numbers 1 and 2 - mm&co

QUESTIONS Numbers 1 and 2 Agustin Company has the following transactions relating to its investments during 2021. January 5 Acquired 10,000 shares of Abalos Company for P1,000,000 paying additional P20,000 for

brokerage fee and another P5,000 for commission. Received dividends from Abalos declared January 2, 2021 to stockholders of record January 10, 2021, P20,000.

February 14

1. How much should the investment account be debited if the shares are held for trading? a. 980,000 b. 1,000,000 c. 1,005,000 d. 1,025,000

2. How much should the investment account be debited if the shares are considered non-trading and the

company designated to recognize change in fair value through other comprehensive income? a. 980,000 b. 1,000,000 c. 1,005,000 d. 1,025,000

Numbers 3-6 You were assigned to audit the receivables for Sarmiento Merchandising Company. As instructed by your audit manager, you have performed a cut off test sales. The result do the cut off test revealed the following: Recorded as Sales in December 2016

Selling Price Cost Terms Shipment date Received by customers P 18,000 P 16,000 FOB shipping point 12/26/16 12/29/16

20,000 14,000 Shipped to consignee 12/26/16 12/29/16 8,680 17,420 FBO Destination 12/26/16 01/02/17 9,000 7,500 FBO shipping point 12/30/16 01/02/17

10,000 7,750 FBO destination 12/31/16 01/02/17 7,800 6,100 FBO shipping point 12/31/16 01/02/17

14,800 12,000 Shipped to consignee 12/31/16 01/02/17 Recorded sales in January 2017


10,000 8,800 FOB shipping point 12/31/16 01/03/17 4,500 8,200 FOB destination 01/02/17 01/03/17 6,500 5,000 FOB shipping point 01/02/17 01/05/17

A count of all inventories within the premises was made in the morning of December 31, 2016. Half of the goods shipped to consignee on December 26 are still unsold at December 31, the agreed commission on consignment sales is 20% the sales price. The unadjusted ledger balances show the following:

Accounts receivables P 376,500

QUESTIONS

Inventories 525,000 Sales 1,520,000 Cost of sales 942,000

Determine the adjusted balances of the following

3. Accounts receivable a. 363,320 b. 329,620 c. 361,120 d. 389,320

4. Inventories

a. 524,340 b. 506,800 c. 547,440 d. 549,500

5. Sales

a. 1,504,620 b. 1,508,820 c. 1,522,320 d. 1,551,500

6. Cost of sales

a. 928,360 b. 942,660 c. 917,500 d. 973,000

Numbers 7-9 Jaybo Company purchased the following portfolio of equity instrument designated as fair value through other comprehensive income during 2022 and reported the following balances below. No sales occurred during 2021 and 2022. Security Cost Market Value, 12/31/21 Market Value, 12/31/22 Goku Ordinary Shares 800,000 820,000 910,000 Vegeta Ordinary Shares 1,400,000 1,500,000 1,000,000

7. How much should Jaybo Company report as unrealized gain or loss related to the securities in its 2021

other comprehensive income? a. 120,000 b. 410,000 c. 290,000 d. 0


statement of comprehensive income? a. 120,000 b. 410,000

QUESTIONS

c. 290,000 d. 0


statement of financial position? a. 120,000 b. 410,000 c. 290,000 d. 0

Numbers 10-11 Jaybu Company acquired the following portfolio of equity instruments held for trading during 2022 and reported the following balances at December 31, 2022. No sales occurred during 2022.

Security Cost Market Value, 12/31/22 AAA Company Shares 300,000 350,000 BBB Company Shares 450,000 410,000 CCC Company Shares 540,000 640,000 DDD Company Shares 610,000 650,000

10. What is the carrying amount of the securities on December 31, 2022?

a. 1,900,000 b. 2,050,000 c. 3,950,000 d. 0

11. How much is the unrealized gain that should be taken to profit or loss statement?

a. 150,000 b. 190,000 c. 40,000 d. 0

12. On January 1, 2020, Erika Company purchased equity investments held for trading.

Purchase Price Transaction Cost Market 12/31/20 Security A 1,000,000 100,000 1,200,000 Security B 2,000,000 200,000 1,500,000 Securty C 3,000,000 300,000 3,100,000

On July 1, 2021, the entity sold Security A for P1,900,000. What amount should be reported as gain on sale for trading securities in the 2021 Income Statement?

a. 900,000 b. 700,000 c. 600,000 d. 800,000

13. C4 Company owns 8% of Isolate Inc., P100 par, 150,000 outstanding ordinary shares which was

acquired on November 20, 2022 for P1,320,000. C4 classified this as fair value through profit or loss. On December 1, 2022, Isolate declared a P2 per share cash dividend to shareholders of record January

QUESTIONS

10, 2023, payable on January 31, 2023. On December 28, 2022, C4 sold all the shares to extend Company at P115 per share. How much gain or loss on sale shall be recognized C4 on December 28, 2022?

a. 36,000 gain b. 60,000 loss c. 36,000 loss d. 60,000 gain

Numbers 14-15 On January 1, 2019, Familia purchased 1,600 ordinary shares of another entity for P2,000,000. At December 31, 2019, the investee’s shares were selling for P1,400 per share. Familia irrevocably designated to classify equity investment at FVOCI. On October 1, 2020, Familia sold half of its shares at P1,800 per share. At December 31, 2020, the shares were selling at P1,900 per share.

14. What amount is recognized in retained in retained earnings as a result of the disposal in 2020? a. 440,000 b. 320,000 c. 216,000 d. 0

15. The unrealized gain is recognized in the statement of comprehensive income for the year end

December 31, 2020 is a. 240,000 b. 520,000 c. 400,000 d. 120,000

16. Lil Wayne Corporation received dividends from ordinary shares (15% interest) and preference share

(25% interest) investment during the current year: • A cash dividend of P100,000 from ordinary shares investment. • A cash dividend of P50,000 from preference share investment. • A stock dividend of 2,000 shares from ordinary shares investment when the market price was P12

per share. • A property dividend costing P500,000 which had a market value of P600,000. • A liquidating dividend of P5,000 from ordinary investment. How much is the total dividend income

that should be reported for the current year? a. 750,000 b. 700,000 c. 150,000 d. 755,000

Numbers 17-19 On June 30, 2020, Cape Company purchased 25% of the outstanding ordinary shares of Bit Co. at a total cost of P2,100,000. The book value of Bit Co.’s net assets on acquisition date was P7,200,000. For the following reasons, Cape was willing to pay more than book value for Bit Co. stock:

• Bit Co. has depreciable assets with a current fair value of P180,000 more than their book value. These assets have a remaining useful life of 10 years.

• Bit co. owns a tract of land with a current fair value of P900,000 more than its carrying amount.

QUESTIONS

• All other identifiable tangible and intangible assets of Bit Co. have current fair values that are equal to their carrying amounts. Bit reported net income of P1,620,000, earned evenly during the current year ended December 31, 2020. Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary shareholders. Market value of Bit Co.’s ordinary shares at December 31, 2020 is P9 million. Cape Company’s financial year-end is December 31.

17. What is the amount of goodwill paid by Cape Company? a. 300,000 b. 1,080,000 c. 120,000 d. 30,000

18. What amount of investment revenue for Cape Company for 2020 is:

a. 202,500 b. 200,250 c. 78,750 d. 123,750

19. The carrying value of Cape Company’s investment in ordinary shares of Bit Co. on December 31, 2020

should be: a. 2,221,500 b. 2,100,000 c. 2,070,000 d. 2,250,000

Numbers 20-21 On January 1, 2021, Flesh-n-Bone Corporation acquired 30% of Doug Corporation’s 200,000 outstanding shares at P50 per share. Doug’s net assets had a book value on the same date at P8,200,000. On the acquisition date, the following assets were deemed understated: • Building having a remaining useful life of 20 years was understated by P1,500,000. • Equipment having a remaining life of 10 years was understated by P500,000. Doug reported net income

for the year at P2,000,000 and paid cash dividends of P10 per share by December 31.

