AUDITING PROBLEMS

PROBLEM NO. 1 (Intermediate Accounting 17th Edition Stice)

The TOY COMPANY completed the following transactions during 2012: Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000 representing property tax for March 1 June 30 which was prepaid by the vendor. Of the purchase price, 25% is deemed applicable to land and the remaining 75% to buildings. The Toy Company assumed a mortgage of P4,600,000 on the purchase and paid cash for the balance. 30 The building acquired necessitates current reconditioning at a cost of P342,000 because previous owners had failed to take care of normal maintenance and repair requirements on it. May 15 Garages in the rear of the building were demolished. The Toy Company recovered P66,000 on the lumber salvage. It then proceeded to construct a warehouse at P1,013,000, which was almost exactly the same as bids made by construction companies. Upon completion of construction, city inspectors ordered extensive modifications to the warehouse as a result of failure on the part of the company to comply with building safety code. Such modifications, which could have been avoided, cost P124,000. June 1 The company exchanged its own ordinary share capital with a market value of P640,000 (par, P40,000) for a patent and new toy-making machine. The machine has a market value of P310,000. 1 The new machinery for the new building arrived. In addition to the machinery, a new franchise was acquired from the manufacturer of the machinery to produce toy robots. Payment was made by issuing the companys own ordinary shares (par, P1,000,000). The value of the franchise is set at P500,000, while the machines fair value is P610,000.

July

Nov. 20 The company contracted for parking lots and landscaping at a cost of P420,000 and P89,000, respectively. The work was completed and paid for on November 20. Dec. 31 The business was closed to permit taking the year-end inventory. During this time, required redecorating and repairs were completed at a cost of P64,000.

After considering the preceding transactions, compute the year-end balances of the following: 1. Buildings A. P7,289,000 2. Land A. P2,074,250 3. Machinery A. P1,070,000 4. Share premium A. P10,000 5. Intangibles A. P830,000 B. P7,511,750 B. P2,000,000 B. P920,000 B. P500,000 B. P500,000 C. P7,413,000 C. P2,583,250 C. P770,000 C. P710,000 C. P330,000 D. P7,635,750 D. P2,509,000 D. P931,000 D. P600,000 D. P840,000

Page 1 of 22 Pages

PROBLEM NO. 2 (Intermediate Accounting 17th Edition Stice)

LAFAYETTE CORPORATION, a client, requests that you compute the appropriate balance of its estimated liability for product warranty account for a statement as of June 30, 2012. Lafayette Corporation manufactures television components and sells them with a 6month warranty under which defective components will be replaced without charge. On December 31, 2011, Estimated Liability for Product warranty had a balance of P620,000. By June 30, 2012, this balance had been reduced to P120,400 by debits for estimated net cost of components returned that had been sold in 2011. The corporation started out in 2012 expecting 7% of the peso volume of sales to be returned. However, due to the introduction of new models during the year, this estimated percentage of returns was increased to 10% on May 1. It is assumed that no components sold during a given month are returned in that month. Each component is stamped with a date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the likely pattern of sales returns during the 6-month period of the warranty, starting with the month following the sale of components. Month Following Sale First Second Third Fourth through sixth10% each month Percentage of Total Returns Expected 30% 20 20 30 100%

Gross sales of components were as follows for the first six months of 2012: Month January February March Amount P4,200,000 4,700,000 3,900,000 Month April May June Amount P3,250,000 2,400,000 1,900,000

The corporations warranty also covers the payment of freight cost on defective components returned and on the new components sent out as replacements. This freight cost runs approximately 5% of the sales price of the components returned. The manufacturing cost of the components is roughly 70% of the sales price, and the salvage value of returned components averages 10% of their sales price. Returned components on hand at December 31, 2011, were thus valued in inventory at 10% of their original sales price. Based on the given information, determine the following: 1. Total estimated returns from the sales made during the first 6 months of 2012 A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500 2. Total estimated returns subsequent to June 30, 2012 A. P678,250 B. P648,850 C. P591,850 D. P615,950

3. Estimated loss on component replacement (in percentage of sales price) A. 65% B. 75% C. 70% D. 80% 4. Required Estimated Liability for Product Warranty balance at June 30, 2012 A. P301,353 B. P421,753 C. P120,400 D. P77,847 5. Required adjustment to liability account A. P301,353 debit C. P421,753 debit B. P301,353 credit D. P421,753 credit
Page 2 of 22 Pages

PROBLEM NO. 3 (Intermediate Accounting 13TH ED - KIESO)

MALOX Specialty Company manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1979, Malox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maloxs fiscal year, November 30, 2012, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods Work in process Raw materials Factory supplies P647,000 112,500 264,000 69,000

The following information relates to Maloxs inventory and operations. 1. The finished goods inventory consists of the items analyzed below. Cost Down tube shifter Standard model Click adjustment model Deluxe model Total down tube shifters Bar end shifter Standard model Click adjustment model Total bar end shifters P 67,500 94,500 108,000 270,000 83,000 99,000 182,000 NRV P 67,000 89,000 110,000 266,000 90,050 97,550 187,600 77,650 119,300 196,950 P650,550

Head tube shifter Standard model 78,000 Click adjustment model 117,000 Total head tube shifters 195,000 Total finished goods P647,000

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory had been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the net realizable value. The net realizable value of the rest of the raw materials is P127,400. 5. The total net realizable value of the work in process inventory is P108,700. 6. Included in the cost of factory supplies are obsolete items with historical cost of P4,200. The net realizable value of the remaining factory supplies is P65,900. 7. Malox applies the lower of cost or net realizable value method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Malox applies the lower of cost or net realizable value method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maloxs financial statements taken as a whole.

