PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

PRTC AP 1405 Final Preboard

Multiple Choice

NARRBEGIN: Indiana
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
During your audit of the records of the Indiana Corporation for the year-ended December 31, 2014, the
following facts were disclosed:
Raw materials inventory, 1/1/2014 P 720,200
Raw materials purchases 5,232,800
Direct labor 6,300,000
Manufacturing overhead applied (150% of direct labor) 9,450,000
Finished goods inventory, 1/1/2014 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a Purchases of raw materials
Month Units Unit Price Amount
January - February 55,000 P17.76 P976,800
March - April 45,000 20.00 900,000
May - June 25,000 19.60 490,000
July - August 35,000 20.00 700,000
September - October 45,000 20.40 918,000
November - December 60,000 20.80 1,248,000
265,000 P5,232,800

b Data with respect to quantities are as follows:

Units .
Explanation 1/1/14 12/31/14
Raw materials 35,000 ?
Work in process (80% completed) 0 25,000
Finished goods 15,000 40,000
Sales, 205,000 units

c Raw materials are issued at the beginning of the manufacturing 
process. During the year, no
returns, spoilage, or wastage occurred. Each unit of finished goods contains one unit of raw materials.

d Inventories are stated at cost as follows:

• Raw materials - according to the FIFO method
• Direct labor - at an average rate determined by correlating total direct labor cost with effective
production during the period
• Manufacturing overhead- at an applied rate of 150% of direct labor cost

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

1. The raw materials inventory as of December 31, 2014 is

A. P897,800
B. P936,000
C. P1,352,000
D. P1,976,000

ANS: B
REF: PRTC May 2014 Final Preboard
TOP: Audit of Factory Costs
NAR: Indiana

2. The work in process inventory as of December 31, 2013 is

A. P1,751,294
B. P1,776,000
C. P1,780,000
D. P1,885,565

ANS: B
REF: PRTC May 2014 Final Preboard
TOP: Audit of Factory Costs

May 2014, Final Preboard Page 1 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

NAR: Indiana

3. The finished goods inventory as of December 31, 2014 is

A. P3,284,588
B. P3,334,000
C. P3,352,000
D. P3,553,130

ANS: B
REF: PRTC May 2014 Final Preboard
TOP: Audit of Factory Costs
NAR: Indiana

4. The cost of goods sold for the year ended December 31, 2014 is
A. P15,857,000
B. P16,568,304
C. P16,875,000
D. P16,897,000

ANS: D
REF: PRTC May 2014 Final Preboard
TOP: Audit of Factory Costs
NAR: Indiana

5. When testing the valuation assertion, the auditor would most likely
A. Confirm inventory on consignment.
B. Observe the taking of physical inventory.
C. Perform price tests to the related cost flow assumption.
D. Examine receiving reports for inventory, tracing their record amounts.

ANS: C
REF: PRTC May 2014 Final Preboard
TOP: Audit of Factory Costs
NAR: Indiana

NARRBEGIN: Miami
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
The general ledger trial balance of Miami Corporation includes the following balance sheet accounts at
December 31, 2014:
Cash P1,056,000
Accounts receivable 1,220,000
Inventory 441,000
Trading securities 200,000
Available for sale investments 500,000
Prepaid insurance 50,000
Deferred tax asset 150,000
Bank overdraft 100,000

Additional information: Cash

• The sales book was left open up to January 5, 2015, and cash sales totaling P150,000 were
considered as sales in December.
• Checks of P93,000 in payment of liabilities were prepared before December 31, 2014, recorded in
the books, but not mailed or delivered to payees.
• Post-dated checks totaling P78,000 are being held by the Cashier as part of Cash. The company's
experience shows that post-dated checks are eventually realized.
• Customer's check for P15,000 deposited with but returned by Bank, "NSF" on December 27,
2014. Return was recorded in the books.
• The Cash account includes P400,000 of compensating balance against a short-term bank loan.
The compensating balance is legally restricted as to withdrawal.