20. How much investment income should be reported in Flesh-n-Bone Corporation’s profit or loss for 2021?

a. 600,000 b. 577,500 c. 622,500 d. 562,500

21. What is the carrying amount of the investment in Doug as of December 31, 2021?

a. 3,562,500 b. 3,000,000 c. 3,622,500 d. 3,022,500

Numbers 22-24

QUESTIONS Giants Company acquired 40% interest in an associate, 49ers Company, for P5,000,000 on January 1, 2017. At the acquisition date, there were no differences between fair value and carrying amount of identifiable assets and liabilities. 49ers Company reported net income of P3,000,000 for 2017 and P4,000,000 for 2018. 49ers Company paid dividend of P500,000 in 2017 and P1,500,000 in 2018. On July 1, 2017, 49ers Company sold an equipment for P1,500,000 to Giants Company. The carrying amount of the equipment is P1,000,000 at the time of sale. The remaining life of the equipment is 5 years and Giants Company used the straight line depreciated. On December 1, 2018, 49ers Company sold an inventory to Giants Company for P2,800,000. The inventory had a cost of P2,000,000 and was still on hand on December 31, 2018.

22. What is the investor’s share in the profit of the associate for 2017? a. 1,020,000 b. 1,200,000 c. 1,040,000 d. 1,000,000

23. What is the investor’s share in the profit of the associate for 2018?

a. 1,600,000 b. 1,320,000 c. 1,640,000 d. 1,280,000

24. What is the carrying amount of the investment in associate on December 31, 2018?

a. 6,740,000 b. 6,720,000 c. 6,540,000 d. 6,560,000

Numbers 25-26 Bow Wow owns 25% of the ordinary shares of Doug Corporation. Doug has 8% preference shares with total par value of P10,000,000. Doug declared P700,000 dividends on its preference shares & reported a profit of P3,000,000 during 2017.

25. How much is the share in net profit assuming the preference shares is cumulative? a. 575,000 b. 750,000 c. 550,000 d. 625,000

26. How much is the share in net income assuming the preference shares is non-cumulative?

a. 575,000 b. 750,000 c. 550,000 d. 625,000

Numbers 27-29 On January 1, 2023 Cement Company acquired 40 of the ordinary shares of another entity for P6,000,000. The purchase was made at prices proportionate to the value assigned to the investee’s net assets which equaled carrying amounts. For the years ended December 31, 2023 and 2024, the investee reported the following:

QUESTIONS On October 1, 2024, Cement sold 75% of its ordinary shares for P7,500,000. The fair value of the remaining investment on such date is P3,000,000 and such investment was designated irrevocably at FVOCI. The fair value of the remaining investment is P3,700,000 on December 31, 2024. The dividends were declared and paid by the investee on November 1, 2023 and December 31, 2024.

27. What is the carrying amount of the investment on October 1, 2024 before disposal? a. 9,600,000 b. 10,400,000 c. 7,200,000 d. 8,000,000

28. What is the gain or loss on disposal on October 1, 2024?

a. 1,500,000 gain b. 2,100,000 gain c. 500,000 loss d. 300,000 gain

29. What total amount of income is recognized in profit or loss for 2024?

a. 4,600,000 b. 3,300,000 c. 3,900,000 d. 1,500,000

30. On February 1, 2021 Red Bull Company purchased 5-year bonds with face value of P2,000,000 and

stated interest of 12% per year payable annually every January 1. The bonds were acquired to yield 10%. The relevant present value factor is as follows:

Present value of 1 at 12% for 5 periods 0.57 Present value of 1 at 10% for 5 periods 0.62 Present value of annuity at 12% for 5 periods 3.60 Present value of annuity at 10% for 5 periods 3.79

How much was the total amount paid to purchase the bonds?

a. 2,149,600 b. 2,169,600 c. 2,004,000 d. 2,024,000

Numbers 31-34 Dr. Dre Corporation acquired on January 1, 2022 a 5-year, 10%, P5,000,000 face value bonds, for P4,639,400 dated January 1, 2022. The bonds which pay interest every December 31 had a 12% prevailing interest rate on the date of acquisition. Dr. Dre’s business model is to collect contractual cash flows and the cash flows are solely payment of principal and interest. Prevailing interest rate on December 31, 2022 is at 9%.

31. How much is the correct income for the year 2023?

a. 500,000 b. 556,728 c. 563,535

QUESTIONS

d. 422,652

32. How much is the unrealized gain/loss to be reported in the company’s 2022 statement of comprehensive income?

a. 303,872 b. 522,450 c. 56,728 d. 0

33. What is the adjusted balance of the Investment as of December 31, 2022?

a. 5,450,000 b. 4,696,128 c. 4,759,663 d. 5,161,850

34. How much is the carrying amount of Investment on December 31, 2025?

a. 4,910,522 b. 5,000,000 c. 4,759,817 d. 4,830,995

35. On January 1, 2021, Norwegian Forest Company purchased bonds with face value of P5,000,000 to be

measured at amortized cost. The entity paid P4,600,000 plus transaction costs of P142,000. The bonds mature on December 31, 2023 and pay 6% interest annually on December 31 of each year with 8% effective interest. The bonds are quoted at 105 on December 31, 2021. The bonds are sold at 110 on December 31, 2022.What amount of gain on sale on these bonds should be reported in 2022 income statement?

a. 500,000 b. 250,000 c. 592,931 d. 758,000

Numbers 36-38 On January 1, 2023, Creedo Company purchased 9% bonds in the face amount of P6,000,000. The bonds mature on January 1, 2028 and were purchased for P5,550,000 to yield 11%. Creedo classified the bonds as held for trading and interest is payable annually every December 31. Fair Value Effective Rate December 31, 2023 5,450,000 12% December 31, 2024 6,150,000 8%

36. What is the interest income for 2023?

a. 540,000 b. 610,992 c. 660,000 d. 661,918

37. What amount of unrealized loss should be reported in profit or loss for 2023?

a. 550,000

QUESTIONS

b. 450,000 c. 100,000 d. 0

38. What amount of unrealized gain should be recognized in profit or loss for 2024?

a. 150,000 b. 600,000 c. 700,000 d. 0

39. On December 1, 2022, Mundo Company purchased P5,000,000, 15% face value bonds at 98. The bonds

mature on November 30, 2032 and pay interest semi-annually every May 31 and November30.Transaction cost incurred in relation to the acquisition is 3% of the bonds face value. Mundo classified this investment as trading securities. On November 30, 2025 after receiving the periodic interest, Mundo sold the investment at 101. The bonds were quoted in the market at 98, 99, 102,100 and 97 on December 31, 2022, 2023, 2024, 2025 and 2026, respectively. What is the gain or loss on sale of the investment?

a. 50,000 gain b. 50,000 loss c. 150,000 gain d. 150,000 loss

Numbers 40-44 Tamaraw Corp. had the following portfolio of financial instrument as of December 31, 2018. All securities were acquired at the beginning of 2018:

Security Face value/denomination Recorded acquisition cost Basted shares 160,000 shares P 9,000,000 Holi Sprite shares 60,000 shares 3,600,000 10% USLE bonds, 3 years P 2,000,000 par ?

Audit notes: • Basted shares were acquired and designated as financial asset at fair value through profit or loss. The

shares were acquired at P60 per share which included P3 per share transaction cost. Half of the Basted shares were sold at P62 per share on July 1, 2019.

