AUDITING PROBLEMS (TAKE-HOME DRILL)

INSTRUCTION: Select the correct answer for each of the following questions.
Mark only one answer for each item by shading the box corresponding to the
letter of your choice on the sheet provided. STRICLY NO ERASURES ALLOWED. Use
pencil no. 1 only.
CASE 1: STOCK INVESTMENT IN SAN MIGUEL

1. The Stock Investment showed the following details during year 2008
STOCK INVESTMENT IN SAN MIGUEL
Debit
Credit
Jan. 1 Audited balance 4,000shares
P80,000
Feb. 28
Cash dividend
2,000
Mar. 31
Bought shares
9,000
Apr. 1 Sale of rights
6,000
June 30
Sale of shares
10,000
1.
2.

A cash dividend of P0.50 per share were received on Feb. 28. The
adjusting entry (assuming the use of the cost method) is:
a. Stock Investment
2,000
Dividend income
2,000
b. Retained earnings
2,000
Dividend income
2,000
c. Dividend Income
2,000
Stock investment
2,000
d. Cash
2,000
Dividend income
2,000

2. On March 15, stock rights were received entitling shareholders to purchase

one share for every five held at P15 per share. Market values on this date
were: shares, P20; rights, P5. The adjusting entry to recognize the cost
allocated to the rights is:
a. Stock rights
Stock investment
b. Stock rights
Stock investment
c. Stock rights
Stock investment
d. Stock rights
Stock investment

16,000
16,000
20,000
20,000
10,000
10,000
30,000
30,000

3. On March 31, 600 shares were purchased with the partial exercise of these
rights. The adjusting entry, after the adjustment in No. 7 above has been
given effect, is
a. Stock investment
Stock rights
b. Stock investment
Stock rights
c. Stock rights
Stock investment
d. Stock rights
Stock investment

18,000
18,000
12,000
12,000
12,000
12,000
15,000
15,000

4. On April 1, the remaining rights were sold for P6, 000. The adjusting entry
is:
a. Stock investment
Gain on sale of rights
b. Stock investment
Stock rights
Gain on sale of rights
c. Stock investment
Loss on sale of rights 2,000
Stock rights
d. Stock investment
Gain on sale of rights

6,000

6,000

6,000
4,000
4,000
6,000
4,000

2,000

4,000

5. On June 30, 460 shares were sold for P10, 000. Using the average cost
method, the adjusting entry is:
a. Cash
10,000
Stock investment
7,500
Gain on sale of stock
2,500
b. Stock investment
10,000
Gain on sale of stock
10,000
c. Stock investment
2,500
Gain on sale of stock
2,500
d. None of the above
CASE 2: HOME OFFICE AND ESPERANZA BRANCH
The following were found in your examination of the interplant accounts
between the Home Office and Esperanza Branch.
a. Transfer of fixed assets from Home Office amounting to P53, 960 was not
booked by the branch.
b. P10,000 covering marketing expenses of another branch was charged by
Home Office to Esperanza.
c. Esperanza recorded a debit note on inventory transfers from Home Office of
P75,000 twice.
d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as
coming from Upi Branch.
e. Esperanza reversed a previous debit memo from Cotabato Branch mounting
to P10,500. Home Office debited that this charge is appropriately Upi
Branchs cost.
f.

Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650.

6.

The net adjustment in the Home Office books related to the Esperanza
Branch current amount is:
a.
b.
c.
d.

P75,700
65,700
86,200
94,820

7. The net adjustment in Esperanzas books related to the Home Office

account is:
a.
b.
c.
d.

P33,335
31,450
20,950
10,450

8. Before the above discrepancies were given effect, the balance in the Home
Office books of its Esperanza Branch Current account was debit balance of
P165, 920. The unadjusted balance in the Esperanza Branch books of its
Home Office Current account must be:
a. P92,336
b. 98,230
c. 104,500
d. 111,170
9. The adjusted balance of the reciprocal account is:
a.
b.
c.
d.

