Auditing Practice (AP) : #128 Maginhawa ST., Brgy. Teacher's Village East, Quezon City Pinnaclecpareview - PH
Auditing Practice (AP) : #128 Maginhawa ST., Brgy. Teacher's Village East, Quezon City Pinnaclecpareview - PH
Practice (AP)
#128 Maginhawa St., Brgy. Teacher’s Village East, Quezon City pinnaclecpareview.ph
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
fb.com/pinnaclecpareviewschool youtube.com/c/MrAccounting +63 917-629-4875
AUDIT OF ACCOUNTS RECEIVABLE
PROBLEM 1
On the other hand, the accounts receivable subsidiary ledger shows the following composition:
Audit notes:
a. Accounts receivable confirmation letters were sent to the customers. You have noted the following:
b.
Customer Balance per reply Remarks
Customer B P36,000 Invoice dated 8/20 was already settled. Investigation revealed
that Customer B’s payment was erroneously posted against
Customer E’s account for an invoice dated 12/20 for the same
amount.
Customer C 71,800 The difference was due to the invoice dated 12/30. Goods have
not yet been received by Customer C as of December 31. Terms
of sale is FOB Destination.
Customer E 121,560 “Amount per our records appear to be higher, so please
check”.
Customer F No reply Customer F is under liquidation and the amount receivable
from the company is deemed definitely uncollectible.
d. In the event that the Accounts Receivable general ledger does not reconcile with the subsidiary ledger after
corrections are made and the difference cannot be located, you have come into an agreement with the client to
adjust the control to the sum of the subsidiaries as miscellaneous income or expense.
Requirements:
1. The erroneous posting of Customer B’s payment to Customer E’s account resulted to total accounts receivable
being
a. Properly stated c. Understated by P26,760
b. Overstated P26,760 d. Understated by P53,520
1
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
3. The journal entry to reconcile the balances of the Accounts Receivable general and subsidiary ledger after
corrections, if any, will include a
a. Debit to Sales c. Credit to Miscellaneous Income
b. Credit to Accounts Receivable d. No journal entry required
4. What is the audited balance of the Accounts Receivable account as of December 31?
a. P438,907 c. P458,707
b. P443,560 d. P470,320
5. What is the correct Allowance for Doubtful Accounts balance as of December 31?
a. P31,413 c. P44,525
b. P31,613 d. P44,725
6. What is the audited net realizable value of the Accounts Receivable as of December 31?
a. P 438,907 c. P 458,707
b. P 441,947 d. P 470,320
PROBLEM 2
You are auditing the accounts receivable and the related allowance for doubtful accounts of Mr. Accounting Inc. for
calendar year 2025. The control account of the aforementioned accounts had the following balances:
b. The allowance for doubtful accounts had the following details in the general ledger:
c. The subsidiary ledger balances of the company’s account receivable as of December 31 contained the following
information:
Debit balances Credit balances
Under 1 month P540,000 ABC Co. P12,000
1-6 months 552,000 DEF Corp. 21,000
Over 6 months 228,000 GHI, Inc. 27,000
Total P1,320,000 Total P60,000
Additional information:
i. The credit balance of ABC Co. was for an overpayment from the customer. The company delivered additional
merchandise to ABC Co. on January 3, 2026 to cover such overstatement.
ii. The credit balance of DEF Corp. was due to a posting error as the amount should have been credit to XYZ
Corp. for a 60-day outstanding receivable.
iii. The credit balance of GHI Inc. was a cash advance for a delivery to be made on January 15, 2026.
d. It was estimated that 1% of accounts receivable under 1 month is doubtful of collection while 2% of accounts
receivable under 1-6 months are expected to require an allowance for doubtful accounts. The accounts over 6
months are analyzed as follows:
Definitely uncollectible P72,000
Doubtful (estimated to be 50% collectible) 36,000
Apparently good but slow (estimated to be 90% collectible) 120,000
Total P228,000
2
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Requirements:
1. Assuming the difference is immaterial and cannot be located, what is the entry to adjust the difference between
the control account and the subsidiary ledger?
a. Sales 10,000
Accounts Receivable 10,000
b. Miscellaneous Expense 10,000
Accounts Receivable 10,000
c. Accounts Receivable 10,000
Miscellaneous Income 10,000
d. No adjustment is necessary since the control account and subsidiary ledger reconcile.
3. The required balance of the allowance for doubtful accounts on December 31, 2025 is
a. P46,020
b. P46,440
c. P64,020
d. P142,020
4. What is the entry to adjust the allowance for doubtful accounts to its required balance?
a. Bad Debt Expense 46,020
Allowance for doubtful accounts 46,020
b. Bad Debt Expense 52,020
Allowance for doubtful accounts 52,020
c. Bad Debt Expense 6,000
Allowance for doubtful accounts 6,000
d. Bad Debt Expense 40,020
Allowance for doubtful accounts 40,020
6. What is the adjusted net realizable value of accounts receivable as of December 31, 2025?
a. P1,180,980
b. P1,213,980
c. P1,114,980
d. P1,174,980
3
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF INVENTORY
PROBLEM 1
You are engaged in the audit of financial statements of JMD Company for the year ended December 31, 2025 and have
observed the physical inventory count on December 30, 2025. All merchandise received up to and including December 30
has been included in the physical count which totaled P354,500. As a result of the count, the following cost of sales
schedule has been prepared by the client’s accountant:
JMD Company
Statement of Cost of Sales
For the fiscal year ended December 31, 2025
Inventory, January 1, 2025 P235,000
Net purchases (unadjusted) 2,543,900
Cost of goods available for sale 2,778,900
Inventory, December 31, 2025 (per count) (354,500)
Cost of sales P2,424,400
The following list of invoices is for purchases of merchandise and are entered in the Purchases Journal for the months of
December 2025 and January 2026:
December 2025
Receiving Amount Freight Terms Date of Invoice / Date of Receipt of
Report No. Date of Shipment Merchandise
105 P18,500 FOB shipping point Dec. 20 Dec. 30
106 7,800 FOB destination Dec. 25 Jan. 3
107 5,000 FOB destination Jan. 4 Dec. 29
108 20,500 FOB shipping point Dec. 25 Dec. 30
109 24,200 FOB destination Dec. 21 Dec. 30
January 2026
Receiving Amount Freight Terms Date of Invoice / Date of Receipt of
Report No. Date of Shipment Merchandise
110 P4,000 FOB destination Dec. 29 Dec. 31
111 9,700 FOB destination Dec. 30 Dec. 30
112 14,440 FOB shipping point Jan. 2 Jan. 3
113 25,640 FOB shipping point Dec. 23 Jan. 3
114 14,200 FOB destination Dec. 27 Jan. 3
As of December 31, 2025, JMD Company reported accounts payable balance of P547,200 before any adjustments. The
unadjusted net income for 2025 is P1,000,000.
