DOMALAON, LORIE JAE E.

May 21, 2017

ACT 123 Completing the Audit
Completing the Audit
Easy

Problem 1
On January 4, 2015, GUYANA, lNC. purchased computer hardware
for P600,000. On the date of acquisition, Guyanas management
estimated that the computers would have an estimated useful life of
5 Years and would have a residual value of P60,000. The company used the double-declining-
balance method to depreciate the computer hardware.

In January 2016, Guyana's management realized that technological

advancements had made the computers virtually obsolete and that
they would have to be replaced. Management decided to change the
estimated useful life of the computer hardware to 2 years.

How much depreciation on computer hardware should be recorded in 2016?

SOLUTION:
Cost P600,000
Accum Depre (240,000)
Salvage value (60,000)
Depreciation for 2016 P300,000

Problem 2
The December 31. 2016, income statement of Case Company contained the following
condensed information:

Fees revenue P 2,520,000

Operating expenses [excluding depreciation) P1,872,000
Depreciation expense 180,000
Loss on sale of equipment 78,000 2,130,000
Income before income taxes 390,000
Income tax expense (120,000)
Net income P 270,000

Ghana Company's comparative statements of financial position at

December 31, 2016 and 2015, contained the following data.
2016 2015
Accounts Receivable P111,000 P162,300
Accounts Payable* 123,000 93,000
Income tax payable 12,000 25,500

*pertains to operating expenses

How much was received from customers?

SOLUTION:
Fees revenue P2,520,000
Decrease in AR 51,000
Cash receipts from customers P2,571,000
DOMALAON, LORIE JAE E. May 21, 2017
ACT 123 Completing the Audit
Problem 3
Sipag Company decided on January 2, 2016, to review its
Accounting practices. This is due to changing economic conditions
and to make its financial statements more comparable to those of
other companies in its industry.

The following will be effective as of January 1, 2016:

1. Sipag decided to change its allowance for bad debts from 2% to 4% of its outstanding
receivables balance. Sipag receivable balance at December 31, 2016 was P690,000. Allowance
for bad debts had a debit balance of P2,000 before adjustment.

2. Sipag decided to use the straight-line method of depreciation on its equipment instead of the
sum-of-the-years-digits method. It was also decided that this asset has 10 more years of useful
life as of January 2, 2016. The equipment was purchased on January 1, 2006, at a cost of
P1,100,000. 0n the acquisition date, it was estimated that the equipment would have-a 15-year
useful life with no residual value.
How much is the increase/decrease in allowance?

SOLUTION:
Required allowance (P690,000 X 4%) P27,600
Add: Debit balance 2,000
Adjustments-increase in allowance 29,600

Problem 4
In the past, PERU COMPANY has depreciated its computer hardware
using the straight-line method. The computer hardware has a 10%
salvage value and an estimated useful life of 5 years. As a result of
the rapid advancement in information technology, management of Peru has determined that it
receives most of the benefits from its
computer facilities in the first few years of ownership. Hence, as of January 1, 2016. Peru
proposes changing to the sum-of-the-years
digits method for depreciating its computer hardware. The following computer purchases were
made by Peru at the beginning of each year.
2013 P90,000
2014- 50,000
2015 60,000
How much depreciation expense was recorded by Peru in 2013?

SOLUTION:
90,000 X 90% /5 = P16,200

Problem 5

The following selected information pertains to ICELALA COMPANY:

Cash balance, January 1, 2016 P 65,000

Accounts receivable, January 1,2016 5.000
Collections from customers in 2016. 1,050,000
Capital account balance, January '1, 2016 190,000
Total assets, January 1, 2016 375,000
DOMALAON, LORIE JAE E. May 21, 2017
ACT 123 Completing the Audit
Additional cash investment, July 1, 2016 25,000
Total assets, December 3 1, 2016 505,000
Cash balance. December 31, 2016 100,000
Accounts receivable, December 3 1, 2016 180,000
Withdrawals made during 2016 55,000
Total liabilities. December 31, 2016 205,000
How much net income should Icelala report in its income statement for the year ended
December 31,2016?