Page 3 of 22 Pages

Based on the preceding information, determine the proper values of the following on November 30, 2012. 1. Finished goods inventory A. P647,000 B. P643,000 2. Work in process inventory A. P108,300 B. P112,500 3. Raw materials inventory A. P264,000 B. P227,400 4. Factory supplies A. P64,800 B. P65,900 C. P650,550 C. P108,700 C. P242,000 C. P61,700 D. P654,550 D. P104,500 D. P237,400 D. P69,000

5. Which of the following best describes the PAS 2 requirement for applying the same cost formula to all inventories? A. When they are purchased from different suppliers. B. When they are purchased from the same geographic region. C. When they are similar in nature or use. D. When they sell for the same price.

PROBLEM NO. 4 (IFRS Practical Implementation Guide and Workbook 2nd edition)
GATAS, INC. produces milk on its farms. It produces 30% of the countrys milk that is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500 heifers. The farms produce 8 million kilograms of milk a year, and the average inventory held is 150,000 kilograms of milk. However, the company is currently holding stocks of 500,000 kilograms of milk in powder form. At October 31, 2012, the herds are: 21,000 cows (3 years old), all purchased on or before November 1, 2011 7,500 heifers, average age 1.5 years, purchased on April 1, 2012 3,000 heifers, average age 2 years, purchased on November 1, 2011

No animals were born or sold in the year. The unit fair values less estimated point-of-sale costs were: 1-year-old animal at October 31, 2012 P3,200 2-year-old animal at October 31, 2012 4,500 1.5-year-old animal at October 31, 2012 3,600 3-year-old animal at October 31, 2012 5,000 1-year-old animal at November 1, 2011 and April 1, 2012 3,000 2-year-old animal at November 1, 2011 4,000 The company has had problems during the year: Contaminated milk was sold to customers. As a result, milk consumption has gone down. The government has decided to compensate farmers for potential loss in revenue from the sale of milk. This fact was published in the national press on September 1, 2012. Gatas received an official letter on October 10, 2012, stating that P5 million would be paid to it on January 2, 2013. The companys business is spread over different parts of the country. The only region affected by the contamination was Central Visayas, where the government curtailed milk production in the region. The cattle were unaffected by the contamination and were healthy. The company estimates that the future discounted cash flow income from the cattle in the Central Visayas region amounted to P4 million, after taking into account the government restriction order. The company feels that it cannot measure the fair value of the cows in the region because of the problems created by the contamination. There are 6,000 cows and
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2,000 heifers in the region. All these animals had been purchased on November 1, 2011. A rival company had offered Gatas P3 million for these animals after point-ofsale costs and further offered P6 million for the farms themselves in that region. Gatas has no intention of selling the farms at present. The company has been applying PAS 41 since November 1, 2011. 1. What is the fair value of the cattle (excluding Central Visayas region) at November 1, 2011? A. P93 million B. P64 million C. P63 million D. P48 million 2. What is the fair value of the cattle (excluding Central Visayas region) at October 31, 2012? A. P106.5 million B. P113.25 million C. P105.6 million D. P105.75 million 3. What is the increase in fair value of the cattle (excluding Central Visayas region) due to price change? A. P10.7 million B. P12.8 million C. P9.2 million D. P16.7 million 4. What is the increase in fair value of the cattle (excluding Central Visayas region) due to physical change? A. P9.2 million B. P11.8 million C. P18.55 million D. P9.4 million 5. On October 31, 2012, the cattle in the Central Visayas region would be valued at A. P39 million B. P3 million C. P4 million D. P5 million

PROBLEM NO. 5 (INTERMEDIATE ACCOUNTING-IFRS - KIESO)

MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining estimates that the acquired property will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a residual value of P900,000. Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000. The company estimates that these structures can be used for 15 years but, because they must be dismantled if they are to be moved, they have no residual value. Mina Mining does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a total cost of P1,800,000. The machinery cost the former owner P4,500,000 and was 50% depreciated when purchased. Mina Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery. 1. What are the estimated depletion and depreciation charges for the first year? Depletion Depreciation A. P2,610,000 P189,000 B. P1,305,000 P378,000 C. P2,610,000 P234,000 D. P1,305,000 P189,000 2. What are the estimated depletion and depreciation charges for the 5 th year? Depletion Depreciation A. P1,305,000 P378,000 B. P2,610,000 P234,000
Page 5 of 22 Pages

C. D.

P2,610,000 P1,305,000

P378,000 P234,000

3. What are the estimated depletion and depreciation charges for the 6 th year? Depletion Depreciation A. P2,610,000 P378,000 B. P1,305,000 P288,000 C. P1,305,000 P189,000 D. P2,610,000 P288,000 4. What are the estimated depletion and depreciation charges for the 11 th year? Depletion Depreciation A. P1,305,000 P99,000 B. P1,305,000 P189,000 C. P2,610,000 P99,000 D. P2,610,000 P234,000 5. What are the depletion and depreciation charges for the first year assuming actual production of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.) Depletion Depreciation A. P1,087,500 P157,500 B. P1,305,000 P99,000 C. P1,305,000 P189,000 D. P1,087,500 P82,500

PROBLEM NO. 6 (INTERMEDIATE ACCOUNTING-IFRS - KIESO)

DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in the demand for its products over the last several years. This prompted the company to obtain additional manufacturing facility. A real estate firm located an available factory near Debbys production facility, and Debby agreed to purchase the factory and used machinery from Que Company on October 1, 2011. Renovations were necessary to convert the factory for Debbys manufacturing use. The terms of the agreement required Debby to pay Que P1,500,000 when renovations started on January 1, 2012, with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was P12,000,000. The building renovations were contracted to Malibay Construction Company at P3,000,000. The payments made, as renovations progressed during 2012, are shown below. The factory was placed in service on January 1, 2013. Que Malibay January 1 P 1,500,000 April 1 2,700,000 P 900,000 October 1 3,300,000 900,000 December 31 4,500,000 1,200,000 P12,000,000 P3,000,000 On January 1, 2012, Debby obtained a 2-year, P3 million loan with a 12% interest rate to finance the renovation of the acquired factory. This is Debbys only outstanding loan during 2012. Debbys policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of the purchase price over the remaining items. The building had originally cost Que P9,000,000 and had a net book value of P1,500,000, while the machinery originally cost P3,750,000 and had a net book value of P1,200,000 on the date of sale. The land was recorded on Ques books at P1,200,000. The following values were determined based independent appraisers at the time of acquisition. Land P8,700,000 Building 3,150,000
Page 6 of 22 Pages

on

appraisal

conducted

by

Machinery

1,350,000

Gin G. Neer, Debbys chief engineer estimated that the renovated plant would be used for 15 years, with an estimated residual value of P900,000. Neer estimated that the productive machinery would have a remaining useful life of 5 years and residual value of P90,000. Debbys depreciation policy is to apply the 200% declining balance method for machinery and the 150% declining balance method for the plant. One-half years depreciation is taken in the year the plant is placed in service and one-half year is allowed when the property is disposed of or retired. Determine the amounts to be recorded on the books of Debby Corp. as of December 31, 2012, for each of the following properties. 1. Land A. P7,909,000 2. Building A. P5,670,000 3. Machinery A. P1,227,300

B. P8,700,000 B. P6,223,600 B. P1,098,000

C. P9,060,000 C. P3,223,600 C. P1,335,300

D. P10,909,000 D. P5,310,000 D. P990,000

Calculate the 2013 depreciation expense for each of the following properties. 4. Building A. P238,500 5. Machinery A. P180,000 B. P311,180 B. P198,000 C. P283,500 C. P219,600 D. P265,500 D. P227,460

PROBLEM NO. 7 (INTERMEDIATE ACCOUNTING-IFRS - KIESO)

During the course of your audit of the financial statements of FISHING CORPORATION for the year ended December 31, 2012, you found a new account, Investment in Equity Securities. Your audit revealed that during 2012, Fishing began a program of investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2012 follows: Fishing Corporation Analysis of Investment in Equity Securities For the Year Ended December 31, 2012 Debit (a) Salmon Company Ordinary Shares Feb.14 Purchased 12,000 shares @ P55 per share July 26 Received 1,200 ordinary shares of Salmon Company as a share dividend. (Memorandum entry in general ledger.) Sept.28 Sold the 1,200 ordinary shares of Salmon Company received July 26 @ P70 per share. (b) Tamban, Inc. Ordinary Shares April30 Purchased 60,000 shares @ P40 per share Oct.28 Received dividend of P1.20 per share. Additional information: a. The fair value for each security as of the 2012 date of each transaction follow: Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31 P2,400,000 P72,000 P660,000 Credit

P84,000 Debit Credit

Page 7 of 22 Pages

Salmon Company Tamban, Inc. Fishing Corp.

P55 25 P40 28

P62 30

P70 33

P74 32 35

b. All of the investments of Fishing Corporation are nominal in respect to percentage of ownership (5% or less). c. Each investment is considered by Fishing Corporation to be non-trading. Fishing Corporation designates its investment in these non-trading securities as available-for-sale. 1. What amount should be reported as gain on sale of non-trading equity securities? A. P18,000 B. P6,000 C. P24,000 D. P 0 2. The receipt of 1,200 share dividend would cause the investment balance to increase by A. P74,400 B. P84,000 C. P66,000 D. P 0 3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.? A. Cash 72,000 Dividend income 72,000 B. Cash 72,000 Investment in equity securities 72,000 C. Investment in equity securities 72,000 Dividend income 72,000 D. Dividend income 72,000 Investment in equity securities 72,000 4. What amount of unrealized gain or loss should be reported in the 2012 statement of comprehensive income as component of other comprehensive income? A. P192,000 gain B. P192,000 loss C. P480,000 gain D. P480,000 loss 5. What amount should be reported as Investment in Equity Securities in the statement of financial position on December 31, 2012? A. P2,808,000 B. P3,000,000 C. P2,520,000 D. P3,288,000

PROBLEM NO. 8 (INTERMEDIATE ACCOUNTING-IFRS - KIESO)

