LA CONSOLACION COLLEGE - MANILA

Auditing Problem
Final Quiz # 1

INSTRUCTION: Select the correct answer for each of the following questions. Mark only
one answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 1 only.
SITUATIONAL
Situation 1
1. Prepare the audit adjustment required in the problem.
2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit
and Loss (WPL).
3. Compute the final balances of each account on your WBS and WPL.
4. Some peso amounts in the problem are rounded off to the nearest thousands.
5. Assume no other issues, except those discussed in the problem.
PROBLEM: MAH LUH APPLIANCES CORPORATION
You are assigned to examine the books of accounts of MAH LUH APPLIANCES
CORPORATION for the year 2010. This is an initial audit since the company was
established on January 2, 2010. Its main purpose is to sell appliances and secondarily to
repair and service used appliances. Its main office and ship is located in Makati City.
Since this is the first audit, you asked for copies of documents for your permanent file and
such as articles of incorporation, by laws, contracts, minutes of the meeting and list of board
of directors and principal officers.
You were then given a copy of the unadjusted balance sheet and profit and loss statement
dated December 31, 2010. You as auditor noted the following information relative to the
accounts of Mah Luh Appliances.
The company maintains accounts with Bank of Commerce and you were given a copy of the
bank reconciliation statement, which showed the following:
Balance per bank
Add: Deposit in transit
Bank debit memos
Bank error
Less: Outstanding checks
Bank credit memo
Balance per books

P 657,340
136,250
231,260
1,800
(276,380)
(1,950)
P 748,320

Your further analysis reflected the following:

1. 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, 2010. No entry was made
on the returned check. The customer replaced the check on January 15, 2011.
2. A check for P5,720 was cleared by the bank as P7,520. The bank made the correction
on January 20 2011.
3. A check for P3,500 representing payment of an employee advance was received on
December 27, 2010 but was not recorded until January 2, 2011.
4. Postdated checks totaling P67,300 were included in the deposit in transit. These
represent collection of current accounts receivable from customers. The checks were
actually deposited on January 8, 2011.
Auditing Problems

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5. Various bank debit memos for drafts purchased for payment of importation of appliances
totaling P230,000 were not yet recorded. These purchases were previously set up as
accounts payable. Said appliances arrived in December 2010.
6. Interest earned on the bank balance for the 4th quarter of 2010, amounting to P1,950
was not recorded.
7. Bank services charges for overdraft and MC charges totaling P1,260 were not recorded.
Your count of petty cash fund on January 5, 2011 showed that the company has P30,000
fund maintained on imprest basis. Various expenses from the fund dated December 2010
totaled P16,250 while those dated January 2011 amounted to P5,903.
Another
disbursement from the fund dated December 2010 was a cash advance to employee
amounting to P3,500. A replenishment of the petty cash fund was made on January 8, 2011.
The company uses the allowance method of accounting for uncollectible trade receivables.
The allowance is set at 6% of past due accounts over 120 days and 3% of current accounts
as of the end of the period. As of year-end, accounts receivable over 120 days totaled
P289,200.
Advances from the customers amounting to P98,360 were credit to sales on December 15,
2010. The goods were delivered to customers in January 2011.
A review of customers ledgers disclosed that a collection of P28,075 on November 10, 2010
from Roland Sales was credit to the account of Rosales Trading.
The company uses the physical inventory method of accounting for merchandise.
inventory list was submitted to you by the accountant on January 25, 2011.

An

On the basis of the list, you and your staff conducted a test check of the items to determine
the accuracy of the inventory. You noted the following on January 25, 2011.
1. A sale on account of a TV set with a selling price of 38,500 has not yet been recorded
but the corresponding cost already been deducted from the inventory.
2. An appliances costing P20,780 was listed twice in the schedule.
3. The unit price of 25 units of refrigerators indicated in the list was overstated. Per
suppliers invoice, the price is P10,250, while the list reflected P11,250.
4. A sales invoice for P19,180 was prepared on December 29, 2010 for one unit washing
machine ordered in December by the customer, but shipped only on January 5, 2011 on
FOB shipping point. Said invoice was not recorded as of year-end.
Your physical count of stock certificates kept by the securities custodian tally with the figures
per books which reflected the following details:
Name of Stock

Number of
Shares

ABS-CBN
DMCI
Kepphil
Piltel
Urban Bank
Total

500
3,000
5,500
2,000
200

Market Value
Per Share

Cost
P 20,750
29,120
15,400
49,680
57,800
P 172,759

P 43.50
10.25
1.30
30.00
245.00

Your review of corporate actions that the stock dividends of DMCI for 200 shares and Piltel
of 300 shares have not been recorded as of year-end.
All of the above securities are actively traded in the stock exchange. The company records
the securities at lower of cost or market.
Accrued interest on the following loans granted to Bin Hua Trading, an affiliate, was not
taken up at year-end.
Value Dated
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Due Date

Rate

Principal
Examination

October 31, 2010

November 20, 2010

April 30, 2011

March 20, 2011

15%
16%

P 200,000
350,000

Mah Luh bought office and store supplies on the following dates and booked them as
expenses:
March 3, 2010
June 15, 2010
Sept. 7, 2010
Total

P 28,300
17,150
33,850
P 79,300

As at year-end, unused supplies amounted to P24,190.

