DMC COLLEGE FOUNDATION

BACHELOR OF SCIENCE IN ACCOUNTANCY

AUDITING PROBLEMS
SY: 2016-2017

NAME:____________________________________________________________ DATE:__________________________

MULTIPLE CHOICE (1 point each)

INSTRUCTION: Write the letter of your best choice. Strictly no erasures. Use ballpen only.

PROBLEM 1:
The following schedule of liabilities were provided to you by the accountant of Detox Inc. in line with your audit of its various
liabilities as of and for the period ended December 31, 2015:
Current Liabilities
Accounts payable (note a) P534,000
Premiums payable (note b) 242,000 P1,216,000
Noncurrent Liabilities
Lease liability (note c) 3,000,000
Total Liabilities P4,216,000
Audit notes:
a. The purchases journal included the following transactions several days before and after December 31, 2015 (Hint: Assume
invoice date is supplier’s shipment date)

December Purchase Journal:

Purchase Receiving
Amount Terms
Invoice Date Report Number/Date
December 26, 2015 1012/ Dec. 30, 2015 P50,000 FOB Destination
December 28, 2015 1014/ Jan. 2, 2016 40,000 FOB Shipping Point
December 30, 2015 1015/ Jan. 2, 2016 35,000 FOB Destination
December 30, 2015 1017/ Jan. 4, 2016 25,000 FOB Shipping Point

January Purchase Journal:

Purchase Receiving
Amount Terms
Invoice Date Report Number/Date
December 29, 2015 1013/ Dec. 30, 2015 P65,000 FOB Destination
December 30, 2015 1016/ Jan. 3, 2016 40,000 FOB Shipping Point
January 2, 2016 1018/ Jan. 5, 2016 30,000 FOB Shipping Point

b. The premiums payable balance was the accrued amount in December 31, 2014 for a promotional program the company has
started in 2014. For every 5 product labels the customer surrenders plus P50, the customer receives a specially designed wall
clock which the company purchases at a cost P160/unit. Details about the said promotional program in 2014 and 2015 are as
follows:
2014 2015
Sales in units 50,000 60,000
Premiums purchased in units 3,000 6,000
Inventory of premiums at the
1,200 2,100
end of each year

The company estimates that from the labels issued with products sold, 40% shall be presented for the said promotional plan
redemption.

c. The lease liability is for a five-year lease agreement for an equipment of Jynx Corp. on January 1, 2015. The equipment
which had a useful life of 10 years had a fair market value on January 1, 2015 at P2,400,000. There is no provision to transfer
ownership to Detox Inc. nor is there an agreement for a bargain purchase option at the end of the lease term. The lease
agreement requires Detox Inc. to pay P600,000 annually starting December 31, 2015. The implicit lease rate known to both
parties was at 8% while the incremental borrowing rate was at 10%. The lease was recorded by the company as a debit to
equipment and a credit to lease liability at P3,000,000 (the total payments to be made for the lease). The company is yet to
record the first lease payment made on December 31, 2015. Depreciation is yet to be provided on the capitalized leased asset.

d. The BOD approved a 10% bonus to its employees based on net income after 30% income tax and after bonus. The company
registered a net income of P2,236,347 before adjustments.

Requirements:
1. What is the correct accounts payable as of December 31, 2015?
a. P604,000 c. P594,000
b. 564,000 d. 539,000
 2. What is the correct premiums payable as of December 31, 2015?
a. P143,000 c. P304,000
b. 209,000 d. 171,000
3. What is the correct carrying value of the lease liability as of December 31, 2015?
a. P1,546,258 c. P1,987,276
b. 2,395,626 d. 1,901,919
4. What is the correct depreciation expense on the leased equipment to be recognized in 2015?
a. P454,894 c. P347,125
b. 239,562 d. 479,125
5. What is the adjusted net income before bonus and before income taxes?
a. P1,528,572 c. P1,462,572
b. 1,495,572 d. 1,587,300
6. What is the correct accrued liability for bonus as of December 31?
a. P100,000 c. P95,682
b. 111,111 d. 97,854
PROBLEM II:
YZ Corporation reported the following balances on the liability portion of its Statement of Financial Position as of December 31,
2014:
Noncurrent Liabilities
Note Payable, Bank 10% P4,500,000
Bonds Payable, 12% 3,231,652
Finance Lease Liability 2,200,000
Additional information:
a. The note payable to the bank was originated on September 1, 2013 and is due annually at the rate of P1.5M every August 31
starting 2014. Interest which is based on the outstanding balance of the loan is also payable every August 31. Interest is yet to
be accrued on the note by the balance sheet date. Payments on the note and interest during the current year had been recorded
appropriately.
b. The 5 year, 12% bonds payable (with a face value of P3M) were issued on January 1, 2014 at the prevailing market rate of
interest which is 10%. Interest on the bonds are payable semi-annually every June 30 and December 31. The entry made by
the client to record the issuance was to debit cash and credit bonds payable for the total cash consideration received.
c. The Lease Liability is in relation to XYZ’s purchase of a machine on December 31, 2013. The machine was delivered the
same day to the company. The lease stipulates that annual payments will be made for 5 years starting December 31, 2013. At
the end of the 5-year term, the company may purchase the machine. The estimated life of the machine is 12 years. Your
further investigation revealed the following terms of the transaction:
Annual lease payments P550,000
Purchase option price 250,000
Estimated fair value after 5 years 750,000
Implicit rate 10%
Borrowing rate 12%

Entry made:
Equipment P2,750,000
Cash P550,000
Finance Lease Liability 2,220,000
Payment on December 31, 2014 is yet to be recorded.

Requirements:
7. What is the amount to be capitalized as an asset for the lease of the machinery?
a. P2,293,450 c. P2,448,656
b. 2,240,170 d. 2,759,130
8. What is the carrying value of the leased asset as of December 31, 2014?
a. P1,958,925 c. P2,448,656
b. 2,244,601 d. 2,040,547
9. What is the correct total noncurrent liability to be presented in the 2014 Statement of Financial Position?
a. P7,336,271 c. P5,842,069
b. 6,193,897 d. 6,049,341
10. What is the correct total current portion of long-term debts to be presented in the 2014 Statement in Financial Position?
a. P,500,000 c. P1,860,134
b. 1,896,148 d. 2,005,457
11. What is the total interest expense to be reported in the 2014 income statement?
a. P1,026,097 c. P1,062,111
b. 1,009,211 d. 662,111