Solution Manual: Ateneo de Naga University College of Business and Accountancy Accountancy Department
Solution Manual: Ateneo de Naga University College of Business and Accountancy Accountancy Department
Solution Manual: Ateneo de Naga University College of Business and Accountancy Accountancy Department
SOLUTION
MANUAL
Submitted by:
Jenniline N. Antonio
Philip G. Arines
Sharmaine C. De Vera
Rica Mae S. Perez
Jaenelle T. Saldivar
Submitted to:
PROBLEM 1: You were able to gather the following from the December 31, 2008 trial balance of RHEA
INC. in connection with your audit of the company:
The petty cash fund consisted of the following items as of December 31,2008:
Currency and coins P 10,000
Employees’ vales 8,000
Currency in an envelope marked
“collections for charity” with
Names attached 6,000
Unreplenished petty cash vouchers 6,500
Check drawn by RHEA, payable to the
Petty cashier 20,000
Unused postage stamps 1,500
P 52,000
Cash on hand represents undeposited collections as of December 31,2008 and includes the following
items:
a. Customer’s check for P 160,000 returned by bank on December 26,2008 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 3,2009.
b. Customer’s check for P 80,000 dated January 2,2009, received on December 29,2008.
c. A customer checks for P 90,000 dated June 1,2008 received on the same date and yet to be
deposited since the same has been missing.
d. Postal money orders received from customers, P 100,000.
Included among the checks drawn by RHEA against the Metrobank current account and recorded in
December 2008 are the following:
a. Check written on December 29,2008 dated January 2,2009, delivered to payee on December
29,2008, P 160,000.
b. Check written and dated December 29,2008 and delivered to payee on January 2,2009, P
200,000.
The credit balance in the BDO Current Account No. 2 represents checks drawn in excess of the deposit
balance. These checks were still outstanding at December 31,2008.
The savings account deposit in Coco Bank has been set by board of directors for acquisition of new
computers. This account is expected to be disbursed in the next 3 months from the balance sheet date.
The time deposit with BPI was purchased on November 1,2008 and shall mature on November 1,2009.
Solution:
Alternative Solution:
Currency and Coins 10,000
Check drawn by RHEA, payable to the 20,000
Petty cashier
Petty Cash Fund 30,000
Solution:
Solution:
Solution:
Unadjusted Cash in bank-Metrobank P 4,000,000
Post-dated check delivered 160,000
Undelivered check 200,000
Adjusted Cash in bank-Metrobank 4,360,000
Solution:
Question No. 5.
Cash on hand P 1,170,000
Petty Cash fund 30,000
Cash in bank-Metrobank current 4,360,000
Cash in bank- BDO (net of 160,000 bank 3,000,000
overdraft)
Cash and cash equivalents 8,560,000
PROBLEM 2: A count of the Petty Cash Fund having an imprest balance of P 10,000 of Reyes Corp.
showed its composition as follows:
Solution:
Question No. 1.
Coins and Currency P 2,900
Paid Vouchers 3,000
NSF check 1,000
Replenishment check 2,700
Petty cash receipt voucher (500)
Petty Cash accounted 9,100
Custodian’s Accountability 10,000
Petty cash shortage 900
PROBLEM 3: A count of the undeposited receipts under the custody of U. Rita, cashier of Ube Corp., on
September 30,2008 showed the following composition:
Checks:
Date Payee Drawer
3-24-08 Cash U. Rita 2,000
9-20-08 Ube Corp. Tams Co. 4,700
9-27-08 Ube Corp. Jonli Inc. 3,920
9-30-08 MERALCO Ube Corp. 1,800
Assuming the cashier’s accountability to be P 36,940 per the client’s record, what was the amount of
shortage/overage on September 30,2008?
Solution:
Question No. 1.