Requirements:
1. As a result of the recording of the accountant, the purchases balance of the company before any adjustments
is
a. P5,000 overstated c. P31,540 understated
b. P12,800 overstated d. P58,540 understated
2. As a result of the recording of the accountant, the ending inventory balance of the company before any
adjustments is
a. P5,000 overstated c. P29,640 understated
b. P12,800 overstated d. P31,540 understated
3. As a result of the recording of the accountant, the cost of sales balance of the company before any adjustments
is
a. P1,900 understated c. P50,360 overstated
b. P12,800 overstated d. Properly stated
4. What is the audited purchases balance to be reported by JMD for the fiscal year ended December 31, 2025?
a. P2,531,100 c. P2,374,040
b. P2,538,900 d. P2,575,440
5. What is the audited ending inventory balance to be reported by JMD for the fiscal year ended December 31,
2025?
a. P349,500 c. P386,040
b. P384,140 d. P413,040
6. What is the audited cost of sales balance to be reported by JMD for the fiscal year ended December 31, 2025?
a. P2,394,760 c. P2,426,300
b. P2,424,400 d. P2,455,940
4
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
7. What is the audited balance of accounts payable to be reported by JMD for the fiscal year ended December 31,
2025?
a. P534,400 c. P578,740
b. P542,200 d. P605,740
8. What is the audited net income to be reported by JMD for the fiscal year ended December 31, 2025?
a. P1,000,000 c. P968,460
b. P998,100 d. P1,027,740
PROBLEM 2
In your audit of the December 31, 2025 financial statements of ABC Company, you found the following inventory-related
transactions:
a. Goods costing P50,000 are on consignment with a customer. These goods were not included in the physical
count on December 31, 2025.
b. Goods costing P16,500 were delivered to ABC on January 4, 2026. The invoice for these goods was received
and recorded on January 10, 2026. The invoice showed the shipment was made on December 29, 2025, FOB
shipping point.
c. Goods costing P21,640 were sold to a customer for P38,950, which were shipped FOB shipping point on
December 31, 2025 and were received by the customer on January 2, 2026. These goods were included in
the 2025 ending inventory. The sale was recorded in 2026 upon confirmation of receipt of goods by the
customer.
d. Goods costing P8,640 were shipped to a customer on December 31, 2025, FOB destination. These goods
were delivered to the customer on January 5, 2026 and were not included in the inventory. The sale was
properly taken up in 2026.
e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2026,
and thus were not included in the physical inventory. Because the related invoice was received on December
31, 2025, this shipment was recorded as a purchase in 2025.
f. Goods valued at P51,000 were received from a vendor under a consignment term during the year. These
goods were included in the physical count.
g. ABC recorded as a 2025 sale a P64,300 shipment of goods to a customer on December 31, 2025, FOB
destination. This shipment of goods costing P37,500 was received by the customer on January 5, 2026 and
was not included in the ending inventory figure.
• Prior to any adjustments, ABC Company’s ending inventory is valued at P445,000 and the reported sales, purchases,
accounts receivable and accounts payable for the year are P1,864,000, P968,700, P691,400 and P536,600,
respectively.
• The unadjusted net income and cost of goods sold in 2025 amounted to P2,000,000 and P934,700, respectively.
Requirements: Determine the audited balances of the following accounts for the period ended December 31, 2025.
1. Sales
a. P1,799,700 c. P1,889,350
b. P1,838,650 d. P1,902,950
2. Purchases
a. P960,100 c. P976,600
b. P960,800 d. P985,200
3. Ending Inventory
a. P468,500 c. P476,400
b. P476,360 d. P485,000
5. Accounts Receivable
a. P627,100 c. P716,750
b. P666,050 d. P730,350
6. Accounts Payable
a. P528,000 c. P544,500
b. P528,700 d. P553,100
7. Net income
a. P2,006,750 c. P1,930,300
b. P1,990,250 d. P1,998,150
5
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 3
You are engaged in the audit of the inventory of Pinnacle Company as of December 31, 2025. The physical inventory count
was taken on the evening of December 29, 2025 rather than on December 31. You have observed the physical inventory
count, and as taken, the physical inventory included only merchandise received through December 29. The subsequent
compilation of the inventory includes only merchandise physically counted but is not yet recorded in the books of the
company.
After having completed appropriate work on the inventory as compiled, you make additional tests to determine:
a. The correct cut-off of the Purchases account for the year 2025 (it is the company policy to recognize purchases based
on freight terms and the passage of title). The ledger balance is P650,000.
b. The correct amount of the inventory to be stated on a comparative basis with purchases and sales. The inventory
summary shows a total of P27,000 based on physical count.
Listed in the table below are certain matters developed in the course of your tests:
December 2025
Invoice Number FOB Shipping Terms Date Shipped Date Received Amount
140 Destination Dec. 23 Dec.26 P250
917 Shipping point Dec.24 Dec.30 310
001 Shipping point Dec.24 Dec.31 180
130 Destination Dec.24 Dec.29 550
660 Shipping point Dec.26 Jan. 2 690
661 Destination Dec.26 Dec.31 420
048 Destination Dec.26 Jan. 3 750
367 Shipping point Dec.27 Dec.30 290
609 Shipping point Jan. 2 Jan. 4 350
January 2026
Invoice Number FOB Shipping Terms Date Shipped Date Received Amount
761 Destination Dec.26 Jan. 2 P680
771 Shipping point Dec.27 Dec. 30 460
900 Destination Dec.27 Dec. 29 770
834 Destination Dec.28 Jan. 2 205
467 Shipping point Dec.28 Jan. 3 315
998 Shipping point Dec.29 Dec. 31 595
726 Destination Dec.29 Dec. 31 610
491 Destination Dec.31 Jan. 4 375
566 Shipping point Jan. 2 Jan. 5 805
Audit notes:
a. The physical inventory compilation includes P750 of merchandise received on consignment from a supplier.
b. The company has other consigned stocks on hand from various companies which were not included in the physical
inventory compilation and which cost P5,200 if purchased.
c. Shipments to customers on December 31, 2025 were properly recorded on the books as sales. You computed that
the cost of these sales is P1,900.
d. The balance of the company’s inventory account on January 1, 2025 is determined to be P15,000.
e. The accounts payable on December 31, 2025 in the company’s books has a balance of P125,000.
f. The unadjusted net income on December 31, 2025 is P500,000.
Requirements: Determine the audited balances of the following accounts.
1. Ending Inventory
a. P26,430 c. P28,220
b. P27,300 d. P30,120
2. Purchases
a. P649,675 c. P650,585
b. P649,990 d. P651,650
4. Accounts Payable
a. P124,675 c. P125,585
b. P124,990 d. P126,650
5. Net income
a. P499,570 c. P499,990
b. P502,220 d. P499,110
6
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF INVESTMENTS
PROBLEM 1
On December 31, 2024, TDC Corporation’s statement of financial position showed the following balances of its
investments account:
The interest on GHI bonds is payable semi-annually every January and July.
