration of a P500,000, 24% loan. BPI charged the company 2% of the accounts
assigned as service charge. By the end of May, ABC Corp. collected P200,000 cash from the
assigned accounts net of a P5,000 sales discount. By the end of June, ABC Corp. collected
another P150,000 from the assigned accounts after P4,000 sales discount. The company
accepted merchandising originally invoiced at P30,000 as sales returns and wrote-off
P20,000 of the assigned accounts as worthless. It was agreed between parties that monthly
collections shall be remitted to the bank as partial payments of the loan and interest.
 On July 1, 2017, ABC Corp. accepted from a customer a 6-month P600,000, 12% notes
receivable for the sale of merchandise. On October 31, 2017, ABC discounted the note to
BPI at a discount rate of 10%. The discounting was done on a without-recourse basis, thus
transferring all significant risks and rewards associated to the receivables to BPI.
23. How much should be reported as gain/loss in the income statement on the assignment of
receivables on May 1?
A. P16,000 B. P100,000 C.P80,000 D. none
Your audit disclosed the following additional information.
I. Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
II. Deposit of P4,000 made with vendor and charged to purchases in April 2017. Product
was shipped in July 26.
III. A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its cost of P16,000.
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the application of
gross profit ratio. Based on the above and the result of your audit, you are to provide the answers
to the following:
27. The gross profit ratio for eleven months ended May 31, 2017 is
A. 20% B. 35% C. 30% D. 25%
28. The cost of goods sold for the year ended June, 2017 using the gross profit ratio method is
A. P1,140,000 B. P1,152,000 C. P1,156,000 D. P1,168,000

24. What is the carrying value of the accounts receivable – assigned as of June 30? 29. The cost of goods sold during the month of June, 2017 using the gross profit ratio method
A. P391,000 B. P400,000 C. P450,000 D. none is
B. P132,000 B. P144,000 C. P148,000 D. P160,000
25. What is the carrying value of the loans payable related to the accounts receivable-assigned
as of June 30? 30. The June 30, 2017 inventory using the gross profit method is
A. P150,000 B. P166,200 C. P310,000 D. none A. P264,000 B. P340,000 C. P268,000 D. P260,000

26. How much should be reported as gain/loss in the income statement on the discounting of
the note receivable on July 1?
B. P10,600 B. P1,400 C. P24,000 D. none

Use the following information for items #27 to #30:

In conducting your audit of CC Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2017, you determined that its internal control
system was good. Accordingly, you observed the physical inventory at an interim date, May 31,
2017 instead of at June 30, 2017. You obtained the following information from the company’s
general ledger.

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ACCOUNTING 502 – MIDTERMS QUIZ 1 April 3, 2018

Problems
Instructions: Present your solutions on your worksheets, and double rule and encircle your
final answers. Failure to do so will invalidate your answer. If the requirement is a compound
adjusting journal entry, there is no need to encircle the entry. Make sure that erasures or
alterations are neatly done. (5 points each)
PROBLEM 1
On December 31, 2013, ABC Co., a financing institution lent P4,000,000 to DEF Corp. due in 3
years after. The loan is supported by an 8% note receivable. Transaction costs incurred to
originate the loan amount to P248,000. P374,000 was chargeable to DEF Corp as origination
fees. Interest on the loan amount are collectible at the end of each year. The yield rate on the
loan is 9.25%.
ABC was able to collect interest as it became due at the end of 2014 and 2015. However, on
December 31, 2015, ABC Company determined that it was probable that DEF would pay back
only P3,400,000 collectible as follows and no more interest will be collected:
4. How much should be recognized as inventory loss?
PROBLEM 3
In your audit of the CAT Corp., you find that a physical inventory count on December 31,
2015 showed merchandise costing P463,000 was on hand at that date. Your examination
reveals the following items were excluded from the inventory count.
a. Merchandise of P20,000 which is held on consignment by CAT from TOM, Inc.
b. Goods costing P39,500 that were shipped FOB shipping point on December
31, 2015. These goods were delivered to the customer on January 6, 2016.
c. Goods costing P16,800 that were shipped FOB destination on December 28,
2015. The customer received the goods on January 2, 2016.
d. Merchandise costing P76,150 shipped by a seller FOB destination on
December 28, 2015, and received by CAT Corp. on January 4, 2016.
e. Goods costing P16,500 shipped by a vendor FOB seller on December 31,
2015, and received by CAT on January 4, 2016.