• Holi Sprite shares were acquired and designated as financial asset at fair value through other comprehensive income. The shares were acquired at P60 per share which included P2 per share transaction cost. 20,000 of these shares were sold on August 1, 2019 at P59 per share.

• The USLE bonds were acquired when the prevailing market rate of interest was at 12%. Interests are collectible every December 31. Half of the USLE bonds were sold on June 30, 2019 at total proceeds of P1,650,000.

• Additional information on the securities are as follows: Security FV 12/31/18 FV 12/31/19 Basted shares P 58 per share P 63 per share Holi Sprite shares 61 per share 66 per share 10 USLE bonds, 3 years 9% yield; ? 11% yield; P ?

Questions: Determine the following:

QUESTIONS

40. What is the realized gain or (loss) on sale of Basted shares? a. 75,000 loss b. 320,000 gain c. 460,000 gain d. 0

41. What is the realized gain or loss from sale of Holi Sprite shares in 2019 under IFRS 9, Financial

Instruments? a. 20,000 loss b. 10,000 c. 30,000 d. 0

42. Assuming that the company’s business model has an objective of holding the debt securities to collect

contractual cash flows, what is the realized gain on sale of USLE bonds? a. 682,829 b. 675,829 c. 625,829 d. 662,829

43. Assuming that the company’s business model has no objective of holding the debt securities to collect



contractual cash flows and to sell, what is the total carrying value of investments that shall be presented in the 2019 financial statement as financial asset at fair value at the end of 2019?

a. 8,100,000 b. 7,680,000 c. 9,661,982 d. 7,650,982

Numbers 45-49 Nebraska Corporation had the following portfolio of financial instruments of the December 31, 2021. All securities were acquired at the beginning of 2021:

Security Denomination/Face Value Recorded Acquisition Cost Alpha shares 100,000 shares 5,250,000 Beta shares 40,000 shares 2,350,000 10%, Delta bonds, 3 years P 2,000,000 par 1,951,126

Audit notes: • Alpha shares were acquired and were designated as financial asset at fair value through profit/losses.

The share were acquired at P52.50 per share which included a P2.50 per share transaction cost. Half of the Alpha shares were sold at P58 per share on July 1, 2022.

QUESTIONS • Beta shares were designated as financial asset at fair value through other comprehensive income. The

shares were acquired at P60 per share which included P1.25 per share transaction cost. 15,000 of these shares were sold on August 1, 2022 at P59 per share.

• The Delta bonds were acquired when the prevailing market rate of interest was at 11%. Interest are collectible every December 31. Half of the Delta bonds were sold on June 30, 2022 at P1,100,000.

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

45. What is the realize gain or loss on sale of Alpha shares in 2022? a. 150,000 b. 200,000 c. 275,000 d. 400,000

46. Assuming that the company’s business model has no objective of holding debt securities to collect

contractual cash flows, what is the realized gain on sale of the Delta bonds in 2022? a. 63,067 b. 113,067 c. 82,409 d. 32,409

47. Assuming that the company’s business model has an objective of holding debt securities to collect



contractual cash flows, what is the total carrying value of investments that shall be presented as financial asset at fair market value through profit of loss (trading securities)?

a. 3,100,000 b. 4,082,143 c. 5,064,285 d. 4,700,000

49. Assuming that the company’s business model as no objective of holding debt securities to collect

contractual cash flows, what is the total carrying value of investments that shall be presented as financial asset at fair market value through profit or loss (trading securities)?

a. 3,100,000 b. 4,082,143 c. 5,064,285 d. 4,700,000

PROBLEM 3 Among the account balances of Faith Evans Corporation at December 31, 2021 are the following:

Patent, net 2,450,000 Installment contract receivable 7,200,000

QUESTIONS Among the account balances of Faith Evans Corporation at December 31, 2021 are the following: • The patent was purchased from Doug Company for P3,150,000 on September 1, 2019. On that date, the

remaining legal life was fifteen years, which was also determined to be the useful life. • The installment contract receivable represents the balance of the consideration received from sale of a

factory building to Cat Company on March 31, 2020, for P12,000,000. Cat made a P3,000,000 down payment and signed five-year 13% note for the P9,000,000 balance. The first of equal annual principal payments of P1,800,000 was received on March 31, 2021 together with interest to that date. The note is collateralized by the factory building with a fair value of P10,000,000 at December 31, 2022. The 2022 payment was received on time.

• On January 2, 2022 Faith Evans purchased a trademark from Bird Corporation for P2,500,000. Faith considers the life of the trademark to be indefinite.

• On May 1, 2022, Faith Evans sold the patent to Snake Company in exchange for a P5,000,000, non-interest bearing note due on May 1, 2025. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at May 1, 2022 was 14%. The present value of 1 for three periods at 14% is 0.675. The collection of the note receivable from Snake is reasonably assured.

• On July 1, 2022, Faith paid P18,800,000 for 750,000 ordinary shares of Lion Corporation, which represented a 25% investment in Lion. The fair value of Lion’s identifiable assets net of liabilities equals their carrying amount of P64,000,000. The market price of Lion’s ordinary share December 31, 2022 was P26.00 per share.

• Lion reported and paid dividends of Profit Dividends per share Six months ended June 30, 2022 5,760,000 — Six months ended December 31, 2022 P 2.00

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

50. Gain on sale of patent a. 2,620,000 b. 1,078,125 c. 995,000 d. 925,000

51. Total interest income for 2022

a. 1,251,000 b. 1,233,000 c. 1,075,500 d. 760,500

52. Noncurrent portion of the installment contract receivable as of December 31, 2022

a. 5,400,000 b. 3,600,000 c. 1,800,000 d. 7,200,000

53. Carrying amount of the note receivable from sale of patent as of December 31, 2022

a. 5,000,000 b. 3,690,000

QUESTIONS

c. 3,375,000 d. 3,847,500

54. The carrying amount of the investment in Lion Corporation as of December 31, 2022

a. 18,800,000 b. 19,025,000 c. 19,060,000 d. 19,500,000

55. Conflict between financial statement users and auditors often arises because of the

a. Placement of the auditor's report in the back of the client's annual report, where it is hard to locate.

b. Extremely technical vocabulary which the auditor uses in the report. c. Expectation gap. d. High cost of performing an audit.

56. Manabat, CPAs, have provided annual audit and tax compliance services to Mint Corp. for several

years. Mint has been unable to pay Manabat in full for services Manabat rendered nineteen months ago. Manabat is ready to begin fieldwork for the current years audit. Under the ethical standards of the profession, which of the following arrangements will permit Manabat to begin the fieldwork on Mints audit?

a. Mint commits to pay the past due fee in full before the audit report is issued. b. Mint gives Manabat an eighteen-month note payable for the full amount of the past due fees

before Manabat begins the audit. c. Mint sets up a two-year payment plan with Manabat to settle the unpaid fee balance. d. Mint engages another firm to perform the fieldwork, and Manabat is limited to reviewing the

workpapers and issuing the audit report.

57. When setting a preliminary judgment about materiality a. less evidence is required for a low peso amount than for a high peso amount b. more evidence is required for a low peso amount than for a high peso amount c. there is no relationship between it and the peso amount of evidence needed d. the same amount of evidence is required for either low or high peso amounts

58. Which of the following types of audits are most similar?

a. operational audits and compliance audits b. independent financial statement audits and operational audits c. internal audits and independent financial statement audits d. compliance audits and independent financial statement audits

59. Which of the following is least likely included in an audit engagement letter?

a. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.

b. The form of any reports or other communication of the results of the engagement. c. The objective of financial reporting. d. Management responsibility for the financial statements.

