You are on page 1of 10

Batangas CPA Review Center

Tanauan City, Batangas

SECOND PREBOARD EXAMINATION


AUDITING

1. The measure of the quality of audit evidence and its relevance to a particular assertion and its reliability.
a. Sufficiency c. Significance
b. Appropriateness d. Assurance

2. It serves as a set of instructions to assistants involved in the audit and as a means to control the proper execution of the
work.
a. Audit program c. Engagement letter
b. Overall audit plan d. Internal control questionnaire

3. Detection risk is
a. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially
misstated.
b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be
material individually or when aggregated with misstatements in other balances or classes, will not be prevented or
detected and corrected on a timely basis by the accounting and internal control systems.
c. The risk that an auditor's substantive procedures will not detect a misstatement that exists in an account balance
or class of transactions that could be material, individually or when aggregated with misstatements in other
balances or classes.
d. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually
or when aggregated with misstatements in other balances of classes, assuming that there were no related internal
controls.

4. Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.
a. Scope of an audit c. Audit program
b. Scope of a review d. Scope limitation

5. A financial statement audit is designed to


a. Provide assurance on internal control and to identify reportable conditions.
b. Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material.
c. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
caused by error or fraud.
d. Obtain absolute assurance on the financial statements and express an opinion on the financial statements.

6. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external
auditor is expected to
a. Express an opinion as to the fairness of Camden's financial statements.
b. Express an opinion as to the attractiveness of Camden for investment purposes.
c. Certify to the correctness of Camden's financial statements.
d. Critique the wisdom and legality of Camden's business decisions.

7. A detailed examination of the utilization of the resources of the company, including the organization structure to carry out
objectives, to indicate areas of increased efficiency and possible cost reduction is
a. Internal audit. c. Management audit.
b. Audit of assets. d. Financial audit.

8. An independent audit
a. Supports an internal audit. c. Duplicates an internal audit.
b. Negates an internal audit. d. Complements an internal audit.

9. Audits of financial statements are designed to obtain assurance of detecting material misstatements due to
a b c d
Errors Yes Yes Yes No
Fraudulent financial reporting Yes Yes No Yes
Misappropriation of assets Yes No Yes No
10. The term “error” refers to unintentional misrepresentations of financial information. Examples of errors are when:
(1) Assets have been misappropriated.
(2) Transactions without substance have been recorded.
(3) Records and documents have been manipulated and falsified.
(4) The effects of transactions have been omitted from records or documents.
a. All of the above statements are true.
b. Only statements (2) and (4) are true.
c. Only statements (1) and (3) are true.
d. All of the above statements are false.

11. Auditing standards require that auditors be aware of relevant factors relating to fraudulent reporting. Which of the
following statements is false concerning fraudulent reporting?
a. Fraud frequently involves a pressure or an incentive to commit fraud and a perceived opportunity to do so.
b. Two types of fraud relevant to the auditor include material misstatements arising from fraudulent financial
reporting and material misstatements arising from misappropriation of assets.
c. Fraud involves actions of management but excludes the actions of employees or third parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go undetected by the auditor.

12. Which of the following is an example of fraudulent financial reporting?


a. Company management changes inventory count tags and overstates ending inventory, while understating cost of
goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account,
thus overstating expenses.
c. An employee steals inventory, and the “shrinkage” is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a
miscellaneous operating expense.

13. The auditor is most likely to presume that a high risk of a defalcation exists if
a. The client is a multinational company that does business in numerous foreign countries.
b. The client does business with several related parties.
c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.
d. Inadequate employee training results in lengthy EDP exception reports each month.

14. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements
exist in an entity’s financial statements?
a. Management places little emphasis on meeting earnings projections.
b. The board of directors makes all major financing decisions.
c. Reportable conditions previously communicated to management are not corrected.
d. Transactions selected for testing are not supported by proper documentation.

