TEST INSTRUCTIONS:

1. WRITE YOUR NAME, SECTION, AND DATE ON THE UPPER LEFT SIDE OF YOUR PAPER.

2. WRITE YOUR ANSWERS IN CAPITAL LETTERS.

3. MAKE A SUMMARY SHEET OF YOUR ANSWERS, INCLUDING BOTH THEORY AND COMPUTATION.

4. SHOW YOUR SOLUTION STEPS CLEARLY AND BOX THE FINAL ANSWER IN YOUR SOLUTION.

5. ANY ERASURES ON THE SUMMARY SHEET WILL BE CONSIDERED WRONG FOR THE FINAL
ANSWER.

6. WRITING IN THE QUESTIONNAIRE IS PROHIBITED.

I. THEORY

4. Which of the following procedures is least likely to be

performed before the balance sheet date?
1. In audi ng accounts payable, an auditor’s procedures
a. Confirma on of receivables
most likely will focus primarily on management’s asser on of:
b. Tes ng of internal control over cash
a. Valua on or alloca on
c. Search for unrecorded liabili es
b. Existence or occurrence
d. Observa on of inventory
c. Completeness
d. Presenta on and disclosure
5. An audit assistant found a purchase order for a regular
supplier in the amount of P5,500, dated a er receipt of goods.
2. An auditor performs a test to determine whether all
The purchasing agent had forgo en to issue the purchase
merchandise for which the client was billed was received. The
order. Addi onally, a disbursement of P450 for materials did
popula on for this test consists of all:
not have a receiving report. The audit director should:
a. Canceled checks
a. Agree with the assistant because the amount of the
b. Vendors’ invoices
purchase order excep on was considerably larger than the
c. Merchandise received
receiving report excep on
d. Receiving reports
b. Disagree with the assistant because two problems have an
equal risk of loss associated with them
3. The primary audit test to determine if accounts payable c. Agree with the assistant because the cash disbursement
are valued properly is: clerk had been assured by the receiving clerk that the failure to
a. Vouching accounts payable to suppor ng documenta on fill out a report didn’t happen very o en
b. Confirma on of accounts payable d. Disagree with the assistant because the lack of a receiving
c. Verifica on that accounts payable was reported as a current report has a greater risk of loss associated with it
liability in the balance sheet
d. An analy cal procedure
6. When using confirma on to provide evidence about the 9. When tle to merchandise in transit has passed to the
completeness asser on for accounts payable, the appropriate audit client, the auditor engaged in the performance of a
popula on most likely is: purchase cut-off will encounter the greatest difficulty in gaining
a. Invoices filed in the en ty’s open invoice file assurance with respect to the:
b. Payees of checks drawn in the month a er the year end a. Quality
c. Vendors with whom the en ty has previously done business b. Terms
d. Amounts recorded in the accounts payable subsidiary ledger c. Price
d. Quan ty