Accounts receivable
The accounts receivable consists of the following:
Trade accounts receivable P650,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Miami on consignment at
130% of cost(included in Miami's ending inventory at cost) 260,000
Security deposit on lease of warehouse used for

May 2014, Final Preboard Page 2 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

storing some inventories 300,000

Total Pl.220.000

Inventory
A physical count of inventory at December 31, 2014 revealed that Miami had inventory on hand at that
date with a cost of P441,000. The annual audit identified that the following items were excluded from this
amount and the related transactions were not recorded:
 Merchandise of P61,000 is held by Miami on consignment. The 
consignor is Heat Company.
 Merchandise costing P38,000 was shipped by Miami FOB destination to a customer on December 31,
2014. The customer was expected to receive the goods on January 6, 2015.
 Merchandise costing P46,000 was shipped by Miami FOB shipping point to a customer on December
29, 2014. The customer was scheduled to receive the goods on January 2, 2015.
 Merchandise costing P83,000 shipped by a vendor FOB destination on December 31,2014 was
received by Miami on January 4, 2015.
 Merchandise costing P51,000 purchased FOB shipping point was shipped by the supplier on
December 31, 2014 and received by Miami on January 5, 2015.

QUESTIONS:
Based on the above and the result of the audit, determine the adjusted amount of the following:
NARREND: Miami

6. Cash
A. P506,000
B. P521,000
C. P584,000
D. P921,000

ANS: B
TOP: Audit of Current Assets
REF: PRTC May 2014 Final Preboard
NAR: Miami

7. Net accounts receivable

A. P630,000
B. P754,000
C. P767,800
D. P782,800

ANS: C
TOP: Audit of Current Assets
REF: PRTC May 2014 Final Preboard
NAR: Miami

8. Trade and other receivables, net

A. P660,000
B. P784,000
C. P797,800
D. P812,800

ANS: C
TOP: Audit of Current Assets
REF: PRTC May 2014 Final Preboard
NAR: Miami

9. Inventory
A. P340,000
B. P451,000
C. P530,000
D. P730,000

ANS: C
TOP: Audit of Current Assets
REF: PRTC May 2014 Final Preboard
NAR: Miami

10. Currents assets

A. P2,361,000

May 2014, Final Preboard Page 3 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

B. P2,485,000
C. P2,498,800
D. P2,513,800

ANS: C
TOP: Audit of Current Assets
REF: PRTC May 2014 Final Preboard
NAR: Miami

NARRBEGIN: Toronto
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
Among the account balances of Toronto Corporation at December 31, 2013 are the following:
Patent, net P2,450,000
Installment contract receivable 7,200,000

Relevant transactions and other information for 2014 were as follows:

a The patent was purchased for P3,150,000 on September 1, 2010. On that date, the remaining legal life
was fifteen years, which was also determined to be the useful life.

b The installment contract receivable represents the balance of the consideration received from the sale
of a factory building to Raptors Company on March 31, 2012, for P12,000,000. Raptors made a
P3,000,000 down payment and signed a 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, 2012 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, 2014. The 2014 payment was
received on time.

c On January 2, 2014, Toronto purchased a trademark for P2,500,000. Toronto considers the life of the
trademark to be indefinite.

d On May 1, 2014, Toronto sold the patent in exchange for a P5,000,000 non-interest bearing note due
on May 1, 2017. 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, 2014 was 14%. The present
value of 1 for three periods at 14% is 0.675. The collection of the note receivable is reasonably
assured.

e On July 1, 2014, Toronto paid P18,800,000 for 750,000 ordinary shares of Canada Corporation,
which represented a 25% investment in Canada. The fair value of all of Canada's identifiable assets
net of liabilities equals their carrying amount of P64,000,000. The market price of Canada's ordinary
share on December 31, 2014 was P26.00 per share.

f Canada reported net income and paid dividends of

Net income Dividends per share
Six months ended 6/30/14 P5,760,000 None
Six months ended 12/31/14 7,040,000 P2.00
Dividend was paid on November 30, 2014.

QUESTIONS:
Based on the above and the result of your audit, compute for the following:
NARREND: Toronto

11. Gain on sale of patent

A. P925,000
B. P 995,000
C. P1,078,125
D. P2,620,000

ANS: B
TOP: Audit of intangibles & installment receivables
REF: PRTC May 2014 Final Preboard
NAR: Toronto

12. Total interest income for 2014

A. P760,500
B. P1,075,500
C. P1,233,000
D. P1,251,000

May 2014, Final Preboard Page 4 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

ANS: B
TOP: Audit of intangibles & installment receivables
REF: PRTC May 2014 Final Preboard
NAR: Toronto

