5.AUDITING Problem.docx

Problem no.1 In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following: Trade creditors, credit balances P 1,363,000 Trade creditors, debit balances 63,000 Net P 1,300,000 Estimated warranty on products sold 100,000 Customer’s deposits 9,000 Due to officers and shareholders for advances 50,000 Goods received on consignment at selling price (offsetting debit made to Purchases) 41,000 P 1,500,000 A further analysis of the “Trade Creditors” debit balances indicates: Date

Items Amount Miscellaneous debit balances prior to 2007. No information available due to loss of records in a fire. P 3,000

03/03/07

Manila Co. –Merchandise returned for credit, but the company is now out of business

06/10/09

8,000

07/10/10

Cebu Corp. – Merchandise returned but Cebu says “never received” 7,000 Jolo Distributors – Allowance granted on defective merchandise after the invoice was paid 5,000

10/10/10

Bulacan Co – Overpayment of invoice

12/05/10

Advance to Zambales Co. This company agrees to supply certain articles on a cost –plus basis

12/05/10

Goods returned for credit and adjustments on

12,000 24,000

price after the invoices were paid; credit memos from supplier not yet received 4,000 63,000 Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received. In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011. The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010. These goods are included in your adjusted inventory. 1. The Accounts payable – Trade balance at December 31, 2010 should be A. P 1,471,000 C. P 1,214,000

B. P 1,614,000 D. P 1,477,000

2. The net adjustment to Purchases should include a A. Net debit of P 51,000 B. Net credit of P 41,000 C. Net debit of P 10,000 D. Net debit of P 73,000 3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. P 18,000 C. P 35,000

B. P 23,000 D. P 39,000

4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. Miscellaneous losses if P 23,000 B. Advances to suppliers of P 24,000 C. Suppliers to debit balances of P 18,000 D. Purchases of P 21,000 5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because

A. There is likely to be other reliable external evidence to support the balances B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment C. This is a duplication of cutoff test D. Accounts payable at the end of reporting period may not be paid before the audit is completed. Problem 2 You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds Payable

P 650,000 190,000 800,000 15,000 ? 600,000 1,500,000 2,000,000

The following additional information pertains to these liabilities: a. All trade notes payable are due within six months of the balance sheet date. b. Bank notes payable include two separate notes payable Allied Bank. (1)A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months. (2)A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on December 31, 2010 c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010, Mavericks is three months behind in paying its required interest payment. d. The 12% mortgage note was issued may 1, 2001, with a term of 20 years. The current principal amount due is P 1,500,000. Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011. The payment includes interest of P 180,000. e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. Based on the above and the result of your audit, answer the following: 1. Interest payable as of December 31, 2010 is a. P155,000 b. 143,000 c. 203,000 d. 215,000 2. The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is a. P 300,000 b. 500,000 c.800,000 d. 0

3. Total current liabilities as of December 31, 2010 is a. P 3,950,000 b. 4,138,000 c. 3,938,000 4. Total noncurrent liabilities as of December 31, 2010 is a. P1,760,000 b. 2,560,000 c. 3,960,000

d. 3,998,000 d. 1,960,000

Problem no. 3 In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher register the information shown in the working paper below. Ite m no. 1

Entry Date

Voucher Ref.

Description

Amoun t

Account Charged

12.18.1 0

12-202

P 20,000

Supplies on hand

12.18.1 0 12.21.1 0 12.21.1 0

12-204

24,000

Prepaid insurance Repairs and maintenance Inventory

5

12.21.1 0

12-219

6

12.26.1 0

12-221

7

12.28.1 0 12.28.1

12-230

Supplies, purchased FOB destination, 23.26.20; received 12.17.10 Auto insurance, 12.15.10 12.20.11 Repairs services; received 12.20.10 Merchandise, shipped FOB Shipping point, 11.20.10; received 12.04.10 Payroll, 12.06.10 to 12.20.10 (12 working days) Subscription to Tax Reporting Service for 2011 Utilities for December 2010 Merchandise, shipped

2 3 4

8

12-206 12-214

12-234

24,000 17,000

69,000

Salaries and wages

5,000

Dues and subscription

29,000

Utilities expense Inventory

111,500

0 9

12.28.1 0

12-243

10

01.02.1 1

01-001

11

01.05.1 1

01-002

12

01.05.1 1

01-003

13

01.05.1 1

01-004

14

01.10.1 1

01-005

15

01.12.1 1

01-006

16

01.12.1 1

01-007

17

01.13.1 1

01-008

18

01.14.1 1

01-009

FOB destination, 12.24.10; received 01.02.11 Merchandise, shipped FOB destination, 12.26.10; received 12.29.10 Legal services; received 12.28.10 Medical services for employees for December 2010 Merchandise, shipped FOB shipping point, 12.29.10; received 01.04.11 Payroll, 12.21.10 to 01.05.11 (12 working days in total, 4 working days in Jan. 2011 Merchandise, shipped FOB shipping point, 01.02.11; received 01.05.11 Manufacturing royalties December 2010 Merchandise, shipped FOB destination, 01.03.11; received 01.10.11 Maintenance e services; received 01.09.11 Interest on bank loan, 10-12-10 to