Custodian’s Accountability P 36,940
Petty Cash accounted:
Total per count 40,620
Less: Cashier’s stale check 2,000
Unreleased
Disbursement check 1,800 3,800
Over footing of cash 360
36,460
480
The bank statement on November 30,2008 showed a balance of P 918,000. Among the bank credits in
November was customer’s note for P 300,000 collected for the account of the company which the
company recognized in December among its receipts. Included in the bank debits were cost of
checkbooks amounting to P 3,600 and a P 120,000 check which was charged by the bank in error against
Bugoy’s account. Also in November you ascertained that there were deposits in transit amounting to P
240,000 and outstanding checks totaling P 510,000.
The bank statement for the month of December showed total credits of P 1,248,000 and total charges of
P 612,000. The company’s books for December showed total debits of P 2,206,800, total credits of P
1,221,600 and a balance of P 1,456,800. Bank debit memos for December were: No. 121 for service
charges, P 4,800 and No. 122 on a customer’s returned check marked “ Refer to Drawer “ for P 72,000.
On December 31, 2008 the company placed with the bank a customer’s promissory note with a face
value of P 360,000 for collection. The company treated this note as part of its receipts although the bank
was able to collect on the note only in January, 2009.
A check for P 11,880 was recorded in the company cash payments books in December as P 118,800.
Solution:
Solution:
Bugoy Corporation
Proof of Cash
For the month ended December 31, 2009
Beginning Ending
Nov.30 Receipts Dec. Disb. Dec. Dec. 31
Balance per bank
statement 918,000 1,248,000 612,000 1,554,000
Deposit in Transit
30-Nov 240,000 (240,000)
31-Dec 658,800 658,800
Outstanding
Check
30-Nov (510,000) (510,000)
31-Dec 1,085,880 (1,085,880)
Erroneous bank
dr. - Nov. 120,000 (120,000)
Adjusted Bank
Balance 768,000 1,546,800 1,187,880 1,126,920
1. Based on the result of your audit, what is the correct doubtful accounts expense for the year
2008?
a. 375,000
b. 300,000
c. 175,000
d. 75,000
Solution:
Question No. 1.
AFDA, 12/31/08 P 400,000
Write-offs during the year 375,000
AFDA, 1/1/08 (600,000)
Recovery of write-offs (100,000)
Doubtful accounts expense 75,000
Solution:
Question No. 2.
Unadjusted accounts receivable P 2,375,000
AFDA, 12/31/08 400,000
Adjusted accounts receivable 1,975,000
PROBLEM 6: From inception of operations to December 31,2008, PDA Corporation provided for
uncollectible accounts receivable under the allowance method: provisions were made monthly at 2% of
credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts
previously written off were credited to the allowance account; and no year-end adjustments to the
allocation account were made. PDA’s usual credit terms are net 30 days.
The balance in the allowance for doubtful accounts was P 130,000 at January 1,2008. During 2008, credit
sales totaled P 9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales; P
90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P
15,000. PDA installed a computer facility in November 2008, and an aging of accounts receivable was
prepared for the first time as of December 31,2008. A summary of the aging is as follows:
Further audit procedures revealed that a P 160,000 customer credit balance resulting from overpayment
was included in the “November-December 2008” receivables and that based on the review of
collectability of the account balances in the “prior to 1/1/08” aging category, additional receivables
totaling P 60,000 were written off as of December 31,2008.
Effective with the year ended December 31,2005, PDA adopted the revised accounting standards in
recognizing bad debts.