The company entered into a contract with an advertising agency to provide and develop
promotional ads for its products. On May 31, 2010, a total of P180,000 was paid to the
agency and this was booked as expense. The ad will run for a period of one-year up to May
31, 2011.
The company insured the building for a P5.0 million coverage effective February 1, 2010.
The annual premium paid amounted to P33,250. Likewise, the merchandise inventory was
also covered by a P7.0 million policy which is effective April 1, 2010. Annual premium paid
on April 15, 2010 amounted to 72,500. The total premium paid for the building and inventory
was booked as prepaid insurance.
The company renovated the building at a cost of P550,000 which was booked as repair
expenses on June 30, 2010. Based on your discussions with the Controller, this
improvement is to be amortized over 5 years.
To generate additional income, Mah Luh Appliances leased a portion of the 2 nd floor for
P360,000 for one year ending July 31, 2011. The amount received was reported as rental
income for 2010.
On May 31, 2010, the company bought several units of computers totaling P180,000 to be
depreciated on the straight line method over their estimated useful life of 4 years. In the
addition to the cost, it paid additional charges which were taken up as a repair expenses.
Delivery charges
Installation cost
Testing cost

P 5,000
8,750
_ ,250
P 20,000

No depreciation for this equipment was recorded at year-end.

On February 1, 2010, the company purchased a parcel of land with an old 2-storey building
for P6.0 million to house its office, store and warehouse. The building has an estimated
useful life of 30 years. The assessed value of the property for real estate tax purposes
indicates the amount P2.8 million for the land and P1.2 million for the building. No
depreciation was booked as of year-end.
The company incurred organization cost of P120,000 reflected under Other Assets. This
includes incorporation expenses, legal fees, and other administrative costs. This is to be
amortized over a period of 5 years. As of year-end, amortization has not yet been recorded.
Accounts payable-trade includes cash advances from the President totaling P300,000 which
was used to augment working capital requirement. It also includes some accrued expenses
set up by the accountant at year-end amounting to P35,700.
You reviewed subsequent payments made in January 2011 which include the following:
Electric bills for December 2010
Sales commissions from October to Dec.2010
Telephone bills for December 2010
Auditing Problems

P 38,750
26,140
5,290
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Water for November and December 2010

Minor repair of a vehicle done in Dec. 2010

4,800
3,250
P 78,230

The company obtained a short-term loan of P750,000 from the bank to augment cash
requirements. This was valued on November 6, 2010 payable after 120 days. Interest rate
is 16% per annum. No accrual was recorded at year-end.
To generate additional funds for working capital, Mah Luh issued P2,200,000 of 14% 5-year
bonds at 92 on July 1, 2010. This discount was charged to interest expense. Interest
expense on the bonds is payable semi-annually on January 1, and July 1, of each year. No
accrual was made as of December 31, 2010.
As an incentive to the employee to exert more effort in their sales campaign, Mah Luh came
out with a policy to distribute an amount equivalent to 1% of gross sales as annual bonus.
This will be given to all regular employees based on their individual performance to be paid
to them after the release of the final audited statements.

MAH LUH APPLIANCES CORPORATION

Working Balances Sheet
December 31, 2010
Per Books
Current Assets
Petty Cash Fund
Cash
Marketable Securities
Allowance for Decline in Marketable Securities
Accounts Receivable
Allowance for Doubtful Accounts
Notes Receivable
Interest Receivable
Inventories
Prepayments
Deferred Income Tax
Total
Property, Plant and Equipment
Land and Building
Building Improvement
Delivery Equipment
Furniture, Fixtures, & Equipment
Total
Accumulated Depreciation
Net Book Value
Other Assets
Total
Current Liabilities
Accounts Payable
Accrued Expenses
Notes Payable
Interest Payable
Income Tax Payable
Unearned Rental Income
Other Liabilities
Total
Long-Term Liabilities
Bonds Payable

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Audit
Adjustment

Final
Balance

30,000.00
748,320.00
172,750.00
680,000.00
550,000.00
1,530,000.00
105,750.00
3,816,820.00