15. Which of the following best describes what is meant by GAAS?


a. Acts to be performed by the auditor.
b. Measures of the quality of the auditor's performance.
c. Procedures to be used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.

16. The least important evidence of a CPA firm's evaluation of its system of quality controls would concern the CPA firm's policies
and procedures with respect to
a. Employment (hiring).
b. Confidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees.

17. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client
is to
a. Enable the CPA firm to attest to the reliability of the client.
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of clients.
c. Minimize the likelihood of association with clients whose management lacks integrity.
d. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

18. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely
include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were
resolved satisfactorily.

2
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an
opinion.
c. Inquiry of third parties, such as the prospective client's bankers and attorneys, about information regarding the
prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the extent of
required substantive tests.

19. In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or
employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control objective would
this be most likely to satisfy?
a. Professional relationship. c. Independence.
b. Supervision. d. Advancement.

20. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed
and to evaluate whether the
a. Auditor’s system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor’s report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency as auditors.

21. Which of the following is the best criterion for evaluating a staff auditor’s work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of requirements set forth in the audit programs.

22. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
a. An inadequate understanding of the entity’s internal control.
b. The close proximity to the end of the entity’s fiscal year.
c. Concluding that the entity’s management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before assessing control risk.

23. Before accepting an audit engagement, you as the successor auditor would least likely make specific inquiries of the
previous auditor regarding
a. Facts that might bear on the integrity of management.
b. The degree of cooperation the previous auditor received from the client’s lawyer.
c. An inquiry regarding disagreements with management as to auditing procedures.
d. The predecessor auditor’s understanding as to the reasons for the change of auditors.

24. Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s
financial statements?
a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control procedures.

25. In making a decision to accept or continue with a client, the auditor should consider:
a b c d
Its own independence Yes No Yes No
Its ability to service a client properly Yes Yes Yes No
The integrity of the client’s management Yes Yes No Yes

26. Which of the following is least likely a source of information about a potential new audit client?
a. The predecessor auditor.
b. Management.
c. Industry journal.
d. The new auditor’s permanent file.

27. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily
a. Perform the audit with increased professional skepticism.
b. Decline to accept or perform the audit.
c. Assess control risk at the maximum level and perform a primarily substantive audit.
d. Modify the scope of the audit to reflect an increased risk of material misstatements due to fraud.

3
28. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement
letter to the client?
a. A recent change in partner and/or staff involved in the audit engagement.
b. A change in the terms of engagement.
c. A recent change of client management.
d. A significant change in the nature or size of the client's business.

29. Adequate audit planning helps ensure that appropriate attention is devoted:
a. b. c. d.
To important areas of the audit Yes Yes Yes Yes
So that potential problems are promptly identified Yes Yes No No
So that the work is completed expeditiously No Yes No Yes

30. This includes distributing assignments among staff assistants and reviewing the progress of such assignments on a
periodic basis.
a. Supervision b. Staff training c. CPE d. Planning.

31. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit
team primarily to
a. Give guidance to the staff regarding both technical and personnel aspects of the audit.
b. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
c. Establish the need for using the work of specialists and internal auditors.
d. Provide an opportunity to document staff disagreements regarding technical issues.

32. An auditor obtains knowledge about a new client’s business and its industry to
a. Make constructive suggestions concerning improvements to the client’s internal control.
b. Develop an attitude of professional skepticism concerning management’s financial statement assertions.
c. Evaluate whether the aggregation of known misstatements causes the financial statements takes as a whole to be
materially misstated.
d. Understand the events and transactions that may have an effect on the client’s financial statements.

33. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Reviewing investment transactions of the audit period to determine whether related parties were credited.
b. Performing analytical procedures to identify areas that may represent specific risks.
c. Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have
occurred.
d. Obtaining a written representation letter from the client to emphasize management’s responsibilities.

34. Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
c. Selecting a sample of vendor’s invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.