7. Which of the following is a substan ve test that an

auditor is most likely to perform to verify the existence and 10. Which of the following audit procedures is least likely to
valua on of recorded accounts payable? detect an unrecorded liability?
a. Vouching selected entries in the accounts payable subsidiary a. Mailing of standard bank confirma on forms
ledger to purchase orders and receiving reports b. Reading of the minutes of mee ngs of the board of directors
b. Confirming accounts payable balances with known suppliers c. Analysis and recomputa on of interest expense
who have zero balances d. Analysis and recomputa on of deprecia on expense
c. Receiving the client’s mail, unopened, for a reasonable
period of me a er year end to search for unrecorded vendor’s
11. Unrecorded liabili es are most likely to be found during
invoices
the review of which of the following documents?
d. Inves ga ng the open purchase order file to ascertain that
a. Shipping records
pre-numbered purchase orders are used and accounted for
b. Unmatched sales invoices
c. Bills of lading
8. Only one of the following four statements, which d. Unpaid bills
compare confirma on of accounts payable with suppliers and
confirma on of accounts receivable with debtors, is false. The
12. Which of the following audit procedures is best for
false statement is that:
iden fying unrecorded trade accounts payable?
a. It is less likely that the confirma on request sent to the
a. Inves ga ng payables recorded just prior to and just
supplier will show the amount owed than that request sent to
subsequent to the balance sheet date to determine whether
the debtor will show the amount due
they are supported by receiving reports
b. Sta s cal sampling techniques are more widely accepted in
b. Reconciling vendors’ statements to the file of receiving
the confirma on of accounts payable than in the confirma on
reports to iden fy items received just prior to the balance
of accounts receivable
sheet date
c. As compared with the confirma on of accounts receivable,
c. Examining unusual rela onships between monthly accounts
the confirma on of accounts payable will tend to emphasize
payable balances and recorded cash payments
accounts with zero balances at the balance sheet date
d. Reviewing cash disbursements recorded subsequent to the
d. Confirma on of accounts receivable with debtors is a more
balance sheet date to determine whether the related payables
widely accepted audi ng procedure than confirma on of
apply to the prior period
accounts payable with suppliers
13. In verifying debits to perpetual inventory records of a 17. In an audit of bonds payable, an auditor expects the trust
non-manufacturing firm, the auditor is most interested in indenture to include the:
examining the purchase: a. Effec ve yield of the bonds issued
a. Orders b. Descrip on of the collateral
b. Invoices c. Subscrip on list
c. Requisi ons d. Auditee’s debt-to-equity ra o at the me of issuance
d. Journal

14. Which of the following procedures rela ng to the 18. In audi ng long-term bonds payable, an auditor most
examina on of accounts payable could the auditor delegate likely will:
en rely to the client’s employees? a. Confirm the existence of individual bondholders at year-end
a. Mail confirma ons for selected account balances b. Compare interest with the bond payable amount for
b. Prepare a schedule of accounts payable reasonableness
c. Reconcile unpaid invoices to vendor statements c. Perform analy cal procedures on the bond premium and
d. Test foo ngs in the accounts payable ledger discount accounts
d. Examine documenta on of assets purchased with bond
proceeds or liens
15. An auditor’s purpose in reviewing the renewal of a note
payable shortly a er the balance sheet date most likely is to
obtain evidence concerning management’s asser ons about: 19. The audit procedures used to verify accrued liabili es
a. Valua on or alloca on differ from those employed for the verifica on of accounts
b. Existence or occurrence payable because:
c. Presenta on and disclosure a. Evidence suppor ng accrued liabili es is non-existent while
d. Completeness evidence suppor ng accounts payable is readily available
b. Accrued liability balances are less material than accounts
payable balances
16. An auditor’s program to audit long-term debt should
c. Accrued liabili es usually pertain to services of a con nuing
include steps that require:
nature while accounts payable are the result of completed
a. Inspec ng the accounts payable subsidiary ledger
transac ons
b. Verifying the existence of the bondholders
d. Accrued liabili es at year-end will become accounts payable
c. Examining bond trust indentures
during the following year
d. Inves ga ng credits to the bond interest income account

20. The auditor is most likely to verify accrued commissions

payable in conjunc on with the:
a. Examina on of trade accounts payable
b. Review of post-balance sheet date disbursements
c. Sales cutoff test
d. Verifica on of con ngent liabili es
II. Problems

In the audit of the Heats Corporation’s financial statements at December 31, 2022, the chief
accountant of the said corporation provided the following information:

Notes payable:

Arising from purchase of goods 200,000

Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2023; P100,000 due on Dec. 31, 2023 500,000
Arising from advances by o icers, due June 30, 2023 50,000

Reserve for general contingencies 400,000

Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of P240,000 5,440,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds ?
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

Additional informations:
On 1 June 2022, Heats Corporation borrows PHP 50,000 on a 8 months note payable with an annual
interest rate of 6%. On 1 September 2022, the company borrows PHP150,000 on a 2 year notes
payable with no interest in face. The e ective rate is 4%.

On January 15, 2023, the BIR assessed Heats an additional income tax of P300,000 for
the 2022 tax year. Heats’ attorneys and tax accountants have stated that it is likely that
the BIR will agree to a P200,000 settlement.

