Solution - Auditing Problems TEST BANK 2 PDF

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PROBLEM 1 – AYALA MERCHANTS CORPORATIONNotes payable 700,Finance cost (Interest expense) 10,####### Accounts payable 72,####### Bacnotan Cement (P16, 7,000) P112,####### La Tondena (P26 x 2,000) 52,####### Union Bank (P27 x 1,600) 44,####### Prepaid advertising 325,####### Christmas promotion P100,#...

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SOLUTION - AUDITING PROBLEMS TEST BANK 2 PROBLEM 1 – A AY YAL ALA A MERCHANTS CORPORA CORPORATION TION ADJUSTING JOURNAL ENRIES December 31, 2017 1. Operating expenses Petty cash fund (P37,250 – P9,510)

27,740 27,740

2. Accounts receivable (P107,400 + P63,000) Notes payable Finance cost (Interest expense) Other charges (Bank service charges) Accounts payable Cash in bank

170,400 700,000 10,000 2,750

3. Allowance for doubtful accounts Accounts receivable (write-off)

152,640

4. Other charges (Unrealized loss – Trading securities) Trading securities Bacnotan Cement (P16, 7,000) Fil-Estate (P19.75 x 10,000) Ionics (P24 x 2,400) La Tondena (P26 x 2,000) Selecta (P1.20 x 8,000) Union Bank (P27.50 x 1,600) Total market value, Dec. 21, 2017 Carrying value, Dec. 31, 2017 Unrealized loss – trading securities 5. Interest receivable Other income (Interest income) (P1,300,000 x 15% 2/12)

72,000 811,150

152,640 10,940 10,940 P112,000 197,500 57,600 52,000 9,600 44,000 P472,700 483,640 P 10,940 32,500 32,500

6. Operating expenses (Advertising expense) 325,000 Prepaid advertising Christmas promotion P100,000 Regular promotion (P640,000 – P100,000 = P540,000 x 5/12) 225,000 Total P325,000 7. Operating expenses (Rent expense) Prepaid rent (P420,000 x 2/3 or P140,000 x 2) 8. Operating expenses (Insurance expense) Prepaid insurance (P490,000 x 2/12) 9. Operating expenses (Office supplies expense) Office supplies inventory (P361,000 – P102,500)

325,000

280,000 280,000

81,667 81,667

258,500 258,500

10. Accounts receivable Sales

146,940

11. Cost of goods sold Inventories

356,000

12. Cost of goods sold Inventories

138,500

13. Inventories Cost of goods sold

153,800

146,940

356,000

138,500

153,800

Page 2 14. Delivery equipment Operating expenses

43,400 43,400

15. Operating expenses (Depreciation expense) Accumulated depreciation (P43,400/10 x 6/12)

2,170 2,170

16. Accumulated depreciation Operating expenses (Depreciation expense)

10,480

17. Accumulated depreciation (P138,620 – P10,480) Other charges (Loss) Delivery equipment

128,140 37,380

18. Operating expenses Accrued expenses

213,000

19. Finance cost (Interest expense) Interest payable (P2.6 million x 16% 3/12)

104,000

20. Retained earnings Dividends payable (P5,400,000 x 10%)

540,000

21. Operating expenses (Doubtful accounts expense) Allowance for doubtful accounts

130,317

Less than 3 months 3 to 6 months Over 6 months

10,480

165,520

213,000

104,000

540,000

Per Books P2,500,960 843,200 274,500

130,317

Adjustments P146,940 107,400 63,000 (152,460)

P3,618,660

Allowance before adjustment (P110,360 – P152,460) Required allowance Adjustment 1. D

2. D

3. D

4. C

Petty cash fund Per books AJE 1 Per audit Cash in bank Per books AJE 2 Per audit Trading securities Per books AJE 4 Per audit Accounts receivable Per books AJE 2 3 10 Per audit