QUESTIONS

60. The lending of staff by a firm, or network firm, to an audit client may create a ____ threat when the individual is in a position to influence the preparation of a client's accounts or financial statements.

a. Familiarity threat b. Self-review threat c. Self-interest threat d. Intimidation threat

61. Garry, CPA-Lawyer, has a law practice. Garry has recommended one of her clients to Francis, CPA.

Francis has agreed to pay Garry 12% of the fee for services rendered by Francis to Garry' client. Both Garry and Francis do not have the necessary safeguards in place to address threats which may be created by the fee arrangement. Who, if anyone, is in violation of the Code of Ethics?

a. Both Garry and Francis b. Neither Garry nor Francis c. Francis only d. Garry only

62. If firm, or network firm, personnel providing such assistance make management decisions, the self-

review threat created could not be reduced to an acceptable level by any safeguards. Example of such managerial decisions include the following, except

a. Determining or changing journal entries, or the classifications for accounts or transactions or other accounting records without obtaining the approval of the audit clients

b. Assisting an audit client in resolving account reconciliation problems c. Preparing source documents or originating data (including decisions on evaluation

assumptions), or making changes to such documents or data d. Authorizing or approving transactions

63. Auditors often make use of computer programs that perform routing processing functions such as

sorting and merging. These programs are made available be electronic data processing companies and others are specifically referred to as

a. supervisory programs b. use programs c. utility programs d. compiler programs

64. Which of the following auditor concerns most likely could be so serious that the auditor concludes that

a financial statement audit cannot be conducted? a. management fails to modify prescribed controls for changes in condition b. procedures requiring segregation of duties are subject to management override c. the entity has formal written code of conduct d. the integrity of the entity’s management is suspicious

65. When positive confirmations are not returned, the auditor is supposed to use alternative procedures.

Which of the following is not an alternative procedure? a. None. All of the three above are alternative procedures. b. Examination of subsequent cash collections. c. Mailing second and third confirmations. d. Examination of supporting documents.

QUESTIONS Questions 66-70 Bird Company is a manufacturer of small tools. The following information was obtained from the company’s accounting records for the year ended December 31, 2021: Inventory at December 31, 2021 (based on physical count in Bird’s warehouse at cost on December 31, 2021) - 1,870,000 Accounts payable at December 31, 2021 - 1,415,000 Net sales (sales less sales returns) - 9,693,400 Your audit reveals the following information:

I. The physical count included tools billed to a customer FOB shipping point on December 31, 2021. These tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by the customer.

II. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2021. These goods with invoice cost of P93,000 were shipped on December 29, 2021.

III. Work in process inventory costing P27,000 was sent to a job contractor for further processing. IV. Not included in the physical count were goods returned by customer on December 31, 2021. These

goods costing P49,000 were inspected and returned to inventory on January 7, 2022. Credit memos for P67,800 were issued to the customers at that date.

V. In transit to a customer on December 31, 2021, were tools costing P17,000 shipped FOB shipping point on December 26, 2021. A sales invoice for P29,400 was issued on January 3, 2022, when Bird Company was notified by the customer that the tools had been received.

VI. At exactly 5:00pm on December 31, 2021, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2022. The related invoice was recorded on December 31, 2021, but the goods were not included in the physical count.

VII. Included in the physical count were goods received from a vendor on December 27, 2021. However, the related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving report was lost.

VIII. A monthly freight bill for P32,000 was received on January 3, 2022. It specifically related to merchandise bought in December 2021, one-half of which was still in the inventory at December 31, 2021. The freight was not included in either the inventory or in accounts payable at December 31, 2021.

66. Bird’s December 31, 201, inventory should be increased by

a. 216,200 b. 233,200 c. 252,200 d. 123,300

67. Bird’s accounts payable balance at December 31, 2021, should be increased by

a. 68,000 b. 145,000 c. 125,000 d. 161,000

68. The amount of net sales to be reported on Bird’s income statement for the year ended December 31,

2022, should be a. 9,547,100

QUESTIONS

b. 9,576,500 c. 9,591,000 d. 9,595,300

69. Bird’s statement of financial position at December 31, 2021, should report accounts payable of

a. 1,576,000 b. 1,483,000 c. 1,540,000 d. 1,431,000

70. The amount of inventory to be reported on Bird’s December 31, 2021, statement of financial position

should be a. 2,103,200 b. 2,086,200 c. 2,122,200 d. 1,993,200

Questions 71-75 The following accounts were included in the adjusted trial balance of Jeanina Company as of December 31, 2022: Cash P 481,600 Accounts receivable 1,127,000 Merchandise Inventory 3,025,000 Accounts payable 2,100,500 Accrued expenses 215,500 During your audit, you noted that Jeanina held its cash book open after year-end. In addition, your audit reveled the following

I. Receipts for January 2023 of P327,300 were recorded in the December 2022 cash receipts book. The receipts of P180,050 represents cash sales and P147,250 represents collections from customers, net of 5% cash discounts.

II. Payments to suppliers made on January 2023 of P186,200, on which discounts of P6,200 were taken, were included in the December 2022 check register.

III. Merchandise inventory is valued at P3,025,000 prior to any adjustments . The following information has been found relating to certain inventory transactions.

IV. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the P1,512,500 inventory figure.

V. Goods costing P108,750 were received from a vendor on January 4, 2023. The related invoice was received and recorded on January 6, 2023. The goods were shipped on December 31, 2022, terms FOB shipping point.

VI. Goods costing P318,750 were shipped on December 31, 2022, and were delivered to the customer on January 6, 2023. The terms of the invoice were FOB shipping point. The goods were included in the 2022 ending inventory even though the sale was recorded in 2022.

VII. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2023. The sale was properly recorded in 2023.

QUESTIONS VIII. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2022.

The related goods, shipped FOB destination were received on January 4, 2023, and thus were not included in the physical inventory.

IX. Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical inventory.

Questions: Based on the result of your audit, determine the adjusted balances of the following as of December 31, 2022.

71. Cash a. 481,600 b. 340,500 c. 334,300 d. 346,700

72. Accounts receivable

a. 1,454,300 b. 1,282,000 c. 1,127,000 d. 1,274,250

73. Merchandise Inventory

a. 3,017,500 b. 3,040,000 c. 2,930,000 d. 2,505,000

74. Accounts payable

a. 2,295,450 b. 2,307,950 c. 2,286,500 d. 2,301,750

75. Current ratio

a. 2.01 b. 2.00 c. 1.84 d. 1.83

Questions 76-79 At the close of its fiscal year on March 31, 2021, Stronger Company was in the process of relocating its plant. This resulted in some confusion relating to the inventory cutoff, as indicated by the following:

• Merchandise on hand costing P17,940 was included in the inventory although the purchase invoice was not recorded until April 12, 2021.

• Merchandise shipped on April 1, 2021 was included in the inventory. The cost of this merchandise was P22,190, and the sales was recorded as P31,380 on March 31, 2021.

• Merchandise costing P12,150 was included in the inventory although it was shipped to a customer on March 31, 2021, FOB shipping point. The company recorded the sale of P19,246 on that date.

QUESTIONS

• Merchandise costing P18,200 was not counted. • Merchandise in transit (shipped to the company FOB destination) was recorded as a purchase as of

April 2, 2021, and its cost of P17,287 was not included in the March 31, 2021 inventory.

