Problem no.1

In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following:

Trade creditors, credit balances P 1,363,000Trade creditors, debit balances 63,000

Net P 1,300,000Estimated warranty on products sold 100,000Customer’s deposits 9,000Due to officers and shareholders for advances 50,000Goods received on consignment at selling price

(offsetting debit made to Purchases) 41,000P 1,500,000

A further analysis of the “Trade Creditors” debit balances indicates:

Date Items AmountMiscellaneous debit balances prior to 2007.

No information available due to lossof records in a fire. P 3,000

03/03/07 Manila Co. –Merchandise returned for credit, but the company is now out of business 8,000

06/10/09 Cebu Corp. – Merchandise returned but Cebusays “never received” 7,000

07/10/10 Jolo Distributors – Allowance granted ondefective merchandise after the invoicewas paid 5,000

10/10/10 Bulacan Co – Overpayment of invoice 12,000

12/05/10 Advance to Zambales Co. This company agreesto supply certain articles on a cost –plus basis 24,000

12/05/10 Goods returned for credit and adjustments onprice after the invoices were paid; credit memosfrom supplier not yet received 4,000

63,000

Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received.

In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011.

The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010. These goods are included in your adjusted inventory.

1. The Accounts payable – Trade balance at December 31, 2010 should be

A. P 1,471,000 B. P 1,614,000C. P 1,214,000 D. P 1,477,000

2. The net adjustment to Purchases should include a

A. Net debit of P 51,000

B. Net credit of P 41,000C. Net debit of P 10,000D. Net debit of P 73,000

3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to

A. P 18,000 B. P 23,000C. P 35,000 D. P 39,000

4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to

A. Miscellaneous losses if P 23,000B. Advances to suppliers of P 24,000C. Suppliers to debit balances of P 18,000D. Purchases of P 21,000

5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because

A. There is likely to be other reliable external evidence to support the balancesB. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-paymentC. This is a duplication of cutoff testD. Accounts payable at the end of reporting period may not be paid before the audit is completed.

Problem 2

You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010.

Accounts payable P 650,000Notes payable – trade 190,000Notes payable – bank 800,000Wages and salaries payable 15,000Interest payable ?Mortgage notes payable – 10% 600,000Mortgage notes payable – 12% 1,500,000Bonds Payable 2,000,000

The following additional information pertains to these liabilities:a. All trade notes payable are due within six months of the balance sheet date.b. Bank notes payable include two separate notes payable Allied Bank.

(1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months.

(2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on December 31, 2010

c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010, Mavericks is three months behind in paying its required interest payment.

d. The 12% mortgage note was issued may 1, 2001, with a term of 20 years. The current principal amount due is P 1,500,000. Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011. The payment includes interest of P 180,000.

e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31.

Based on the above and the result of your audit, answer the following:1. Interest payable as of December 31, 2010 is

a. P155,000 b. 143,000 c. 203,000 d. 215,000

2. The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is

a. P 300,000 b. 500,000 c.800,000 d. 03. Total current liabilities as of December 31, 2010 is

a. P 3,950,000 b. 4,138,000 c. 3,938,000d. 3,998,000

4. Total noncurrent liabilities as of December 31, 2010 isa. P1,760,000 b. 2,560,000 c. 3,960,000

d. 1,960,000

Problem no. 3In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher register the information shown in the working paper below.

Item no.

Entry Date Voucher Ref.

Description Amount Account Charged

1 12.18.10 12-202 Supplies, purchased FOB destination, 23.26.20;

received 12.17.10

P 20,000 Supplies on hand

2 12.18.10 12-204 Auto insurance, 12.15.10 12.20.11

24,000 Prepaid insurance

3 12.21.10 12-206 Repairs services; received 12.20.10

24,000 Repairs and maintenance

4 12.21.10 12-214 Merchandise, shipped FOB Shipping point, 11.20.10;

received 12.04.10

17,000 Inventory

5 12.21.10 12-219 Payroll, 12.06.10 to 12.20.10 (12 working days)