Presented below are two independent situations. Answer the questions at the end of each situation. GARLA HOME IMPROVEMENTS installs replacement siding, windows, and louvered glass doors for single family homes and condominium complexes in Quezon City. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2012, and Jimmy Lansang, controller for GARLA, has gathered the following data concerning inventory. At May 31, 2012, the balance in GARLAs Raw Material Inventory account was P1,224,000, and the Allowance to Reduce Inventory to NRV had a credit balance of P82,500. Lansang summarized the relevant inventory cost and market data at May 31, 2012, in the schedule below. Cost Sales Price Net Realizable Value Aluminum siding P 210,000 P 192,000 P 168,000 Cedar shake siding 258,000 282,000 254,400 Louvered glass doors 336,000 559,200 504,900 Thermal windows 420,000 464,400 420,000 P1,224,000 P1,497,600 P1,347,300
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1. What amount should be reported as Allowance to Reduce Inventory to Net Realizable Value at May 31, 2012? A. P168,900 B. P45,600 C. P273,600 D. P123,300 2. What amount of gain or loss should be recorded for the year ended May 31, 2012, due to the change in the Allowance to Reduce Inventory to Net Realizable Value? A. P36,900 gain B. P86,400 loss C. P40,800 loss D. P82,500 gain MANGO BANGGO purchased a mango farm in August 2012 for P2,250,000. The purchase was risky because the growing season was coming to an end, the mangoes must be harvested in the next few weeks, and Mango has limited experience in carrying off a mango harvest. At the end of the first quarter of operations, Mango is feeling pretty good about his early results. The first harvest was a success; 30,000 kilos of mangoes were harvested with a value of P90,000 (based on current local commodity prices at the time of harvest). The fair value of Mangos mango farm has increased by P45,000 at the end of the quarter. After storing the mangoes for a short period of time, Mango was able to sell the entire harvest for P105,000. 3. What amount of gain should be recognized on the change in fair value of Mangos mango farm? A. P150,000 B. P45,000 C. P90,000 D. P135,000 4. At what amount should the mangoes harvested be initially recorded on Mangos books? A. P90,000 B. P105,000 C. P60,000 D. P150,000 5. What is the total effect on income for the quarter related to Mangos biological asset and agricultural produce? A. P150,000 B. P45,000 C. P15,000 D. P60,000 PROBLEM NO. 9 (IFRS for SMEs Training Modules Modules 14, 18 and 21) The following independent cases relate to different SMALL AND MEDIUM-SIZED ENTITIES (SMEs): Case 1 On January 1, 20X4, SME A acquired a trademark for a line of products in a separate acquisition from a competitor for P300,000. SME A expected to continue marketing the line of products using the trademark indefinitely. An analysis of (i) product life cycle studies, (ii) market, competitive and environmental trends, and (iii) brand extension opportunities provides evidence that the line of trademarked products may generate net cash inflows for the acquiring entity for an indefinite period. Because management is unable to estimate the useful life of the trademark, SME A amortizes the cost of the trademark over 10 years (i.e., its presumed useful life) using the straight-line method. In 20X7, a competitor unexpectedly revealed a technological breakthrough that is expected to result in a product, that when launched by the competitor, will extinguish for SME As patented product-line. Demand for SME As patented product-line is expected to remain strong until December 20X9, when the competitor is expected to launch its new product. On December 31, 20X7, SME A assessed the recoverable amount of the trademark at P50,000. SME A intends to continue manufacturing the patented products until December 31, 20X9. SME A has a December 31 financial year-end.
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Case 2 SME B gives warranties at the time of sale to purchasers of its product. Under the terms of the contract of sale, SME B undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e., more likely than not) that there will be some claims under the warranties. At December 31, 20X1, SME B appropriately recognized P50,000 warranty provision. SME B incurred and charged P140,000 against the warranty provision in 20X2. P80,000 of this related to warranties for sales made in 20X2. The increase during 20X2 in the discounted amount recognized as a provision at December 31, 20X2 arising from the passage of time is P2,000. At December 31, 20X2, SME B estimated that it would incur expenditures in 20X3 to meet its warranty obligations at December 31, 20X2, as follows: 5 percent probability of P400,000 20 percent probability of P200,000 50 percent probability of P80,000 25 percent probability of P20,000

Assume for simplicity that the 20X3 cash flows for warranty repairs and replacements take place, on average, on June 30, 20X3. An appropriate discount rate is 10 percent per year. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 percent to the probability-weighted expected cash flows. SME B is also the defendant in a breach of patent lawsuit. Its lawyers believe there is a 70 percent chance that SME B will successfully defend the case. However, if the court rules in favor of the claimant, the lawyers believe that there is a 60 percent chance that the entity will be required to pay damages of P2 million (the amount sought by the claimant) and a 40 percent chance that the entity will be required to pay damages of P1 million (the amount that was recently awarded by the same judge in a similar case). Other amounts of damages are unlikely. The court is expected to rule in late December 20X3. There is no indication that the claimant will settle out of court. A 7 percent risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 10 percent per year. Case 3 On January 1, 20X1, SME AA acquired 25 percent of the equity of each of entities BB, CC and DD for P10,000, P15,000 and P28,000, respectively. SME AA has significant influence over entities BB, CC and DD. Transaction costs of 1 percent of the purchase price of the shares were incurred by SME AA. On January 2, 20X1, entity BB declared and paid dividends of P1,000 for the year ended 20X0. On December 31, 20X1, entity CC declared a dividend of P8,000 for the year ended 20X1. The dividend declared by entity CC was paid in 20X2. For the year ended December 31, 20X1, entities BB and CC recognized profit of respectively P5,000 and P18,000. However, entity DD recognized a loss of P20,000 for that year. Published price quotations do not exist for the shares of entities BB, CC and DD. Using appropriate valuation techniques, SME AA determined the fair value of its investment in entities BB, CC and DD at December 31, 20X1 as P13,000, P29,000
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and P15,000, respectively. Costs to sell are estimated at 5 percent of the fair value of the investments. Based on the above information, calculate the following: 1. Trademark amortization for the year ended December 31, 20X7 A. P90,000 B. P70,000 C. P30,000 D. P 0 2. Impairment loss to be recognized for the trademark at December 31, 20X7 A. P90,000 B. P50,000 C. P130,000 D. P60,000 3. The carrying amount of the warranties provision at December 31, 20X2 A. P88,000 B. P50,000 C. P52,000 D. P106,000 4. The amount of loss on litigation that should be reported by SME B at December 31, 20X2 A. P1,000,000 B. P1,070,000 C. P1,019,050 D. P 0 Assume SME AA measures all its investments in associates using the cost model. 5. The amount of impairment loss that SME AA should recognize at December 31, 20X1 A. P13,750 B. P14,030 C. P9,030 D. P 0 6. The net amount to be recognized by SME AA in profit or loss for the year ended December 31, 20X1 A. P11,780 B. P14,030 C. P2,000 D. P2,250 Assume SME AA measures all its investments in associates using the equity method. Assume that there is neither implicit goodwill nor fair value adjustments. 7. The amount of impairment loss that SME AA should recognize at December 31, 20X1 A. P13,750 B. P14,030 C. P9,030 D. P 0 8. The net amount to be recognized by SME AA in profit or loss for the year ended December 31, 20X1 A. P8,280 B. P6,030 C. P6,780 D. P2,250 Assume SME AA measures all its investments in associates after initial recognition using the fair value model. 9. The increase in fair value that SME AA should recognize in profit or loss for the year ended December 31, 20X1 A. P4,000 B. P3,470 C. P1,150 D. P620 10. The carrying amount of the investment in associates under each of the following assumptions Cost Equity Fair Value Model Method Model A. P38,970 P43,000 P57,000 B. 38,970 52,030 54,150 C. 39,500 43,000 57,000 D. 39,500 52,030 54,150 PROBLEM NO. 10 (Intermediate Accounting 17Th Edition Stice)
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HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatts financial statements have never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2012 and 2011.