35. In developing the overall audit plan for a new client, factor not to be considered is
a. The terms of the engagement and any statutory responsibilities.
b. The client's business, including the structure of the organization and accounting system used.
c. The amount of estimated audit fee.
d. The audit risk and procedures to be performed to achieve audit objectives.

Problem 1
Samsung Company, a manufacturer of small tools, provided the following information from its accounting records for the
year ended December 31, 2018:

Inventory at December 31, 2018 (based on physical count on December 31,


2018) P1,520,000
Accounts payable at December 31, 2018 1,200,000
Net sales (sales less sales returns) 8,150,000

Additional information follows:

a. Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2018. These tools
had a cost of P31,000 and were billed at P40,000. The shipment was on Samsung’s loading dock waiting to be picked up
by the common carrier.

4
b. Goods were in transit from a vendor to Samsung on December 31, 2018. The invoice cost was P71,000, and the goods
were shipped FOB shipping point on December 29, 2018.

c. Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30, 2018.

d. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2018, were not
included in the physical count. On January 8, 2019, the tools costing P32,000 were inspected and returned to inventory.
Credit memos totaling P47,000 were issued to the customers on the same date.

e. Tools shipped to a customer FOB destination on December 26, 2018, were in transit at December 31, 2018, and had a
cost of P21,000. Upon notification of receipt by the customer on January 2, 2019, Samsung issued a sales invoice for
P42,000.

f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2018, were recorded on
a receiving report dated January 2, 2019. The goods were not included in the physical count, but the invoice was included
in accounts payable at December 31, 2018.

g. Goods received from a vendor on December 26, 2018, were included in the physical count. However, the related
P56,000 vendor invoice was not included in accounts payable at December 31, 2018, because the accounts payable copy
of the receiving report was lost.

h. On January 3, 2019, a monthly freight bill in the amount of P6,000 was received. The bill specifically related to
merchandise purchased in December 2018, one-half of which was still in the inventory at December 31, 2018. The
freight charges were not included in either the inventory or accounts payable at December 31, 2018.

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

36. The adjusted balance of Inventory as of December 31, 2018 is


a. P1,673,000 b. P1,704,000 c. P1,672,000 d. P1,670,000

37. The adjusted balance of Accounts Payable as of December 31, 2018 is


a. P1,333,000 b. P1,262,000 c. P1,327,000 d. P1,330,000

38. The adjusted Net Sales for the year ended December 31, 2018 is
a. P8,103,000 b. P8,110,000 c. P8,150,000 d. P8,063,000

39. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that
a. All goods purchased before year end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. All goods owned at year end are included in the inventory balance.
d. No goods observed during the physical count are pledged or sold.

40. Which of the following audit procedures would provide the least reliable evidence that the client has legal title to
inventories?
a. Analytical review of inventory balances compared to purchasing and sales activities.
b. Confirmation of inventories at locations outside the client's facilities.
c. Observation of physical inventory counts.
d. Examination of paid vendors' invoices.

Problem 2
You requested a depreciation schedule for Semitrucks of Iphone Manufacturing Company showing the additions, retirements,
depreciation and other data affecting the income of the Company in the 4-year period 2015 to 2018, inclusive. The
Semitrucks account consists of the following as of January 1, 2015:

Truck No. 1 purchased Jan. 1, 2012, cost P 180,000


Truck No. 2 purchased July 1, 2012, cost 220,000
Truck No. 3 purchased Jan. 1, 2014, cost 300,000
Truck No. 4 purchased July 1, 2014, cost 240,000
P 940,000

The Semitrucks – Accumulated Depreciation account previously adjusted to January 1, 2015, and duly entered to the ledger,
had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of purchase, based on five-year
life, no salvage value). No charges have been made against the account before January 1, 2015.

5
Transactions between January 1, 2015, and December 31, 2018, and their record in the ledger were as follows:

July 1, 2015 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was P340,000. Iphone
Mfg. Co. paid the automobile dealer P150,000 cash on the transaction. The entry was debit to Semitrucks
and a credit to cash, P150,000.