Fair Value Through Other Comprehensive Income (FVOCI) Cost Market Value
i. 10,000 shares of JKL shares P1,180,000 P1,260,000
ii. 20,000 shares MNO shares 980,000 1,100,000
The market values of stocks and bonds on December 31, 2025 are as follows:
ABC Corp. P153.20 JKL Corp. P110.50
DEF Inc. P137.00 MNO stocks P44.00
GHI bonds 82.22 PQR bonds 98.00
Requirements:
1. How much is the realized gain or loss on the sale of shares of DEF?
a. P0 c. P23,750
b. P2,000 d. (P23,750)
2. How much OCI is transferred to Retained Earnings as a result of sale of shares of JKL?
a. P0 c. P24,000
b. P8,000 d. (P24,000)
4. How much is the unrealized gain to be reported in the 2025 income statement?
a. P64,950 c. P10,250
b. P49,750 d. P84,950
5. How much is the unrealized loss to be reported in the 2025 statement of financial position?
a. P121,000 c. P129,000
b. P125,000 d. P145,000
6. What is the carrying value of the investments at fair value through profit or loss (FVPL) on December 31, 2025?
a. P3,100,000 c. P3,342,700
b. P3,257,750 d. P3,354,700
7. What is the carrying value of the investments at fair value through other comprehensive income (FVOCI) on
December 31, 2025?
a. P1,543,000 c. P1,856,000
b. P1,688,000 d. P1,935,000
PROBLEM 2
During the course of your audit of the financial statements of NJL, Inc. for the year ended December 31, 2025, you found
a new account, “Investment in Equity Securities”. Your audit revealed that during 2025, NJL entered all investment-related
transactions in this account. Your analysis of this account for 2025 follows:
7
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Date Transactions Debit Credit
A Co. Ordinary Shares
Feb. 14 Purchased 36,000 shares at P55 per share P1,980,000
July 26 Received 3,600 shares as stock dividend (memo entry)
Sept. 28 Sold the 3,600 shares received on July 26
at P70 per share P252,000
B Corp. Ordinary Shares
Apr. 1 Purchased 180,000 shares at P40 per share 7,200,000
Oct. 28 Received dividend of P1.20 per share 216,000
C, Inc. Ordinary Shares
Apr. 1 Purchased 12,500 shares at P40 per share 500,000
Dec. 31 Recorded share in net income 60,000
Additional information:
a. The ordinary shares of A Co. were acquired with an intention of generating short-term profits. NJL has made an
irrevocable election to present in other comprehensive income subsequent changes in fair value of B Corp. ordinary
shares.
b. On April 1, NJL acquired 40% of the outstanding shares of C, Inc. For the year ended December 31, 2025, C Inc.
reported a net income of P150,000. C Inc. paid total cash dividends of P20,000 on December 31.
c. The fair value for each security on various dates in 2025 are as follows:
Security Feb. 14 Apr. 1 July 26 Sept. 28 Dec. 31
A P55 P62 P70 P74
B P40 P32
C P40 P45
Requirements:
1. What amount should be reported as gain or loss on sale of A. Co. ordinary shares in the income statement of
NJL, Inc. for the year ended December 31, 2025?
a. P0 c. P54,000
b. P18,000 d. P72,000
2. The receipt of 3,600 stock dividend from A Company would result to an increase in the investment balance by:
a. P 0 c. P 223,200
b. P 198,000 d. P 252,000
3. What is the journal entry to correct the recording of the cash dividend received from B Corporation?
a. Cash 216,000
Dividend Income 216,000
b. Cash 216,000
Investment in Equity Securities 216,000
c. Investment in Equity Securities 216,000
Dividend Income 216,000
d. Dividend Income 216,000
Investment in Equity Securities 216,000
4. What amount of unrealized gain or loss should be reported in the 2025 statement of comprehensive income as
component of other comprehensive income?
a. P 576,000 gain c. P 1,440,000 gain
b. P 576,000 loss d. P 1,440,000 loss
5. What amount should be reported as investment in equity securities classified as FVOCI in the statement of
financial position on December 31, 2025?
a. P 5,760,000 c. P 9,000,000
b. P 8,424,000 d. P 9,864,000
6. What amount of investment income from C, Inc. should be reported for the year ended December 31, 2025?
a. P 44,100 c. P 58,800
b. P 45,000 d. P 61,200
PROBLEM 3
NDC, Inc. had the following portfolio of financial assets as of December 31, 2025:
8
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Investment Acquisition Cost
A Corp. stocks (20,000 shares) P605,000
B Inc. stocks (40,000 shares) 1,100,000
C Co. 10%, P2,000,000 bonds 1,973,008
D Corp. stocks (50,000 shares) 2,400,000
Audit notes:
a. The shares of A Corp. were acquired with an intention of generating short-term profits from the share price’s
fluctuations. The company paid P30.25 per share, which included the P1.25 per share broker’s fees and commissions.
The shares were acquired on February 20, 2025. A P2 per share cash dividends were received on March 30. These
dividends were declared by A Corp. on January 20, 2025 to stockholders as of record date March 1, 2025.
b. The company paid P27.50 per share, including P0.50 per share broker’s fees and commissions on the acquisition of
B, Inc.’s stocks on March 1, 2025. These shares were classified as FVOCI. A P3 per share dividends were received from
the said shares on May 3, 2025. The dividends were declared on April 1 to stockholders as of record date April 20,
2025.
c. C Co. bonds, which pay semi-annual interest every June 30 and December 31, were acquired on October 1, 2025 at
P1,973,008 when the prevailing market interest rate on similar instruments was at 12%. The bonds will mature on
December 31, 2027. The company adopts a business model of holding debt securities to collect contractual cash
flows.
d. D Corp. stocks were acquired at P48 per share, including P3 per share broker’s fees and commissions on June 30,
2025. D Corp. had a total of 200,000 shares outstanding on the same date. The company received P5 dividends per
share from D Corp. on December 20, 2025.
e. The following information are available at year-end:
A Corp. B, Inc. C Co. D Corp.