P84, 807
90, 220
99, 200
109, 120

CASE 3: LEILA MAES FLOWER SHOP (ACCRUAL)

The following information pertains to Leila Mas Flower Shop, a calendaryear sole proprietorship, which maintained its books on the cash basis during the
year.
Leila Mas Flower Shop
TRIAL BALANCE
December 31, 2008
Debit
Credit
Cash
P 102, 400
Accounts receivable
64, 800
Inventory, 12/31/2007
248, 000
Furniture & fixtures
472, 800
Land improvements
180, 000
Accumulated depreciation, 12/31/2007
P129, 600
Accounts payable, 12/31/2007
68, 000
Leila Maes, Drawings
Leila Maes, Capital, 12/31/2007
498, 400
Sales
2, 612, 000
Purchases
1, 220, 400
Salaries
696, 000
Payroll taxes
49, 600
Insurance
34, 800
Rent
136, 800
Utilities
50, 400
Living expenses
52, 000
P3, 308, 000
P3, 309, 000
Leila Maes has developed plans to extend into wholesale flower market
and is in the process of negotiating a bank loan to finance the expansion. The
bank is requesting 2008 financial statements prepared on the accrual basis of
accounting from Leila Maes. During the course of a review engagement, Marion,
Leila Maes accountant, obtained the following additional information.
1. Amounts due from customers totaled P128, 000 at December 31, 2008.
2. An analysis of the above receivables revealed that an allowance for
uncollectible accounts of P15, 200 should be provided.
3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at
December 31, 2008, and December 31, 2007, respectively.
4. The inventory totaled P291, 200 based on a physical count of the goods at
December 31, 2008. The inventory was priced at cost, which approximates
market value.
5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive
insurance coverage for 1 year. The premium on the previous policy, which
expired on April 30, 2008, was P31, 200.
6. On January 2, 2008, Leila Mae entered into 25-year operating lease for the
vacant lot adjacent to Barons retail store for use as a parking lot. As
agreed in the lease, Leila Mae paved and fenced in the lot at a cost P180,
000. The improvements were completed on April 1, 2008, and have an
estimated useful life of 15 years. No provision for depreciation or
amortization has been recorded. Depreciation on furniture and fixtures was
P48, 000 for 2008.

7. Accrued expenses at December 31, 2007 and 2008, were as follows:

Utilities
Payroll taxes

2000
P3, 600
4, 400
P8, 000

2001
P 6, 000
6, 400
P12, 400

8. Leila Mae is being sued for P16, 000. The coverage under the
comprehensive insurance policy is limited to P1, 000, 000. Leila Maes
attorney believes that an unfavorable outcome is probable and that a
reasonable estimate of the settlement is P1, 200, 000.
9. The salaries account includes P16, 000 per month paid to the proprietor.
Leila Mae also receives P1, 000 per week for living expenses.
Required: You are to convert the balances of the nine (9) accounts below to the
accrual basis.

MULTIPLE CHOICE QUESTIONS:

a

10. Accounts receivable

P64, 800
P63, 200
P128, 000
P192, 800
11. Inventory
291, 200
248, 000
43, 200
334,
400
12. Accounts payable
54, 000
68, 000
122, 000
176, 000
13. Sales
2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200
14. Purchases
1, 274, 400
1, 220, 400 1, 166, 400 1,
250, 000
15. Salaries
888, 000
696, 000
600, 000
504, 000
16. Payroll taxes
51, 600 47, 600
49, 600
50, 000
17. Insurance
34, 800
33, 600
36, 000
35,
000
18. Utilities
50, 400
48, 000
50, 000
52, 800
CASE 4: J& M CO. (BONDS)
The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747,
280 plus accrued interest. The bonds were dated July 1, 2001; interest payable
semiannually on January 1 and July 1; redeemable after June 30, 2006 to June 30,
2007, at 101, and thereafter until maturity at 100; and convertible into P10 par
value common stock as follows.
Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond.
From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000
bond.

After June 30, 2009, at the rate of 4 shares for each P1, 000 bond.

The bonds mature 10 years from their issue date. The company adjusts its
books monthly and closes its books as of December 31 each year.
The following transactions occur in connection with the bonds:
2007
July 1 P2, 000, 000 of bonds were converted into stock.
2008
Dec. 31

P1, 000, 000 face value of bonds were reacquired

at 99-1/4 plus accrued interest. These were
immediately retired.

2009
July 1 The remaining bonds were called for redemption
and accrued interest was paid. For purposes of obtaining funds for redemption
and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97. These
bonds are dated July 1, 2009, and are due in 20 years.