76. How much was the Inventory account of Stronger Company as of March 31, 2021 overstated or understated?

a. 6,050 understated b. 18,200 understated c. 12,150 overstated d. 16,140 overstated

77. How much was the Purchase account of Stronger Company as of March 31, 2021 overstated or

understated? a. Not affected b. 17,787 understated c. 17,940 understated d. 35,227 understated

78. How much was the Sales account of Stronger Company as of March 31, 2021 overstated or

understated? a. 50,625 overstated b. 31,380 overstated c. 12,134 overstated d. 12,134 understated

79. How much was the net income of Stronger Company as of March 31, 2021 overstated or understated?

a. 7,390 overstated b. 43,270 overstated c. 60,557 overstated d. 61,740 overstated

ANSWERS Numbers 1 and 2 Agustin Company has the following transactions relating to its investments during 2021. January 5 Acquired 10,000 shares of Abalos Company for P1,000,000 paying additional P20,000 for

brokerage fee and another P5,000 for commission. Received dividends from Abalos declared January 2, 2021 to stockholders of record January 10, 2021, P20,000.

February 14

1. How much should the investment account be debited if the shares are held for trading? a. 980,000 b. 1,000,000 c. 1,005,000 d. 1,025,000

2. How much should the investment account be debited if the shares are considered non-trading and the

company designated to recognize change in fair value through other comprehensive income? a. 980,000 b. 1,000,000 c. 1,005,000 d. 1,025,000

Numbers 3-6 You were assigned to audit the receivables for Sarmiento Merchandising Company. As instructed by your audit manager, you have performed a cut off test sales. The result do the cut off test revealed the following: Recorded as Sales in December 2016


20,000 14,000 Shipped to consignee 12/26/16 12/29/16 8,680 17,420 FBO Destination 12/26/16 01/02/17 9,000 7,500 FBO shipping point 12/30/16 01/02/17

10,000 7,750 FBO destination 12/31/16 01/02/17 7,800 6,100 FBO shipping point 12/31/16 01/02/17

14,800 12,000 Shipped to consignee 12/31/16 01/02/17 Recorded sales in January 2017


10,000 8,800 FOB shipping point 12/31/16 01/03/17 4,500 8,200 FOB destination 01/02/17 01/03/17 6,500 5,000 FOB shipping point 01/02/17 01/05/17

A count of all inventories within the premises was made in the morning of December 31, 2016. Half of the goods shipped to consignee on December 26 are still unsold at December 31, the agreed commission on consignment sales is 20% the sales price. The unadjusted ledger balances show the following:

Accounts receivables P 376,500

ANSWERS

Inventories 525,000 Sales 1,520,000 Cost of sales 942,000

Determine the adjusted balances of the following

3. Accounts receivable a. 363,320 b. 329,620 c. 361,120 d. 389,320

4. Inventories

a. 524,340 b. 506,800 c. 547,440 d. 549,500

5. Sales

a. 1,504,620 b. 1,508,820 c. 1,522,320 d. 1,551,500

6. Cost of sales

a. 928,360 b. 942,660 c. 917,500 d. 973,000

Numbers 7-9 Jaybo Company purchased the following portfolio of equity instrument designated as fair value through other comprehensive income during 2022 and reported the following balances below. No sales occurred during 2021 and 2022. Security Cost Market Value, 12/31/21 Market Value, 12/31/22 Goku Ordinary Shares 800,000 820,000 910,000 Vegeta Ordinary Shares 1,400,000 1,500,000 1,000,000


other comprehensive income? a. 120,000 b. 410,000 c. 290,000 d. 0


statement of comprehensive income? a. 120,000 b. 410,000

ANSWERS

c. 290,000 d. 0


statement of financial position? a. 120,000 b. 410,000 c. 290,000 d. 0

Numbers 10-11 Jaybu Company acquired the following portfolio of equity instruments held for trading during 2022 and reported the following balances at December 31, 2022. No sales occurred during 2022.

Security Cost Market Value, 12/31/22 AAA Company Shares 300,000 350,000 BBB Company Shares 450,000 410,000 CCC Company Shares 540,000 640,000 DDD Company Shares 610,000 650,000

10. What is the carrying amount of the securities on December 31, 2022?

a. 1,900,000 b. 2,050,000 c. 3,950,000 d. 0

11. How much is the unrealized gain that should be taken to profit or loss statement?

a. 150,000 b. 190,000 c. 40,000 d. 0

12. On January 1, 2020, Erika Company purchased equity investments held for trading.

Purchase Price Transaction Cost Market 12/31/20 Security A 1,000,000 100,000 1,200,000 Security B 2,000,000 200,000 1,500,000 Securty C 3,000,000 300,000 3,100,000

On July 1, 2021, the entity sold Security A for P1,900,000. What amount should be reported as gain on sale for trading securities in the 2021 Income Statement?

a. 900,000 b. 700,000 c. 600,000 d. 800,000

13. C4 Company owns 8% of Isolate Inc., P100 par, 150,000 outstanding ordinary shares which was

acquired on November 20, 2022 for P1,320,000. C4 classified this as fair value through profit or loss. On December 1, 2022, Isolate declared a P2 per share cash dividend to shareholders of record January

ANSWERS

10, 2023, payable on January 31, 2023. On December 28, 2022, C4 sold all the shares to extend Company at P115 per share. How much gain or loss on sale shall be recognized C4 on December 28, 2022?

a. 36,000 gain b. 60,000 loss c. 36,000 loss d. 60,000 gain

Numbers 14-15 On January 1, 2019, Familia purchased 1,600 ordinary shares of another entity for P2,000,000. At December 31, 2019, the investee’s shares were selling for P1,400 per share. Familia irrevocably designated to classify equity investment at FVOCI. On October 1, 2020, Familia sold half of its shares at P1,800 per share. At December 31, 2020, the shares were selling at P1,900 per share.

14. What amount is recognized in retained in retained earnings as a result of the disposal in 2020? a. 440,000 b. 320,000 c. 216,000 d. 0

15. The unrealized gain is recognized in the statement of comprehensive income for the year end

December 31, 2020 is a. 240,000 b. 520,000 c. 400,000 d. 120,000

16. Lil Wayne Corporation received dividends from ordinary shares (15% interest) and preference share

(25% interest) investment during the current year: • A cash dividend of P100,000 from ordinary shares investment. • A cash dividend of P50,000 from preference share investment. • A stock dividend of 2,000 shares from ordinary shares investment when the market price was P12

per share. • A property dividend costing P500,000 which had a market value of P600,000. • A liquidating dividend of P5,000 from ordinary investment. How much is the total dividend income

that should be reported for the current year? a. 750,000 b. 700,000 c. 150,000 d. 755,000

Numbers 17-19 On June 30, 2020, Cape Company purchased 25% of the outstanding ordinary shares of Bit Co. at a total cost of P2,100,000. The book value of Bit Co.’s net assets on acquisition date was P7,200,000. For the following reasons, Cape was willing to pay more than book value for Bit Co. stock:

• Bit Co. has depreciable assets with a current fair value of P180,000 more than their book value. These assets have a remaining useful life of 10 years.

• Bit co. owns a tract of land with a current fair value of P900,000 more than its carrying amount.

ANSWERS

• All other identifiable tangible and intangible assets of Bit Co. have current fair values that are equal to their carrying amounts. Bit reported net income of P1,620,000, earned evenly during the current year ended December 31, 2020. Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary shareholders. Market value of Bit Co.’s ordinary shares at December 31, 2020 is P9 million. Cape Company’s financial year-end is December 31.

17. What is the amount of goodwill paid by Cape Company? a. 300,000 b. 1,080,000 c. 120,000 d. 30,000

18. What amount of investment revenue for Cape Company for 2020 is:

a. 202,500 b. 200,250 c. 78,750 d. 123,750

19. The carrying value of Cape Company’s investment in ordinary shares of Bit Co. on December 31, 2020

should be: a. 2,221,500 b. 2,100,000 c. 2,070,000 d. 2,250,000

Numbers 20-21 On January 1, 2021, Flesh-n-Bone Corporation acquired 30% of Doug Corporation’s 200,000 outstanding shares at P50 per share. Doug’s net assets had a book value on the same date at P8,200,000. On the acquisition date, the following assets were deemed understated: • Building having a remaining useful life of 20 years was understated by P1,500,000. • Equipment having a remaining life of 10 years was understated by P500,000. Doug reported net income

for the year at P2,000,000 and paid cash dividends of P10 per share by December 31.