Net income P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair value P35/share P25/share 11% P52/share
Requirements:
1. The journal entry to record the acquisition of A Corp. stocks will include a:
a. Debit to Investment in A Corp. Stocks for P605,000 c. Credit to Dividend Income for P40,000
b. Debit to Expense for P65,000 d. Debit to Dividend Receivable for P40,000
2. At what amount should the B, Inc. stocks be recorded on its date of acquisition?
a. P960,000 c. P1,080,000
b. P980,000 d. P1,100,000
3. The journal entry to record the acquisition of C Co. bonds will include a:
a. Credit to Cash for P1,923,008
b. Debit to Interest Receivable for P50,000
c. Debit to Investment in C Co. bonds for P2,000,000
d. Credit to Interest Income for P50,000
4. At what amount should the D Corp. stocks be recorded on its date of acquisition?
a. P2,250,000 c. P2,600,000
b. P2,400,000 d. P2,550,000
5. The net effect from the equity investments to be recorded in profit or loss for 2025 is:
a. P360,000 c. P535,000
b. P450,000 d. P560,000
6. The net investment income from the debt investments to be recorded in profit or loss for 2025 is:
a. P0 c. P57,690
b. P50,000 d. P91,912
7. What is the net effect of all the investments-related transactions on net income of NDC, Inc. in 2025?
a. P435,000 c. P492,690
b. P485,000 d. P592,690
8. What is correct carrying amount of investments that should be presented as current assets on December 31,
2025?
a. P700,000 c. P6,094,920
b. P4,130,000 d. P6,374,920
9. What is correct carrying amount of investments that should be presented as non-current assets on December
31, 2025?
a. P4,394,920 c. P5,360,698
b. P4,640,698 d. P5,674,920
9
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF PROPERTY, PLANT AND EQUIPMENT (PPE)
PROBLEM 1
Pinnacle Company incurred the following expenditures related to land and building:
Requirements:
a. Cost of the land
b. Cost of the new building
PROBLEM 2
Mr. Accounting Inc. incurred the following expenditures related to the construction of a new office:
Requirements:
a. Cost of land
b. Cost of new building
c. Cost of land improvements
d. Amount charged to expense
10
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 3
On January 1, 2025, Mr. Accounting Company reported the following property, plant and equipment and accumulated
depreciation balances:
Accumulated
Cost Depreciation
Machinery and equipment P1,380,000 P367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Audit notes:
a. Mr. Accounting Company employs the following depreciation methods and useful lives:
• Machinery and equipment – straight line; 10 years
• Automobiles and trucks – 150% declining balance; 5 years
• Leasehold improvements – straight line
b. Salvage values are immaterial except for automobiles and trucks which have estimated salvage values equal to
15% of cost.
Additional information:
a. On July 1, 2025, machinery and equipment were purchased at a total invoice cost of P325,000. Installation cost
of P44,000 was incurred.
b. On August 31, 2025, Mr. Accounting purchased new automobile for P25,000.
c. On September 30, 2025, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2024
was sold for P23,500.
d. On December 31, 2025, a machine with a cost of P17,000, a carrying amount of P2,975 on date of disposition,
was sold for P4,000.
e. Mr. Accounting entered into another 12-year operating lease starting January 1, 2022. The new leasehold
improvements were completed on December 31, 2021 and the facility was occupied on January 1, 2022.
Requirements:
1. Net gain or loss on sale of property, plant and equipment to be reported in 2025
a. P1,025 net gain c. P2,975 net gain
b. P1,275 net gain d. P5,475 net loss
2. Adjusted balance of the property, plant and equipment as of December 31, 2025
a. P1,919,000 c. P2,351,000
b. P2,307,000 d. P2,388,500
3. Total depreciation expense for the year ended December 31, 2025
a. P138,000 c. P221,402
b. P185,402 d. P245,065
5. Audited carrying amount of the property, plant and equipment as of December 31, 2025
a. P1,139,797
b. P1,527,797
c. P1,578,547
d. P1,591,297
11
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 4
Pinnacle Company presented to you the following Property, Plant and Equipment schedule at the beginning of the year in
line with your audit for the calendar year 2025:
Audit notes:
a. The PPE were acquired at the beginning of 2021 when the company started its operations.
b. On January 1, 2025, Pinnacle incurred P230,000 in minor repairs on various parts of the building.
c. On June 30, 2025, an old machinery with an original cost of P2,400,000 was exchanged for a machinery of NDC
Company. The fair value of Pinnacle’s machinery was at P1,250,000 while the fair value of NDC’s machinery was at
P1,400,000 on the date of exchange. Pinnacle paid additional cash at P200,000 on the exchanged which was
deemed to have commercial substance.
d. On March 1, 2025, some furniture and fixtures were sold for P400,000. These furniture and fixtures were originally
acquired at P1,800,000.
e. New furniture and fixtures were acquired on June 30, 2025 at a price of P2,400,000, payable in 3 equal installments
starting June 30, 2026. Pinnacle incurred freight and handling costs of P138,320. The prevailing market rate of
interest on this date was 8%. The present value factor of an ordinary annuity of 1 at 8% for 3 periods is 2.5771.
Requirements:
6. How much is the gain or loss to be recognized on the exchange of machinery on June 30, 2025?
a. P 130,000 c. P 250,000
b. P 70,000 d. P 190,000
7. How much is the gain or loss to be recognized on the sale of furniture and fixtures on March 1, 2025?
a. P 650,000 c. P 680,000
b. P 254,545 d. P 287,273
8. The new furniture acquired on June 30, 2025 should be recorded at a cost of
a. P 2,061,680 c. P 2,400,000
b. P 2,538,320 d. P 2,200,000
10. What is the carrying value of the machinery and equipment on December 31, 2025?
a. P 7,677,500 c. P 7,487,500
b. P 7,797,500 d. P 7,867,500
11. What is the carrying value of the furniture and fixtures on December 31, 2025?
a. P 3,145,454 c. P 3,453,018
b. P 3,178,182 d. P 3,109,709
12. The total depreciation expense to be recognized for the calendar year 2025 is
a. P 2,721,325 c. P 2,581,172
b. P 2,733,899 d. P 2,743,899
12
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF INTANGIBLE ASSETS
PROBLEM 1
The following account balances are excerpt from Pinnacle Corporation’s trial balance for the audit period ended December
31, 2024:
Patent P4,940,000
Licensing agreement 1,920,000
Trademark 1,606,000
Leasehold improvements 1,300,000
Audit notes:
a. The patent for Pinnacle’s manufacturing process was acquired on January 1, 2024 at a cost of P3,740,000. An
additional amount of P1,387,000 was spent on December 31, 2024 for repairs on machinery covered by the patent
and charged to the Patent account. The repairs were necessarily incurred to bring back the said machinery to its
original working condition. The useful life of the patent is its legal life of 20 years.
b. Pinnacle purchased the licensing agreement on January 1, 2023. The Licensing Agreement account balance included
the purchase price of P2,160,000 and P240,000 cost to train employees at the inception of the licensing agreement.
The license has been amortized over the agreement term which is 10 years.
c. A trademark was purchased by Pinnacle for P1,280,000 on July 1, 2023. Expenditures for the successful litigation in
defense of the trademark totaled to P326,000 were paid on July 1, 2025 and were charged to the Trademark account.
The trademark was estimated to have an indefinite life. By the end of 2025, the company estimated to general annual
net future cash flow from the continued use of the trademark at P90,000. The prevailing market rate of interest on
this date was at 9%.
d. A 10-year non-renewable lease was signed January 1, 2025 for the leased building that Pinnacle used in
manufacturing operations. The Leasehold Improvement account includes: (1) P900,000 cost of improvements which
was completed on March 1, 2025 with a total estimated useful life of 5 years; and (2) P400,000 lease rights paid for
the exclusive right to occupy the leased property for the duration of the lease term without the lessor having the
right to lease it out to other third parties.
e. No amortization or depreciation is recognized yet on the lease-related assets. Pinnacle uses the straight-line method
with zero residual value for all depreciation and amortization of assets.