19. What are the carrying value of bonds payable at December 31, 2001?
a. P5, 747, 280
c. P5, 753, 760
b. P6, 000, 000
d. P5, 749, 440
20. What is the total interest expense for 2001?
a. P128, 520
c. P141, 480
b. P 47, 160
d. P135, 000
21. In recording the bond conversion on July 1, 200, how much should be credited
to the additional paid-in capital account?
a. P1, 796, 320
c. P1, 845, 440
b. P1, 965, 440
d. P1, 865, 440
22. What is the gain or loss on bond conversion on July 1, 2007?
a. P0
c. P1, 865, 440
b. P1, 796, 320
d. P
34, 560
23. What is the carrying value of the bonds reacquired on December 31, 2008?
a. P989, 200
c. P1, 010, 800
b. P957, 880
d. P 981, 700
24. What is the gain (loss) on bond reacquisition on December 31, 2008?
a. P3, 300
c. P34, 620
b. (P3, 300)
d. P (P34, 620)
25. What is the carrying value of the bonds retired on July 1, 2009?
a. P3, 000, 000
c. P2, 873, 640
b. P2, 974, 080
d. P3, 025, 920
26. What is the gain (loss) on bond retirement on July1, 2009?
a. (P25, 920)
c. (P12, 960)
b. P25, 920
d. P0

CASE 5: BLUE ICE CO. (R/E)

BLUE ICE COMPANYS stockholders equity account balance at December 31,
2008 were as follows:
Common Stock
800, 000
Additional Paid-in capital 1, 600, 000
Retained Earnings
1, 845, 000
The following 2009 transactions and other information relate to the stockholders
equity accounts:
a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which
160, 000 shares were issued and outstanding.
b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for
P10 per share to hold as treasury stock. The shares were originally issued
at P15 per share. BLUE ICE uses the cost method to account for treasury
stock. Treasury stock is permitted in BLUE ICEs state of incorporation.
c. On July 15, 2009, BLUE ICE declared and distributed a property dividend of
inventory. The inventory had a P75, 000 carrying value and a P60, 000 fair
market value.
d. On January 2, 2009, BLUE ICE granted stock options to employees to
purchase 20, 000 share of BLUE ICEs common stock at P18 per share,
which was the market on that date. The option may be exercised all 20, 000
options when the market value of the stock was P25 per share. BLUE ICE
issued new shares to settle the transaction.
e. BLUE ICEs net income for 2009 was P240, 000.
Instruction: Based on the information above and other analysis as necessary,
answer the following question.
27. BLUE ICEs Common Stock balance at December 31, 2009 is;
a. P1, 160, 000
b. P900, 000

c. P800, 000
d. P1, 300, 000

28. BLUE ICEs Additional Paid-in capital balance at December 31, 2009 is;
a. P1, 860, 000
c. P2, 000, 000
b. P1, 960, 000
d. P2, 100, 000
29. BLUE ICEs Retained Earnings balance at December 31, 2009 is;
a. P2, 085, 000
b. P2, 010, 000

c. P2, 025, 000

d. P1, 770, 000

30. BLUE ICEs Treasury Stock balance at December 31, 2009 is;
a. P50, 000
b. P75, 000

c. P0
d. P125, 000

31. BLUE ICEs Stockholders Equity balance at December 31, 2009 is;
a. P4, 910, 000
b. P4, 820, 000

c. P4, 720, 000

d. P4, 735, 000

CASE 6: LETICIAS CO. (PPE)

Information pertaining to LETICIA
equipment for 2009 is presented below.

COMPANYS

property,

plant

and

Account balances at January 1, 2009:

Debit
Credit
Land
6, 000, 000
Buildings
48, 000, 000
Accum. Depreciation Bldg.
10, 524, 000
Machinery and equipment
36, 000, 000
Accum. Depreciation Mach/Equip.
10, 000, 000
Automotive equipment
4, 600, 000
Accum. Depreciation Auto. Equip.
3, 384, 000
Depreciation data:

Depreciation
Method
Building
150% declining balance
Machinery/Equip.
SLM
Automotive Equip.
SYD
Leasehold improvements SLM

Useful
Life

25 years
10 years
4 years

Depreciation is computed to the nearest month.

Transactions during 2009 and other information are as follows:
On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and tradein of a 2-year-old car with a cost of P720, 000 and a book value of P216, 000. The
new car has a cash price of P960, 000; market value of the trade-in is not known.
On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related
lease terminates on December 31, 2008.
On July 1, 2009, machinery and equipment were purchased at a total invoice
cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000, 000
for installation were incurred.
LETICIA determined that the automotive equipment comprising the P4, 600, 000
balance at January 1, 2009, would have been depreciated at a total amount of
P720, 000 for the year ended December 31, 2009.
Instruction: Based on the information above and other analysis as necessary,
answer the following question:
32. What is the depreciation on building for 2009?
a. P1, 499, 040
b. P2, 880, 000