13. Noncurrent portion of the installment contract receivable as of December 31, 2014
A. P1,800,000
B. P3,600,000
C. P5,400,000
D. P7,200,000

ANS: B
TOP: Audit of intangibles & installment receivables
REF: PRTC May 2014 Final Preboard
NAR: Toronto

14. Carrying amount of the note receivable from sale of patent as of December 31, 2014
A. P3,375,000
B. P3,690,000
C. P3,847,500
D. P5,000,000

ANS: B
TOP: Audit of intangibles & installment receivables
REF: PRTC May 2014 Final Preboard
NAR: Toronto

15. The carrying amount of the investment in Canada Corporation as of December 31, 2014
A. P18,800,000
B. P19,025,000
C. P19,060,000
D. P19,500,000

ANS: C
TOP: Audit of intangibles & installment receivables
REF: PRTC May 2014 Final Preboard
NAR: Toronto

NARRBEGIN: Chicago
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
In connection with your reconstruction engagement, the Chicago Company presented to you the
following information regarding its Cash in Bank account for the month of December 2014:
a Balances per bank statements: November 30, P107,800, and December 31, P115,200.
b Total charges in the bank statement during December were P1,094,850.
c Receipt on December 15 paid out in cash for expenses,P6,050. Recorded as receipts and
disbursements per books.
d Undeposited receipts were: November 30, P45,300 and December 31, P50,600.
e Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a check for
P2,500 was certified by the bank on December 26.
f NSF checks returned, recorded as reduction of cash receipts, were:
• Returned by bank on December, recorded also in December, P5,200.
• Returned by bank on December but recorded in January, P4,300
g Collections by bank not recorded by Company were P60,750 in November and P58,200 in December.
h Bank service charge not entered in company’s books were: November 30, P3,750 and December 31,
P2,100.
i A check for P4,750 of Chicago Company was charged to Chicago Company in error.
j A check drawn for P4,200 was erroneously entered in the books as P2,400.

Based on the above and the result of your engagement, answer the following:
NARREND: Chicago

16. How much is the unadjusted cash balance per books as of November 30, 2014?
A. P 82,725
B. P139,725
C. P196,725
D. P204,225

ANS: A

May 2014, Final Preboard Page 5 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

TOP: Proof of Cash

REF: PRTC May 2014 Final Preboard
NAR: Chicago

17. How much is the unadjusted book receipts for December?

A. P1, 098,850
B. P1,110,950
C. P1,113,600
D. P1,116,150

ANS: B
TOP: Proof of Cash
REF: PRTC May 2014 Final Preboard
NAR: Chicago

18. How much is the unadjusted book disbursements for December?

A. P1,068,175
B. P1,080,275
C. P1,083,875
D. P1,089,925

ANS: B
TOP: Proof of Cash
REF: PRTC May 2014 Final Preboard
NAR: Chicago

19. How much is the unadjusted cash balance as of December 31, 2014?
A. P103,900
B. P109,800
C. P113,400
D. P163,400

ANS: C
TOP: Proof of Cash
REF: PRTC May 2014 Final Preboard
NAR: Chicago

20. How does the auditor typically test for the existence of cash?
A. Inquiry of management
B. Standard bank confirmation
C. Counting cash at the depository institution
D. Tracing the bank reconciliation to the general ledger

ANS: B
TOP: Proof of Cash
REF: PRTC May 2014 Final Preboard
NAR: Chicago

NARRBEGIN: Brooklyn
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
On January 4, 2014, Brooklyn Corp. paid P1,296,000 for 40,000 ordinary shares of Nets Company. The
investment represents a 30% interest in the net assets of Nets and gave Brooklyn the ability to exercise
significant influence of Nets' operating and financial policy decisions. Brooklyn received dividends of P3
per share on December 4, 2014, and Nets reported net income of P640,000 for the year ended December
31, 2014. The market value of Nets' ordinary share at December 31, 2014, was P32 per share. The book
value of Nets' net assets was P3,200,000 and:
• The fair value of Nets' depreciable assets, with an average remaining useful life of 8 years,
exceeded their book value by P320,000
• The remainder of the excess of the cost of the investment over the book value of assets purchased
was attributable to goodwill.
NARREND: Brooklyn

21. What amount of the investment cost is attributable to goodwill?

A. P 96,000
B. P144,000
C. P240,000
D. P336,000

May 2014, Final Preboard Page 6 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