Based on the above information and on your audit, answer the following requirements:
1. What is the correct carrying value of the Patent as of December 31, 2025?
a. P3,366,000 c. P4,680,000
b. P3,553,000 d. P4,753,000
2. What is the correct carrying value of the Licensing Agreement as of December 31, 2025?
a. P1,334,000 c. P1,536,000
b. P1,512,000 d. P1,728,000
3. What is total retroactive adjustment to beginning retained earnings in 2025 related to the Licensing
Agreement account?
a. P0 c. P192,000
b. P180,000 d. P216,000
4. What is the correct carrying value of the Trademark as of December 31, 2025?
a. P768,927 c. P1,280,000
b. P1,000,000 d. P1,606,000
5. What is the total expense to be recognized in relation to the lease agreement for 2025?
a. P180,000 c. P200,000
b. P190,000 d. P220,000
6. What is the total carrying amount of intangible assets to be presented in the balance sheet as of December
31, 2025?
a. P5,878,000 c. P6,518,000
b. P6,238,000 d. P6,988,000
13
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 2
ABC Company reported the following intangibles in its December 31, 2024 statement of financial position:
Patent P200,000
Copyright 400,000
Trademark 350,000
Computer Software 100,000
Goodwill 900,000
The company’s accountant determines the patent has an expected life of 10 years and no expected residual value, and
that it will generate approximately equal benefits each year. On the other hand, the copyright and trademark have a legal
life of 50 years and 10 years, respectively, but the company expects to use the copyright and the trademark for the
foreseeable future.
The accountant knows that the computer software has been used by the company in 120 sales offices and the company
has replaced the software in 60 offices in 2025 and expects to replace the software in 40 more offices in 2026 and the
remainder in 2027.
On December 31, 2025, there are no indications of impairment on the patent and computer software. The following
information relates to the other intangible assets:
a. Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
b. The trademark is expected to generate cash flows of P15,000 per year.
c. The goodwill is associated with one of ABC’s reporting unit. The cash flows expected to generate by the reporting
unit is P200,000 per year for the next 25 years. The reporting unit has a carrying amount of P2,100,000 excluding
goodwill.
The appropriate discount rate for all the above items is 5%. The present value of an ordinary annuity of 1 at 5% for 25
periods is 14.0939.
Requirements:
7. What is the total amortization expense to be recognized on the intangible assets in 2025?
a. P20,000 c. P88,750
b. P70,000 d. P107,500
8. What is the total loss on impairment to be recognized on the intangible assets in 2025?
a. P433,720 c. P471,220
b. P452,470 d. P530,280
10. What is the carrying amount of the patent on December 31, 2025?
a. P160,000 c. P190,000
b. P180,000 d. P200,000
11. What is the carrying amount of the copyright on December 31, 2025?
a. P156,800 c. P392,000
b. P160,000 d. P400,000
12. What is the carrying amount of the trademark on December 31, 2025?
a. P270,000 c. P315,000
b. P300,000 d. P350,000
13. What is the carrying amount of the computer software on December 31, 2025?
a. P16,667 c. P50,000
b. P25,000 d. P100,000
14
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF LIABILITIES
PROBLEM 1
You were able to obtain the following from the accountant for Pinnacle Corporation related to the company’s liabilities as
of December 31, 2025.
Accounts payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000
Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2025 is
a. P143,000 c. P203,000
b. P155,000 d. P215,000
2. The portion of the Note Payable bank to be reported under current liabilities as of December 31, 2025 is
a. P0 c. P500,000
b. P300,000 d. P800,000
PROBLEM 2
ABC Company is in the business of selling appliances. The company’s fiscal year ends on March 31. The following
information relates to the obligations of the company as of March 31, 2025:
Notes payable
ABC has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total
unpaid interest for all these notes amounts to P408,000 on March 31, 2025.
Due date Amount
April 31, 2025 P720,000
July 31, 2025 1,080,000
September 1, 2025 500,000
February 1, 2026 580,000
April 1, 2026 to March 31, 2027 3,240,000
P6,120,000
15
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Estimated warranties
ABC has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the
2023-2024 fiscal year and still outstanding as of March 31, 2024, amounted to P302,400. The warranty costs on sales
made from April 1, 2024 to March 31, 2025, are estimated at P756,000. The actual warranty costs incurred during 2024-
2025 fiscal year are as follows:
Warranty claims honored on 2023-2024 sales P302,400
Warranty claims honored on 2024-2025 sales 342,000
Total P644,400
Dividends
On March 10, 2025, ABC’s board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary
share dividend. Both dividends were to be distributed on April 5, 2025 to shareholders on record at the close of business
on March 31, 2025. As of March 31, 2025, ABC has 6 million, P2 par value, ordinary shares issued outstanding.
Bonds payable
ABC issued P6,000,000, 12% bonds, on October 1, 2016 at face value. The bonds will mature on October 1, 2026. Interest
is paid semi-annually on October 1 and April 1.
Based on the forgoing information, determine the adjusted balance of the following as of March 31, 2025:
5. Estimated warranty payable
a. P302,400 c. P786,000
b. P414,000 d. P1,058,400
PROBLEM 3
You are auditing the financial statements of Mr. Accounting Inc. for the year ended December 31, 2025. The liability
section of the company’s balance sheet shows the following information:
Accounts payable P250,000
Warranty liability 10,000
Premiums payable 242,000
Bonds payable 851,706
Liability under finance lease 5,400,000
Upon further investigation on the liabilities account, you discovered the following information:
Accounts Payable
You rendered purchases cut-off on the company’s purchases transactions from December 15 to January 10. The results of
such cut-off test are summarized below:
Receiving Amount Shipment Terms Shipment Date of Receipt of
Report No. Date Goods
2631 P5,500 FOB Shipping point 12/15/25 12/16/25
2632 6,000 FOB Shipping point 12/17/25 12/20/25
2633 7,900 FOB Destination 12/21/25 12/23/25
2635 8,900 FOB Destination 12/26/25 12/30/25
2636 10,000 FOB Shipping point 12/28/25 12/31/25
2637 8,000 FOB Shipping point 12/29/25 1/2/26
2638 9,500 FOB Destination 12/30/25 12/31/25
2639 10,500 FOB Destination 1/2/26 1/5/26
2640 11,000 FOB Shipping point 1/5/26 1/10/26
2641 12,000 FOB Shipping point 1/7/26 1/11/26
2642 15,000 FOB Destination 1/10/26 1/15/26
16
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
• The inventory count procedures were done on December 31, 2025 and documents cut-off shows that the last
receiving report used and recorded for the current year by the company is Receiving Report No. 2635.
• Receiving Report No. 2634 is for a shipment made on December 27, 2025 under FOB shipping point. The related
invoice amounting to P12,500 was misplaced and was recovered only on January 5, 2026 and was recorded
thereafter.