69,000 Salaries and wages

6 12.26.10 12-221 Subscription to Tax Reporting Service for 2011

5,000 Dues and subscription

7 12.28.10 12-230 Utilities for December 2010 29,000 Utilities expense8 12.28.10 12-234 Merchandise, shipped FOB

destination, 12.24.10; received 01.02.11

111,500 Inventory

9 12.28.10 12-243 Merchandise, shipped FOB destination, 12.26.10;

received 12.29.10

84,000 Inventory

10 01.02.11 01-001 Legal services; received 12.28.10

46,000 Legal and professional expense

11 01.05.11 01-002 Medical services for employees for December

2010

25,000 Medical expense

12 01.05.11 01-003 Merchandise, shipped FOB shipping point, 12.29.10;

received 01.04.11

55,000 Inventory

13 01.05.11 01-004 Payroll, 12.21.10 to 01.05.11 (12 working days in total, 4 working days in

Jan. 2011

72,000 Salaries and wages

14 01.10.11 01-005 Merchandise, shipped FOB shipping point, 01.02.11;

received 01.05.11

64,000 Inventory

15 01.12.11 01-006 Manufacturing royalties December 2010

39,000 Manufacturing cost

16 01.12.11 01-007 Merchandise, shipped FOB destination, 01.03.11;

received 01.10.11

38,000 Inventory

17 01.13.11 01-008 Maintenance e services; received 01.09.11

9,000 Repairs and maintenance

18 01.14.11 01-009 Interest on bank loan, 10-12-10 to 021.10.11

30,000 Interest Expense

19 01.15.11 01-010 Manufacturing equipment installed on 12.29.10

254,000 Machinery and equipment

20 01.15.11 01-011 Dividends declared, 12.15.10

160,000 Dividends payable

Accrues liabilities as December 31, 2010 were as follows:Accrued payroll P 48,000Accrued interest payable 26,667Dividends payable 160,000Accrues royalties payable 39,000

The accrues payroll, accrued interest payable, and accrued royalties payable accounts were reversed on January 1, 2011.

REQUIRED:Prepare adjusting entries as of December 31, 2010 based on your review of the data given above.

PROBLEM NO 4FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of March 31, 2010.

BONDS PAYABLEFeel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount

NOTES PAYABLEFeel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010

Due Date Amount DueApril 1, 2010 P 400,000July 1, 2010 600,000October 1, 2010 300,000April 1 2011 - March 31, 2012 300,000April 1, 2012 – March 31, 2013 1,200.000April 1, 2013 – March 31, 2014 1,000,000April 1, 2014 – March 31, 2015 800,000April 1, 2015 – March 31, 2016 1,000,000

P 7,000,000ESTIMATED WARRANTIES

Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows:

Warranty claims honored on 2008-2009 sales P 180,000Warranty claims honored on 2009-2010 sales 178,000Total warranty claims honored P 358,000

OTHER INFORMATION

1. TRADE PAYABLESAccounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010

2. PAYROLL RELATED ITEMS

Merchandise, shipped FOB destination, 12.24.10; received 01.02.11Accrued Salaries and wages P 300,000Withholding taxes payable 94,000Other payroll deductions 10,000

3. MISCELLANEOUS ACCRUALSOther accruals not separately classified amount to P150,000 as of March 31, 2010

4. DIVIDENDSOn march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of

P0.20 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding Feel Na Feel common stock are as follows:

Per Value P 5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market Values of Common Stock:March 15, 2010 P 22.00 per shareMarch 31, 2010 21.50 per shareApril 12, 2010 22.50 per

share

1. How much was received by Feel Na Feel from the bonds issued on July 1, 2008?a. P8,852,960 b. 10,000,000 c. 10,500,000 d.

10,647,0402. On March 31, 2010, Feel Na Feel’s statements of financial position would report total current

liabilities ofa. P5,286,000 b. 4,386,000 c. 5,336,000 d.

5,642,0003. On March 31, 201, Feel Na Feel’s statement of financial position would report total

noncurrent liabilities of a. P14,389.350 b. 14,352,217 c. 14,370,783 d.

14,252,960

PROBLEM NO. 5

On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Wizards uses the effective interest method of amortization. On December 31, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.

Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.)

1. The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 isa. P2,155.500 b. P2,000,000 c. 1,844,400

d. 2,147,800

2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 isa. 1,898,400 b. 2,129,500 c. 2,000,000 d.

