NAQDOWN – Elimination

Auditing Problems

Name:______________________________________
Year and Section:_____________________________
Instructions: Write the letter of your answer before each number. Use UPPERCASE letters only.
Provide all necessary solutions on your worksheet. Erasures are NOT allowed.

For items 1 to2

The following information was obtained from the audited financial statements of Dalaygon, INC. for the
year ended December 31, 2012:
 Operating income P 3,500,000
 Selling, administrative, and other operating expenses 1,800,000
 Finance cost 250,000
 10% Nonconvertible bonds 2,500,000
 Income tax rate 30%

Additional data:
a. There were 35,000 ordinary shares outstanding throughout the year.
b. On January 1, 2012, there were options outstanding to purchase 20,000 ordinary shares at P30 per
share. The average market price during the year was P40 per share.

1. What is Dalaygon’s basic earnings per share for 2012?

a. P29.00 c. 23.56
b. 31.57 d. 31.42

2. What is Dalaygon’s diluted earnings per share for 2012?

a. P26.93 c. 17.14
b. 25.38 d. 31.42

For items 3 to 5
Do Min Joon Company has long-standing policy of acquiring company equipment by leasing. On January
1, 2011, the company entered into a lease for a new machine. The lease contract provides that annual
payments will be made for 5 years. The payments are to be made in advance on December 31 of each
year. At the end of the 5-year period, Do Min Joon may purchase the machine. The estimated economic
life of the machine is 12 years. Do Min Joon uses the calendar year for reporting purposes and depreciates
its other equipment using the straight-line method.

In addition, the following information about the lease is also available:

 Annual lease payments P 165,000
 Purchase option price 75,000
 Estimated fair market value of the machine after 5 years 1,125,000
 Interest rate implicit in the lease 10%
 Date of first lease payment January 1, 2011

The following data are abstracted from the present value tables:
 PV of 1 for 5 periods at 10% 0.62092
 PV of an annuity due for 5 periods at 10% 4.16986
 PV of an ordinary annuity for 5 periods at 10% 3.79079

3. What is the amount to be capitalized as an asset for the lease of the machine?
a. 672,049
b. 837,232
c. 734,596
d. 763,027

4. What is the amount of interest expense to be recognized for the year ended December 31, 2012?

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 a. 46,156 d. 103,116
b. 56,960
c. 34,271
5. How much depreciation should be provided on the leased equipment for the year ended December 31,
2012?

a. P63,586
b. 56,004
c. 146,920
d. 61,216

For item 6
You are engaged in the regular annual examination of the accounts and records of PRTC Manufacturing
Co. for the year ended December 31, 2012. To reduce the workload at year end, the company, upon your
recommendation, took its annual physical inventory on November 30, 2012. You observed the taking of
the inventory and made tests of the inventory count and the inventory records. The company’s inventory
account, which includes raw materials and work-in-process is on perpetual basis. Inventories are valued at
cost, first-in, first-out method. There is no finished goods inventory. The company’s physical inventory
revealed that the book inventory of P1,695,960 was understated by P84,000. To avoid delay in
completing its monthly financial statements, the company decided not to adjust the book inventory until
year-end except for obsolete inventory items. Your examination disclosed the following information
regarding the November 30 inventory:
a. Pricing tests showed that the physical inventory was overstated by P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in footings and extensions.
c. Direct labor included in the inventory amounted to P280,000. Overhead was included at the rate of
200% of direct labor. You have ascertained that the amount of direct labor was correct and that the
overhead rate was proper.
d. The physical inventory included obsolete materials with a total cost of P7,000. During December, the
obsolete materials were written off by a charge to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.

6. Based on the above info. and the result of your audit , what is the adjusted amount of physical
inventory at November 30, 2012
a. P1,715,560 b. P1,845,760 c. P1,631,560 d. P1,722,560

7. Adjusted amount of inventory at December 31, 2012

a. P1,509,760 b. P1,502,760 c. P1,516,760 d. P1,425,760

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For items 7 – 10
The following information was obtained in connection with the audit of MICHELLE TALAVERA
COMPANY’s cash account as of December 31, 2012.

 Outstanding checks, 11/30/12 P 16,250

 Outstanding checks, 12/31/12 12,500
 Deposit in transit, 11/30/12 12,500
 Cash balance per general ledger 12/31/12 37,500
 Actual company collections from its customers during December 152,500
 Company checks paid by bank in December 130,000
 Bank service charges recorded on company books in December 2,500
 Bank service charges per December bank statement 3,250
 Deposits credited by bank during December 145,000
 November bank service charges recorded on company books in December 1,500
 The cash receipts book of December is under footed by P2,500.
 The bank erroneously charged the company’s account for a P3,750 check of another depositor.
This bank error was corrected in January 2013.
8. How much is the deposit in transit on December 31, 2012?
a. P5,000 c. 22,500
b. 20,000 d. 17,500