Jan. 1, 2016 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Semitrucks, P35,000.

July 1, 2017 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to Semitrucks account.
(Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash. Iphone Mfg.
Co. received P25,000 from the insurance company. The entry made by the bookkeeper was a debit to cash,
P32,000, and credits to Miscellaneous Income, P7,000 and Semitrucks P 25,000.

Entries for depreciation had been made for the close of each year as follows: 2015, P203,000; 2016, P211,000; 2017, P244,500;
2018, P278,000.

Based on the above and the result of your audit, determine the following: (Disregard tax implications)

41. The 2018 depreciation expense is


a. P138,000 b. P184,000 c. P104,000 d. P140,000

42. The carrying amount of Semitrucks as of December 31, 2018 is


a. P885,400 b. P284,000 c. P504,000 d. P354,000

43. The 2015 net income is overstated by


a. P9,000 b. P20,000 c. P31,000 d. P0

44. The 2016 net income is understated by


a. P16,000 b. P50,000 c. P51,000 d. P0

45. The 2017 net income is understated by


a. P23,500 b. P94,500 c. P64,500 d. P 0

Problem 3
You were asked by Cherry Mobile Corporation to audit its financial statements for the years ended December 31, 2017 and
2018. While reviewing the entity's records for 2017 and 2018, you discovered that no adjustments have yet been made for
the items listed below.
Item No. 1 Insurance premiums of P300,000 for the three-year period beginning January 1, 2017, had been paid and
fully expensed in 2017.

Item No. 2 The merchandise inventories at the end of 2017 and 2018 did not include merchandise that was then in
transit and to which the company had title. These shipments of P50,000 and P30,000 were recorded as
purchases in January 2018 and 2019, respectively.

ltem No. 3 Rental of P60,000 an an equipment , applicable for six months, was received on November 1, 2017. The
entire amount was reported as income upon receipt.

Item No. 4 The entity purchased a machine on January 2, 2017, at a cost of P120,000. An additional P50,000 was spent
for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life
of five years and a residual amount of P20,000.

Item No. 5 The entity received P360,000 from a customer at the beginning of 2017 for services that it is to perform
evenly over a 3-year period beginning in 2017. None of the amount received was reported as unearned
revenue at the end of 2017.

Based on the above and the result of your audit, answer the following:
46. In relation to Item No. 1, which of the following is correct?
a. The 2017 profit is overstated.
b. The 2018 profit is overstated.
c. The December 31, 2017 retained earnings is correctly stated.
d. The December 31, 2018 retained earnings is correctly stated.

6
47. In relation to item No. 2, which of the following is incorrect?
a. The 2017 profit is understated.
b. The 2018 profit is correctly stated.
c. The December 31, 2017 retained earnings is correctly stated.
d. The December 34, 2018 retained earnings is correctly stated.

48. In relation to Item No. 3, which of the following is correct


a. The 2017 profit is overstated by P60,000.
b. The 2018 profit is understated by P60,000.
c. The 2018 profit is understated by P40,000.
d. The December 31, 2017 retained earnings is correctly stated.

49. In relation to Item No. 4, which of the following is correct?


a. Retained earnings at December 31, 2018, was understated by P30,000 and 2018 income was overstated by P6,000.
b. Retained earnings at December 31, 2018, was understated by P38,000 and 2018 income was overstated by P6,000.
c. Retained earnings at December 31, 2018, was understated by P30,000 and 2018 income was overstated by P10,000.
d. 2017 income was understated by P50,000.

50. In relation to ltem No. 5, which of the following is incorrect?


a. The 2017 profit is overstated by P240,000.
b. The 2018 profit is understated by P120,000.
c. The December 31, 2017 retained earnings is overstated by P240,000.
d. The December 31, 2018 retained earnings is correctly stated.