One year product warranty on selected items in its product line. The es mated warranty liability on sales
made during 2021, which was outstanding as of December 31, 2021, amounted to P416,000. The
warranty costs on sales made in 2022 are es mated at P1,504,000. Actual warranty costs incurred during
the current 2022 fiscal year are as follows:

Warranty claims honored on 2021 sales P 416,000

Warranty claims honored on 2022 sales P992,000

Total warranty claims honored P1,408,000

On January 2, 2022, the company. issued P2,000,000 of 8% conver ble bonds at par. The bonds will
mature on January 1, 2026 and interest is payable annually every January 1. The bond contract en tles
the bondholders to receive 6 shares of P100 par value common stock in exchange for each P1,000 bond.
On the date of issue, the prevailing market interest rate for similar debt without the conversion op on is
10%. On December 31, 2023, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. In addi on, the company reacquired at 110, bonds with a face value of P500,000.
The balances in the capital accounts as of December 31, 2022 were:

Common stock, P100 par, authorized 50,000 shares, issued and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

December 31, 2022 118 40

December 31, 2023 110 42

The unpaid voucher file in the Accounts payable per general ledger control included the following items
that not had been recorded as of December 31, 2022:

a) A Company – P224,000 merchandise shipped on December 31, 2022, FOB des na on; received on
January 10, 2023.

b) B, Inc. – P192,000 merchandise shipped on December 26, 2022, FOB shipping point; received on
January 16, 2023.

c) C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2023.

d) MERALCO – P67,200 electric bill covering the period December 16, 2022 to January 15, 2023. On
December 28, 2022, a supplier authorized Heats to return goods billed at P160,000 and shipped on
December 20, 2022. The goods were returned by Heats on December 28, 2022, but the P160,000 credit
memo was not received un l January 6, 2023.

Ques ons:

Based on the above and the result of your audit, compute for the following as of December 31, 2022:

1. Total current liabili es

2. Total noncurrent liabili es

3. Total liabili es

4. Accounts Payable

5. Product warranty

6. Notes Receivable

7. How much of the proceeds from the issuance of conver ble bonds should be allocated to equity?

8. How much is the carrying value of the bonds payable as of December 31, 2022?

9. How much is the interest expense related to conver ble bonds for the year 2023?

10. The entry to record the conversion on December 31, 2023 will include a credit to APIC of

11. How much is the loss on bond reacquisi on on December 31, 2023?

II.B. Easy solving

On January 1, 2022, Kaya ko Pa Company leased an equipment from a lessor with the following
per nent informa on:

Annual Rental payable at the end of each year 400,000

Payment to lessor to obtain the lease 100,000
Lease incentive receive 50,000
Initial Direct Cost 30,000
Estimated cost of restoring the asset as required by the contract 40,000
Annual Executory cost 40,000
Implicit interest rate 9%
Incremental borrowing rate of the lessee 11%
Lease term 5 years
Useful life of equipment 10 years
 The en ty has the op on to purchase the equipment on January 1, 2027 by paying 300,000
which is significantly less than the expected fair value of the equipment on the op on
exercise date. There is reasonable certainty that the en ty shall exercise the op on.

12. What is the ini al cost of the right of use asset?

13. What is the interest expense for 2023?
14. What is the lease liability on December 31, 2023?
15. What is the deprecia on for 2024?
16. What is the loss or gain on finance lease if the op on is not exercised on January
1,2027?
Ez Peasy Corpora on reported the following informa on during the first year of opera ons:

Pretax financial income 7,000,000

Non-taxable interest received 250,000
Long-term loss accrual in excess of deductible amount 500,000
Tax depreciation in excess of financial depreciation 1,250,000
Income Tax Rate 30%
Estimated Tax Payment 1,300,000
Other taxable temporary differences 300,000
Other deductible temporary differences 400,000
Future Enacted Tax Rates-following years 25%

17. What is the current tax expense?

18. What is the total tax expense?
19. What is the deferred tax liability at year end?
20. What is the deferred tax asset at year end?
21. What is the current tax payable?
22. What is the deferred tax expense?