Warranty Liability
The company has a two-year warranty on its products. The warranty estimates in the past years were at 5% of net sales.
During the current year, because of increased returns, the company decided to increase warranty estimates at 6% of its
total net sales, two-thirds (2/3) of which is expected to be incurred during the year of sale and one-third (1/3) on the year
following the year of sale. The summary of the company’s total sales and actual warranty costs incurred for the past three
years are presented below (assume sales were made evenly throughout the year):
2023 2024 2025
Net sales P8,000,000 P9,050,000 P10,550,000
Actual warranty costs paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2025.
Premiums Payable
The premiums payable was the accrued amount on December 31, 2024 for a promotional program the company has
started in 2024. For every 5 product labels the customer surrenders plus P50, the customer receives a specially designed
shirt which the company purchases at cost of P160/unit. Details about the said promotional program in 2024 and 2025
are as follows: 2024 2025
Sales in units 50,000 60,000
Premiums purchased in units 3,000 6,000
Inventory of premiums in units 1,200 2,100
The company estimates that from the labels issued with products sold, 40% shall be presented for the said promotional
redemption plan.
Bonds Payable
The company issued P800,000 of 12% face value bonds for P851,706. The bonds are dated and issued on April 1, 2025 and
are due March 31, 2029. Interest is payable semi-annually on September 30 and March 31. The company sold the bonds
to yield 10%.
The interest rate stated in the lease agreement is 8%. The present value of an annuity due of 1 at 2% for 40 periods is
27.9026.
Requirements:
9. What is the correct balance of accounts payable as of December 31, 2025?
a. P260,000 c. P282,000
b. P272,500 d. P290,000
10. What is the correct balance of warranty liability as of December 31, 2025?
a. P308,000 c. P323,000
b. P318,000 d. P333,000
11. What is the correct balance of premiums payable as of December 31, 2025?
a. P143,000 c. P209,000
b. P171,000 d. P304,000
12. How much is the carrying value of the bonds payable as of December 31, 2025?
a. P840,606 c. P843,448
b. P840,817 d. P843,584
13. What is the balance of the liability under finance lease to be presented as non-current liabilities as of December
31, 2025?
a. P3,520,252 c. P3,823,328
b. P3,616,406 d. P3,912,160
14. What is the total amount of current liabilities to be presented in relation to the liability under finance lease and
bonds payable as of December 31, 2025?
a. P0 c. P303,076
b. P48,000 d. P327,076
17
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF SHAREHOLDERS’ EQUITY
PROBLEM 1
The shareholders’ equity section of Pinnacle Corporation’s statement of financial position as of December 31, 2024, is as
follows:
Ordinary share capital, P10 par value (authorized 2,000,000 shares, issued and P4,000,000
outstanding 400,000 shares)
20%, non-cumulative preferred share capital, P5 par value (authorized 1,000,000 1,000,000
shares, issued 200,000)
Share premium - Ordinary 1,800,000
Share premium - Preferred 600,000
Unrealized holding gain (Loss) on FVOCI investments (400,000)
Retained earnings 6,000,000
TOTAL P13,000,000
3. Share premium
a. P4,435,000
b. P4,505,000
c. P4,355,000
d. P4,612,500
4. Treasury shares
a. P240,000
b. P360,000
c. P480,000
d. P720,000
18
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
b. P5,437,500
c. P6,533,400
d. P6,637,500
PROBLEM 2
Your audit client, ABC Company is a public entity whose shares are traded in the stock exchange market. On December
31, 2024, ABC had 3,000,000 authorized, P10 par value, ordinary shares, of which 1,000,000 shares were issued and
outstanding. The equity accounts on December 31, 2024 had a following balances.
Transactions during 2025 and other information relating to the equity accounts were as follows:
a. On January 2, 2025, ABC issued at P54 per share, 50,000 shares of P50 par value, 9% cumulative convertible
preference shares. Each preference share is convertible into two ordinary shares. ABC had 300,000 authorized
shares of preference shares.
b. On February 1, 2025, ABC reacquired 10,000 ordinary shares for P16 per share.
c. On April 30, 2025, ABC sold 250,000, P10 par value, ordinary shares (previously unissued) to the public at P17 per
share.
d. On June 15, 2025, ABC declared a cash dividend of P1 per share on ordinary shares, payable on July 15, 2025, to
shareholders of record on July 1, 2025.
e. On November 10, 2025, ABC sold 5,000 treasury shares for P21 per share.
f. On December 15, 2025, ABC declared the yearly cash dividend on preference share, payable on January 15, 2026,
to shareholders of record on December 31, 2025.
g. On January 20, 2026, before the books were closed for 2025, ABC became aware that the ending inventories on
December 31, 2024 were understated by P150,000. The tax rate is 30%.
h. After correcting the beginning inventory, the net income for 2025 was P2,250,000.
Based on the above and the result of your audit, determine the following as of December 31, 2025:
8. Share premium
a. P5,500,000
b. P5,525,000
c. P5,700,000
d. P5,725,000
19
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 3
In your audit of NJL Corporation for the calendar year ended December 31, 2025, you discovered the breakdown of the
company’s Retained Earnings account:
Balance, January 1 P7,400,000
Unrealized holding loss on financial assets held at fair value through other (300,000)
comprehensive income (FVOC)
Inventory fire loss (250,000)
Impairment loss on machinery (650,000)
25% stock dividends (declared on 100,000 shares outstanding at market (2,800,000)
value of P112 per share)
Loss on sale of equipment (200,000)
Prior period error correction (1,000,000)
Loss on retirement of ordinary shares as treasury (1,050,000)
Gain on sale of ordinary shares at excess over par 950,000
Gain on pre-mature retirement of bonds payable 400,000
Unrealized holding gain on financial assets held at fair value through profit 800,000
or loss (FVPL)
Proceeds from sale of donated shares (originally issued at P500,000) 800,000
Net income for the year 9,000,000
Appropriation for treasury shares (at cost) (450,000)
Audit notes:
a. The 25% stock dividends on ordinary shares with par value of P100 were declared on November 1, 2025 distributable
to stockholders on January 15, 2026 of record on December 1, 2025. NJL’s stocks were selling at P105 on November
1, P110 on December 1, and P112 on December 31.
b. The company’s Share Premium from Treasury Stock Transaction amounted to P750,000.
c. The company’s management decided to change its inventory costing method from the weighted average (WAVE) to
the first-in, first-out (FIFO) method during the current year. The inventory balances under two methods are as
follows:
Ending Inventory, 2024 Ending Inventory, 2025
WAVE 2,500,000 1,900,000
FIFO 2,600,000 2,200,000
The company has yet to reflect the said changes in its current year financial statements.