HIATT TEXTILE CORPORATION COMPARATIVE STATEMENTS OF FINANCIAL POSITION December 31, 2012 and 2011 2012 2011 Assets Current assets: Cash and cash equivalents P1,205,000 P 800,000 Accounts receivable 1,960,000 1,480,000 Allowance for bad debts (185,000) (90,000) Inventory 1,035,000 1,010,000 Total current assets 4,015,000 3,200,000 Noncurrent assets: Property, plant, and equipment Accumulated depreciation Total noncurrent assets Total assets Liabilities and Shareholders Equity Liabilities: Accounts payable Shareholders equity: Ordinary shares, P20 par value; 150,000 shares authorized; 65,000 shares issued and outstanding Retained earnings Total shareholders equity Total liabilities and shareholders equity 835,000 (608,000) 227,000 P4,242,000 847,500 (532,000) 315,500 P3,515,500

P 607,000

P 980,500

1,300,000 2,335,000 3,635,000 P4,242,000

1,300,000 1,235,000 2,535,000 P3,515,500

HIATT TEXTILE CORPORATION COMPARATIVE INCOME STATEMENTS For the Years Ended December 31, 2012 and 2011 2012 Sales Cost of goods sold Gross income Operating expenses: Selling expenses Administrative expenses Total operating expenses Net income The 2012 audit revealed the following facts: a. On January 5, 2011, Hiatt Textile Corporation had charged a 5-year insurance premium to expense. The premium totaled P31,000. P5,000,000 2,150,000 2,850,000 1,150,000 600,000 1,750,000 P1,100,000 2011 P4,500,000 1,975,000 2,525,000 1,025,000 525,000 1,550,000 P 975,000

Page 12 of 22 Pages

b. The amount of loss due to bad debts has steadily decreased over the last 2 years. Hiatt Textile Corporation has decided to reduce the amount of bad debt expense from 2% to 1 % of sales, beginning with 2012. (A charge of 2% has already been made for 2012.) c. Hiatt Textile Corporation uses the periodic inventory system. The following are the inventory errors for the last 2 years. 2011 - Ending inventory overstated by P75,500 2012 - Ending inventory overstated by P99,000 d. An equipment costing P150,000 was acquired on January 3, 2011. The purchase was recorded by a charge to operating expense. The equipment has a useful life of 10 years and a residual value of P25,000. Hiatt Textile Corporation uses the straight-line method in depreciating its assets. e. Assume that the books for 2012 have not yet been closed. implications. Based on the above information, answer the following: 1. The December 31, 2012 adjusting entry to correct the expensing of insurance premium paid is A. Prepaid insurance 18,600 Insurance expense 6,200 Retained earnings 24,800 B. Prepaid insurance 18,600 Retained earnings 18,600 C. Insurance expense 18,600 Retained earnings 18,600 D. Insurance expense 6,200 Retained earnings 6,200 2. The December 31, 2012 adjusting entry to correct the expensing of the equipment purchased on January 3, 2012 should include a credit to A. Accumulated depreciationP12,500. B. Retained earningsP137,500. C. EquipmentP12,500. D. Depreciation expenseP12,500. 3. The December 31, 2012 adjusting entry to correct the inventory errors should include a debit to A. Cost of goods soldP99,000. B. InventoryP23,500. C. Retained earningsP75,500. D. Cost of goods soldP75,500. 4. What is Hiatts corrected net income for the year ended December 31, 2011? A. P1,012,200 B. P1,212,800 C. P786,800 D. P1,061,800 5. What is Hiatts corrected net income for the year ended December 31, 2012? A. P1,095,200 B. P1,129,800 C. P1,082,800 D. P1,107,800 PROBLEM NO. 11 (Intermediate Accounting 16th Edition Stice) The schedule below shows the account balances of BENEFICIO CORPORATION at the beginning and end of the year ended December 31, 2012: DEBITS Cash and cash equivalents Investment in trading securities Accounts receivable Inventories Dec. 31, 2012 P222,000 10,000 148,000 291,000
Page 13 of 22 Pages

Ignore tax

Dec. 31, 2011 P 50,000 40,000 100,000 300,000

Prepaid insurance Land and building Equipment Discount on bonds payable Treasury stock (at cost) Cost of goods sold Selling and general expenses Income taxes Unrealized loss on trading securities Loss on sale of equipment Total debits CREDITS Allowance for bad debts Accumulated depreciation Building Accumulated depreciation Equipment Accounts payable Notes payable current Miscellaneous expenses payable Taxes payable Unearned revenue Notes payable long-term Bonds payable long-term Deferred income tax liability Common stock, P2 par Retained earnings appropriated for treasury shares Retained earnings appropriated for possible building expansion Unappropriated retained earnings Paid-in capital in excess of par value Sales Gain on sale of investment securities Total credits Additional information: a) All purchases and sales were on account.