20. How much investment income should be reported in Flesh-n-Bone Corporation’s profit or loss for 2021?

a. 600,000 b. 577,500 c. 622,500 d. 562,500

21. What is the carrying amount of the investment in Doug as of December 31, 2021?

a. 3,562,500 b. 3,000,000 c. 3,622,500 d. 3,022,500

Numbers 22-24

ANSWERS Giants Company acquired 40% interest in an associate, 49ers Company, for P5,000,000 on January 1, 2017. At the acquisition date, there were no differences between fair value and carrying amount of identifiable assets and liabilities. 49ers Company reported net income of P3,000,000 for 2017 and P4,000,000 for 2018. 49ers Company paid dividend of P500,000 in 2017 and P1,500,000 in 2018. On July 1, 2017, 49ers Company sold an equipment for P1,500,000 to Giants Company. The carrying amount of the equipment is P1,000,000 at the time of sale. The remaining life of the equipment is 5 years and Giants Company used the straight line depreciated. On December 1, 2018, 49ers Company sold an inventory to Giants Company for P2,800,000. The inventory had a cost of P2,000,000 and was still on hand on December 31, 2018.

22. What is the investor’s share in the profit of the associate for 2017? a. 1,020,000 b. 1,200,000 c. 1,040,000 d. 1,000,000

23. What is the investor’s share in the profit of the associate for 2018?

a. 1,600,000 b. 1,320,000 c. 1,640,000 d. 1,280,000

24. What is the carrying amount of the investment in associate on December 31, 2018?

a. 6,740,000 b. 6,720,000 c. 6,540,000 d. 6,560,000

Numbers 25-26 Bow Wow owns 25% of the ordinary shares of Doug Corporation. Doug has 8% preference shares with total par value of P10,000,000. Doug declared P700,000 dividends on its preference shares & reported a profit of P3,000,000 during 2017.

25. How much is the share in net profit assuming the preference shares is cumulative? a. 575,000 b. 750,000 c. 550,000 d. 625,000

26. How much is the share in net income assuming the preference shares is non-cumulative?

a. 575,000 b. 750,000 c. 550,000 d. 625,000

Numbers 27-29 On January 1, 2023 Cement Company acquired 40 of the ordinary shares of another entity for P6,000,000. The purchase was made at prices proportionate to the value assigned to the investee’s net assets which equaled carrying amounts. For the years ended December 31, 2023 and 2024, the investee reported the following:

ANSWERS On October 1, 2024, Cement sold 75% of its ordinary shares for P7,500,000. The fair value of the remaining investment on such date is P3,000,000 and such investment was designated irrevocably at FVOCI. The fair value of the remaining investment is P3,700,000 on December 31, 2024. The dividends were declared and paid by the investee on November 1, 2023 and December 31, 2024.

27. What is the carrying amount of the investment on October 1, 2024 before disposal? a. 9,600,000 b. 10,400,000 c. 7,200,000 d. 8,000,000

28. What is the gain or loss on disposal on October 1, 2024?

a. 1,500,000 gain b. 2,100,000 gain c. 500,000 loss d. 300,000 gain

29. What total amount of income is recognized in profit or loss for 2024?

a. 4,600,000 b. 3,300,000 c. 3,900,000 d. 1,500,000

30. On February 1, 2021 Red Bull Company purchased 5-year bonds with face value of P2,000,000 and

stated interest of 12% per year payable annually every January 1. The bonds were acquired to yield 10%. The relevant present value factor is as follows:

Present value of 1 at 12% for 5 periods 0.57 Present value of 1 at 10% for 5 periods 0.62 Present value of annuity at 12% for 5 periods 3.60 Present value of annuity at 10% for 5 periods 3.79

How much was the total amount paid to purchase the bonds?

a. 2,149,600 b. 2,169,600 c. 2,004,000 d. 2,024,000

Numbers 31-34 Dr. Dre Corporation acquired on January 1, 2022 a 5-year, 10%, P5,000,000 face value bonds, for P4,639,400 dated January 1, 2022. The bonds which pay interest every December 31 had a 12% prevailing interest rate on the date of acquisition. Dr. Dre’s business model is to collect contractual cash flows and the cash flows are solely payment of principal and interest. Prevailing interest rate on December 31, 2022 is at 9%.

31. How much is the correct income for the year 2023?

a. 500,000 b. 556,728 c. 563,535

ANSWERS

d. 422,652

32. How much is the unrealized gain/loss to be reported in the company’s 2022 statement of comprehensive income?

a. 303,872 b. 522,450 c. 56,728 d. 0

33. What is the adjusted balance of the Investment as of December 31, 2022?

a. 5,450,000 b. 4,696,128 c. 4,759,663 d. 5,161,850

34. How much is the carrying amount of Investment on December 31, 2025?

a. 4,910,522 b. 5,000,000 c. 4,759,817 d. 4,830,995

35. On January 1, 2021, Norwegian Forest Company purchased bonds with face value of P5,000,000 to be

measured at amortized cost. The entity paid P4,600,000 plus transaction costs of P142,000. The bonds mature on December 31, 2023 and pay 6% interest annually on December 31 of each year with 8% effective interest. The bonds are quoted at 105 on December 31, 2021. The bonds are sold at 110 on December 31, 2022.What amount of gain on sale on these bonds should be reported in 2022 income statement?

a. 500,000 b. 250,000 c. 592,931 d. 758,000

Numbers 36-38 On January 1, 2023, Creedo Company purchased 9% bonds in the face amount of P6,000,000. The bonds mature on January 1, 2028 and were purchased for P5,550,000 to yield 11%. Creedo classified the bonds as held for trading and interest is payable annually every December 31. Fair Value Effective Rate December 31, 2023 5,450,000 12% December 31, 2024 6,150,000 8%

36. What is the interest income for 2023?

a. 540,000 b. 610,992 c. 660,000 d. 661,918

37. What amount of unrealized loss should be reported in profit or loss for 2023?

a. 550,000

ANSWERS

b. 450,000 c. 100,000 d. 0

38. What amount of unrealized gain should be recognized in profit or loss for 2024?

a. 150,000 b. 600,000 c. 700,000 d. 0

39. On December 1, 2022, Mundo Company purchased P5,000,000, 15% face value bonds at 98. The bonds

mature on November 30, 2032 and pay interest semi-annually every May 31 and November30.Transaction cost incurred in relation to the acquisition is 3% of the bonds face value. Mundo classified this investment as trading securities. On November 30, 2025 after receiving the periodic interest, Mundo sold the investment at 101. The bonds were quoted in the market at 98, 99, 102,100 and 97 on December 31, 2022, 2023, 2024, 2025 and 2026, respectively. What is the gain or loss on sale of the investment?

a. 50,000 gain b. 50,000 loss c. 150,000 gain d. 150,000 loss

Numbers 40-44 Tamaraw Corp. had the following portfolio of financial instrument as of December 31, 2018. All securities were acquired at the beginning of 2018:

Security Face value/denomination Recorded acquisition cost Basted shares 160,000 shares P 9,000,000 Holi Sprite shares 60,000 shares 3,600,000 10% USLE bonds, 3 years P 2,000,000 par ?