Requirements:
12. How much is the audited beginning retained earnings in 2025?
a. P6,400,000
b. P6,500,000
c. P7,400,000
d. P7,500,000
13. How much is the audited net income for the year 2025?
a. P9,100,000
b. P9,300,000
c. P9,400,000
d. P9,750,000
15. Based on the above information, what is the net adjustment to Additional Paid-in Capital account for the year?
a. P100,000
b. P200,000
c. P1,000,000
d. P1,750,000
16. Assuming the paid-in capital of the company is equal to P10,000,000 at the end of the year, what is the total
shareholders’ equity of NJL Corporation in 2025?
a. P 22,500,000
b. P 22,800,000
c. P 23,250,000
d. P 23,700,000
20
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
AUDIT OF CASH
PROBLEM 1
As the representative of your audit firm, you were assigned to verify the petty cash on hand of Pinnacle Company in the
morning of January 4, 2026. You began to count at 9:00 A.M. in the presence of the company’s cashier. While counting,
you found currencies in paper bills and coins together with checks, vouchers, and other items, which are listed below:
Bills:
P100 25 pieces
P50 130 pieces
P20 142 pieces
Coins:
P10 1 roll and 10 loose (20 pieces to a roll)
P5 4 rolls (50 pieces to a roll)
P1 2 rolls and 29 loose (50 pieces to a roll)
Checks:
Maker Date Payee Amount
A, Asst. Manager 12/22/21 Pinnacle Company P1,200
B, Cashier 12/27/21 Pinnacle Company 800
IOUs:
Name Date Amount
C, Janitor 12/19/21 P700
D, Employee 12/21/21 500
E, Bookkeeper 12/23/21 300
2. What is the adjusted petty cash fund balance on December 31, 2025?
a. P10,677 c. P12,405
b. P12,109 d. P13,269
PROBLEM 2
In connection with your audit of Mr. Accounting Inc. for the year ended December 31, 2025, you gathered the following
information:
a. The company’s trial balance as of December 31, 2025 include the following accounts:
Cash in bank – BPI P748,320
Cash in bank – BDO (restricted account for plant expansion,
expected to be disbursed in 2026) 700,000
Petty cash fund 30,000
Time deposit, placed December 20, 2025 and due March 20, 2026 5,000,000
21
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Money market placement, placed December 28, 2025 and due April 28, 2026 2,500,000
b. The company maintains its current account with BPI. The bank statement on December 31, 2025 showed a balance
of P638,340. Your audit of the company’s account with BPI revealed the following:
i. A check for P22,500 received from a customer whose account is current had been deposited and then returned
by the bank on December 28, 2025. No entry was made for the return of this check. The customer replaced the
check on January 15, 2026.
ii. A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January 2, 2026.
iii. A check for P3,500 representing payment of an employee advance was received and deposited on December
27, 2025 but was not recorded until January 3, 2026.
iv. Various debit memos for drafts purchased for payment of importation of equipment totaling P230,000 were
not recorded. These purchases were previously set up as accounts payable. Said equipment arrived in
December 2025.
v. Interest earned on the bank balance for the 4th quarter of 2025 amounting to P1,950 was not recorded.
vi. Bank service charged totaling P1,260 were not recorded.
vii. Deposits-in-transit and outstanding checks as of December 31, 2025 totaled P136,250 and P276,380,
respectively.
viii. Postdated checks totaling P67,300 were included in the deposits-in-transit. These represent collections of
current accounts receivable from customers. The checks were actually deposited on January 5, 2026.
c. Various expenses from the company’s petty cash fund dated December 2025 totaled P16,250, while those dated
January 2026 amounted to P5,903. Another disbursement from the fund dated December 2025 was a cash advance
to an employee amounting to P3,500. A replenishment of the petty cash fund was made on January 8, 2026.
Requirements:
3. What is the adjusted Cash in bank – BPI balance on December 31, 2025?
a. P429,110 c. P500,010
b. P432,710 d. P748,320
4. The compound journal entry to adjust the Cash in bank – BPI balance at year-end should include a debit to:
a. Interest expense for P1,950 c. Accounts receivable for P89,800
b. Accounts receivable for P86,300 d. Accounts payable for P228,200
5. What is the adjusted Petty cash fund balance on December 31, 2025?
a. P4,347 c. P24,097
b. P10,250 d. P30,000
6. The net effect on the company’s net income in 2025 of all the adjustments on various cash accounts is:
a. P690 c. P3,657
b. P2,810 d. P15,560
7. What is the total amount of Cash and Cash Equivalents to be shown in the Statement of Financial Position on
December 31, 2025?
a. P5,439,360 c. P6,142,960
b. P5,442,960 d. P7,942,960
PROBLEM 3
ABC Company provided the following data for the month of December:
November 30 December 31
Cash in bank account balances P2,032,000 P3,160,000
Bank statement balance 1,890,000 2,900,000
Bank debits 1,080,000
Bank credits ?
Book debits ?
Book credits 1,440,000
Outstanding checks 180,000 592,000
Deposit in transit 80,000 498,000
Check erroneously charged by bank against entity’s
account and corrected in subsequent month 40,000 50,000
Bank service charge 2,000 4,000
Note recorded as cash receipt by entity when
placed with bank for collection and note is actually collected
by bank in subsequent month and credited by bank to
entity’s account in same month 200,000 300,000
22
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
8. How much is the unadjusted receipts per book for the month of December?
a. P1,440,000 c. P2,032,000
b. P2,568,000 d. P3,160,000
9. How much is the unadjusted receipts per bank for the month of December?
a. P1,080,000 c. P2,090,000
b. P1,890,000 d. P2,900,000
10. How much is the adjusted cash in bank balance as of November 30?
a. P1,442,000 c. P2,468,000
b. P1,830,000 d. P2,856,000
11. How much is the adjusted cash in bank balance as of December 31?
a. P1,442,000 c. P2,468,000
b. P1,830,000 d. P2,856,000
12. How much is the adjusted receipts for the month of December?
a. P1,442,000 c. P2,468,000
b. P1,830,000 d. P2,856,000
13. How much is the adjusted disbursements for the month of December?
a. P1,442,000 c. P2,468,000
b. P1,830,000 d. P2,856,000
PROBLEM 4
Mastery Company provided the following data concerning the cash records for the months of January and February:
January 31 February 28
Book balance 1,900,000 ?
Total cash receipts per book 1,400,000
Total cash disbursements per book 2,400,000
Bank balance 2,100,000 ?
