University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
PROBLEM NO. 1
You are engaged to examine the financial statements of the Olive Manufacturing Corp. for the year
ended December 31, 2019. The following schedules for property, plant, and equipment and related
accumulated depreciation accounts have been prepared by your client. The opening balances agree with
your prior year’s audit working papers.
Olive Manufacturing Co.
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2019
Audited Per books
Cost 12-31-18 Additions Retirement 12-31-19
Land P450,000 P100,000 P- P550,000
Buildings 2,400,000 350,000 - 2,750,000
Machinery & equipment 2,770,000 808,000 520,000 3,526,000
P5,620,000 P1,258,000 P520,000 P6,826,000
Audited Per books
Accumulated Depreciation 12-31-18 Additions Retirement 12-31-19
Buildings P1,200,000 P103,000 P - P1,303,000
Machinery & equipment 546,500 313,600 - 860,100
P1,746,500 P416,600 P - P2,163,100
Further investigation revealed the following:
a. All depreciable assets are depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Buildings – 25 years, all other items 10 years.
b. The company entered into a lease contract for a derrick machine with annual rental of P100,000
payable in advance every April 1. The parties to the contract stipulated that a 30-day written notice
is required to cancel the lease. Estimated useful life is 10 years. The derrick was recorded under
machinery and equipment at P808,000 and P60,600, applicable to the machine was included in the
depreciation expense during the year.
c. The company finished construction of a new building wing in June 30. The useful life of the main
building was not prolonged. The lowest construction bid was P350,000 which was the amount
recorded. Company personnel constructed the building at a total cost of P330,000.
d. P100,000 was paid for the construction of a parking lot which was completed on July 1, 2019. The
expenditure was charged to land.
e. The P520,000 equipment under retirement column represent cash received on October 1, 2019 for
a machinery bought on October 1, 2015 for P960,000. The bookkeeper recorded depreciation
expense of P72,000 on this machine in 2019.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
f. The company’s president donated land and building appraised at P200,000 and P400,000
respectively to the company to be used as plant site. The company began operating the plant on
September 30, 2019. Since no money was involved, the bookkeeper did not make any entry for the
above transaction.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the buildings on December 31, 2019 is
a. P1,820,250 c. P1,816,250
b. P1,827,400 d. P1,447,000
2. The carrying amount of the land on December 31, 2019 is
a. P650,000 c. P750,000
b. P450,000 d. P545,000
3. The carrying amount of the property, plant and equipment as of December 31, 2019 is
a. P3,860,750 c. P3,955,750
b. P3,755,750 d. P3,312,900
4. The loss on the disposal of the machinery sold for P520,000 is
a. P56,000 c. P152,000
b. P80,000 d. P 0
5. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of
the audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
d. Expenditures for property and equipment have not been charged expense.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
PROBLEM NO. 2
You were able to obtain the following information in connection with your audit of the Cash account
of the Syria Company as of December 31, 2019:
November 30 December 31
a. Balances per bank P480,000 P420,000
b. Undeposited collections 244,000 300,000
c. Outstanding checks 150,000 120,000
d. The bank statement for the month of December showed total credits of P240,000.
e. DAIF checks are recorded as a reduction of cash receipts. DAIF checks which are later redeposited
are then recorded as regular receipts. Data regarding DAIF checks are as follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.
f. Check of Syrio Company amounting to P90,000 was charged to the company’s account by the bank
in error on December 31.
g. A bank memo stated that the company’s account was credited for the net proceeds of a customer’s
note for P106,000.
h. The company has hypothecated its accounts receivable with the bank under an agreement whereby
the bank lends the company 80% of the hypothecated accounts receivable. The company performs
accounting and collection of the accounts. Adjustments of the loan are made from daily sales
reports and deposits.
i. The bank credits the company account and increases the amount of the loan for 80% of the reported
sales. The loan agreement states specifically that the sales report must be accepted by the bank
before the company is credited. Sales reports are forwarded by the company to the bank on the first
day following the date of sale. The bank allocates each deposit 80% to the payment of the loan,
and 20% to the company account. Thus, only 80% of each day’s sales and 20% of each collection
deposits are entered on the bank statement. The company accountant records the hypothecation of
new accounts receivable (80% of sales) as a debit to Cash and a credit to the bank loan as of the
date of sales. One hundred percent of the collection on accounts receivable is recorded as a cash
receipt; 80% of the collection is recorded in the cash disbursements books as a payment on the loan.