84,000

Inventory

46,000

Legal and professional expense

25,000

Medical expense

55,000

Inventory

72,000

Salaries and wages

64,000

Inventory

39,000

Manufacturing cost

38,000

Inventory

9,000

Repairs and maintenance

30,000

Interest Expense

19

01.15.1 1

01-010

20

01.15.1 1

01-011

021.10.11 Manufacturing equipment installed on 12.29.10 Dividends declared, 12.15.10

254,000

Machinery and equipment

160,000

Dividends payable

Accrues liabilities as December 31, 2010 were as follows: Accrued payroll P 48,000 Accrued interest payable 26,667 Dividends payable 160,000 Accrues royalties payable 39,000 The accrues payroll, accrued interest payable, and accrued royalties payable accounts were reversed on January 1, 2011. REQUIRED: Prepare adjusting entries as of December 31, 2010 based on your review of the data given above. PROBLEM NO 4 FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of March 31, 2010. BONDS PAYABLE Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount NOTES PAYABLE Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010 Due Date Amount Due April 1, 2010 P 400,000 July 1, 2010 600,000 October 1, 2010 300,000 April 1 2011 - March 31, 2012 300,000 April 1, 2012 – March 31, 2013 1,200.000 April 1, 2013 – March 31, 2014 1,000,000 April 1, 2014 – March 31, 2015 800,000 April 1, 2015 – March 31, 2016 1,000,000

P 7,000,000 ESTIMATED WARRANTIES Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 20082009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows: Warranty claims honored on 2008-2009 sales P 180,000 Warranty claims honored on 2009-2010 sales 178,000 Total warranty claims honored P 358,000 OTHER INFORMATION 1. TRADE PAYABLES Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010 2. PAYROLL RELATED ITEMS Merchandise, shipped FOB destination, 12.24.10; received 01.02.11 Accrued Salaries and wages P 300,000 Withholding taxes payable 94,000 Other payroll deductions 10,000 3. MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150,000 as of March 31, 2010 4. DIVIDENDS On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding Feel Na Feel common stock are as follows: Per Value P 5.00 per share Number of shares issued and outstanding 6,000,000 shares Market Values of Common Stock: March 15, 2010 March 31, 2010 April 12, 2010

P 22.00 per share 21.50 per share 22.50 per share

1. How much was received by Feel Na Feel from the bonds issued on July 1, 2008? a. P8,852,960 b. 10,000,000 c. 10,500,000 d. 10,647,040 2. On March 31, 2010, Feel Na Feel’s statements of financial position would report total current liabilities of a. P5,286,000 b. 4,386,000 c. 5,336,000 d. 5,642,000 3. On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent liabilities of a. P14,389.350 b. 14,352,217 c. 14,370,783 d. 14,252,960 PROBLEM NO. 5 On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Wizards uses the effective interest method of amortization. On December 31, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a fair value of P105 and a par value of P1 at the date of conversion. Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.) 1. The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 is a. P2,155.500 b. P2,000,000 c. 1,844,400 d. 2,147,800 2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 is a. 1,898,400 b. 2,129,500 c. 2,000,000 d. 2,121,100 3. The gain on early retirement of bonds on December 31, 2010 is a. P20,000 b. 112,000 c. 121,200 D. 0 4. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is a. P4,605,800 b. 5,000,000 c. 4,732.875 d. 4,615,400 5. The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by a. P1,485,000 b. 1,374,000 c. 1,415.054 d. P1,377,697

PROBLEM NO. 6 The following data were obtained from the initial audit of BIBI COMPANY: 15%, 10 year, bonds payable, dated January 1, 2009 Debit Credit Cash proceeds from issue on January 1, 2009

Balance

Of 1,000, P1,000 bonds. The market rate of Interest on the date of issue was 12% Bond Interest Expense Cash paid, 1/2/10 Cash paid, 7/1/10 Accrual, 12/31/10

P 1,172,044

P 75,000 75,000 75,000

Accrued Interest on Bonds Balance, 1/1/10 Accrual, 12/31/10 Treasurer bonds Redemption price and interest to date on 200 bonds permanently retired on 12/31/10