1. What is the correct balance of the allowance for doubtful accounts at year end?
a. 254,100
b. 256,500
c. 296,100
d. 298,500
Solution:
256,500
2. What is the correct bad debt expense for the year?26
a. 261,500
b. 201,500
c. 81,500
d. 76,500
Solution:
Solution:
In connection with your audit, you were able to gather the following transactions during 2008 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. The note is payable
in 3 annual installments of P 1,500,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1,2008.
b. The note receivable from officer is dated December 31,2007, earns interest at 10% per
annum, and is due on December 31,2008. The principal and interest were received on
December 31,2008.
c. The corporation sold a piece of equipment to SNOW INC. on April 1,2008, in exchange for an
P 600,000 non-interest bearing note due on April 1,2010. 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 April 1,2008 was 12%. The present value factor of 1 for two periods
at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two periods at
12% is 1.690.
d. A tract of land was sold by the corporation to WHITE CO. on July 1,2008, for P 3,000,000,
under an installment sale contract. White signed a 4-year 11% note for P 2,100,000 on July
1,2008, in addition to the down payment of P 900,000. The equal annual payments of
principal and interest on the note will be P 676,875 payable on July 1,2009,2010,2011, and
2012. The land had an established cash price of P 3,000,000, and its cost to the corporation
was P 2,250,000. The collection of the installments on this note is reasonably assured.
Solution:
2. How much is the total current portion of long-term notes receivable as of December
31,2008?
a. 1,945,875
b. 2,176,875
c. 1,500,000
d. 0
Solution:
Solution:
Solution:
3. The adjusted net sales for the year ended December 31,2017
a. P 10,008,000
b. P 10,001,000
c. P 9,919,000
d. P 9,961,000
Solution:
Question Nos. 1 to 3
(b) 50,000
(c)
(f) 30,000
(h) 21,000
(i) 27,000
(j) 56,000
(k) 3,000 6,000
Solution:
PSA 501, paragraph 7 states that “If attendance at physical inventory counting is
impracticable, the auditor shall perform alternative audit procedures to obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory.
5. The audit of year-end inventories should include steps to verify that the client’s purchases
and sales cutoffs were adequate. These audit steps should be designed to detect whether
merchandise included in the physical count at year-end was recorded as a
a. Sale in the subsequent period.
b. Purchase in the current period.
c. Sale in the current period.
d. Purchase in the subsequent period.
Solution:
FRS 18 states that revenue from the sale of goods should be recognized when the entity
has transferred to the buyer the significant risks and rewards of ownership of the goods
(FRS 18, paragraph 14a). In most cases, the transfer of the risks and rewards of
ownership coincides with the transfer of the legal title or the passing of possession to
the buyer. For local purchases, the auditors will need to obtain delivery orders of
suppliers and check that the dates of receipt of the goods by the company are in the
same accounting period in which the purchases are recognized.
PROBLEM 9: You were asked by Samuka Corporation to audit its financial statements for the years
ended December 31, 2016 and 2017. While reviewing the entity’s records for 2016 and 2017, you
discovered that no adjustments have yet been made for the items listed below.
Item No. 1 Insurance premiums of P 300,000 for the three-year period beginning January
1,2016, had been paid and fully expensed in 2016.
Item No. 2 The merchandise inventories at the end of 2016 and 2017 did not include
merchandise that was then in transit and to which the company had title.
These shipments of P 50,000 and P 30,000 were recorded as purchases in
January 2017 and 2018, respectively.
Item No. 3 Rental of P 60,000 on an equipment, applicable for six months, was received
on November 1, 2016. The entire amount was reported as income upon
receipt.
Item No. 4 The entity purchased a machine on January 2, 2016 at a cost of P 120,000. An
additional P 50,000 was spent for installation, but this amount was charged
erroneously to repairs expense. The machine has a useful life of five years and
a residual amount of P 20,000.
Item No. 5 The entity received P 360,000 from a customer at the beginning of 2016 for
services that it is to perform evenly over a 3-year period beginning in 2016.
None of the amount received was reported as unearned revenue at the end of
2016.