Per Audit

Required Allowance

%

P2,755,300 843,200

1 5

P27,553 42,160

185,040 P3,783,540

10

18,504 P88,217

P 42,100 debit 88,217 P130,317

P60,000 (27,740) P32,260

P1,056,000 (811,150) P 244,850

P483,640 (10,940) P472,700

P3,618,660 170,400 (152,460) 146,940 P3,783,540

Page 3 5. D

6. C

7. A

8. B

9. A

10. D

11. D

Allowance for doubtful accounts Per books AJE 3 21 Per audit

P110,360 (152,460) 130,317 P 88,217

Notes and interest receivable Per books AJE 5 Per audit

P1,300,000 32,500 P1,332,500

Inventories Per books AJE 11 12 13 Per audit

P7,274,900 (356,000) (138,500) 153,800 P6,934,200

Prepaid insurance Per books AJE 8 Per audit

P490,000 (81,667) P408,333

Prepaid rent Per books AJE 7 Per audit

P420,000 (280,000) P140,000

Prepaid advertising Per books AJE 6 Per audit

P640,000 (325,000) P315,000

Office supplies inventory Per books AJE 9 Per audit

P361,000 (258,500) P102,500

12. C

Petty cash fund Cash in bank Trading securities Accounts receivable (P3,783,540 – P88,217) Notes and interest receivable Inventories Prepaid insurance Prepaid rent Prepaid advertising Office supplies inventory Total current assets

13. C

Property, plant, and equipment (PPE) Per books AJE 14 17 Per audit

P4,068,400 43,400 (165,520) P3,946,280

Accumulated depreciation Per books AJE 15 16 17 Per audit

P1,177,500 2,170 (10,480) (128,140) P1,041,050

Accounts payable Per books

P2,356,320

14. B

15. B

P 32,260 244,850 472,700 3,695,323 1,332,500 6,934,200 408,333 140,000 315,000 102,500 P13,677,666

AJE 2 Per audit

72,000 P2,428,320

Page 4 16. A

Interest payable Per books AJE 19 Per audit

17. C

Accounts payable – trade Notes payable Accrued expenses Interest payable Dividends payable Total current liabilities

18. C

Sales Per books AJE 10 Per audit

19. C

20. D

P0 104,000 P104,000 P2,428,320 2,600,000 382,040 104,000 540,000 P6,054,360

P13,078,000 146,940 P13,224,940

Cost of goods sold Per books AJE 11 12 13, Per audit

P8,034,000 356,000 138,500 (153,800) P8,374,700

Operating expenses Per books AJE 1 6 7 8 9 14 15 16 18 21 Per audit

P3,357,000 27,740 325,000 280,000 81,667 258,500 (43,400) 2,170 (10,480) 213,000 130,317 P4,621,514

PROBLEM 2 – LUKAS COMP COMPANY ANY 21. A

Sales returns and allowance Accounts receivable

90,000

Inventory Cost of sales (P90,000 x 80%)

72,000

90,000

72,000

Net decrease in income (P90,000 – P72,000) 22. A

Sales Accounts receivable

P18,000 30,000 30,000

Income overstated by

P30,000

23. D

Overstatement of receivable Lazaro (P150 x 320 units)

P48,000

24. A

Correctly stated because the goods are considered sold in 2017.

25. D

Accounts payable Accounts receivable

PROBLEM 3 – CROCODILE, INC.

135,000 135,000

26. B

27. C

28. B

29. B

30. D

Page 5 PROBLEM 4 – SPA SPARK RK COMPA COMPANY NY 31. B

Cash balance, Dec. 31, 2016 Sales (SQUEEZE) Cash paid for operating expenses Cash paid on accounts payable Collections on notes receivable Cash balance, Dec. 31, 2017

P100,000 920,000 (220,000) (471,700) 25,000 P353,300

Units sold (P920,000/P50) 32. D

18,400

Accounts payable: Balance, Dec. 31, 2016 Purchases Cash payments on accounts payable Balance, Dec. 31, 2017

*Purchases: Purchases: Month January February March April May June July August September October November December Total purchases

Unit Cost P32.60 32.70 32.80 32.90 33.00 33.10 33.20 33.30 33.40 33.50 33.60 33.70

Units 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 18,000

P75,000 596,700* (471,700) P200,000 Total Cost P48,900 49,050 49,200 49,350 49,500 49,650 49,800 49,950 50,100 50,250 50,400 50,550 P596,700

Or (P32.60 + P33,70)/2 x (1,500 x 12) = P596,700

33. A

Inventory, Dec. 31, 2016 (P199,875/P32.50) Purchases Units sold Inventory, Dec. 31, 2017

34. C

FIFO cost of inventory, Dec. 31, 2017: December purchases 1,500 x P33.70 November purchase 1,500 x P33.60 October purchase 1,500 x P33.50 September purchase 1,250 x P33.40 5,750

P 50,550 50,400 50,250 41,750 P192,950

Inventory, Jan. 1, 2017 Purchases Goods available for sale Inventory, Dec. 31, 2017 Cost of goods sold

P199,875 596,700 796,575 (192,950) P603,625

35. D

6,150 18,000 (18,400) 5,750...