P1,172.044

P 75,000 150,000 225,000 P 75,000 75,000

P 75,000 150,000

P 265,000

Based on the preceding information, determine the following: 1. Carrying value of bonds payable at December 31, 2010 a. P831,110 b. 800,000 c. 1,151,583 2. Loss on Bond redemption a. P4,683 b. P19,683 c. 15,000 d. 34,683 3. Accrued Interest on Bonds at December 31, 2010 a. P75,000 b. 135,000 c. 60,000 d. 52,500 4. Bond Interest Expense for the year ended December 31, 2010 a. P150,000 b. 1398,174 c. 69,745

P 265,000

d. 921,266

d. 160,826

PROBLEM 7 NUGGETS CORPORATION manufactures and sells food products and food processing machinery. Its reporting date is December 31. Relevant extracts from its financial statements at December 31, 2009 are as follows: Current liabilities Provision Provision for warranties

P270,000

Noncurrent liabilities Provision Provision for warranties

P180,000

Note 36-Contigent Liabilities

NUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums. NUGGETS strenuously denies the allegation and , as at the same date authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any cost or damages that may be [payable to the plaintiffs. The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year. Estimated cost of repairs – Products with minor defects P 1,000,000 Estimated cost of repairs – Products with minor defects P 6,000,000 Expected % of products sold during 2008 having no defects in 2010 80% Expected & of products sold during 2008 having minor defects in 2010 15 % Expected & of products sold during 2008 having Major defects in 2010 5% -those with minor defects all in 2010 Expected timing of settlement of warranty payments -those with major defects 40% in 2010 60% in 2010 During the year ended December 31, 2010, the following occurred: 1. In a relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision. Of the amount paid, P150,000 was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2010/ 2. In calculating its warranty provision for December 31, 2010, NUGGETS made the following adjustment to the assumptions used for the prior year: Estimated cost of repairs-products with minor defects no change Estimated cost if repairs – products with major defects P 5,000,000 Expected % of products sold during 209 having no defects in 2011 85% Expected % of products sold during 2009 having minor defects in 2011 13% Expected % of products sold during 2009 having major defects in 2011 2% -those with minor defects all in one 2011 Expected timing of settlement of warranty payments 20% in 2011 -those with major defects 80% in 2012 3. NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011 at an estimated cost of P250,000. The carrying amount of the conveyor belt at December 31, 2009 was P140,000. Its original cost was P200,000 4. NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs. As at December 31, 2010, NUGGETS had paid P800,000

5. NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above, in October 2010, the court found in favor of NUGGETS. The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue. NUGGETS estimated that it would receive about P425,000. 6. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary, ChapaChocks Ltd. ChapaChocs’ loan with Choko Bank was P3,200,000 as at December 31, 2010. ChapaChocs was in a strong financial position at 31 December 2010 Based on the above and the result of your audit, answer the following: 1. The warranty expense in 2010 is a. P100,000 b. 400,000 c. 160,000 d. 230,000 2. The provision for warranties as of December 31, 2010 is a. P580,000 b. 230,000 c. 480,000 d. 410,000 3. The provision for warranties to be reported as current liability as of December 31, 2010 is a. 220,000 b. 150,000 c. 400,000 d, 330,000 4. The provision for warranties to be reported as noncurrent liability as of December 31, 2010 is a. P. 80,000 b. P260,000 c. 150,000 d. 330,000 5. Total provisions to be reported in the statement of financial position as of December 31, 2010 is a. P480,000 b. 410,000 c. 1,180,000 d. 1,360,000 PROBLEM NO 8 Select the best answer for each of the following: 1. In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of. a. Existence c. Completeness b. Presentation and disclosure d. Valuation and allocation 2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consist of all a. Merchandiser received c. Canceled checks b. Vendor’s invoices d. receiving reports 3. The primary audit test to determine if accounts payable are valued properly is a. Confirmation of accounts payable b. Vouching accounts payable to supporting documentation

4.

5.

6.

7.

8.

c. An analytical procedure d. Verification that accounts payable was reported as a current liability in the balance sheet. Which of the following procedures is least likely to be performed before the balance sheet date? a. Observation of inventory count. b. Testing of internal control over cash. c. Search for unrecorded liabilities. d. Confirmation of receivables. An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should. a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often. c. Disagree with the assistant because two problems have an equal risk of loss associated with them d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it. When using confirmation to provide evidence about completeness assertion for account payable, the appropriate population most likely is a. Vendors with whom the entity has previously done business b. Amounts recorded in the accounts payable subsidiary ledger c. Payees of checks drawn in the month after the year end. d. Invoices filed in the entity’s open invoice file. Which of the following is a substantive test than an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable? a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for. b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. d. Confirming accounts payable balances with know suppliers who have zero balances. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false. The false statements is that a. Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ]

c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date. d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date. 9. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the a. Quantity C. Price b. Quality d. Terms 10.