2,121,1003. The gain on early retirement of bonds on December 31, 2010 is

a. P20,000 b. 112,000 c. 121,200 D. 04. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is

a. P4,605,800 b. 5,000,000 c. 4,732.875d. 4,615,400

5. The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by

a. P1,485,000 b. 1,374,000 c. 1,415.054d. P1,377,697

PROBLEM NO. 6The following data were obtained from the initial audit of BIBI COMPANY:

15%, 10 year, bonds payable, dated January 1, 2009 Debit Credit

BalanceCash proceeds from issue on January 1, 2009Of 1,000, P1,000 bonds. The market rate ofInterest on the date of issue was 12% P 1,172,044 P1,172.044

Bond Interest ExpenseCash paid, 1/2/10 P 75,000 P 75,000Cash paid, 7/1/10 75,000 150,000Accrual, 12/31/10 75,000 225,000

Accrued Interest on Bonds Balance, 1/1/10 P 75,000 P 75,000Accrual, 12/31/10 75,000 150,000

Treasurer bondsRedemption price and interest to date on200 bonds permanently retired on 12/31/10 P 265,000 P

265,000

Based on the preceding information, determine the following:1. Carrying value of bonds payable at December 31, 2010

a. P831,110 b. 800,000 c. 1,151,583 d. 921,266

2. Loss on Bond redemptiona. P4,683 b. P19,683 c. 15,000 d. 34,683

3. Accrued Interest on Bonds at December 31, 2010a. P75,000 b. 135,000 c. 60,000 d. 52,500

4. Bond Interest Expense for the year ended December 31, 2010a. P150,000 b. 1398,174 c. 69,745 d. 160,826

PROBLEM 7 NUGGETS CORPORATION manufactures and sells food products and food processing machinery. Its reporting date is December 31. Relevant extracts from its financial statements at December 31, 2009 are as follows:

Current liabilitiesProvision

Provision for warranties P270,000

Noncurrent liabilitiesProvision

Provision for warranties P180,000

Note 36-Contigent LiabilitiesNUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums. NUGGETS strenuously denies the allegation and , as at the same date authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any cost or damages that may be [payable to the plaintiffs.

The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year.

Estimated cost of repairs – Products with minor defects P 1,000,000Estimated cost of repairs – Products with minor defects P 6,000,000Expected % of products sold during 2008 having no defects in 2010 80%Expected & of products sold during 2008 having minor defects in 2010 15 %Expected & of products sold during 2008 having Major defects in 2010 5%

-those with minor defects all in 2010

Expected timing of settlement of warranty payments-those with major defects 40%

in 2010

60% in 2010

During the year ended December 31, 2010, the following occurred:

1. In a relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision. Of the amount paid, P150,000 was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2010/

2. In calculating its warranty provision for December 31, 2010, NUGGETS made the following adjustment to the assumptions used for the prior year:Estimated cost of repairs-products with minor defects no change Estimated cost if repairs – products with major defects P 5,000,000Expected % of products sold during 209 having no defects in 2011 85%Expected % of products sold during 2009 having minor defects in 2011 13%Expected % of products sold during 2009 having major defects in 2011 2%

-those with minor defects all in one 2011Expected timing of settlement of warranty payments 20% in 2011

-those with major defects 80% in 2012

3. NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011 at an estimated cost of P250,000. The carrying amount of the conveyor belt at December 31, 2009 was P140,000. Its original cost was P200,000

4. NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs. As at December 31, 2010, NUGGETS had paid P800,000

5. NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above, in October 2010, the court found in favor of NUGGETS. The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue. NUGGETS estimated that it would receive about P425,000.

6. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary, ChapaChocks Ltd. ChapaChocs’ loan with Choko Bank was P3,200,000 as at December 31, 2010. ChapaChocs was in a strong financial position at 31 December 2010

Based on the above and the result of your audit, answer the following:

1. The warranty expense in 2010 isa. P100,000 b. 400,000 c. 160,000 d.

230,0002. The provision for warranties as of December 31, 2010 is

a. P580,000 b. 230,000 c. 480,000 d. 410,000

3. The provision for warranties to be reported as current liability as of December 31, 2010 isa. 220,000 b. 150,000 c. 400,000 d,

330,0004. The provision for warranties to be reported as noncurrent liability as of December 31, 2010 is

a. P. 80,000 b. P260,000 c. 150,000 d. 330,000

5. Total provisions to be reported in the statement of financial position as of December 31, 2010 isa. P480,000 b. 410,000 c. 1,180,000 d.