ANS: C
TOP: Audit of Investment in Associate
REF: PRTC May 2014 Final Preboard
NAR: Brooklyn

22. What amount of investment income should be reported in Brooklyn income statement for the year
ended December 31, 2014?
A. P108,000
B. P120,000
C. P180,000
D. P192,000

ANS: C
TOP: Audit of Investment in Associate
REF: PRTC May 2014 Final Preboard
NAR: Brooklyn

23. What is the carrying amount of the investment in Nets ordinary shares on December 31, 2014?
A. P1,280,000
B. P1,296,000
C. P1,356,000
D. P1,368,000

ANS: C
TOP: Audit of Investment in Associate
REF: PRTC May 2014 Final Preboard
NAR: Brooklyn

24. Assume that the 40,000 shares represent 10% interest in the net assets of Nets rather than a 30%
interest. What amount of investment income should be reported in Brooklyn income statement for the
year ended December 31, 2014?
A. P60,000
B. P64,000
C. P120,000
D. P180,000

ANS: C
TOP: Audit of Investment in Associate
REF: PRTC May 2014 Final Preboard
NAR: Brooklyn

25. Assume that the 40,000 shares represent 10% interest in the net assets of Nets rather than a 30%
interest. What is the Carrying amount of the investment in Nets ordinary shares at December 31,
2014?
A. P1,236,000
B. P1,280,000
C. P1,296,000
D. P1,356,000

ANS: B
TOP: Audit of Investment in Associate
REF: PRTC May 2014 Final Preboard
NAR: Brooklyn

NARRBEGIN: San
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
San Antonio Ltd Is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered
into an agreement on 1 July 2013 to sell its processing plant to Spurs Ltd P467,100. At the date of sale,
the plant had a carrying amount of P400,000 and a future useful life of five years. Spurs Ltd immediately
leased the processing plant back to San Antonio Ltd. The terms of the lease agreement were:
Lease term 3 years
Economic life of plant 5 years
Annual rental payment, in arrears (commencing 30 June 2014) P165,000
Residual value of plant at end of lease term P90,000
Residual value guaranteed by San Antonio Ltd P60,000
Interest rate implicit in the lease ?

The lease is cancellable, but only with the permission of the lessor. At the end of the lease term, the plant

May 2014, Final Preboard Page 7 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

is to be returned to Spurs Ltd.- In setting up the lease agreement Spurs Ltd incurred P9,414 in legal fees
and stamp duty costs. The annual rental payment includes P15,000 to reimburse the lessor for
maintenance costs incurred on behalf of the lessee.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to
four decimal places)
NARREND: San

26. The interest rate implicit in the lease is

A. 6%
B. 7%
C. 8%
D. 9%

ANS: A
TOP: Audit of Leases
REF: PRTC May 2014 Final Preboard
NAR: San

27. The interest income to be recognized by the lessor during the fiscal period ended 30 June 2013 is
A. P27,080
B. P27,644
C. P28,026
D. P28,591

ANS: A
TOP: Audit of Leases
REF: PRTC May 2014 Final Preboard
NAR: San

28. The carrying amount of the finance lease receivable to be reported by the lessor as of 30 June 2014 is
A. P328,406
B. P338,384
C. P345,126
D. P355,105

ANS: A
TOP: Audit of Leases
REF: PRTC May 2014 Final Preboard
NAR: San

29. The total lease-related expenses to be recognized by the lessee during the fiscal period ended 30 June
2014 is
A. P120,345
B. P157,522
C. P162,522
D. P172,522

ANS: A
TOP: Audit of Leases
REF: PRTC May 2014 Final Preboard
NAR: San

30. The amount to be reported by the lessee under current liabilities as liability under finance lease as of
30 June 2014 is
A. P122,920
B. P128,694
C. P130,296
D. P198,110

ANS: A
TOP: Audit of Leases
REF: PRTC May 2014 Final Preboard
NAR: San

NARRBEGIN: Oklahoma
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

May 2014, Final Preboard Page 8 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

In connection with your audit of the Oklahoma Company, you were asked to prepare comparative data
from the company's inception to the present. The following were gathered during your audit:

a Oklahoma Company's charter became effective on January 2, 2010, when 80,000, P10 par value,
ordinary shares and 40,000, 5% cumulative, nonparticipating, preference shares were issued. The
ordinary share was sold at P12 per share and the preference share was sold at its par value of P100 per
share.