c. P2, 998, 080

d. P2, 248, 557

33. What is the book value of the building at December 31, 2009?
a. P34, 596, 000
b. P35, 976, 960

c. P34, 477, 920

d. P35, 227, 393

34. What is the depreciation on machinery and equipment for 2009?

a. P4, 128, 000
b. P4, 151, 000

c. P4, 220, 000

d. P4, 197, 000

35. What is the gain on machine destroyed by fire?

a. P620, 000
b. P300, 000

c. P160, 000
d. P460, 000

36. What is the balance of the accumulated depreciation machinery and

equipment at December 31, 2009?
a. P13, 231, 000
b. P13, 777, 000

c. P13, 760, 000

d. P13, 691, 000

37. What is the depreciation on automotive equipment for 2009?

a. P1, 104, 000
b. P816, 000

c. P720, 000
d. P960, 000

38. What is the gain (loss) on car traded in?

a. P (240, 000)
b. P240, 000

c. P (56, 000)
d. P56, 000

39. What is the depreciation on leasehold improvement for 2009?

a. P756, 000
b. P672, 000

c. P560, 000
d. P630, 000

40. What is the book value of leasehold improvements at December 31, 2009?
a. P6, 160, 000
b. P6, 048, 000

c. P6, 090, 000

d. P5, 964, 000

CASE 7: ST. JOHN AND ST. THERESE

Financial Statements for St. John and St. Therese on December 31, 2009 follows:
Income Statements for the year ended 12/31/02
St. John

St. Therese

Sales
Cost of sales
Gross Margin
Depreciation and interest expense
Other operating expenses
Net income from operations
Gain on sale of equipment
Gain on bonds
Equity in subsidiarys income
Net income

750, 000
420, 000
581, 000
266, 000
169, 000
154, 000
28, 400
16, 200
117, 000
128, 400
23, 600
9, 400
3, 000

01/01/02 Retained Earnings

Net Income (from above)
Total
Dividends
12/31/02 Balance

48, 000
35, 060
83, 060
(15, 000)
68, 060
=========

8, 460
.
35, 060
9, 400
========
========
Statement of Retained Earnings for the year ended 12/31/02
41, 000
9, 400
50, 400
(4, 000)
46, 400
========

Balance Sheet as of December 31, 2009

Cash

45, 300

6, 400

Accounts receivable (net)

Inventories
Equipment
Accumulated depreciation
Investment in stock of St. John
Investment in bonds of St. Therese
Patents

Accounts payable
Bonds payable
Capital Stock
Additional paid-capital
Retained earnings (from above)

43, 700

12, 100
20, 750
57, 000
(35, 200)
(18, 900)
125, 460
44, 000
.
9, 000
412, 560
130, 350
=========
========

38, 300
195, 000

8, 900
18,
100, 000
154, 000
50,
81, 600
15,
68, 060
46,
412, 560
130, 350
======== =========

950
000
000
400

St. John acquired 90% of the common stock of St. Therese for P120, 600 on
January 1, 2009.
The following additional information is available in the first year after the
acquisition.
1. During 2009, St. John sold merchandise to St. Therese that originally cost St.
John P15, 000, and the sale was made for P20, 000. On December 31, 2008, St.
Thereses inventory included merchandise purchased from St. John at a cost to St.
Therese of P12, 000.
2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese.
St. Therese uses normal markup of 25% above cost. St. Johns ending inventory
includes P10, 000 of the merchandise acquired from St. Therese.
3. St. Therese reduced its intercompany account payable to St. John to a balance
of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on
December 30. This P1, 000 payment was still in transit on December 31, 2009.
4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000.
The equipment was originally purchased by St. John for P5, 000 and had a book
value of P4, 000 at the date of sale to ST. Therese. The equipment had an
estimated remaining life of 4 years as of January 2, 2009.
5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the
outstanding bonds issued by St. John. The bonds mature on December 31, 2005,
and were originally issued at par. The bonds pay interest annually on December
31 of each year, and the interest was paid to the prior investor immediately
before St. Thereses purchase of bonds.
QUESTION:
Assume that the combination is accounted for as PURCHASE.
41. What is the eliminating entry for the Equity in subsidiarys income and
dividends declared by the subsidiary?
a. Equity in subsidiarys income
8, 460
Investment in stock of St. Therese
8, 460
b. Equity in subsidiarys income
8, 460
Dividends declared St. Therese
3, 600
Investment in stock of St. Therese
4, 860
c. Equity in subsidiarys income
12, 060
Investment in stock of St. Therese
12, 060
d. No Eliminating Entry
42. What is the eliminating entry for St. Thereses
a. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Goodwill
Investment in stock of St. Therese
b. Capital; stock St. Therese
Additional paid-in capital St. Therese

stockholders equity?
45, 000
13, 500
36, 900
25, 200
120, 600
45, 000
13, 500

Retained earnings St. Therese

Investment in stock of St. Therese
c. Capital stock St. Therese
Additional paid-in capital
Retained earnings St. Therese
Goodwill
Investment in stock of St. Therese
d. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Investment in stock of St. Therese