Problem 4
You gathered the following information related to the Patents account of the Sony Cookie Corporation in connection with your
audit of the company’s financial statements for the year 2018.

In 2017, Sony developed a new machine that reduces the time required to insert the fortunes into its fortune cookies. Because
the process is considered very valuable to the fortune cookie industry, Sony patented the machine. The following expenses
were incurred in developing and patenting the machine:

Research and development laboratory expenses P1,000,000


Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 480,000
Wages paid for the employees’ work on the research, development, and building of the machine
(60% of the time was spent in actually building the machine) 1,200,000
Expense of drawing required by the patent office to be submitted with the patent application
68,000
Fees paid to the government patent office to process application 100,000

During 2018, Sony paid P150,000 in legal fees to successfully defend the patent against an infringement suit by Cookie Monster
Corporation.

It is the company’s policy to take full year amortization in the year of acquisition.

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

51. Cost of patent


a. P580,000 b. P1,128,000 c. P648,000 d. P 798,000

52. Cost of machine


a. P1,236,000 b. P1,040,000 c. P1,648,000 d. P1,168,000

53. Amount that should charged to expense when incurred in connection with the development of the patented machine
a. P1,480,000 b. P1,608,000 c. P1,000,000 d. P 0

54. Carrying amount of patent as of December 31, 2018


a. P522,000 b. P1,015,200 c. P583,200 d. P 837,900

55. The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristics
of an asset is to

7
a. Analyze research and development expenditures to determine that only those expenditures possessing future
economic benefit have been capitalized.
b. Vouch the purchase by reference to underlying documentation.
c. Inquire as to the status of patent applications.
d. Evaluate the future revenue-producing capacity of the intangible asset.

Problem 5
On January 10, 2019, you started the audit of the financial records of the Nokia Company for the year ended December 31,
2018. From your investigation, you discovered the following:

1. The bookkeeper also acts as the cashier. On December 31, 2018, the bookkeeper’s year-end cash reconciliation contains
the following items.

Cash per ledger, 12-31-18 P491,200


Cash per bank, 12-31-18 518,800
Outstanding checks 41,760
Miami Co. check charge by bank in error
12-20-18; corrected by bank on 1-5-19 1,200
Cash in transit, credited by bank on 1-2-19 5,760

2. The cash account balances per ledger as of 12-31-18 were: Cash - P491,200; petty cash - P1,200

3. The count of the cash on hand at the close of business on January 10, 2019, including the petty cash, was as follows:

Currency and coin P3,080


Expense vouchers 160
Employees’ IOU’s dated 1-5-18 440
Customers’ checks in payment of account 2,320
P6,000

4. From January 2, 2019 to January 10, 2019, the date of your cash count, total cash receipts appearing in the cash records
were P68,800. According to the bank statement for the period from January 2, 2019 to January 10, 2019, total credits
were P60,800.

5. On July 5, 2018, cash of P3,200 was received from an account customer; the Allowance for Doubtful Accounts was
charged and Accounts Receivable credited.

6. On December 5, 2018, cash of P2,400 was received from an account customer; Inventory was charged and Accounts
Receivable credited.

7. Cash of P5,840 received during 2018 was not recorded.

8. Checks received from customers from January 2, 2019 to January 10, 2019, totaling P3,360, were not recorded but were
deposited in bank.

9. On July 1, 2018, the bank refunded interest of P160 because a note of the Nokia Company was paid before maturity. No
entry had been made for the refund.

10. In the cashier’s petty cash, there were receipts for collections from customers on January 9, 2019, totaling P6,800; these
were unrecorded and undeposited.

11. In the outstanding checks, there is one for P400 made payable to a trade creditor; investigation shows that this check
had been returned by the creditor on June 14, 2018 and a new check for P800 was issued in its place; the original check
for P400 was made in error as to amount.