b Oklahoma was unable to pay preference dividends at the end of its first year. The owners of the
preference shares agreed to accept 2 ordinary shares for every 50 shares of preference shares owned
in discharge of the preference share dividends due on December 31, 2010. The shares were issued on
January 2, 2011, The fair value was P30 per share for ordinary on the date of issue.

c Oklahoma Company acquired all outstanding shares of Thunder Corporation on May1, 2012, in
exchange for 40,000 ordinary shares of Oklahoma.

d Oklahoma split its ordinary shares 3 for 2 on January 1, 2013, and 2 for 1 on January 1, 2014.

e Oklahoma offered to convert 20% of the preference shares to ordinary on the basis of 2 ordinary
shares for 1 preference share. The offer was accepted, and the conversion was made on July 1, 2014.

f No cash dividends were declared on ordinary shares until December 31, 2012. Cash dividends per
ordinary share were declared and paid as follows:
December 31 June 30
2012 P4.00
2013 P5.00 P3.00
2014 P2.00 P2.50

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

31. Outstanding number of ordinary shares as of December 31, 2014

A. 364,800
B. 372,800
C. 380,800
D. 684,800

ANS: C
TOP: Audit of Shareholders’ Equity
REF: PRTC May 2014 Final Preboard
NAR: Oklahoma

32. Outstanding number of preference shares as of December 31, 2014

A. 24,000
B. 32,000
C. 40,000
D. 96,000

ANS: B
TOP: Audit of Shareholders’ Equity
REF: PRTC May 2014 Final Preboard
NAR: Oklahoma

33. Amount of cash dividends declared and paid to ordinary shareholders for the year 2013
A. P608,000
B. P972,800
C. P1,459,200
D. P1,981,440

ANS: C
TOP: Audit of Shareholders’ Equity
REF: PRTC May 2014 Final Preboard
NAR: Oklahoma

34. Amount of cash dividends declared and paid to ordinary shareholders for the year 2014
A. P1,673,600

May 2014, Final Preboard Page 9 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

B. P1,713,600
C. P3,041,600
D. P3,911,040

ANS: A
TOP: Audit of Shareholders’ Equity
REF: PRTC May 2014 Final Preboard
NAR: Oklahoma

35. Where no independent stock transfer agent are employed and the corporation issues its own stocks
and maintains stock records, cancelled stock certificates should
A. Be destroyed to prevent reissuance.
B. Be defaced and sent to the secretary of state.
C. Be defaced to prevent reissuance and attached to their corresponding stubs.
D. Not be defaced but segregated from other stock certificates and retained in a canceled certificates
file.

ANS: C
TOP: Audit of Shareholders’ Equity
REF: PRTC May 2014 Final Preboard
NAR: Oklahoma

NARRBEGIN: Los
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
Los Angeles, Inc., is a public enterprise whose shares are traded in the over-the-counter market. At
December 31, 2013, Los Angeles had 6,000,000 authorized shares of P10 par value ordinary shares, of
which 2,000,000 shares were issued and outstanding. The shareholders' equity accounts at December 31,
2013, had the following balances.
Ordinary shares P20,000,000
Share premium 7,500,000
Retained earnings 6,470,000

Transactions during 2014 and other information relating to the shareholders' equity accounts were as
follows:
1 On January 5, 2014, Los Angeles issued at P54 per share, 100,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at the option of
the holder, into two ordinary shares. Los Angeles had 600,000 authorized preference shares.
2 On February 1, 2014, Los Angeles reacquired 20,000 of its ordinary shares for P16 per share. Los
Angeles uses the cost method to account for treasury shares.
3 On April 30, 2014, Los Angeles sold 500,000 shares (previously unissued) of P10 par value
ordinary shares to the public at P17 per share.
4 On June 18, 2014, Los Angeles declared a cash dividend of P1 per ordinary share, payable on
July 12, 2014, to shareholders of record on July 1, 2014.
5 On November 10, 2014, Los Angeles sold 10,000 treasury shares for P21 per share.
6 On December 14, 2014, Los Angeles declared the yearly cash dividend on preference shares,
payable on January 14, 2015, to shareholders of record on December 31, 2014.
7 On January 20, 2015, before the books were closed for 2014, Los Angeles became aware that the
ending inventories at December 31, 2013, were understated by P300,000 (the after-tax effect on
2014 net income was P210,000). The appropriate correcting entry was recorded the same
day.
8 After correcting the beginning inventory, net income for 2014 was P4,500,000.
NARREND: Los