1,360,000

PROBLEM NO 8

Select the best answer for each of the following:

1. In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of.

a. Existence c. Completeness

b. Presentation and disclosure d. Valuation and allocation

2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consist of all

a. Merchandiser received c. Canceled checksb. Vendor’s invoices d. receiving

reports3. The primary audit test to determine if accounts payable are valued properly is

a. Confirmation of accounts payableb. Vouching accounts payable to supporting documentationc. An analytical procedured. Verification that accounts payable was reported as a current liability in

the balance sheet. 4. Which of the following procedures is least likely to be performed before the

balance sheet date?a. Observation of inventory count.b. Testing of internal control over cash.c. Search for unrecorded liabilities.d. Confirmation of receivables.

5. An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should.

a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception

b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often.

c. Disagree with the assistant because two problems have an equal risk of loss associated with them

d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.

6. When using confirmation to provide evidence about completeness assertion for account payable, the appropriate population most likely is

a. Vendors with whom the entity has previously done businessb. Amounts recorded in the accounts payable subsidiary ledger c. Payees of checks drawn in the month after the year end.d. Invoices filed in the entity’s open invoice file.

7. Which of the following is a substantive test than an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable?

a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for.

b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

d. Confirming accounts payable balances with know suppliers who have zero balances.

8. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false. The false statements is that

a. Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers

b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ]

c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date.

d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date.

9. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the

a. Quantity C. Priceb. Quality d. Terms

10. Which of the following audit procedures is least likely to detect an unrecorded liability?

a. Analysis and recomputation of interest expenseb. Analysis and recomputation of depreciation expense.c. Mailing of standard bank confirmation forms.d. Reading of the minutes of meetings of the board of directors

11. Unrecorded liabilities are most likely to be found during the review of which of the following documents?

a. Unpaid bills c. bills of ladingb. Shipping records d. Unmatched sales invoice

12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

a. Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.

c. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.

d. Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date,

13. In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase

a. Journal c. Orderb. Requisitions d. Invoices.

14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees

a. Test footings in the accounts payable ledgerb. Reconcile unpaid invoices to vendors statements

c. Prepare a schedule of accounts payabled. Mail confirmation for selected account balances

15. An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about

a. Existence c. Completenessb. Presentation and disclosure d. Valuation

16. An auditors program to audit long-term debt should include steps that requirea. Examining bond trust indenturesb. Inspecting the accounts payable subsidiary ledgerc. Investigating credits to the bond interest income accountd. Verifying the existence of the bondholders.

17. In an audit of bonds payable, an auditor expects the trust indenture to include thea. Auditee’s debt-to-equity ratio at the same time of issuanceb. Effective yield of the bonds issuedc. Subscription listd. Description on the collateral

18. In auditing long-term bonds payable, an auditor most likely willa. Perform analytical procedures on the bond premium and discount

accountsb. Examine documentation of assets purchased with the bond proceeds or

liensc. Com[pare interest with the bond payable amount for reasonablenessd. Confirm the existence of individual bondholders at year-end

19. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because

a. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction

b. Accrued liability balances are less material than account payable balances.

c. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available

d. Accrued liabilities at year end will become account payable during the following year

20. The auditor is most likely to verify accrued commissions payable in conjunction with the

a. Sales cutoff test.b. Verification of contingent liabilities.c. Review of post-balance sheet date disbursements.d. Examination of trade accounts payable

Suggested Answers

Problem 1 Problem 81. D 1. C2. C 2. B3. A 3. C4. B 4. C5. A 5. DProblem 2 6. A1. B 7. C2. A 8. B3. C 9. B4. D 10. BProblem 3 11. AAdjusting entries 12. A

13. DProblem 4 14. C1. A 15. D2. A 16. A3. C 17. D

18. CProblem 5 19. A1. A 20. A2. B3. C4. A5. B

Problem 61. D2. B3. C4. C5. D6. A7. C

Problem 71. C2. D3. 4. A5. B