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

56. Correct bank balance as of December 31, 2018 is


a. P484,400 b. P503,200 c. P484,000 d. P483,200

57. Cash shortage as of December 31, 2018 is


a. P19,200 b. P18,800 c. P18,400 d. P0

58. Cash shortage for the period January 1 to 10, 2019 is


a. P13,360 b. P20,320 c. P10,160 d. P0

8
59. From the standpoint of good internal control, the monthly bank statements should be reconciled by someone under the
direction of the
a. Controller. b. Treasurer. c. Cashier. d. Credit manager.

60. An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittance from
the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.
b. Prelist of individual checks. d. Monthly bank reconciliation.

Problem 6
On January 1 2017, Oppo Corporation acquired two assets within the same class of plant and equipment. Information on
these assets follows:
Cost Expected useful life
Machine A P100,000 5 years
Machine B 60,000 3 years

Tre machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is measured
using the revaluation model.
At 31 December 2017, information about the assets follows:
Fair value Expected useful life
Machine A P84,000 4 years
Machine B 38,000 2 years

On July 2018, machine B was sold for P32,000 cash. On the same day, Oppo Corporation acquired machine C for P80,000
cash. Machine C has expected useful life of four years.

At 31 December 2018, information on the machines follows:


Fair value Expected useful life
Machine A P61,000 3 years
Machine C 68,500 1.5 years

Based on the above and the result of your audit, answer the following:
61. The amount to be recognized in 2017 profit or loss related to the revaluation of the assets is
a. P4,000
b. P2,000
c. (P2,000)
d. P0

62. The amount to be recognized in 2017 comprehensive income related to the revaluation of the assets is
a. P4,000
b. P2,000
C. (P2,000)
d. P17,000

63. The gain or loss on sale of Machine B is


a. P13,000 gain
b. P 3,500 gain
c. P 333 gain
d. P6,000 loss

64. The total depreciation for the year 2018 is


a. P40,500
b. P31,000
C. P64, 167
d. P50,500

65. The amount to be recognized in 2018 profit or loss related to the revaluation of the assets is
a, (P3,500)
b. (P1,500)
c. (P500)
d. P0

9
Problem 7
LG Corporation is a company engaged in buying and selling manufacturing equipment. On January 1, 2017, LG Corporation
sold equipment, with a cash price of P1,500,000. The cost of the equipment is P750,000. The buyer signed a deferred
payment contract that provides for a down payment of P300,000 and a 5-year note for P1,705,900. The note is to be paid in 5
equal annual payments of P341, 180. The payments include interest and are made on December 31 of each year, beginning
on December 31, 2017.
LG Corporation made the following entries in relation to the sale of the equipment and the related note receivable:

January 1, 2017
Cash P 300,000
Notes receivable 1,705,900
Cost of goods sold 750,000
Sales P2,005,900
Inventory 750,000

December 31, 2017


Cash P341,180
Notes receivable P341,180

December 31, 2018


Cash P341,180
Notes receivable P341,180

LG Corporation reported the notes receivable in its statement of financial position at December 31, 2017 and 2018 as part of
trade and other receivables.

Based on the above and the result of your audit, answer the following:
66. The interest rate on the note is
a, 10%
b. 11%
c. 12%
d. 13%

67. Profit for 2017 is overstated by


ä. P349,900
b. P361,900
c. P505,900
d. P 49,900

68. Retained earnings as of December 31, 2018 is overstated by


a. Nil
b. 349,900
c. P241,562
d. P217,973

69. The working capital as of December 31, 2018 is overstated by


a. P776,197
b. P682,360
c. P787,084
d. Nil

70. A logical substantive test for accrued interest receivable would be to


a. Verify the cost, carrying value, and market value of notes receivable.
b. Verify the interest income by a calculation based on the face amount of notes and the nominal interest rate.
c. Recalculate interest earned and compare it to the amounts received.
d. Compare the interest income with published interest investment records.

10

You might also like