Since 1977

AUDITING PROBLEMS OCAMPO/CABARLES/SOLIMAN/OCAMPO

QUIZ NO. 2 SET A OCTOBER 2019

PROBLEM NO. 1 b) Total receipts per books were P2,221,900 of which

On December 31, 2018, Probe Corporation acquired the P12,100 was paid in cash to a creditor on December
following three intangible assets: 24.
 A trademark for P300,000. The trademark has 7 years c) Undeposited receipts were: November 30, P90,600
remaining legal life. It is not anticipated that the and December 31, P101,200.
trademark will be renewed in the future, indefinitely, d) Outstanding checks were: November 30, P26,750,
without problem. and December 31, P19,300, of which a check for
P5,000 was certified by the bank on December 26.
 Goodwill for P1,500,000. The goodwill is associated e) NSF checks returned, recorded as reduction of cash
with Probe’s Nexus Manufacturing reporting unit. receipts, were:
 Returned by bank on December, recorded also in
 A customer list for P220,000. By contract, Probe has
December, P10,400.
exclusive use of the list for 5 years. Because of
 Returned by bank on December but recorded in
market conditions, it is expected that the list will have
January, P8,600
economic value for just 3 years.
f) Collections by bank not recorded by Company were
On December 31, 2019, before any adjusting entries for P121,500 in November and P116,400 in December.
the year were made, the following information was g) Bank service charges not entered in company’s books
assembled about each of the intangible assets: were: November 30, P7,500 and December 31,
P4,200.
a) Because of a decline in the economy, the trademark is
h) A check for P9,500 of QMQ Company was charged to
now expected to generate cash flows of just P10,000
MQM Company in error.
per year over its remaining legal life.
i) A check drawn for P8,400 was erroneously entered in
b) The cash flows expected to be generated by the Nexus the books as P4,800.
Manufacturing reporting unit is P200,000 per year for
the next 20 years. Book values and fair values of the QUESTIONS:
assets and liabilities of the Nexus Manufacturing Based on the above and the result of your audit, answer
reporting unit are as follows: the following:
Book values Fair values 6. How much is the unadjusted bank balance as of
Identifiable assets P2,700,000 P3,000,000 November 30?
Goodwill 1,500,000 ? a. P215,600 c. P279,450
Liabilities 1,800,000 1,800,000 b. P151,750 d. P274,450

c) The cash flows expected to be generated by the 7. How much is the unadjusted bank receipts for
customer list are P120,000 in 2020 and P80,000 in December?
2021. a. P2,204,500 c. P2,227,200
b. P2,113,900 d. P2,216,800
REQUIRED:
8. How much is the unadjusted bank disbursements for
Based on the above and the result of your audit, determine
December?
the following: (Assume that the appropriate discount rate
a. P2,169,450 c. P2,157,350
for all items is 6%):
b. P2,179,850 d. P2,189,700
1. Total amortization for the year 2019
a. P 73,333 c. P141,515 9. How much is the unadjusted bank balance as of
b. P116,190 d. P 86,857 December 31?
a. P317,300 c. P307,800
2. Impairment loss for the year 2019
b. P230,400 d. P326,800
a. P313,990 c. P179,584
b. P133,333 d. P207,970 10. An auditor compares information on canceled checks
with information contained in the cash disbursement
3. Carrying amount of Trademark as of December 31,
journal. The objective of this test is to determine that
2019
a. recorded cash disbursement transactions are
a. P300,000 c. P166,667
properly authorized.
b. P257,143 d. P 49,173
b. proper cash purchase discounts have been
recorded.
4. Carrying amount of Goodwill as of December 31, 2019 c. cash disbursements are for goods and services
a. P1,500,000 c. P1,393,980 actually received.
b. P1,425,000 d. P1,462,500 d. no discrepancies exist between the date on the
5. Carrying amount of Customer list as of December 31, checks and the data in the journal.
2019
a. P220,000 c. P176,000 PROBLEM NO. 3
b. P146,667 d. P 0 The accountant of Unjust Inc. presented to you the
following details of its subsidiary ledger in relation to your
PROBLEM NO. 2 audit of the company’s accounts receivable balance as of
In connection with your examination, the MQM Company December 31,2019:
presented to you the following information regarding its Customer Invoice Date Amount
Cash in Bank account for the month of December:
Cheap Inc. December 20 P 550,000
a) Balances of cash in bank account in company’s books:
December 1 1,200,000
November 30, P165,450, and December 31, P226,800.

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EXCEL PROFESSIONAL SERVICES, INC.