11.

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 meetings of the board of directors

Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. Unpaid bills c. bills of lading b. Shipping records d. Unmatched sales invoice 12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. c. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. d. Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date, 13. In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase a. Journal c. Order b. Requisitions d. Invoices. 14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees a. Test footings in the accounts payable ledger b. Reconcile unpaid invoices to vendors statements c. Prepare a schedule of accounts payable d. Mail confirmation for selected account balances

15. An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about a. Existence c. Completeness b. Presentation and disclosure d. Valuation 16. An auditors 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. 17. In an audit of bonds payable, an auditor expects the trust indenture to include the a. Auditee’s debt-to-equity ratio at the same time of issuance b. Effective yield of the bonds issued c. Subscription list d. Description on the collateral 18. 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 the bond proceeds or liens c. Com[pare interest with the bond payable amount for reasonableness d. Confirm the existence of individual bondholders at year-end 19. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because a. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction b. Accrued liability balances are less material than account payable balances. c. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available d. Accrued liabilities at year end will become account payable during the following year 20. 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

Suggested Answers Problem 1 1. D 2. C 3. A 4. B 5. A Problem 2 1. B 2. A 3. C 4. D Problem 3 Adjusting entries Problem 4 1. A 2. A 3. C Problem 5 1. A 2. B 3. C

Problem 8 1. C 2. B 3. C 4. C 5. D 6. A 7. C 8. B 9. B 10. B 11. A 12. A 13. D 14. C 15. D 16. A 17. D 18. C 19. A 20. A

4. A 5. B Problem 6 1. D 2. B 3. C 4. C 5. D 6. A 7. C Problem 7 1. C 2. D 3. 4. A 5. B

Accountancy Department College of Business and Accountancy Notre Dame University Cotabato City, Philippines CPA – MOCK BOARD EXAMINATION AUDITING PROBLEMS MR. RONALD GERMO MAMARIL 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 sheet provided. STRICLY NO ERASURES ALLOWED. Use pencil no. 1 only.

CASE 1: STOCK INVESTMENT IN SAN MIGUEL 1. The Stock Investment showed the following details during year 2008 STOCK INVESTMENT IN SAN MIGUEL

Jan. 1 Audited balance 4,000shares Feb. 28 Cash dividend Mar. 31 Bought shares Apr. 1Sale of rights June 30 Sale of shares 1.

Debit P80,000

Credit 2,000

9,000 6,000 10,000

A cash dividend of P0.50 per share were received on Feb. 28. The adjusting entry (assuming the use of the cost method) is: a. Stock Investment Dividend income b. Retained earnings Dividend income c. Dividend Income Stock investment d. Cash Dividend income

2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

2. On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share. Market values on this date were: shares, P20; rights, P5. The adjusting entry to recognize the cost allocated to the rights is: a. Stock rights Stock investment b. Stock rights Stock investment c. Stock rights Stock investment d. Stock rights Stock investment

16,000 16,000 20,000 20,000 10,000 10,000 30,000 30,000

3. On March 31, 600 shares were purchased with the partial exercise of these rights. The adjusting entry, after the adjustment in No. 7 above has been given effect, is a. Stock investment Stock rights b. Stock investment Stock rights c. Stock rights Stock investment d. Stock rights Stock investment

18,000 18,000 12,000 12,000 12,000 12,000 15,000 15,000

4. On April 1, the remaining rights were sold for P6, 000. The adjusting entry is: a. Stock investment 6,000 Gain on sale of rights 6,000 b. Stock investment 6,000 Stock rights 4,000 Gain on sale of rights 2,000 c. Stock investment 4,000 Loss on sale of rights 2,000 Stock rights 6,000 d. Stock investment 4,000 Gain on sale of rights 4,000 5. On June 30, 460 shares were sold for P10, 000. Using the average cost method, the adjusting entry is: a. Cash Stock investment Gain on sale of stock b. Stock investment Gain on sale of stock