36, 900
95, 400
50, 000
15, 000
46, 400
14, 060
125, 460
50, 000
15, 000
46, 400
111, 400

43. To eliminate the sales made by St. John to St. Therese, the entry is:
a. Sales
20, 000
Inventory St. Therese (B/S)
3, 000
Purchases
20, 000
Inventory St. Therese (I/S)
3, 000
b. Sales
20, 000
Cost of sales
17, 000
Inventory St. Therese
3, 000
c. Sales
Inventory St. Therese
Cost of sales
d. Retained Earnings
Sales
Inventory St. Therese
Cost of sales

20, 000
3, 000
23, 000
3, 000
20, 000
3, 000
20, 000

44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume
that Equity in subsidiary income has not been recorded by parent)
a. Sales
18, 000
Inventory
2, 000
Cost of sales
16, 000
b. Sales
18, 000
Investment in stock of St. Therese 1, 600
Retained earnings St. Therese
400
Cost of sales
18, 000
Inventory
2, 000
c. Sales
18, 000
Retained earnings
2, 000
Cost of sales
18, 000
Inventory
2, 000
d. Sales
18, 000
Inventory
2, 000
Cost of sales
20, 000
45. To record the items in transit and to eliminate the inter-companys
payable/receivable, the entry is:
a. Accounts payable
4, 000
Accounts receivable
4, 000
b. Accounts receivable
4, 000
Cash
1, 000
Accounts payable
5, 000
c. Cash
1, 000
Accounts payable
3, 000
Accounts receivable
4, 000
d. Cash
1, 000
Accounts payable
4, 000
Accounts receivable
5, 000
46. To eliminate the acquisition made by St. Therese from St. John, the entry is:
a. Equipment
2, 000
Accumulate depreciation
1, 000
Gain on sale of equipment
3, 000
b. Gain on sales of equipment
3, 000
Equipment
2, 000
Accumulated depreciation
250
Depreciation expense
750
c. Gain on sale of equipment
3, 000

Equipment
Accumulated depreciation
d. Gain on sale of equipment
Equipment
Depreciation expense

3, 000

2, 000
1, 000
2, 000
1, 000

47. The depreciation recorded by St. John at December 31, 2009 is:
a. Overstated by P750
c. Overstated by P1, 750
b. Overstated by P250
d. Understated by P1, 000
48. The entry to eliminate the bonds purchased by St. Therese from St. John is:
a. Bonds payable
50, 000
Investment in bonds of St. John
44, 000
Gain on extinguishments of debt
6, 000
b. Investment of St. John
44, 000
Loss on extinguishments of debt
6, 000
Bonds payable
50, 000
c. Bonds payable
44, 000
Investment in bonds of St. John
44, 000
Retained earnings
6, 000
d. Bonds payable
50, 000
Investment in bonds of St. John
44, 000
Retained earnings
6, 000
For items 49-50, assume that the combination is accounted for as POOLING OF
INTEREST.
49. What is the eliminating entry for the Equity in subsidiarys income and
dividends declared by the subsidiary?
a. Equity in subsidiarys income
8, 460
Investment in stock of St. Therese
8, 460
b. Equity in subsidiarys income
8, 460
Dividends declared St. Therese
3, 600
Investment in stock of St. Therese
4, 860
c. Equity in subsidiarys income
12, 060
Investment in stock of St. Therese
12, 060
e. No eliminating Entry
50. What is the eliminating entry for St. Thereses
a. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Goodwill
Investment in stock of St. Therese
b. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Investment in stock of St. Therese
c. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Goodwill
Investment in stock of St. Therese
d. Capital stock St. Therese
Additional paid-in capital St. Therese
Retained earnings St. Therese
Investment in stock of St. Therese

stockholders equity?
45, 000
13, 500
36, 900
25, 200
120, 600
45, 000
13, 500
36, 900
95, 400
50, 000
15, 000
46, 400
14, 060
125, 460
50, 000
15, 000
46, 400
111, 400