Audit notes: • Basted shares were acquired and designated as financial asset at fair value through profit or loss. The

shares were acquired at P60 per share which included P3 per share transaction cost. Half of the Basted shares were sold at P62 per share on July 1, 2019.

• Holi Sprite shares were acquired and designated as financial asset at fair value through other comprehensive income. The shares were acquired at P60 per share which included P2 per share transaction cost. 20,000 of these shares were sold on August 1, 2019 at P59 per share.

• The USLE bonds were acquired when the prevailing market rate of interest was at 12%. Interests are collectible every December 31. Half of the USLE bonds were sold on June 30, 2019 at total proceeds of P1,650,000.

• Additional information on the securities are as follows: Security FV 12/31/18 FV 12/31/19 Basted shares P 58 per share P 63 per share Holi Sprite shares 61 per share 66 per share 10 USLE bonds, 3 years 9% yield; ? 11% yield; P ?

Questions: Determine the following:

ANSWERS

40. What is the realized gain or (loss) on sale of Basted shares? a. 75,000 loss b. 320,000 gain c. 460,000 gain d. 0

41. What is the realized gain or loss from sale of Holi Sprite shares in 2019 under IFRS 9, Financial

Instruments? a. 20,000 loss b. 10,000 c. 30,000 d. 0

42. Assuming that the company’s business model has an objective of holding the debt securities to collect





contractual cash flows and to sell, what is the total carrying value of investments that shall be presented in the 2019 financial statement as financial asset at fair value at the end of 2019?

a. 8,100,000 b. 7,680,000 c. 9,661,982 d. 7,650,982

Numbers 45-49 Nebraska Corporation had the following portfolio of financial instruments of the December 31, 2021. All securities were acquired at the beginning of 2021:

Security Denomination/Face Value Recorded Acquisition Cost Alpha shares 100,000 shares 5,250,000 Beta shares 40,000 shares 2,350,000 10%, Delta bonds, 3 years P 2,000,000 par 1,951,126

Audit notes: • Alpha shares were acquired and were designated as financial asset at fair value through profit/losses.

The share were acquired at P52.50 per share which included a P2.50 per share transaction cost. Half of the Alpha shares were sold at P58 per share on July 1, 2022.

ANSWERS • Beta shares were designated as financial asset at fair value through other comprehensive income. The

shares were acquired at P60 per share which included P1.25 per share transaction cost. 15,000 of these shares were sold on August 1, 2022 at P59 per share.

• The Delta bonds were acquired when the prevailing market rate of interest was at 11%. Interest are collectible every December 31. Half of the Delta bonds were sold on June 30, 2022 at P1,100,000.

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

45. What is the realize gain or loss on sale of Alpha shares in 2022? a. 150,000 b. 200,000 c. 275,000 d. 400,000

46. Assuming that the company’s business model has no objective of holding debt securities to collect





contractual cash flows, what is the total carrying value of investments that shall be presented as financial asset at fair market value through profit of loss (trading securities)?

a. 3,100,000 b. 4,082,143 c. 5,064,285 d. 4,700,000

49. Assuming that the company’s business model as no objective of holding debt securities to collect

contractual cash flows, what is the total carrying value of investments that shall be presented as financial asset at fair market value through profit or loss (trading securities)?

a. 3,100,000 b. 4,082,143 c. 5,064,285 d. 4,700,000

PROBLEM 3 Among the account balances of Faith Evans Corporation at December 31, 2021 are the following:

Patent, net 2,450,000 Installment contract receivable 7,200,000

ANSWERS Among the account balances of Faith Evans Corporation at December 31, 2021 are the following: • The patent was purchased from Doug Company for P3,150,000 on September 1, 2019. On that date, the

remaining legal life was fifteen years, which was also determined to be the useful life. • The installment contract receivable represents the balance of the consideration received from sale of a

factory building to Cat Company on March 31, 2020, for P12,000,000. Cat made a P3,000,000 down payment and signed five-year 13% note for the P9,000,000 balance. The first of equal annual principal payments of P1,800,000 was received on March 31, 2021 together with interest to that date. The note is collateralized by the factory building with a fair value of P10,000,000 at December 31, 2022. The 2022 payment was received on time.

• On January 2, 2022 Faith Evans purchased a trademark from Bird Corporation for P2,500,000. Faith considers the life of the trademark to be indefinite.

• On May 1, 2022, Faith Evans sold the patent to Snake Company in exchange for a P5,000,000, non-interest bearing note due on May 1, 2025. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at May 1, 2022 was 14%. The present value of 1 for three periods at 14% is 0.675. The collection of the note receivable from Snake is reasonably assured.

• On July 1, 2022, Faith paid P18,800,000 for 750,000 ordinary shares of Lion Corporation, which represented a 25% investment in Lion. The fair value of Lion’s identifiable assets net of liabilities equals their carrying amount of P64,000,000. The market price of Lion’s ordinary share December 31, 2022 was P26.00 per share.

• Lion reported and paid dividends of Profit Dividends per share Six months ended June 30, 2022 5,760,000 — Six months ended December 31, 2022 P 2.00

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

50. Gain on sale of patent a. 2,620,000 b. 1,078,125 c. 995,000 d. 925,000

51. Total interest income for 2022

a. 1,251,000 b. 1,233,000 c. 1,075,500 d. 760,500

52. Noncurrent portion of the installment contract receivable as of December 31, 2022

a. 5,400,000 b. 3,600,000 c. 1,800,000 d. 7,200,000

53. Carrying amount of the note receivable from sale of patent as of December 31, 2022

a. 5,000,000 b. 3,690,000

ANSWERS

c. 3,375,000 d. 3,847,500

54. The carrying amount of the investment in Lion Corporation as of December 31, 2022

a. 18,800,000 b. 19,025,000 c. 19,060,000 d. 19,500,000

55. Conflict between financial statement users and auditors often arises because of the

a. Placement of the auditor's report in the back of the client's annual report, where it is hard to locate.

b. Extremely technical vocabulary which the auditor uses in the report. c. Expectation gap. d. High cost of performing an audit.

56. Manabat, CPAs, have provided annual audit and tax compliance services to Mint Corp. for several

years. Mint has been unable to pay Manabat in full for services Manabat rendered nineteen months ago. Manabat is ready to begin fieldwork for the current years audit. Under the ethical standards of the profession, which of the following arrangements will permit Manabat to begin the fieldwork on Mints audit?

a. Mint commits to pay the past due fee in full before the audit report is issued. b. Mint gives Manabat an eighteen-month note payable for the full amount of the past due fees

before Manabat begins the audit. c. Mint sets up a two-year payment plan with Manabat to settle the unpaid fee balance. d. Mint engages another firm to perform the fieldwork, and Manabat is limited to reviewing the

workpapers and issuing the audit report.

57. When setting a preliminary judgment about materiality a. less evidence is required for a low peso amount than for a high peso amount b. more evidence is required for a low peso amount than for a high peso amount c. there is no relationship between it and the peso amount of evidence needed d. the same amount of evidence is required for either low or high peso amounts

58. Which of the following types of audits are most similar?

a. operational audits and compliance audits b. independent financial statement audits and operational audits c. internal audits and independent financial statement audits d. compliance audits and independent financial statement audits

59. Which of the following is least likely included in an audit engagement letter?

a. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.

b. The form of any reports or other communication of the results of the engagement. c. The objective of financial reporting. d. Management responsibility for the financial statements.