October 11 950,000 c. Considering the evidence concerning the

August 4 420,000 collectibility of current amounts.
d. Assessing the reasonableness of the percentages
Cruddy Co. November 20 2,000,000 used to compute the allowance component
September 4 900,000 required for each aging category and the adequacy
August 2 500,000 of the overall allowance.

Grubby Inc. December 10 1,750,000 PROBLEM NO. 4

October 4 600,000 The Vian Company included the following in its notes
July 5 500,000 receivable as of December 31, 2019:
Note receivable from sale of land P 880,000
Paltry Corp. September 9 2,600,000 Note receivable from consultation 1,200,000
July 10 1,250,000 Note receivable from sale of equipment 1,600,000
March 5 900,000
In connection with your audit, you were able to gather the
Nasty co. December 1 (500,000) following transactions during 2019 and other information
pertaining to the company’s notes receivable:
Audit notes:  On January 1, 2019, Vigan Company sold a tract of
 The company’s term is n/60 days. land. The land, purchased 10 years ago, was carried
 The company’s general ledger shows the following on Vigan Company’s books at a value of P500,000.
balances as of December 31,2019: Vigan received a noninterest-bearing note for
Accounts Receivable P13,650,000 P880,000. The note is due on December 31, 2020.
Allowance for doubtful accounts (950,000) There is no readily available market value for the land,
but the current market rate of interest for comparable
 The credit balance of the receivable resulted from notes is 10%.
Nasty Co.’s overpayment of its account. The same  On January 1, 2019, Vigan Company finished
shall be settled by a delivery of merchandise the consultation services and accepted in exchange a
following period. promissory note with a face value of P1,200,000, a
 You have discovered that Grubby Inc.’s payment of an due date of December 31, 2020, and a stated rate of
October 4 invoice amounting to P600,000 was posted 5%, with interest receivable at the end of each year.
against Cruddy Co.’s account for an invoice dated The fair value of the services is not readily
December 4, for the same amount. determinable and the note is not readily marketable.
 Discussions with the credit department manager Under the circumstances, the note is considered to
revealed the following appropriate credit policy: have an appropriate imputed rate of interest of 10%.
Accounts receivable Doubtful of collection  On January 1, 2019, Vigan Company sold equipment
Current 2% with a carrying amount of P1,600,000 to X Company.
1-60 days past due 5% As payment, X gave Vigan Company a P2,400,000
61-120 days past due 20% note. The note bears an interest rate of 5% and is to
More than 120 days be repaid in three annual installments of P800,000
past due 50% (plus interest on the outstanding balance). The first
payment was received on December 31, 2019. The
QUESTIONS: market price of the equipment is not reliably
Based on the above and the result of your audit, answer determinable. The prevailing rate of interest for notes
the following: of this type is 14%.
11. How much is the unreconciled difference between the
control account and the subsidiary ledger? QUESTIONS:
a. None c. P20,000 Based on the above and the result of your audit, answer
b. P10,000 d. P30,000 the following: (Round off present value factors to four
decimal places and final answers to nearest hundred)
12. What is the correct accounts receivable balance as of 16. The consultation service fee revenue that should be
December 31, 2019? recognized in 2019 is
a. P14,120,000 c. P14,140,000 a. P1,050,800 c. P 901,600
b. P14,130,000 d. P14,150,000 b. P1,095,800 d. P1,200,000
13. Assuming that there were no other entries affecting 17. The gain on sale of equipment that should be
the allowance for bad debts, what is the correct bad recognized in 2019 is
debt expense for 2019? a. P331,600 c. P412,400
b. P451,200 d. P800,000
a. P369,500 c. P387,500
b. P378,500 d. P396,500 18. The noncurrent notes receivable as of December 31,
2019 is
14. What is correct amortized cost of the receivables as of a. P2,605,706 c. P2,494,000
December 31, 2019? b. P1,825,800 d. P 729,900
a. P12,291,500 c. P12,791,500
b. P12,773,500 d. P12,803,500 19. The current portion of long-term notes receivable as of
December 31, 2019 is
15. The tests of balances to evaluate the adequacy of the a. P2,613,600 c. P1,468,200
allowance for uncollectible accounts do not involve b. P1,680,000 d. P 800,000
which of the following?
a. Considering the evidence concerning the 20. The interest income to be recognized in 2019 is
collectibility of past due amounts. a. P464,000 c. P459,500
b. Testing the aging of the amounts shown in the b. P435,800 d. P156,000
aging categories on the aged trial balance.

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