Total charges in bank statement 2,500,000
Total credits in bank statement 1,200,000
NSF check 60,000 40,000
Collections of accounts receivable not
recorded by entity and corrected in
subsequent month 30,000 50,000
Overstatement of check in payment
of salaries corrected in subsequent month 90,000 120,000
Deposit in transit 130,000 260,000
Outstanding checks 270,000 30,000
14. How much is the unadjusted balance per book as of February 28?
a. P900,000 c. P1,900,000
b. P1,400,000 d. P2,400,000
15. How much is the unadjusted balance per bank as of February 28?
a. P800,000 c. P2,100,000
b. P1,200,000 d. P2,500,000
16. How much is the adjusted cash in bank balance as of January 31?
a. P1,030,000 c. P1,960,000
b. P1,330,000 d. P2,260,000
17. How much is the adjusted cash in bank balance as of February 28?
a. P1,030,000 c. P1,960,000
b. P1,330,000 d. P2,260,000
18. How much is the adjusted receipts for the month of February?
a. P1,030,000 c. P1,960,000
b. P1,330,000 d. P2,260,000
19. How much is the adjusted disbursements for the month of February?
a. P1,030,000 c. P1,960,000
b. P1,330,000 d. P2,260,000
23
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
CORRECTION OF ERRORS
PROBLEM 1
You have engaged to review the records and prepare corrected financial statements of Pinnacle Corporation. The
December 31, 2025 Statement of Financial Position is shown below:
Pinnacle Corporation
Statement of Financial Position
December 31, 2025
Assets
Cash P15,000
Accounts receivable 30,000
Notes receivable 9,000
Inventory 75,000
Total P129,000
Liabilities and Shareholders’ Equity
Accounts payable P6,000
Notes payable 12,000
Share capital 5,000
Share premium 25,000
Retained earnings 81,000
Total P129,000
A review of the books of the company indicates that the following errors and omissions had not been corrected during
years shown below:
2022 2023 2024 2025
Inventory under(over)statement P18,000 (P21,000) (P24,000) P27,000
Omissions:
a. Prepaid expense 2,700 2,100 1,500 1,800
b. Deferred income - 1,200 - 900
c. Accrued expense 600 225 300 150
d. Accrued income - 375 - 450
The unadjusted net income per books are: 2022: P10,000 2023: P22,500; 2024: P19,500; 2025: P16,500. No dividends
were declared during these years, and no adjustments were made to retained earnings.
Requirements:
1. What is the adjusted net income/loss for the year ended December 31, 2022?
a. P19,550 c. P25,750
b. P20,750 d. P30,100
2. What is the adjusted net income/loss for the year ended December 31, 2023?
a. P17,550 c. P21,750
b. P18,750 d. P22,950
3. What is the adjusted net income/loss for the year ended December 31, 2024?
a. P16,650 c. P20,850
b. P17,250 d. P21,450
4. What is the adjusted net income/loss for the year ended December 31, 2025?
a. P66,600 c. P67,725
b. P67,500 d. P70,500
24
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
PROBLEM 2
You are engaged for the first-time audit of the financial statements of ABC Company for the period ended December 31,
2025. The company both incorporated and commenced its operations in 2023. In reviewing the books, you discovered
that certain adjustments had either been overlooked or improperly recorded at the end of years to 2025. The following
yearly information is summarized below:
2023 2024 2025
1. Omissions of the following year-end accruals and deferrals:
Accrued utilities expense 10,000 14,000 12,000
Accrued interest income 4,000 8,000 6,000
Prepaid rent expense - 4,000 2,000
Unearned royalty income 16,000 - 6,000
2. Receipt of merchandise at year-end from suppliers (recorded as - 12,000 6,000
purchases upon payment the following year; inventories were
included in physical count at the year when these were received)
3. Cash received from customers at year-end (recorded as sales but 6,000 - 10,000
deliveries were made the following year; corresponding inventories at
cost were included in the physical count in the year of collection)
4. Overstatement in ending inventories 18,000 - 14,000
5. Understatement in ending inventories - 8,000 -
6. Organization costs incurred in the start-up of the business at the 100,000 - -
beginning of 2023 (capitalized as an intangible asset and amortized
over 5 years)
7. Major repairs eligible for capitalization on the company’s equipment - 70,000 80,000
(recognized as outright expense); Depreciation on equipment is at
20% per annum, except for the year of expenditure which is at 10%
8. Cash dividends paid (paid at beginning of the year but declared in the - 220,000 260,000
previous year-end; dividends declared in 2025 but paid in 2026
amounted to P300,000)
The unadjusted net income for calendar years 2023, 2024 and 2025 are P445,000, P486,000 and P410,000, respectively.
Requirements:
8. The ending balance of retained earnings for calendar year 2025 before any corrections is:
a. P561,000 c. P861,000
b. P624,000 d. P1,341,000
9. How much is the audited net income to be reported for calendar year 2023?
a. P109,000 c. P341,000
b. P319,000 d. P373,000
10. How much is the audited net income to be reported for calendar year 2024?
a. P563,000 c. P596,000
b. P583,000 d. P609,000
11. How much is the audited net income to be reported for calendar year 2025?
a. P454,000 c. P488,000
b. P472,000 d. P496,000
12. How much is the audited ending retained earnings balance to be reported for calendar year 2023?
a. P99,000 c. P121,000
b. P111,000 d. P153,000
13. How much is the audited ending retained earnings balance to be reported for calendar year 2024?
a. P444,000 c. P447,000
b. P445,000 d. P448,000
14. How much is the audited ending retained earnings balance to be reported for calendar year 2025?
a. P600,000 c. P640,000
b. P602,000 d. P644,000
PROBLEM 3
Mr. Accounting Company engaged you in 2025 to examine its books and records and to make whatever adjustments are
necessary. Your examination disclosed the following:
25
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Date Particulars Debit Credit Balance
2023
Jan. 1 Balance P580,000
Dec. 31 Net income for the year 310,000 890,000
2024
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess 90,000 840,000
of par
Aug. 30 Gain on retirement of
ordinary shares at less
than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500
2025
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 P434,000
b. The company failed to properly recognize accruals and prepayments. Selected accounts revealed the following
information:
2022 2023 2024 2025
1. Prepaid expenses P8,500 P6,200 P7,400 P9,500
2. Accrued expenses 5,400 7,300 8,700 9,000
3. Unearned income 6,900 7,800 8,900 9,600
4. Accrued income 4,700 5,600 6,200 7,800
c. Dividends had been declared on December 31 in 2023 and 2024 but had not been entered in the books until paid.
d. The company purchased a machine worth P270,000 on April 30, 2022. The company charged the purchase to
expense. The machine has an estimated useful life of 3 years. The company uses the straight -line method and
residual values are deemed immaterial.
e. The company received a transportation equipment as donation from one of its shareholders on September 30, 2024.
The equipment was used to deliver goods to customers. The equipment has a fair value of P240,000 and has a
remaining life of 3 years on the date of donation. P30,000 was incurred for registering the transfer of ownership. The
company did not record the donation on its books. The expense paid related to the donated equipment were charged
to expense.
f. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the end of 2023 and
2025, respectively.
g. The merchandise inventories at the end of 2024 and 2025 did not include merchandise that was then in transit
shipped FOB shipping point. These shipments of P43,400 and P32,600 were recorded as purchase in January 2025
and 2026, respectively.
Based on the above audit findings, compute the adjusted balances of the following:
15. Net income/loss for 2023
a. P215,800 c. P369,800
b. P279,800 d. P373,100
26
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.