6,000,000.00
575,000.00
221,000.00
6,796,000.00
(132,600.00)
6,663,400.00
120,000.00
P10,600,220.00

P 2,088,220.00
36,000.00
750,000.00
109,900.00
212,000.00
3,196,120.00

2,200,000.00

Examination

Discounts on bonds Payable

Total

2,200,000.00

Stockholders' Equity
Paid-up Capital 50,000 shares at P100 par value
5,000,000.00
Net Income
204,100.00
Total
5,204,100.00
Total
P10,600,220.00
MAH LUH APPLIANCES CORPORATION
Working Profit and Loss
Year Ended December 31, 2010
Per Books
Sales
Cost of Good Sold
Gross Profit
Operating Expenses
Income from Operations
Other Income
Other Charges
Income Before Taxes
Provision for Income Tax
NET INCOME

1. Petty Cash
A. 13,750
B. 30,000
2. Cash
A. 432,710
B. 455,210
3. Net Realizable Value of Securities
A. 172,750
B. 179,700
4. Accounts Receivable
A. 808,300
B. 680,000
5. Allowance for Doubtful Accounts
A. 32,250
B. 31,770
6. Notes and Interest Receivable
A. 550,000
B. 561,461
7. Inventories
A. 1,505,000
B. 1,509,220
8. Prepaid Insurance
A. 84,855
B. 51,375
9. Prepaid Advertising
A. 105,000
B. 180,000
10. Unused Office Supplies
A. 79,300
B. 55,110
11. Deferred Income Tax
A. 11,525
B. 85,025
12. Cost of Land
A. 6,000,000
B. 1,800,000
13. Net Book Value of Building
A. 1,800,000
B. 2,240,000
14. Total Property, Plant, & Equipment
A. 7,366,000
B. 7,346,000
15. Accumulated Depreciation
A. 271,767
B. 216,767
16. Other Assets
A. 92,500
B. 99,500
17. Accounts Payable
A. 2,088,220
B. 1,858,220
18. Notes and Related Interest Payable
Auditing Problems

Audit
Adjustment

Final
Balance

P 4,647,000.00
(3,280,000.00)
1,367,000.00
(1,238,000.00)
129,000.00
395,000.00
(210,000.00)
314,000.00
(109,900.00)
P 204,100.00

C. 4,347

D. 10,250

C. 500,010

D. 748,320

C. 196,750

D. 155,700

C. 785,800

D. 741,000

C. 32,292

D. 556,387

C. 555,083

D. 556,378

C. 1,484,220

D. 1,530,000

C. 105,750

D. 20,895

C. 60,000

D. 75,000

C. 24,190

D. 37,960

C. 72,820

D. 73,500

C. 4,200,000

D. 2,800,000

C. 1,745,000

D. 1,200,000

C. 6,816,000

D. 6,796,000

C. 242,600

D. 132,600

C. 120,000

D. 96,000

C. 1,752,520

D. 1,522,520
Page 5 of 9

A. 922,333
B. 768,333
19. Total Interest Payable
A. 18,333
B. 172,333
20. Accrued Expenses
A. 160,101
B. 149,930
21. Income Tax Payable
A. 109,900
B. 97,088
22. Unearned Rental Income
A. 360,000
B. 150,000
23. Other Liabilities
A. 512,000
B. 310,360
24. Carrying Value of Bonds Payable
A. 2,182,400
B. 2,200,000
25. Sales
A. 4,647,000
B. 4,548,640
26. Cost of Good Sold
A. 3,325,780
B. 3,305,000
27. Operating Expenses
A. 1,238,000
B. 1,065,108
28. Income from Operations
A. 129,000
B. 315,392
29. Other Income
A. 408,411
B. 395,000
30. Other Charges
A. 206,860
B. 401,193
31. Income Before Taxes
A. 244,470
B. 243,315
32. Provision for Income Tax
A. 85,565
B. 84,880
33. Net Income
A. 74,565
B. 147,382
34. Taxable Income
A. 454,470
B. 314,000
35. Earnings Per Share
A. 2.95
B. 3.19

C. 790,000

D. 750,000

C. 154,000

D. 194,000

C. 195,000

D. 36,000

C. 169,905

D. 159,065

C. 210,000

D. 180,000

C. 610,360

D. 212,000

C. 4,685,500

D. 4,587,140

C. 4,685,500

D. 4,587,140

C. 3,280,000

D. 3,300,780

C. 1,540,108

D. 990,108

C. 182,752

D. 271252

C. 186,950

D. 198,411

C. 210,000

D. 225,193

C. 420,470

D. 314,000

C. 109,900

D. 97,088

C. 189,500

D. 204,100

C. 277,395

D. 485,445

C. 1.49

D. 4.08

* * * END * * *

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Examination