December 31, 2017 P1,400,000 5. What is the total amount of adjustments to the inventory balance for 2015?
December 31, 2018 1,000,000 6. What is the amount that should appear on CAT Corp.’s statement of financial position as
December 31, 2019 600,000 inventory at December 31, 2015?
December 31, 2020 400,000
As of December 31, 2015, the prevailing interest rate of interest for all debt instruments is PROBLEM 4
14%.Based on the above information and on your audit, answer the following requirements: In the course of your audit of the Loans Receivable account of ABC Corp. for the year ended
December 31, 2014, you discovered the following information from the company’s subsidiary
1. What is the carrying value of the loans receivable as of December 31, 2014? ledger accounts:
2. What is the impairment loss to be recognized in the 2015 statement of comprehensive Balances per ledger
income? UVW Corp. 10% P5,000,000
XYZ Inc. , 12% 2,000,000
PROBLEM 2
 The three-year loan to UVW Corp. was made on January 1, 2013 when the prevailing
On May 2, 2015, a fire destroyed the entire merchandise inventory on hand of Organic rate of interest was at 12%. The company recorded the loan as a debit to loans
Corporation. The following information is available: receivable account at the face value of the loan charging any difference between the
loaned amount and the face value of the loan to interest income. Semi-annual interest
Sales, Jan. 1 – May 2, 2015 P380,000 collection on the loan every June 30 and December 31 has been appropriately
Sales returns and allowances (covering the same period) 20,000 recorded.
Inventory, Jan. 1, 2015 80,000  Loan to XYZ, Inc. was made at face value on January 1, 2014 and is due on December
Purchases, Jan 1 through May 2, 2015 (including P40,000 of 31, 2016. The first annual interest collection on the loan on December 31, was
goods in transit on May 2, 2015 shipped FOB shipping point) 400,000 correctly recorded.
Purchase discount 40,000 7. What is the retroactive adjustment to retained earnings, if any, as a result of your audit of
Purchase returns and allowances 30,000
loans receivable from UVW? (the books are still open in 2014)
Mark-up percentage on cost 20%
8. What is the correct total carrying value of the loans receivables as of December 31, 2014?

3. What is the estimated ending inventory on May 2, 2015 immediately prior to the fire?
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ACCOUNTING 502 – MIDTERMS QUIZ 1 April 3, 2018

Estimated ending P110,000

SOLUTION inventory
1. Ans. 3,912,345 Inventory in transit (40,000)
Carrying Value Inventory loss 70,000
December 31, 2013 P3,874,000
(4M + 248K – 374K) 5. Ans. 33,300
December 31, 2014 3,912,345 6. Ans. 496,300
December 31, 2015 3,954,237 Inventory per physical
count P463,000
2. Ans. 1,336,188 Adjustments:
(c) Goods sold FOB
PV of future cash flows: destination P16,800
Cash flows PV Present (e) Goods purchased
Factor Value FOB seller 16,500 33,300
12/31/17 P1,400,000 0.8378 1,172,965.25 Adjusted inventory 496,300
12/31/18 1,000,000 0.7669 766,894.57
12/31/19 600,000 0.7020 421,177.80
12/31/20 400,000 0.6426 257,011.62
2,618,049.24
Less: Carrying Value 12/31/15 3,954,237
Impairment Loss 1,336,188

3. Ans. 110,000
Beg. inventory P80,000
Net Purchases:
Purchases P400,000
Purchase discount (40,000)
Purchase Returns (30,000) 330,000
COGAS 410,000
COS (300,000)*
Ending Inventory P110,000

*COS computation
Net Sales:
Sales P380,000
Sales Returns (20,000) 360,000
Divide by Cost percentage 120%
COS 300,000

4. Ans. 70,000
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ACCOUNTING 502 – MIDTERMS QUIZ 1 April 3, 2018