2,500 195,000 305,000 8,500 5,000 539,000 287,000 35,000 4,000 1,000 P2,053,000

2,000 195,000 170,000 9,000 10,000

P 876,000

8,000 26,250 39,750 55,000 70,000 18,000 35,000 1,000 40,000 250,000 47,000 359,400 5,000

5,000 22,500 27,500 60,000 20,000 8,700 10,000 9,000 60,000 250,000 53,300 200,000 10,000 23,000 112,000 5,000

38,000 34,600 116,000 898,000 12,000 P2,053,000

P 876,000

b) Equipment with an original cost of P15,000 was sold for P7,000. c) Selling and general expenses include the following: Building depreciation P 3,750 Equipment depreciation 25,250 Bad debt expense 4,000 Interest expense 18,000 d) A six-month note payable for P50,000 was issued toward the purchase of new equipment. e) The long-term note payable requires the payment of P20,000 per year plus interest until paid. f) Treasury stock was sold for P1,000 more than their cost. g) During the year, a 30% stock dividend was declared and issued. At that time, there were 100,000 shares of P2 par common stock outstanding. However, 1,000 of these shares were held as treasury stock at the time and were prohibited from participating in the stock dividend. Market price was P10 per share when the stock dividend was declared. h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The cost was debited to Accumulated DepreciationEquipment.

Page 14 of 22 Pages

i) Beneficio has determined that its purchases and sales of trading securities are operating activities. Based on the given data, calculate the following: 1. Net income for 2012 A. P45,000 B. P50,300 C. P43,500 D. P44,000 D. P 0

2. Cash dividends declared and paid during 2012 A. P8,000 B. P52,000 C. P7,400 3. Proceeds from issuance of common stock in 2012 A. P100,000 B. P110,000 C. P210,000 4. Proceeds from sale of trading securities A. P26,000 B. P38,000 C. P42,000

D. P269,400 D. P14,000 D. P9,000 D. P100,000 D. P10,000 D. P89,300 D. P93,000 D. P106,000

5. Accumulated depreciation of equipment sold A. P7,000 B. P15,000 C. P8,000 6. Cash paid for purchase of equipment A. P50,000 B. P106,000 7. Proceeds from sale of treasury stock A. P6,000 B. P5,000 C. P150,000 C. P4,000

8. Net cash provided by operating activities A. P45,000 B. P87,000 C. P83,000 9. Net cash used in investing activities A. P106,000 B. P99,000 C. P61,000

10. Net cash provided by financing activities A. P188,000 B. P187,000 C. P182,000 PROBLEM 12 (Applying International Accounting Standards Alfredson)

CORNETTE MANUFACTURING COMPANYs accounts at December 31, 2011 included the following balances: Machinery (at cost) Accumulated depreciation - machinery Vehicles (at cost; purchased November 21, 2010) Accumulated depreciation vehicles Land (at cost; purchased October 25, 2008) Building (at cost; purchased October 25, 2008) Accumulated depreciation building P273,000 144,600 140,400 58,968 243,000 557,160 85,842

Details of machines owned at December 31, 2011 are as follows: Machine 1 2 Purchase Date Oct. 7, 2008 Feb. 4, 2009 Cost P129,000 144,000 Useful Life 5 years 6 years Residual Value P7,500 9,000

Additional information: Cornette calculates depreciation to the nearest month and uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum.

Page 15 of 22 Pages

Cornettes financial year-end is December 31. The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P70,200. On acquiring the land and building, Cornette estimated the buildings useful life and residual value at 20 years and P15,000, respectively.

The following transactions occurred from January 1, 2012: 2012 Jan. 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326 and installation costs of P5,274 were paid in cash. The useful life and residual value were estimated at five years and P12,000, respectively. June22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four new tires costing P1,035 were paid for in cash. Aug.28 Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of exchange. The fair value of machine 1 at the date of exchange was P34,500. The office furniture originally cost P108,000 and, to the date of exchange, had been depreciated by P72,300 in the previous owners books. Cornette estimated the office furnitures useful life and residual value at eight years and P1,620, respectively. Dec.31 Recorded depreciation. 2013 April30 Paid for repairs and maintenance on the machinery amounting to P2,784. May25 Sold one of the vechicles bought on November 21, 2010 for P19,800 cash. June26 Installed a fence around the property at cost of P16,500. The fence has an estimated useful life of 10 years and zero residual value. (Debit the cost to a Land Improvements asset account.) Dec.31 Recorded depreciation. 2014 Jan. 5 Overhauled machine 2 at cost of P36,000, after which Cornette estimated its remaining life at one additional year and revised its residual value to P15,000. June20 Traded in the remaining vehicle bought on November 21, 2010 for a new vehicle. A trade-in allowance of P11,100 was received and P69,900 was paid in cash. Oct. 4 Scrapped the vehicle bought on June 22, 2012, as it had been so badly damaged in a traffic accident that it was not worthwhile repairing it. Dec.31 Recorded depreciation. Required: 1. Machine 3, purchased on January 3, 2012, should be recorded at A. P171,000 B. P177,600 C. P165,600 C. P159,000 2. The second-hand vehicle purchased on June 22, 2012, should be recorded at A. P45,600 B. P46,635 C. P47,565 D. P48,600

Page 16 of 22 Pages

3. The office furniture acquired on August 28, 2012, should be recorded at A. P34,500 B. P37,500 C. P35,700 D. P33,825 4. The gain to be recognized on the exchange of machine 1 for office furniture on August 28, 2012, should be A. P1,875 B. P 0 C. P3,675 D. P675 5. The total depreciation expense for 2012 is A. P142,198 B. P126,391 C. P142,716 D. P142,591

6. The gain (loss) to be recognized on the sale of vehicle on May 25, 2013, is A. P(558) B. P(4,630) C. P558 D. P4,630 7. The total depreciation expense for 2013, is A. P112,987 B. P117,059 C. P117,434 D. P116,430

8. After the overhaul, machine 2s revised annual depreciation is A. P22,560 B. P50,192 C. P26,100 D. P33,300 9. What is the cost of the new vehicle acquired on June 20, 2014? A. P81,000 B. P69,900 C. P58,800 D. P91,398 10. The total depreciation expense for 2014 is A. P114,678 B. P118,593 C. P118,218 D. P108,288