In connection with the hypothecation, the following facts were determined:
• Included in the undeposited collections is cash from the hypothecation of accounts receivable.
Sales were P180,000 on November 30, and P200,000 at December 31. The balance was made
up from collections which were entered on the books in the manner indicated above.
• Collections on accounts receivable deposited in December, other than deposits in transit, totaled
P725,000.
j. Interest on the bank loan for the month of December charged by the bank but not recorded in the
books, amounted to P38,000.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
QUESTIONS:
Based on the above and the result of your audit, answer the following:
6. How much is the unadjusted balance per books as of November 30, 2019?
a. P504,000 c. P430,000
b. P484,000 d. P356,000
7. How much is the unadjusted book receipts for December, 2019?
a. P860,000 c. P735,000
b. P770,000 d. P738,000
8. How much is the unadjusted book disbursements for December, 2019?
a. P773,000 c. P735,000
b. P700,000 d. P760,000
9. How much is the unadjusted balance per books as of December 31, 2019?
a. P481,000 c. P309,000
b. P530,000 d. P539,000
10. Cash receipts should be deposited on the day of receipt or the following business day. Select the
most appropriate audit procedure to determine that cash is promptly deposited.
a. Review cash register tapes prepared for each sale.
b. Compare the daily cash receipts totals with the bank deposits.
c. Review the functions of cash handling and maintaining accounting records for proper
separation of duties.
d. Review the functions of cash receiving and disbursing for proper separation of duties.
PROBLEM NO. 3
Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1, 2019. The
interest rate on the loan is 10% payable annually starting December 31, 2019. The loan matures in five
years on December 31, 2023. Bahrain Bank incurs P130,900 of direct loan origination cost and P50,000
of indirect loan origination cost. In addition, Bahrain Bank charges the borrower a 5-point
nonrefundable loan origination fee.
The borrower paid the interest due on December 31, 2019. However, during 2013 the borrower began
to experience financial difficulties, requiring the bank to reassess the collectibility of the loan. As of
December 31, 2020, the bank expects that only P8,000,000 of the principal will be recovered. The
P8,000,000 principal amount is expected to be collected in two equal installments on December 31,
2022 and December 31, 2024. The prevailing interest rates for similar type of note as of December 31,
2019 and 2020 are 15% and 16%, respectively.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors
to four decimal places)
11. The interest income to be recognized in 2019 is
a. P1,000,000 c. P1,080,150
b. P1,059,399 d. P1,051,346
12. The carrying amount of the loan as of December 31, 2019 is
a. P10,000,000 c. P9,690,299
b. P 9,732,246 d. P9,580,150
13. The loan impairment loss to be recognized in 2020 is
a. P3,875,032 c. P4,118,800
b. P3,809,099 d. P 0
14. Which of the following audit procedures provides the best evidence about the collectibility of notes
receivable?
a. Examination of cash receipts records to determine promptness of interest and principal
payments.
b. Reconciliation of the detail of notes receivable and the provision for uncollectible amounts to
the general ledger control.
c. Confirmation of note receivable balances with the debtors.
d. Examination of notes for appropriate debtors' signatures.
15. A logical substantive test for accrued interest receivable would be to
a. Verify the interest income by a calculation based on the face amount of notes and the nominal
interest rate.
b. Recalculate interest earned and compare it to the amounts received.
c. Verify the cost, carrying value, and market value of notes receivable.
d. Compare the interest income with published interest investment records.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
PROBLEM NO. 4
On December 31, 2018, La Cost Company’s financial statements showed the following balances
related to its securities accounts:
Financial assets measured at FVPTL P1,477,500
Financial assets measured at FVOCI 1,180,000
La Cost’s securities portfolio on December 31, 2018, was made up of the following securities:
Security Classification Cost Fair value
10,000 Yeye Bonel Corp. shares FVPTL P750,000 P762,500
8,000 Totoy Bibo Inc. shares FVPTL 550,000 528,250
10% Mayniladlad bonds FVPTL 250,000 186,750
10,000 Bulaklak Inc. shares FVOCI 590,000 630,000
20,000 Jumbo Inc. shares FVOCI 490,000 550,000
During 2019, the following transactions took place:
Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. for P229,500, classified as
FVPTL.
