AUDITING PROBLEMS

: Problem 7

You have been engaged to audit the accounts of Garcia Company for the first time in 2020. The

company started operations in 2018. During the audit you discovered the following information:

Year ending December 31,

2018 2019 2020

a. Unadjusted Net Income P520,000 P580,000 P710,000

b. Ending inventory overstated as a

result of over counting items at

year-end.

50,000 40,000

c. Ending inventory understated as a

result of wrong pricing and

computational errors

14,000 8,000

d. Delivery of merchandise to customers

at year-end recorded as sales only

upon collection the following year 25,000 22,000

e. Receipt of merchandise from suppliers

at year-end recorded as purchases

only upon payment the following year 12,000 10,000

f. Major repairs on equipment at the

beginning of each year, charged to

repairs expense but should have been

capitalized. Annual depr. is 10%. 240,000

Additional information:

An equipment with an original cost of P200,000 and an accumulated depreciation of P120,000

as of December 31, 2020 was sold for P100,000 on December 31, 2020. The amount

collected was credited to miscellaneous income.

A 10%, P1,000,000, 5-year bonds payable was issued on January 1, 2020. Interest on the

bonds is payable annually. The yield rate on the bonds on the issuance date was at 8%. The

company recorded the transaction as a debit to cash (based on the 8% yield rate) a credit to

bonds payable at face value with the difference being charged against the interest expense

account. The only other entry made by the client was the payment of the interest at year-end.

Dividends declared by the company at each year end but were recorded only upon payment

the following year were: P90,000, P120,000 and P150,000 for 2018, 2019 and 2020,

respectively.

Requirements: Determine the adjusted balances of:

32. 2018 Net income

a. 470,000 c. 445,000

b. 495,000 d. 595,000

33. 2019 Net income

a. 869,000 c. 820,000

b. 845,000 d. 855,000

34. 2020 Net income

a. 473,757 c. 453,612

b. 606,243 d. 460,146

35. Retroactive adjustment to the retained earnings beginning 2020?

a. 240,000 credit c. 24,000 credit

b. 120,000 credit d. 120,000 debit

36. What is the correct carrying value of the bonds payable as of December 31, 2020?

a. 1,079,854 c. 1,066,243

b. 1,051,542 d. 1,000,000