10,000 7,500 2,500 10,000 10,000

c. Stock investment Gain on sale of stock d. None of the above

2,500 2,500

CASE 2: HOME OFFICE AND ESPERANZA BRANCH The following were found in your examination of the interplant accounts between the Home Office and Esperanza Branch. a. Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the branch. b. P10,000 covering marketing expenses of another branch was charged by Home Office to Esperanza. c. Esperanza recorded a debit note on inventory transfers from Home Office of P75,000 twice. d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from Upi Branch. e. Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500. Home Office debited that this charge is appropriately Upi Branch’s cost. f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650. 6. The net adjustment in the Home Office books related to the Esperanza Branch current amount is: a. P75,700 b. 65,700 c. 86,200 d. 94,820 7. The net adjustment in Esperanza’s books related to the Home Office account is: a. P33,335 b. 31,450 c. 20,950 d. 10,450 8. Before the above discrepancies were given effect, the balance in the Home Office books of its Esperanza Branch Current account was debit balance of P165, 920. The unadjusted balance in the Esperanza Branch books of its Home Office Current account must be:

a. P92,336 b. 98,230 c. 104,500 d. 111,170 page 2 9. The adjusted balance of the reciprocal account is: a. P84, 807 b. 90, 220 c. 99, 200 d. 109, 120 CASE 3: LEILA MAE’S FLOWER SHOP (ACCRUAL) The following information pertains to Leila Ma’s Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year. Leila Ma’s Flower Shop TRIAL BALANCE December 31, 2008 Debit Credit Cash P 102, 400 Accounts receivable 64, 800 Inventory, 12/31/2007 248, 000 Furniture & fixtures 472, 800 Land improvements 180, 000 Accumulated depreciation, 12/31/2007 P129, 600 Accounts payable, 12/31/2007 68, 000 Leila Mae’s, Drawings Leila Mae’s, Capital, 12/31/2007 498, 400 Sales 2, 612, 000 Purchases 1, 220, 400 Salaries 696, 000

Payroll taxes Insurance Rent Utilities Living expenses

49, 600 34, 800 136, 800 50, 400 52, 000 P3, 308, 000

P3, 309, 000

Leila Mae’s has developed plans to extend into wholesale flower market and is in the process of negotiating a bank loan to finance the expansion. The bank is requesting 2008 financial statements prepared on the accrual basis of accounting from Leila Mae’s. During the course of a review engagement, Marion, Leila Mae’s accountant, obtained the following additional information. 1. Amounts due from customers totaled P128, 000 at December 31, 2008. 2. An analysis of the above receivables revealed that an allowance for uncollectible accounts of P15, 200 should be provided. 3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at December 31, 2008, and December 31, 2007, respectively. 4. The inventory totaled P291, 200 based on a physical count of the goods at December 31, 2008. The inventory was priced at cost, which approximates market value. 5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive insurance coverage for 1 year. The premium on the previous policy, which expired on April 30, 2008, was P31, 200. 6. On January 2, 2008, Leila Mae entered into 25-year operating lease for the vacant lot adjacent to Baron’s retail store for use as a parking lot. As agreed in the lease, Leila Mae paved and fenced in the lot at a cost P180, 000. The improvements were completed on April 1, 2008, and have an estimated useful life of 15 years. No provision for depreciation or amortization has been recorded. Depreciation on furniture and fixtures was P48, 000 for 2008. 7. Accrued expenses at December 31, 2007 and 2008, were as follows: Utilities Payroll taxes

2000 P3, 600 4, 400 P8, 000

2001 P 6, 000 6, 400 P12, 400

page 3 8. Leila Mae is being sued for P16, 000. The coverage under the comprehensive insurance policy is limited to P1, 000, 000. Leila Mae’s attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000. 9. The salaries account includes P16, 000 per month paid to the proprietor. Leila Mae also receives P1, 000 per week for living expenses.

Required: You are to convert the balances of the nine (9) accounts below to the accrual basis. MULTIPLE CHOICE QUESTIONS: a 10. 11. 12. 13. 14. 15. 16. 17. 18.

b

c

d

Accounts receivableP64, 800 P63, 200 P128, 000 P192, 800 Inventory 291, 200 248, 000 43, 200 334, 400 Accounts payable 54, 000 68, 000 122, 000 176, 000 Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200 Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 000 Salaries 888, 000 696, 000 600, 000 504, 000 Payroll taxes 51, 600 47, 600 49, 600 50, 000 Insurance 34, 800 33, 600 36, 000 35, 000 Utilities 50, 400 48, 000 50, 000 52, 800

CASE 4: J& M CO. (BONDS) The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus accrued interest. The bonds were dated July 1, 2001; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows.  Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond.  From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000 bond.  After June 30, 2009, at the rate of 4 shares for each P1, 000 bond. The bonds mature 10 years from their issue date. The company adjusts its books monthly and closes its books as of December 31 each year. The following transactions occur in connection with the bonds: 2007 July 1 P2, 000, 000 of bonds were converted into stock. 2008 Dec. 31

P1, 000, 000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were immediately retired.

2009 July 1 The remaining bonds were called for redemption and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2009, and are due in 20 years.