Apr. 15 Sold 4,000 shares of Totoy Bibo Inc. for P69 per share.
May 4 Sold 4,000 shares of Bulaklak Inc. for P62 per share.
Oct. 30 Purchased 15,000 shares of Pasaway Co. for P832,500, classified as FVPTL.
The fair values of the shares and bonds on December 31, 2019, are as follows:
Yeye Bonel Corp. shares P76.60 per share
Totoy Bibo Inc. shares P68.50 per share
Pasaway Co. shares P55.25 per share
Mayniladlad water bonds P205,550
Bulaklak Inc. shares P61.00 per share
Jumbo Unlimited Inc. shares P27.00 per share
QUESTIONS:
Based on the above and the result of your audit, determine the following:
16. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2019,
a. P1,000 gain c. P11,875 gain
b. P1,000 loss d. P11,875 loss
Bonus point – Where is the gain/loss recognized?
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
17. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2019
a. P12,000 gain c. P12,000 loss
b. P 4,000 gain d. P 4,000 loss
Bonus point – Where is the gain/loss recognized?
18. Carrying amount of financial asset at FVPTL as of December 31, 2019
a. P2,337,000 c. P2,304,100
b. P2,287,800 d. P2,297,400
19. Carrying amount of financial asset at FVOCI as of December 31, 2019
a. P844,000 c. P906,000
b. P806,000 d. P944,000
20. In 2019, what amount of unrealized gain or loss should be shown as component of income and
equity?
Income Equity
a. P28,725 gain P62,000 gain
b. P28,725 gain P22,000 loss
c. P32,900 loss P122,000 loss
d. P39,600 gain P78,000 gain
Bonus point – what is the movement of the equity component for FY2019?
PROBLEM NO. 5
Perseverance Corporation was authorized at the beginning of 2017 with 300,000 authorized shares of
P100, par value ordinary shares. At December 31, 2017, the shareholders’ equity section of
Perseverance was as follows:
Share capital, par value P100 per share; authorized 300,000 shares; issued 30,000 shares P3,000,000
Share premium 300,000
Retained earnings 450,000
Total shareholders’ equity P3,750,000
On June 15, 2018, Perseverance issued 50,000 ordinary shares for P6,000,000. A 5% share dividend
was declared on September 30, 2018 and issued on November 10, 2018 to shareholders of record on
October 31, 2018. Market value of ordinary share was P110 per share on declaration date. The profit
of Perseverance for the year ended December 31, 2018 was P475,000.
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
During 2019, Perseverance had the following transactions;
Mar. 1 Perseverance reacquired 3,000 shares of its ordinary shares for P95 per share.
May 31 Perseverance sold 1,500 treasury shares for P120 per share.
Aug. 10 Issued to shareholders one right for each share held to purchase two additional
ordinary shares for P125 per share. The rights expire on December 31, 2019.
Sep. 15 25,000 rights were exercised when the market value of ordinary share was P130
per share.
Oct. 31 40,000 rights were exercised when the market value of the ordinary share was P140
per share.
Dec. 10 Perseverance declared a cash dividend of P2 per share payable on January 5, 2020
to shareholders of record on December 31, 2019.
Dec. 20 Perseverance retired 1,000 treasury shares and reverted them to an unissued basis.
On this date, the market value of the ordinary share was P150 per share.
Dec. 31 Profit for 2019 was P500,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
21. Share capital
a. P21,400,000 c. P14,800,000
b. P21,300,000 d. P21,250,000
22. Share premium
a. P4,627,500 c. P4,632,500
b. P3,007,500 d. P4,592,500
23. Total retained earnings
a. P600,000 c. P557,000
b. P565,000 d. P560,000
24. Total equity
a. P26,397,500 c. P26,492,500
b. P25,932,500 d. P26,445,000
University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Assignment #1 - Comprehensive Problems
Auditing Problem
25. An auditor usually obtains evidence of shareholders’ equity transactions by reviewing the entity’s
a. Canceled stock certificates.
b. Transfer agent’s records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