QUESTIONS:
SOLUTION:
INCOME RETAINED EARNINGS
2016 2017 2016 2017
Item no. 1 200,000 (100,000) 200,000 (100,000)
Item no.2 - 50,000 - 50,000
Item no. 3 (40,000) 40,000 (40,000) 40,000
Item no. 4 30,000 (10,000) 30,000 (10,000)
50,000
Item no. 5 (240,000) 120,000 (240,000) 120,000
PROBLEM 10: Tabang Corporation, a manufacturer of steel products, began operation on October 1,
2015. The accounting department of Tabang has started the fixed-asset and depreciation schedule
presented below.
TABANG CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30,2016, and September 30,2017
Depreciation Expense
Estimated Year Ended
Assets Acquisition Cost Salvage Depreciation Life in September 30
Date Method Years 2016 2017
Land A 10/1/15 ? N/A N/A N/A N/A N/A
Building A 10/1/16 ? P 40,000 Straight-line ? P 17,450 ?
You have been asked to assist in completing this schedule. In addition in ascertaining that the data
already on the schedule are correct, you have obtained the following information from the Company’s
records and personnel:
a. Land A and Building A were acquired from a predecessor corporation. Tabang paid P 820,000 for
the land and building together. At the time of acquisition, the land had an appraised value of P
90,000, and the building had an appraised value of P 810,000.
b. Land B was acquired on October 2,2015, in exchange for 2,500 newly issued ordinary shares of
Tabang. At the date of acquisition, the shares had a par value of P 5 per share and a fair value of
P 30 per share. During October 2015,Tabang paid P 16,000 to demolish an existing building on
this land so it could construct Building B.
c. Construction of building B on the newly acquired land began on October 1,2016. By September
30,2017, Tabang has paid P 320,000 of the estimated total construction costs of 450,000. It is
estimated that the building will be completed and occupied by July 2018.
d. Certain equipment was donated to the corporation by a local university. An independent
appraisal of the equipment when donated placed the fair value at P 30,000 and the salvage
value at P 3,000.
e. Machinery A’s total cost of P 164,900 includes installation expense of P 600 and normal repairs
and maintenance of P 14,900. Salvage value is estimated at P 6,000. Machinery A was sold on
February 1,2017.
f. On October 1,2016, Machinery B was acquired with a down payment of P 5,740 and the
remaining payments to be made in 11 annual installments of P 6,000 each beginning October
1,2016. The prevailing interest rate was 8%. The following data were abstracted from the
present-value tables (rounded):
QUESTIONS:
Based on the above and the result of your audit, answer the following:
Solution:
Solution:
Solution:
Because Building B is not yet available for its intended use as of September 30, 2017, no
depreciation should be provided.
4. The most significant audit step in substantiating additions to the equipment account balance is
a. Comparison to prior year’s acquisition.
b. Review of transactions near the end of the reporting period for proper period cutoff.
c. Calculation of ratio of depreciation expense to gross office equipment cost.
d. Examination of vendors’ invoices and receiving reports for current year’s acquisitions.
Note:
(D) Examination of vendors’ invoices and receiving reports for current year’s acquisitions.
Acquisition of new PPE and improvements to the existing ones should be verified with reference to
supporting documents such as orders, invoices, receiving reports and title deeds and applicable
customs or excise documents. Due care needs to be taken when the purchase is from a related party.
The auditor may employ procedures such as possible comparative prices prevalent in a ready market,
evaluation, justification and approvals for the purchase
5. Analytical estimation of depreciation by the auditor is an important audit test because it does
which of the following?
a. It yields statistical precision in sampling.
b. It signals which additions will be vouched.
c. It gives the auditor an indication of the impaired balances existing in financial
statements.
d. It is a good start point for determining additional procedures.
Note:
The machines are expected to generate benefits evenly over their useful lives. The class of plant and
equipment is measured using the revaluation model.
On 1 July 2017, machine B was sold for P 32,000 cash. On the same day, Kalipay Corporation acquired
machine C for P 80,000 cash. Machine C has expected useful life of four years.