9. The total unrecorded bank service charges as of December 31, 2012 is

a. P750 c. 1,750
b. 2,250 d. 4,250

10. What is the total book receipt in December?

a. P150,000
b. 152,500
c. 155,000
d. 147,500

Instructions:Write your answer on the space provided. Provide all necessary solutions on your
worksheet. (Items 11 – 20)

For Items 11 – 15

The following is Macedonia Company’s pre-audit income statement for year ended December 31, 2010:

Sales P2,964,000
Cost of goods sold 1,926,000
Gross income P1,038,000
Operating expenses:
Rent expense P250,000
Salaries expense 345,000
Utilities expense 219,000
Advertising expense 30,000

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 Warranty expense 14,000
Other expenses 35,500 893,500
Net income P144,500

A. Some Macedonia’s customers pay for their orders in advance. At December 31, 2010, orders paid
for in advance of shipment totaled P15,000. These have been included in the sales figure.
B. Macedonia’s products are sold with a 30 day money-back guarantee. Customers seldom returned
the products during the year. Macedonia has not included in the sales figure and in cost of goods
sold those products sold within the last 30 days of the current year. The revenue is P98,000 and
the cost of the products is P63,700.
C. On July 1, 2010, Macedonia prepaid its office space rent for 18 months. The amount paid
P216,000, was recorded as rent expense.
D. The amount of P120,000 was paid on July 1, 2010, for general advertising to be completed prior
to December 31, 2010. Macedonia’s management believes that the advertising will benefit a 2-
year period and, therefore, has decided to charge the costs to the income statement at the rate of
P5,000 per month.
E. In prior years, Macedonia has estimated warranty expense using a percentage of sales. Future
warranty cost relating to 2010 sales are estimated to amount to 2% of sales. However, during
2010, Macedonia elected to charge costs to warranty expense as costs were incurred. Macedonia
spent P14,000 during 2010 to repair and replace defective products sold in current and prior
years.

11. The correct amount of Macedonia’s sales revenue for 2010 is ________________________________
12. Macedonia’s income statement for 2010 should show gross income of _________________________
13. Macedonia’s total expenses (excluding cost of goods sold) for 2010 should be__________________
14. Macedonia’s net income for 2010 (ignore income tax) should be______________________________
15. The prepaid advertising account balance on December 31, 2010 is____________________________

For items 16 – 20
PRTC Company's property, plant, and equipment, accumulated depreciation, and amortization balances at
December 31, 2011 are:

Cost Accum.
depreciation
Land P 275,000
Buildings 2,800,000 P 672,900
Machinery and equipment 1,380,000 367,500
Automobile and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Totals P5,097,000 P1,262,726

Additional information on depreciation, amortization methods, and useful lives follows:

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 Asset Depreciation method Useful life
Buildings 150%-declining-balance 25 years.
Machinery and equipment straight-line 10 years
Automobile and trucks (all acquired after 2009) 150%-declining-balance 5 years
Leasehold improvements straight-line

Depreciation is computed to the nearest month.

Salvage values of depreciable assets are immaterial except for automobiles and trucks which have
estimated salvage values equal to 15% of cost.
Other additional information:
 PRTC entered into a twelve-year operating lease starting January 1, 2009. The leasehold
improvements were completed on December 31, 2008 and the facility was occupied on January 1,
2009.
 On January 6, 2012, PRTC completed its self-construction of a building on its own land. Direct
costs of construction were P1,095,000. Construction of the building required 15,000 direct labor
hours. PRTC's construction department has an overhead allocation system for outside jobs based
on an activity denominator of 100,000 direct labor hours, budgeted fixed costs of P2,500,000, and
budgeted variable costs of P27 per direct labor hour.
 On July 1, 2012, machinery and equipment were purchased at a total invoice cost of P325,000.
Additional costs of P23,000 to rectify damage on delivery and P18,000 for concrete embedding of
machinery were incurred. A wall had to be demolished to enable a large machine to be moved
into the plant. The wall demolition cost P7,000, and rebuilding of the wall cost P19,000.
 On August 30, 2012, PRTC purchased a new automobile costing P25,000.
 On September 30, 2012, a truck with a cost of P48,000 and a carrying amount of P30,000 on
December 31, 2011 was sold for P23,500.
 On November 4, 2012, PRTC purchased a tract of land for investment purposes for P700,000.
PRTC thinks it might use the land as a potential future building site.
 On December 20, 2012, a machine with a cost of P17,000, a carrying amount of P2,975 on date
of disposition, and a market value of P4,000 was sold to a corporate officer.
QUESTIONS:
Based on the above info. and the result of your audit, compute for the following as of and for the year
ended December 31, 2012:
16. Total Depreciation:______________________________________________
17. Carrying Amount of Buildings:____________________________________
18. Carrying amount of machinery and equipment_________________________
19. Carrying amount of automobiles and trucks___________________________
20. Carrying amount of property, plant and equipment _____________________

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