PROBLEM 13 (AUDITING An Integrated Approach 7th Edition Arens and Loebbeck) The following information was obtained in an audit of the cash account of CHELSEE COMPANY as of December 31, 2012. Assume that the CPA has satisfied himself as to the propriety of the cash book, the bank statements, and the returned checks, except as noted: 1. The bookkeepers bank reconciliation at November 30, 2012. Balance per bank statement Add: Deposit in transit Total Less: Outstanding checks No. 1434 1562 1571 1584 1591 Balance per books P194,000 11,000 P205,000 P1,400 7,500 5,800 8,000 300

23,000 P182,000

2. A summary of the bank statement for December 2012. Balance brought forward Deposits Total Charges Balance, December 31, 2012 P 194,000 1,487,000 P1,681,000 (1,325,000) P 356,000

3. Included with cancelled checks returned with the December bank statement were the checks listed below. 4. The Chelsee Company discounted its own 60-day note for P90,000 with the bank on December 1, 2012. The discount rate was 6 percent. The accountant recorded the proceeds as a cash receipt at the face value of the note. 5. The accountant records customers dishonored checks as a reduction of cash receipts. When the dishonored checks are redeposited they are recorded as a regular cash receipt. Two NSF checks for P1,800 and P2,200 were returned by
Page 17 of 22 Pages

the bank during December. Both checks were redeposited and were recorded by the accountant. 6. Cancellations of Chelsee Company checks are recorded by a reduction of cash disbursements. 7. December bank charges were P200. In addition, a P100 service charge was made in December for the collection of a note receivable in November. These charges were not recorded on the books. 8. Check no. 1434 listed in the November outstanding checks was drawn in 2010. Since the payee cannot be located, the President of Chelsee Company agreed to the CPAs suggestion that the check be written back into the accounts by a journal entry. 9. Outstanding checks at December 31, 2012, totaled P49,400, including checks 1434 and 1584. 10. The cutoff bank statement disclosed that the bank had recorded a deposit of P24,000 on January 2, 2013. The accountant had recorded this deposit on the books on December 31, 2012, and then mailed the deposit to the bank. Cancelled Checks Returned with the December Bank Statement
Date Amount Number of Checkof Check Comments

1562 1571 1583

11/28/12 11/28/12 12/04/12

P 750 5,800 1,500

This check was in payment of an invoice for P7,500 and was recorded in the cash book as P7,500. This check was in payment of an invoice for P5,800 and was recorded in the cash book as P5,800. Examination of this check revealed that it was unsigned. A discussion with the client disclosed that it had been mailed inadvertently before it was signed. The check was endorsed and deposited by the payee and processed by the bank even though it was a legal nullity. The check was recorded in the cash disbursements journal. This check replaced 1584, which was returned by the payee because it was mutilated. Check 1584 was not cancelled on the books. This was a counter check drawn at the bank by the President of the company as a cash advance for travel expense. The President overlooked informing the bookkeeper about the check. The drawer of this check was the Chelsea Company. This check had been labeled NSF and returned to the payee because the bank had erroneously believed that the check was drawn by the Chelseen Company. Subsequently, the payee was advised to redeposit the check. This check was given to the payee on December 30, 2012, as a postdated check with the understanding that it would not be deposited until January 5. The check was not recorded on the books in December.

1588

12/12/12

8,000

-----

12/19/12

2,000

----1595

12/20/12 12/20/12

3,000 3,500

1599

01/05/13100,000

Required:
Page 18 of 22 Pages

1. What is the correct amount of outstanding checks on December 31? A. P41,400 B. P33,250 C. P48,000 D. P40,000 2. What is the amount of cash receipts per book in December? A. P1,496,900 B. P1,504,900 C. P1,495,100 D. P1,487,000

3. What is the amount of cash disbursements per book in December? A. P1,254,850 B. P1,252,850 C. P1,256,850 D. P1,248,850 4. What is the cash in bank balance per book as of December 31? A. P426,050 B. P428,250 C. P430,050 D. P343,050 5. What is the adjusted cash balance as of December 31? A. P343,000 B. P340,200 C. P347,000 D. P344,200

PROBLEM 14 (Auditing Standards and Procedures 9th Edition Holmes and Burns) The following information is based on a first audit of SABILA COMPANY. The client has not prepared financial statements for 2010, 2011, or 2012. During these years, no accounts have been written off as uncollectible, and the rate of gross income on sales has remained constant for each of the three years. Prior to January 1, 2010, the client used the accrual method of accounting. From January 1, 2010, to December 31, 2012, only cash receipts and disbursements records were maintained. When sales on account were made, they were entered in the subsidiary accounts receivable ledger. No general ledger postings have been made since December 31, 2009. As a result of your examination, the correct data shown in the table below are available: 12/31/09 Accounts receivable balances: Less than one year old One to two years old Two to three years old Over three years old Total accounts receivable Inventories Accounts payable for inventory purchased Cash received on accounts receivable in: 2010 Applied to: Current year collections Accounts of the prior year Accounts of two years prior Total Cash sales Cash disbursements for inventory purchased Required: 1. The companys sales revenue for the three-year period amounted to A. P658,200 B. P74,200 C. P625,400 D. P415,300
Page 19 of 22 Pages

12/31/12 P28,200 1,800 800 2,200 P33,000 P18,800 P11,000

P15,400 1,200 P16,600 P11,600 P 5,000

2011 P161,800 15,000 400 P177,200 P26,000 P141,200

2012 P208,800 16,800 2,000 P227,600 P31,200 P173,800

P148,800 13,400 600 P162,800 P17,000 P125,000

2. What is the companys total sales revenue for 2011? A. P206,400 B. P183,600 C. P268,200

D. P180,400

3. The aggregate amount of purchases for the three-year period is A. P131,000 B. P440,000 C. P434,000 D. P446,000 4. What is the companys gross profit ratio in each of the three-year period? A. 33.33% B. 28.35% C. 35.16% D. 31.15% 5. What is the companys gross profit for each of the three-year period? 2010 2011 2012 A. P 60,933 P 68,200 P 80,000 B. 55,533 60,133 79,000 C. 122,400 137,600 178,800 D. 61,200 68,800 89,400 PROBLEM 15 (Intermediate Accounting 17th Edition Stice) On December 31, 2011, MABUHAY COMPANYs statement of financial position showed the following balances related to its securities accounts: Trading securities Available-for-sale securities (AFS) Interest receivable Manila Water bonds Unrealized gain AFS P1,477,500 1,180,000 12,500 100,000