QUESTIONS:
1. The amount to be recognized in 2016 profit or loss related to the revaluation of the assets is:
a. 4,000
b. 2,000
c. (2,000)
d. 0
Solution:
Machine B
The revaluation surplus on Machine A is not reported in profit and loss but in statement of
comprehensive income.
2. The amount to be recognized in 2016 comprehensive income related to the revaluation of the
assets is
a. 4,000
b. 2,000
c. (2,000)
d. 17,000
Solution:
Revaluation increase (Machine A) 4,000
Revaluation decrease (Machine B) (2,000)
Revaluation increase to be recognize 2,000
Solution:
Machine B
Selling Price 32,000
Book Value: 7/1/17
Book Value 12/31/16 38,000
Less: Acc Dep (38,000/4 x 6/12) 9,500 28,500
Gain on sale 3,500
Solution:
Solution:
Machine C
Fair Value 12/31/17 68,500
In 2016, Chicago developed a new machine that reduces the time required to insert the fortunes into its
fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Chicago
patented the machine. The following expenses were incurred in developing and patenting the machine:
During 2016, Chicago paid 225,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.
It is the company’s policy to take full year amortization in the year of acquisition.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of machine
a. 1,854,000
b. 2,472,000
c. 1,560,000
d. 1,752,000
Solution:
Solution:
Solution:
D
PAS 38 paragraph 20 states that “It is often difficult to attribute subsequent expenditure directly
to a particular intangible asset rather than to the business as a whole. Therefore, only rarely will
subsequent expenditure - expenditure incurred after initial recognition of an acquired intangible
asset or after the completion of an internally generated intangible asset – be recognized in the
carrying amount of an asset.”
5. In evaluating control risk and effectiveness for intangible assets, controls should be designed for
numerous purposes. Which of the following is not a usual control for intangible assets?
a. Ensure that decisions are appropriately made as to when to capitalize or expense
research and development expenditures.
b. Develop amortization schedules that reflect the remaining useful life of patents or
copyrights associated with the assets.
c. Identify and account for intangible asset impairment.
d. All of the above are usual controls for intangible assets.
Note:
D
Intangible assets are divided into two categories according to IAS 38: goodwill and research and
development expenses. For research and development expenses the question is whether they
should be recognized as expenses when they arise or as asset. Their recognition as an asset
should be carried out, if and only if, the asset definition is met: future economic benefits are
likely and the cost can be reliably measured. According to IAS38, no intangible asset arising from
research shall be recognized. IAS 38- Intangible assets provides the basis for measuring
intangible assets separated from goodwill
The cost less residual value of an intangible asset with a finite useful life should be amortized on
a systematic basis over that life: [IAS 38.97] The amortization method should reflect the pattern
of benefits. If the pattern cannot be determined reliably, amortize by the straight-line method.
At each balance sheet date, according to the requirements of IAS 36- Impairment of Assets, an
enterprise should consider whether there are indications that intangible assets have lost some
of their book value. If any such indication exists, the enterprise should determine the
recoverable amount of intangible assets, defined as: „The highest value between the value in
use of the asset or cash-generating unit and the fair value less costs for sale"; also, IAS 38
requires a test for impairment annually, regardless of whether exists or not an indication of
impairment, in the following two cases: (CECCAR, IAS 38, 2013)
PROBLEM 13: On January 10, 2018, you started the audit of the financial records of the Kinsa Company
for the year ended December 31, 2017. From your investigation, you discovered the following:
a. The bookkeeper also acts as the cashier. On December 31, 2017, the bookkeeper’s year-end
cash reconciliation contains of the following items.
c. The count of the cash on hand at the close of business on January 10,2018, including the petty
cash, was as follows:
d. From January 2, 2018 to January 10, 2018, the date of your cash count, total cash receipts
appearing in the cash records were 68,800. According to the bank statement, for the period
from January 2, 2018 to January 10, 2018, total deposits were 60,800.
e. On July 5, 2017, cash of 3,200 was received from an account customer; the Allowance for
Doubtful Accounts was charged and Accounts Receivable credited.