36. The Retained Earnings balance as of January 1, 2014 is

A. P6,170,000
B. P6,260,000
C. P6,680,000
D. P6,770,000

ANS: C
TOP: Audit of Shareholders Equity
REF: PRTC May 2014 Final Preboard
NAR: Los

37. The Retained Earnings balance as of December 31, 2014 is

A. P7,830,000
B. P8,340,000
C. P8,250,000

May 2014, Final Preboard Page 10 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

D. P8,520,000

ANS: C
TOP: Audit of Shareholders Equity
REF: PRTC May 2014 Final Preboard
NAR: Los

38. The share premium from preference shares as of December 31, 2014 is
A. P100,000
B. P300,000
C. P350,000
D. P400,000

ANS: D
TOP: Audit of Shareholders Equity
REF: PRTC May 2014 Final Preboard
NAR: Los

39. The share premium from ordinary shares as of December 31, 2014 is
A. P10,000,000
B. P11,000,000
C. P11,050,000
D. P11,500,000

ANS: C
TOP: Audit of Shareholders Equity
REF: PRTC May 2014 Final Preboard
NAR: Los

40. Total shareholders' equity as of December 31, 2014 is

A. P49,540,000
B. P49,700,000
C. P49,450,000
D. P49,504,000

ANS: A
TOP: Audit of Shareholders Equity
REF: PRTC May 2014 Final Preboard
NAR: Los

NARRBEGIN: Houston
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
Your firm has been engaged to examine the financial statements of Houston Corporation for the year
2014. The bookkeeper who maintains the financial records has prepared all the unaudited financial
statements for the corporation. The client provides you with the information below.
Houston Corporation
Statement of Financial Position
December 31, 2014
Assets Liabilities
Current assets P1,881,100 Current liabilities P 962,400
Other assets 5,171,400 Long-term liabilities 1,439,500
. Capital 4,650,600
P7,052,500 P7,052,500

An analysis of current assets discloses the following:

Cash (restricted in the amount of P400,000 for plant expansion) P 571,000
Investment in land 185,000
Accounts receivable less allowance of P30,000 480,000
Inventories 645,100
P1,881,100
• Other assets include:
Prepaid expenses P47,400
Plant and equipment less accumulated depreciation of Pl,430,000 4,130,000
Cash surrender value of life insurance policy 84,000
Unamortized bond discount 49,500
Notes receivable (short term) 162,300
Goodwill 252,0.00
Land 446,200

May 2014, Final Preboard Page 11 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

P 5,171,400
• Current liabilities include:
Accounts payable P510,000
Notes payable (due 2016) 157,400
Income tax payable 145,000
Share premium reserve 150,000
P962,400

• Long-term liabilities include:

Unearned revenue P 489,500
Dividends payable 200,000
8% bonds payable (due May 1, 2019) 750,000
P1,439,500

• Capital includes:
Retained earnings P2,810,600
Share capital, par value P10; authorized
200,0000 shares, 184,000 shares issued 1,840,000
P4,650,600

The supplementary information below is also provided.

a On May 1, 2014, the company issued at 93.4, P750,000 of bonds to finance plant expansion. The
long term bond agreement provided for the annual payment of interest every May 1. The existing
plant was pledged as security for the loan. Use straight-line method for discount amortization.

b The bookkeeper made the following mistakes:

1 In 2012, the ending inventory was overstated by P183,000. The ending inventories for 2013 and
2014 were correctly computed.
2 In 2014, accrued wages in the amount of P275,000 were omitted from the balance sheet and these
expenses were not charged on the income statement.
3 In 2014, a gain of P175,000 (net of tax) on the sale of certain plant assets was credited directly to
retained earnings.
c You learned on January 28, 2015, prior to completion of the audit, of heavy damage because recent
fire to one of the entity's two plants; the loss will not be reimbursed by insurance. The plant has a
carrying amount of PI,200,000 on the date of fire.

