DMC College Foundation

Bachelor of Science in Accountancy

Auditing

Problem I (1-5)

Roy Ltd has determined its accounting profit before tax for the year ended 30 June
2015 to be ₱256,700. Included in this profit are the items of income and expense shown
below.
Royalty revenue (exempt from taxation) ₱8,000
Gain on sale of building 5,000
Entertainment expense (nondeductible) 1,700
Depreciation expense – buildings 7,600
Depreciation expense – plant 22,500
Doubtful debts expense 4,100
Annual leave expense 46,000
Insurance expense 4,200
Development expense 15,000
The company’s draft balance sheet at 30 June 2015 showed the following assets and
liabilities:
Assets
Cash ₱2,500
Accounts receivable 21,500
Allow. for doubtful debts (4,100) 17,400
Inventory 31,600
Prepaid insurance 4,500
Land 75,000
Buildings 170,000
Acc. depreciation (59,500) 110,500
Plant 150,000
Acc. depreciation (67,500) 82,500
Deferred tax asset, (opening
balance) 9,600
333,600
Liabilities
Accounts payable 25,000
Provision for annual leave 10,000
Deferred tax liability, (opening
balance) 27,270
Loan 140,000
202,270
Additional information:
a. Quarterly income tax installments paid during the year were:
28 October 2014 ₱18,000
28 January 2015 17,500
28 April 2015 18,000
b. The tax depreciation rate for plant (which costs ₱150,000 three years ago) is
20%. Depreciation on buildings is not deductible for taxation purposes.
c. The building sold during the year had cost ₱100,000 when acquired six years ago.
The company depreciates buildings at 5%, straight-line.
d. During the year, the following cash amounts were paid:
Annual leave ₱52,000
Insurance 3,700
e. Bad debts of ₱3,500 were written off against the allowance for doubtful debts
during the year.
f. The ₱15,000 spent (and expensed) on development during the year is not
deductible for tax purposes until 30 June 2016.
g. Roy Ltd has tax losses amounting to ₱12,500 carried forward from prior years.
h. The company tax rate is 35%.
REQUIRED:
Compute for the following as of and for the fiscal period ended 30 June 2015:
1. Current tax expense
a. ₱89,460 b. ₱81,585 c. ₱77,210 d. ₱85,085
2. Current tax payable
a. ₱31,585 b. ₱23,710 c. ₱28,025 d. ₱35,960
3. Deferred tax liability
 a. ₱9,450 b. ₱7,875 c. ₱48,125 d. ₱ 1,575
4. Deferred tax asset
a. ₱14,560 b. ₱11,760 c. ₱10,185 d. ₱ 9,310
5. Deferred tax expense (benefit)
a. (₱22,780) b. (₱19,980) c. ₱20,270 d. (₱18,405)

Select the best answer for each of the following:

6. In auditing accounts payable, an auditor’s procedure most likely will focus primarily
on management’s assertion of
a. existence. c. completeness.
b. presentation and disclosure. d. valuation.
7. Which of the following procedures is least likely to be performed before the balance
sheet date?
a. observation of inventory
b. testing of internal control over cash
c. search for unrecorded liabilities
d. confirmation of receivables
8. Which of the following audit procedures is least likely to detect an unrecorded
liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meeting of the board of directors.
9. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?
a. unpaid bills
b. bills of lading
c. shipping records
d. unmatched sales invoices
10. An auditor performs a test to determine whether all merchandise for which the client
was billed was received. The population for this test consists of all
a. merchandise received.
b. vendor’s invoices.
c. canceled checks.
d. receiving reports.
11. The auditor is most likely to verify accrued commissions payable in conjunction with
the
a. sales cutoff test.
b. verification of contingent liabilities.
c. review of post balance sheet date disbursements.
d. examination of trade accounts payable.
12. An auditor’s program to audit long term debt should include steps that require
a. examining bond trust indentures.
b. inspecting the accounts payable subsidiary ledger.
c. investigating credits to the bond interest income account.
d. verifying the existence of the bondholders.
13. In an audit of bonds payable, an auditor expects the trust indenture to include the
a. auditee’s debt-to-equity ratio at the time of issuance.
b. effective yield of the bonds issued.
c. subscription list.
d. description of the collateral.
14. In auditing long-term bonds payable an auditor most likely will
a. perform analytical procedures on the bond premium and discount accounts.
b. examine documentation of assets purchased with bond proceeds or liens.
c. compare interest with the bond payable amount for reasonableness.
d. confirm the existence of individual bondholders at year-end.
15. An auditor’s purpose in reviewing the renewal of a note payable shortly after the
balance sheet date most likely is to obtain evidence concerning management’s assertions
about
a. existence or occurrence.
b. presentation and disclosure.
c. valuation or allocation.
d. completeness.
Problem II

Universal Company uses leases as a method of selling its products. On January 1,

2017, Universal Company leased equipment to National Company with the following
information:
Annual rental payable at the end of each lease year ₱700,000
Cost of equipment to Universal 2,000,000
Est. residual value 400,000
Initial direct costs incurred by Universal 100,000
Useful life of the equipment and lease term 8 years
Implicit interest rate in the lease 12%
PV of an OA of 1 for 8 periods at 12% 4.968
PV of 1 for 8 periods at 12% 0.404

At the end of the lease, the equipment will revert to the lessor.

REQUIRED:
PART A
Compute for the following assuming the residual value is guaranteed:
16. Sales
a. ₱3,639,200 b. ₱3,909,500 c. ₱3,200,679 d. ₱2,990,500
17. Cost of sales
a. ₱2,100,000 b. ₱2,500,000 c. ₱2,435,200 d. ₱2,000,000
18. Interest income in 2017
a. ₱436,704 b. ₱300,500 c. ₱420,500 d. ₱100,560
19. Carrying amount of lease receivable as of December 31, 2017
a. ₱3,375,904 b. ₱3,500,000 c. 3,895,401 d. ₱3,704,567

PART B
Compute for the following assuming the residual value is unguaranteed:
20. Sales
a. ₱3,477,600 b. ₱3,505,789 c. ₱3,670,500 d. ₱3,290,000
21. Cost of Sales
a. ₱1,938,400 b. ₱1,000,000 c. ₱2,190,000 d. ₱1,699,400
22. Interest income in 2017
a. ₱436,704 b. ₱300,500 c. ₱420,500 d. ₱100,560
23. Carrying amount of lease receivable as of December 31, 2017
a. ₱3,375,904 b. ₱3,500,000 c. 3,895,401 d. ₱3,704,567