SOLUTION:
Net Assets, December 31, 2016 (P505,000 - P205,000) P3oo,ooo
Add: Withdrawals made lm 55,000
Netassets, January 1 2016 190,000
Additional cash Investment 25,000 215,000
Net Income P140,000

Problem 6
The following is Mamaru Companys pre-audit income
statement for the year ended December 31. 2016:

Sales P2,964,000
Cost of goods sold 1,926,000
Gross income P1.038.000
Operating expenses:
Rent expense 250,000
Salaries expense 345,000
Utilities expense 219,000
Advertising expense 30,000
Warranty expense 14,000
other expenses 35,000 893,500
Net income 144,500
You obtained the following information from the companys
accounting records:

1. Some of Mamarus customers pay for their orders in advance.

At December 31, 2016, orders paid for in advance of shipment
totaled P15,000. These have been included in the sales gure.

2. Mamaru's products are sold with a 30-day money-back

guarantee. Customers seldom returned the products during the
year. Mamaru has not included in the sales gure and in cost
of goods sold those products sold within the last 30 days of the
current year. The revenue is P98,000 and the cost of the
product is P63,700.

3. On July 1, 2016, Mamaru prepaid its office space rent for 18

Months. The amount paid, P216,000, was recorded as rent expense.
DOMALAON, LORIE JAE E. May 21, 2017
ACT 123 Completing the Audit
4. The amount of P120,000 was paid on July 1, 2016, for general
advertising to be completed prior to December 31, 2016. Mamaru's management believes that
the advertising will benet a 2-year period and, therefore, has decided to charge the costs to the
income statement at the rate of P5,000 per month.

5. In prior years, Macedonia has estimated warranty expense using a percentage of sales.
Future warranty costs relating to 2016 sales are estimated to amount to 2% of sales.
However, during 2016, Mamaru elected to charge costs to warranty expense as costs
were incurred. Macedonia spent P14,000 during 2016 to repair and replace defective
products sold in current and prior years.
The correct amount of Mamaru's sales revenue for 2016 is?

SOLUTION:
P2,964,000 15,000 + 98,000 = P3,047,000

MODERATE

Problem 7
The following are changes in all the account balances of Kitty Company during the year ended
December 31 2016 except for retained earnings.
Increase
(Decrease)

cash 395.000
Accounts receivable (net) 948,ooo
inventory (5oo,ooo)
Investments (235,000)
Accounts payable (255,000)
Bonds payable 410,000
Ordinary share capital 300,000
Share premium 20,000
There were no entries in the retained earnings account except for
net income and a dividend declaration of P295.000 which was paid
in the current year.
What is Kitty's net increase/decrease in net assets. P453,000

SOLUTION:
Effect on Net Assets
Increase Decrease
Increase in cash P 395,000
Increase in accounts receivable, net 948,000
Decrease in inventory P500,000
Decrease in Investments 235,000
Decrease in accounts Payable 255,000
Increase in bonds payable 410,000
Total 1,598,000 - 1,145,000
= P453,000

Problem 8
The audited income statement of Aruy Co. shows a net income
DOMALAON, LORIE JAE E. May 21, 2017
ACT 123 Completing the Audit
of P175,000 for the year ended December 31, 2016. Adjustments
were made for the following errors:

1. December 31. 2015, inventory overstated by P22,500.

2. December 31, 2016, inventory understated by P37,500.
3. A Pl0,000 customer's deposit received in December 2016, was
credited to sales in 2016. The goods were actually shipped in January 2017.
What is the unadjusted net income of Aruy Co. for the year ended December 31,2016?

SOLUTION:
Unadjusted net income P125,000
December 31,2015, inventory-overstated 22,500
December 31, 2016, inventory-understated 37,500
Customers deposit recognized as sales revenue (10,000)
Adjusted net Income P175,000

HARD

Problem 9
Hindrance, Inc. has been using FIFO method of inventory costing since it began operations in
2015. In 2016, the company decided to change to the weighted average method. The following
are the December 31 inventory balances under each method.
FIFO Weighted Average
2015 P450,000 P560,000
2016 895,000 999,000
what is the credited amount to be recorded to Retained Earnings as of 2015?

SOLUTION:
P560,000- 450,000 = P110,000

Problem 10
On January 1,2013, Heaven Inc. purchased an equipment for P650,000. The machine had an
estimated useful life of 8 years( with no residual value) at the acquisition date. On January
1,2016, Heaven determined, as a result of additional information, that the equipment had an
estimated useful life of 10 years from the acquisition date with no residual value.
What is the amount of depreciation expense on the equipment for the year ended December
31,2016?

SOLUTION:
Cost of equipment P650,000
Accum Depre (243,750)
Book Value, Jan. 1,2016 406,250
Divide (10-3) 7 years
Revised annual depreciation P58,036
DOMALAON, LORIE JAE E. May 21, 2017
ACT 123 Completing the Audit