19. What are the carrying value of bonds payable at December 31, 2001? a. P5, 747, 280 b. P6, 000, 000

c. P5, 753, 760 d. P5, 749, 440

20. What is the total interest expense for 2001? a. P128, 520 b. P 47, 160

c. P141, 480 d. P135, 000

21. In recording the bond conversion on July 1, 200, how much should be credited to the additional paid-in capital account? a. P1, 796, 320 b. P1, 965, 440

c. P1, 845, 440 d. P1, 865, 440 page 4

22. What is the gain or loss on bond conversion on July 1, 2007? a. P0 b. P1, 796, 320

c. P1, 865, 440 d. P 34, 560

23. What is the carrying value of the bonds reacquired on December 31, 2008? a. P989, 200 b. P957, 880

c. P1, 010, 800 d. P 981, 700

24. What is the gain (loss) on bond reacquisition on December 31, 2008? a. P3, 300 b. (P3, 300)

c. P34, 620 d. P (P34, 620)

25. What is the carrying value of the bonds retired on July 1, 2009? a. P3, 000, 000 b. P2, 974, 080

c. P2, 873, 640 d. P3, 025, 920

26. What is the gain (loss) on bond retirement on July1, 2009? a. (P25, 920) b. P25, 920

c. (P12, 960) d. P0

CASE 5: BLUE ICE CO. (R/E) BLUE ICE COMPANY’S stockholders’ equity account balance at December 31, 2008 were as follows: Common Stock Additional Paid-in capital Retained Earnings

800, 000 1, 600, 000 1, 845, 000

The following 2009 transactions and other information relate to the stockholders’ equity accounts: a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares were issued and outstanding. b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to hold as treasury stock. The shares were originally issued at P15 per share. BLUE ICE uses the cost method to account for treasury stock. Treasury stock is permitted in BLUE ICE’s state of incorporation. c. On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory. The inventory had a P75, 000 carrying value and a P60, 000 fair market value. d. On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of BLUE ICE’s common stock at P18 per share, which was the market on that date. The option may be exercised all 20, 000 options when the market value of the stock was P25 per share. BLUE ICE issued new shares to settle the transaction. e. BLUE ICE’s net income for 2009 was P240, 000. Instruction:

Based on the information above and other analysis as necessary, answer the following question.

27. BLUE ICE’s Common Stock balance at December 31, 2009 is; a. P1, 160, 000 b. P900, 000

c. P800, 000 d. P1, 300, 000

28. BLUE ICE’s Additional Paid-in capital balance at December 31, 2009 is; a. P1, 860, 000 c. P2, 000, 000 b. P1, 960, 000 d. P2, 100, 000 29. BLUE ICE’s Retained Earnings balance at December 31, 2009 is; a. P2, 085, 000 b. P2, 010, 000

c. P2, 025, 000 d. P1, 770, 000

30. BLUE ICE’s Treasury Stock balance at December 31, 2009 is; a. P50, 000 b. P75, 000

c. P0 d. P125, 000 page 5

31. BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is; a. P4, 910, 000 b. P4, 820, 000

c. P4, 720, 000 d. P4, 735, 000

CASE 6: LETICIA’S CO. (PPE) Information pertaining to LETICIA COMPANY’S property, plant and equipment for 2009 is presented below. Account balances at January 1, 2009: Debit 6, 000, 000 48, 000, 000

Credit

Land Buildings Accum. Depreciation – Bldg. 10, 524, 000 Machinery and equipment 36, 000, 000 Accum. Depreciation – Mach/Equip. 10, 000, 000 Automotive equipment 4, 600, 000 Accum. Depreciation – Auto. Equip. 3, 384, 000

Depreciation data: Depreciation Useful Method Life Building 150% declining balance 25 years Machinery/Equip. SLM 10 years Automotive Equip. SYD 4 years Leasehold improvements SLM Depreciation is computed to the nearest month. Transactions during 2009 and other information are as follows: • On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-old car with a cost of P720, 000 and a book value of P216, 000. The new car has a cash price of P960, 000; market value of the trade-in is not known. • On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2008. • On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000, 000 for installation were incurred. • LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at January 1, 2009, would have been depreciated at a total amount of P720, 000 for the year ended December 31, 2009. Instruction:

Based on the information above and other analysis as necessary, answer the following question:

32. What is the depreciation on building for 2009? a. P1, 499, 040 b. P2, 880, 000

c. P2, 998, 080 d. P2, 248, 557

33. What is the book value of the building at December 31, 2009? a. P34, 596, 000 b. P35, 976, 960

c. P34, 477, 920 d. P35, 227, 393

34. What is the depreciation on machinery and equipment for 2009? a. P4, 128, 000

c. P4, 220, 000

b. P4, 151, 000

d. P4, 197, 000

35. What is the gain on machine destroyed by fire? a. P620, 000 b. P300, 000

c. P160, 000 d. P460, 000 page 6

36. What is the balance of the accumulated depreciation – machinery and equipment at December 31, 2009? a. P13, 231, 000 b. P13, 777, 000

c. P13, 760, 000 d. P13, 691, 000

37. What is the depreciation on automotive equipment for 2009? a. P1, 104, 000 b. P816, 000

c. P720, 000 d. P960, 000

38. What is the gain (loss) on car traded in? a. P (240, 000) b. P240, 000

c. P (56, 000) d. P56, 000

39. What is the depreciation on leasehold improvement for 2009? a. P756, 000 b. P672, 000

c. P560, 000 d. P630, 000

40. What is the book value of leasehold improvements at December 31, 2009? a. P6, 160, 000 b. P6, 048, 000

c. P6, 090, 000 d. P5, 964, 000

CASE 7: ST. JOHN AND ST. THERESE

Financial Statements for St. John and St. Therese on December 31, 2009 follows: Income Statements for the year ended 12/31/02 St. John

St. Therese

Sales 750, 000 420, 000 Cost of sales 581, 000 266, 000 Gross Margin 169, 000 154, 000 Depreciation and interest expense 28, 400 16, 200 Other operating expenses 117, 000 128, 400 Net income from operations 23, 600 9, 400 Gain on sale of equipment 3, 000 Gain on bonds Equity in subsidiary’s income 8, 460 . Net income 35, 060 9, 400 ======== ======== Statement of Retained Earnings for the year ended 12/31/02 01/01/02 Retained Earnings Net Income (from above) Total Dividends 12/31/02 Balance

48, 000 41, 000 35, 060 9, 400 83, 060 50, 400 (15, 000) (4, 000) 68, 060 46, 400 ========= ========

Balance Sheet as of December 31, 2009 Cash 45, 300 6, 400 Accounts receivable (net) 43, 700 12, 100 Inventories 38, 300 20, 750 Equipment 195, 000 57, 000 Accumulated depreciation (35, 200) (18, 900) Investment in stock of St. John 125, 460 Investment in bonds of St. Therese 44, 000 Patents . 9, 000 412, 560 130, 350 ========= ======== Accounts payable

8, 900

18, 950

Bonds payable Capital Stock Additional paid-capital Retained earnings (from above)

100, 000 154, 000 81, 600 68, 060 412, 560 ========

50, 000 15, 000 46, 400 130, 350 ========= page 7

St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009. The following additional information is available in the first year after the acquisition. 1. During 2009, St. John sold merchandise to St. Therese that originally cost St. John P15, 000, and the sale was made for P20, 000. On December 31, 2008, St. Therese’s inventory included merchandise purchased from St. John at a cost to St. Therese of P12, 000. 2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese. St. Therese uses normal markup of 25% above cost. St. John’s ending inventory includes P10, 000 of the merchandise acquired from St. Therese. 3. St. Therese reduced its intercompany account payable to St. John to a balance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on December 30. This P1, 000 payment was still in transit on December 31, 2009. 4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000. The equipment was originally purchased by St. John for P5, 000 and had a book value of P4, 000 at the date of sale to ST. Therese. The equipment had an estimated remaining life of 4 years as of January 2, 2009. 5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the outstanding bonds issued by St. John. The bonds mature on December 31, 2005, and were originally issued at par. The bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately before St. Therese’s purchase of bonds. QUESTION: Assume that the combination is accounted for as PURCHASE. 41. What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary? a. Equity in subsidiary’s income 8, 460 Investment in stock of St. Therese 8, 460 b. Equity in subsidiary’s income 8, 460 Dividends declared – St. Therese 3, 600 Investment in stock of St. Therese 4, 860 c. Equity in subsidiary’s income 12, 060

Investment in stock of St. Therese d. No Eliminating Entry

12, 060

42. What is the eliminating entry for St. Therese’s stockholders’ equity? a. Capital stock – St. Therese 45, 000 Additional paid-in capital – St. Therese 13, 500 Retained earnings – St. Therese 36, 900 Goodwill 25, 200 Investment in stock of St. Therese 120, 600 b. Capital; stock – St. Therese 45, 000 Additional paid-in capital – St. Therese 13, 500 Retained earnings – St. Therese 36, 900 Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000 Additional paid-in capital 15, 000 Retained earnings – St. Therese 46, 400 Goodwill 14, 060 Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000 Additional paid-in capital – St. Therese 15, 000 Retained earnings – St. Therese 46, 400 Investment in stock of St. Therese 111, 400 43. To eliminate the sales made by St. John to St. Therese, the entry is: a. Sales Inventory – St. Therese (B/S) Purchases Inventory – St. Therese (I/S) b. Sales Cost of sales Inventory – St. Therese c. Sales Inventory – St. Therese Cost of sales