Mabuhays securities portfolio on December 31, 2011, was made up of the following securities: Security Classification Cost 10,000 shares Yemen Corp. stock Trading P750,000 8,000 shares Toronto, Inc. stock Trading 550,000 10% Manila Water bonds (interest payable semiannually on Jan. 1 and July 1) Trading 250,000 10,000 shares Bulacan, Inc. stock Available-for-sale590,000 20,000 shares Jumbo Unlimited, Inc. stock Available-for-sale490,000 During 2012, the following transactions took place: Jan. Mar. 3 1 Received interest on the Manila Water bonds. Purchased 3,000 additional shares of Yemen Corp. stock for P229,500, classified as a trading security. Sold 4,000 shares of the Toronto, Inc. stock for P69 per share. Sold 4,000 shares of the Bulacan, Inc. stock for P62 per share. Received interest on the Manila Water bonds. Purchased 15,000 shares of Pasay Co. stock for P832,500, classified as a trading security. Market P762,500 528,250 186,750 630,000 550,000

Apr. 15 May 4 July 1 Oct. 30

The market values of the stocks and bonds on December 31, 2012, are as follows: Yemen Corp. stock Toronto, Inc. stock Pasay Co. stock Manila Water bonds Bulacan, Inc. stock Jumbo Unlimited, Inc. stock P76.60 P68.50 P55.25 P205,550 P61.00 P27.00 per share per share per share per share per share

Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of 4,000 Toronto, Inc. shares on April 15, 2012 A. P1,000 gain B. P1,000 loss C. P11,875 gain D. P11,875 loss
Page 20 of 22 Pages

2. Net realized gain or loss on sale of 4,000 Bulacan, Inc. shares on May 4, 2012 A. P12,000 gain B. P12,000 loss C. P4,000 gain D. P4,000 loss 3. Carrying amount of Trading Securities as of December 31, 2012 A. P2,337,000 B. P2,287,800 C. P2,304,100 D. P2,297,400 4. Carrying amount of Available-for-Sale Securities as of December 31, 2012 A. P844,000 B. P806,000 C. P906,000 D. P944,000 5. In 2012, what amount of unrealized gain or loss should be shown as component of income and shareholders equity? Income Shareholders Equity A. P28,725 gain P62,000 gain B. P28,725 gain P22,000 loss C. P32,900 loss P122,000 loss D. P39,600 gain P78,000 gain PROBLEM 16 (CPA Coaching Course 2nd Edition Chamberlaine and Meier) You have been asked by a client to review the records of BABOLS COMPANY, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following: 1. BABOLS commenced business on April 1, 2009, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes: Year Ended March 31 2010 2011 2012 Income Before Taxes P 143,200 222,800 207,160

2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to: 2010 2011 2012 P 13,000 None 11,180 Assume the consigned

Sales price was determined by adding 30% to cost. machines are sold the following year.

3. On March 30, 2011, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2011, when cash was received for P12,200. The machines were not included in the inventory at March 31, 2011. (Title passed on March 30, 2011.) 4. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to of 1% of sales. The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were: Year Ended March 31 Sales 2010 P 1,880,000 2011 2,020,000 Warranty Expense For Sales Made In 2010 2011 2012 Total P 1,520 P 1,520 720 P 2,620 3,340
Page 21 of 22 Pages

2012

3,590,000

640

3,240

P 3,820

7,700

5. Bad debts have been recorded on a direct writeoff basis. Experience of similar enterprises indicates that losses will approximate of 1% of sales. Bad debts written off were: Bad Debts Incurred on Sales Made In 2010 2011 2012 P 1,500 1,600 P 1,040 700 3,600 P 3,400 Total P 1,500 2,640 7,700

2010 2011 2012

6. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were: 2010 P 2,800 2011 1,600 2012 2,240 7. A review of the corporate minutes reveals the manager is entitled to a bonus of of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.

Based on the preceding information, determine the following: 1. Correct sales for the year ended March 31, 2010. A. P1,867,000 B. P1,880,000 C. P1,870,000 2. Correct sales for the year ended March 31, 2011. A. P2,035,200 B. P2,032,200 C. P2,042,200 D. P1,873,000 D. P2,045,200

3. Correct sales for the year ended March 31, 2012. A. P3,569,200 B. P3,566,620 C. P3,578,820 D. P3,590,000 4. Additional warranty expense for the year ended March 31, 2012. A. P10,133 B. P24,834 C. P6,886 D. P17,833 5. Additional bad debt expense for the year ended March 31, 2011. A. P2,473 B. P1,217 C. P8,917 D. P6,858 6. Additional commission expense for the year ended March 31, 2012. A. P1,600 B. P2,240 C. P4,640 D. P640 7. Managers bonus expense for the year ended March 31, 2012. A. P902 B. P1,781 C. P2,683 D. P1,149 8. Correct income before income tax for the year ended March 31, 2010. A. P229,841 B. P228,692 C. P125,785 D. P126,417 9. Correct income before income tax for the year ended March 31, 2011. A. P228,692 B. P179,488 C. P125,785 D. P126,417 10. Correct income before income tax for the year ended March 31, 2012. A. P179,488 B. P229,841 C. P180,390 D. P126,417

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