QUESTIONS:
Based on the above and the result of the audit, answer the following:
NARREND: Houston

41. The adjusted current assets as of December 31, 2014 is

A. P1,296,100
B. P1,505,800
C. P1,553,200
D. P1,690,800

ANS: B
TOP: Correction of Errors
REF: PRTC May 2014 Final Preboard
NAR: Houston

42. The adjusted current liabilities as of December 31, 2014 is

A. P1,130,000
B. P1,419,500
C. P1,619,500
D. P1,659,500

ANS: D
TOP: Correction of Errors
REF: PRTC May 2014 Final Preboard
NAR: Houston

43. The adjusted noncurrent liabilities as of December 31, 2014 is

A. P 857,900
B. P864,500
C. P907,400
D. P1,554,000

May 2014, Final Preboard Page 12 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

ANS: B
TOP: Correction of Errors
REF: PRTC May 2014 Final Preboard
NAR: Houston

44. The adjusted equity as of December 31, 2014 is

A. P4,329,000
B. P4,479,000
C. P4,519,000
D. P4,525,600

ANS: B
TOP: Correction of Errors
REF: PRTC May 2014 Final Preboard
NAR: Houston

45. When a subsequent event provides evidence about conditions that existed at the balance sheet date,
the auditor should do which of the following?
A. Assign a specialist.
B. Shop for an opinion that fits the desired type of event.
C. Provide management with a new engagement letter to document the terms of the revised
arrangement.
D. Ensure that the financial statements are adjusted to reflect the information, including any
necessary footnote disclosures.

ANS: D
TOP: Correction of Errors
REF: PRTC May 2014 Final Preboard
NAR: Houston

NARRBEGIN: Portland
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
You have been appointed as auditor of Portland Corporation, an SME. Presented below is the balance of
Portland Corporation as of December 31, 2014.
Portland Corporation
Balance Sheet
December 31, 2014
Assets
Goodwill (Note 2) P1,200,000
Buildings (Note 1) 16,400,000
Inventories 3,121,000
Land 7,500,000
Accounts receivables 1,700,000
Treasury shares (50,000 shares) 870,000
Cash on hand 1,759,000
Assets allocated to trustee for plant expansion
Cash in bank 700,000
BSP Treasury notes, at cost and fair value 1,380,000
P34,630,000

Equities
Notes payables (Note 3) P6,000,000
Share capital - Ordinary, authorized and issued,
1,000,000 shares, no par 11,500,000
Retained earnings 6,580,000
Appreciation capital (Note 1) 5,700,000
Income taxes payable 750,000
Reserve for depreciation recorded to date on the building 4,100,000
P34,630,000

Note 1: Buildings are stated at revalued amount. The excess of revalued amount over cost
was P5,700,000.
Note 2: Goodwill in the amount of P1,200,000 was recognized because the company believed
that book value was not an accurate representation of the fair market value of the
company. The gain of P1,200,000 was credited to retained earnings.
Note 3: Notes payable are long-term except for the current installment due of P1,000,000.
NARREND: Portland

May 2014, Final Preboard Page 13 of 14

PROFESSIONAL REVIEW & TRAINING CENTER AUDITING PROBLEM

46. The audited total current assets as of December 31, 2014 would amount to
A. P6,580,000
B. P6,850,000
C. P6,880,000
D. P8,660,000

ANS: A
TOP: Audit of SME
REF: PRTC May 2014 Final Preboard
NAR: Portland

47. The net carrying value of property, plant and equipment would amount to
A. P14,100,000
B. P18,900,000
C. P19,800,000
D. P19,900,000

ANS: A
TOP: Audit of SME
REF: PRTC May 2014 Final Preboard
NAR: Portland

48. Total shareholders' equity as adjusted would amount to

A. P16,010,000
B. P21,710,000
C. P27,110,000
D. P28,460,000

ANS: A
TOP: Audit of SME
REF: PRTC May 2014 Final Preboard
NAR: Portland

49. Total assets as adjusted would amount to

A. P22,760,000
B. P24,860,000
C. P27,260,000
D. P28,460,000

ANS: A
TOP: Audit of SME
REF: PRTC May 2014 Final Preboard
NAR: Portland

50. There are a number of accounting standards and disclosures 
that may not provide useful
information to the users of SMEs 
financial statements. Which of the following topics does the
Standard for SMEs not address?
A. Earnings Per share.
B. Liabilities and equity.
C. Provisions and contingencies.
D. Revenue.

ANS: A
TOP: Audit of SME
REF: PRTC May 2014 Final Preboard
NAR: Portland

May 2014, Final Preboard Page 14 of 14