f. On December 5, 2017, cash of 2,400 was received from an account customer; Inventory was
charged and Accounts Receivable credited.
h. Checks received from customers from January 2, 2018 to January 10,2018, totaling 3,360, were
not recorded but were deposited in bank.
i. On July 1, 2017, the bank refunded interest of 160 because a note of the Kinsa Company was
paid before maturity. No entry had been made for the refund.
j. In the cashier’s petty cash, there were receipts for collections from customers on January 9,
2018, totaling 6,800; those were unrecorded and undeposited.
k. In the outstanding checks, there is one for 400 made payable to a trade creditor; investigations
that the check had been returned by the creditor on June 14,2011 and a new check for 800 was
issued in its place; the original check for 400 was made in error as to amount.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
Solution:
Bank Book
Unadjusted Balance 518,800 491,200
Outstanding Check (41,760)
Cash in transit 5,760
Bank Debit error 1,200
AJE
1 3,200
2 2,400
3 5,840
4 160
5 400 400
Corrected Balance 484,400 503,200
Shortage 12/31/17 (18,800)
Adjusted Balance 484,400 484,400
3. The cash shortage for the period January 1 to 10, 2018 is
a. 13,360
b. 10,160
c. 20,320
d. 0
Solution:
4. Which of the following misstatements is most likely to be uncovered during an audit of a client’s
bank reconciliation?
a. Duplicate payment of a vendor’s invoice
b. Billing a customer at a lower price than indicated by company policy
c. Failure to record a collection of a note receivable by the bank on the client’s behalf
d. Payment to an employee for more than the hours actually worked
Note:
5. Which of the following would normally be discovered as part of the audit of the bank
reconciliation?
a. Failure to bill a customer
b. Failure to include a deposit in transit on the bank reconciliation
c. Duplicate payment of a vendor’s invoice
d. Payment to an employee for more than the hours actually worked
Note:
Deposits which have been sent by the company to the bank but have not been received by the
bank at proper time before the issuance of bank statement are called “Deposit in Transit”. These
transactions usually appear in the company’s records but not in the bank statement. This is
discovered in a bank reconciliation as the client’s records and bank statement is matched.
PROBLEM 14:Unsa Corporation is engaged in buying and selling manufacturing equipment. On 1 January
2016, Unsa Corporation sold equipment, with a cash price of 1,500,000. The cost of the equipment is
750,000. The buyer signed a deferred payment contract that provides for a down payment of 300,000
and a 5 year note for 1,705,900. The note is to be paid in 5 equal annual payments of 341,180. The
payments include interest and are made on December 31 of each year, beginning on December 31,
2016.
Unsa Corporation made the following entries in relation to the sale of the equipment and the related
note receivable:
January 1, 2016
Cash 300,000
Notes Receivable 1,705,900
Cost of goods Sold 750,000
Sales 2,005,900
Inventory 750,000
December31, 2016
Cash 341,180
Notes Receivable 341,180
December31, 2017
Cash 341,180
Notes Receivable 341,180
QUESTIONS: Based on the above and the result of your audit, answer the following:
Solution:
Solution:
Profit
Over (under)
Sales – over Reported should be
(2,005,900 – 1,705,900) P 505,900
Interest income – under Reported should be
(0 - 156,000) (156,000)
Net Misstatement of Profit, 12/31/17 – over (under) (A) P 349,900
Solution:
Solution:
Note:
A logical substantive test for accrued interest receivable would be to recalculate interest earned
and compare it to the amounts received. The following tests would not be logical: comparing
the interest income with published interest-investment records; verifying the interest income by
calculation based on the face amount of notes and the nominal interest rate; or verifying the
carrying value, and market value of notes receivable. These three tests do not calculate interest
earned for checking its accuracy and do not compare to the amounts received, which is the
focus of the substantive test.