ANSWERS

60. The lending of staff by a firm, or network firm, to an audit client may create a ____ threat when the individual is in a position to influence the preparation of a client's accounts or financial statements.

a. Familiarity threat b. Self-review threat c. Self-interest threat d. Intimidation threat

61. Garry, CPA-Lawyer, has a law practice. Garry has recommended one of her clients to Francis, CPA.

Francis has agreed to pay Garry 12% of the fee for services rendered by Francis to Garry' client. Both Garry and Francis do not have the necessary safeguards in place to address threats which may be created by the fee arrangement. Who, if anyone, is in violation of the Code of Ethics?

a. Both Garry and Francis b. Neither Garry nor Francis c. Francis only d. Garry only

62. If firm, or network firm, personnel providing such assistance make management decisions, the self-

review threat created could not be reduced to an acceptable level by any safeguards. Example of such managerial decisions include the following, except

a. Determining or changing journal entries, or the classifications for accounts or transactions or other accounting records without obtaining the approval of the audit clients

b. Assisting an audit client in resolving account reconciliation problems c. Preparing source documents or originating data (including decisions on evaluation

assumptions), or making changes to such documents or data d. Authorizing or approving transactions

63. Auditors often make use of computer programs that perform routing processing functions such as

sorting and merging. These programs are made available be electronic data processing companies and others are specifically referred to as

a. supervisory programs b. use programs c. utility programs d. compiler programs

64. Which of the following auditor concerns most likely could be so serious that the auditor concludes that

a financial statement audit cannot be conducted? a. management fails to modify prescribed controls for changes in condition b. procedures requiring segregation of duties are subject to management override c. the entity has formal written code of conduct d. the integrity of the entity’s management is suspicious

65. When positive confirmations are not returned, the auditor is supposed to use alternative procedures.

Which of the following is not an alternative procedure? a. None. All of the three above are alternative procedures. b. Examination of subsequent cash collections. c. Mailing second and third confirmations. d. Examination of supporting documents.

ANSWERS Questions 66-70 Bird Company is a manufacturer of small tools. The following information was obtained from the company’s accounting records for the year ended December 31, 2021: Inventory at December 31, 2021 (based on physical count in Bird’s warehouse at cost on December 31, 2021) - 1,870,000 Accounts payable at December 31, 2021 - 1,415,000 Net sales (sales less sales returns) - 9,693,400 Your audit reveals the following information:

I. The physical count included tools billed to a customer FOB shipping point on December 31, 2021. These tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by the customer.

II. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2021. These goods with invoice cost of P93,000 were shipped on December 29, 2021.

III. Work in process inventory costing P27,000 was sent to a job contractor for further processing. IV. Not included in the physical count were goods returned by customer on December 31, 2021. These

goods costing P49,000 were inspected and returned to inventory on January 7, 2022. Credit memos for P67,800 were issued to the customers at that date.

V. In transit to a customer on December 31, 2021, were tools costing P17,000 shipped FOB shipping point on December 26, 2021. A sales invoice for P29,400 was issued on January 3, 2022, when Bird Company was notified by the customer that the tools had been received.

VI. At exactly 5:00pm on December 31, 2021, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2022. The related invoice was recorded on December 31, 2021, but the goods were not included in the physical count.

VII. Included in the physical count were goods received from a vendor on December 27, 2021. However, the related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving report was lost.

VIII. A monthly freight bill for P32,000 was received on January 3, 2022. It specifically related to merchandise bought in December 2021, one-half of which was still in the inventory at December 31, 2021. The freight was not included in either the inventory or in accounts payable at December 31, 2021.

66. Bird’s December 31, 201, inventory should be increased by

a. 216,200 b. 233,200 c. 252,200 d. 123,300

67. Bird’s accounts payable balance at December 31, 2021, should be increased by

a. 68,000 b. 145,000 c. 125,000 d. 161,000

68. The amount of net sales to be reported on Bird’s income statement for the year ended December 31,

2022, should be a. 9,547,100

ANSWERS

b. 9,576,500 c. 9,591,000 d. 9,595,300

69. Bird’s statement of financial position at December 31, 2021, should report accounts payable of

a. 1,576,000 b. 1,483,000 c. 1,540,000 d. 1,431,000

70. The amount of inventory to be reported on Bird’s December 31, 2021, statement of financial position

should be a. 2,103,200 b. 2,086,200 c. 2,122,200 d. 1,993,200

Questions 71-75 The following accounts were included in the adjusted trial balance of Jeanina Company as of December 31, 2022: Cash P 481,600 Accounts receivable 1,127,000 Merchandise Inventory 3,025,000 Accounts payable 2,100,500 Accrued expenses 215,500 During your audit, you noted that Jeanina held its cash book open after year-end. In addition, your audit reveled the following

I. Receipts for January 2023 of P327,300 were recorded in the December 2022 cash receipts book. The receipts of P180,050 represents cash sales and P147,250 represents collections from customers, net of 5% cash discounts.

II. Payments to suppliers made on January 2023 of P186,200, on which discounts of P6,200 were taken, were included in the December 2022 check register.

III. Merchandise inventory is valued at P3,025,000 prior to any adjustments . The following information has been found relating to certain inventory transactions.

IV. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the P1,512,500 inventory figure.

V. Goods costing P108,750 were received from a vendor on January 4, 2023. The related invoice was received and recorded on January 6, 2023. The goods were shipped on December 31, 2022, terms FOB shipping point.

VI. Goods costing P318,750 were shipped on December 31, 2022, and were delivered to the customer on January 6, 2023. The terms of the invoice were FOB shipping point. The goods were included in the 2022 ending inventory even though the sale was recorded in 2022.

VII. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2023. The sale was properly recorded in 2023.

ANSWERS VIII. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2022.

The related goods, shipped FOB destination were received on January 4, 2023, and thus were not included in the physical inventory.

IX. Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical inventory.

Questions: Based on the result of your audit, determine the adjusted balances of the following as of December 31, 2022.

71. Cash a. 481,600 b. 340,500 c. 334,300 d. 346,700

72. Accounts receivable

a. 1,454,300 b. 1,282,000 c. 1,127,000 d. 1,274,250

73. Merchandise Inventory

a. 3,017,500 b. 3,040,000 c. 2,930,000 d. 2,505,000

74. Accounts payable

a. 2,295,450 b. 2,307,950 c. 2,286,500 d. 2,301,750

75. Current ratio

a. 2.01 b. 2.00 c. 1.84 d. 1.83

Questions 76-79 At the close of its fiscal year on March 31, 2021, Stronger Company was in the process of relocating its plant. This resulted in some confusion relating to the inventory cutoff, as indicated by the following:

• Merchandise on hand costing P17,940 was included in the inventory although the purchase invoice was not recorded until April 12, 2021.

• Merchandise shipped on April 1, 2021 was included in the inventory. The cost of this merchandise was P22,190, and the sales was recorded as P31,380 on March 31, 2021.

• Merchandise costing P12,150 was included in the inventory although it was shipped to a customer on March 31, 2021, FOB shipping point. The company recorded the sale of P19,246 on that date.

ANSWERS

• Merchandise costing P18,200 was not counted. • Merchandise in transit (shipped to the company FOB destination) was recorded as a purchase as of

April 2, 2021, and its cost of P17,287 was not included in the March 31, 2021 inventory.

76. How much was the Inventory account of Stronger Company as of March 31, 2021 overstated or understated?

a. 6,050 understated b. 18,200 understated c. 12,150 overstated d. 16,140 overstated

77. How much was the Purchase account of Stronger Company as of March 31, 2021 overstated or

understated? a. Not affected b. 17,787 understated c. 17,940 understated d. 35,227 understated

78. How much was the Sales account of Stronger Company as of March 31, 2021 overstated or

understated? a. 50,625 overstated b. 31,380 overstated c. 12,134 overstated d. 12,134 understated

79. How much was the net income of Stronger Company as of March 31, 2021 overstated or understated?

a. 7,390 overstated b. 43,270 overstated c. 60,557 overstated d. 61,740 overstated

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