20, 000 3, 000 20, 000 3, 000 20, 000 17, 000 3, 000 20, 000 3, 000 23, 000 Page 8

d. Retained Earnings Sales

3, 000 20, 000

Inventory – St. Therese Cost of sales

3, 000 20, 000

44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume that Equity in subsidiary income has not been recorded by parent) a. Sales 18, 000 Inventory 2, 000 Cost of sales 16, 000 b. Sales 18, 000 Investment in stock of St. Therese 1, 600 Retained earnings – St. Therese 400 Cost of sales 18, 000 Inventory 2, 000 c. Sales 18, 000 Retained earnings 2, 000 Cost of sales 18, 000 Inventory 2, 000 d. Sales 18, 000 Inventory 2, 000 Cost of sales 20, 000 45. To record the items in transit and to eliminate the inter-company’s payable/receivable, the entry is: a. Accounts payable 4, 000 Accounts receivable 4, 000 b. Accounts receivable 4, 000 Cash 1, 000 Accounts payable 5, 000 c. Cash 1, 000 Accounts payable 3, 000 Accounts receivable 4, 000 d. Cash 1, 000 Accounts payable 4, 000 Accounts receivable 5, 000 46. To eliminate the acquisition made by St. Therese from St. John, the entry is: a. Equipment 2, 000 Accumulate depreciation 1, 000 Gain on sale of equipment 3, 000 b. Gain on sales of equipment 3, 000 Equipment 2, 000

Accumulated depreciation Depreciation expense c. Gain on sale of equipment Equipment Accumulated depreciation d. Gain on sale of equipment Equipment Depreciation expense

250 750 3, 000 2, 000 1, 000 3, 000 2, 000 1, 000

47. The depreciation recorded by St. John at December 31, 2009 is: a. Overstated by P750 c. Overstated by P1, 750 b. Overstated by P250 d. Understated by P1, 000 48. The entry to eliminate the bonds purchased by St. Therese from St. John is: a. Bonds payable 50, 000 Investment in bonds of St. John 44, 000 Gain on extinguishments of debt 6, 000 b. Investment of St. John 44, 000 Loss on extinguishments of debt 6, 000 Bonds payable 50, 000 c. Bonds payable 44, 000 Investment in bonds of St. John 44, 000 Retained earnings 6, 000 d. Bonds payable 50, 000 Investment in bonds of St. John 44, 000 Retained earnings 6, 000

page 9

For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST. 49. What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary? a. Equity in subsidiary’s income 8, 460

Investment in stock of St. Therese b. Equity in subsidiary’s income Dividends declared – St. Therese Investment in stock of St. Therese c. Equity in subsidiary’s income Investment in stock of St. Therese e. No eliminating Entry

8, 460 8, 460 3, 600 4, 860 12, 060 12, 060

50. What is the eliminating entry for St. Therese’s stockholders’ equity? a. Capital stock – St. Therese 45, 000 Additional paid-in capital – St. Therese 13, 500 Retained earnings – St. Therese 36, 900 Goodwill 25, 200 Investment in stock of St. Therese 120, 600 b. Capital stock – St. Therese 45, 000 Additional paid-in capital – St. Therese 13, 500 Retained earnings – St. Therese 36, 900 Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000 Additional paid-in capital – St. Therese 15, 000 Retained earnings – St. Therese 46, 400 Goodwill 14, 060 Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000 Additional paid-in capital – St. Therese 15, 000 Retained earnings – St. Therese 46, 400 Investment in stock of St. Therese 111, 400

Page 10 Punongbayan & Araullo’s Auditing Problems Quiz EASY 1. On July 01, 2007, one of FLOYD INC.'S delivery trucks was destroyed in an accident. On that date, the truck's book value was P900,000. On July 15, 2007, FLOYD INC. received and recorded a P42,000 invoice for a new engine installed in the truck in May 2007 and another P6,000 invoice for various repairs. What amount should FLOYD INC. use to determine the gain or loss on disposal of the truck? a.P900,000 b.P942,000 c.P948,000 d.P936,000 2.

Henry Company had the following bank reconciliation at March 31: Balance per bank statement, March 31 P 93,000 Add deposit in transit 20,600 P 113,600 Less outstanding checks 25,200

Balance per books, March 31

P

88,400

Data per bank statement for the month of April follow: Deposits P Disbursements P

116,800 99,400

All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled P15,000. What is the amount of cash disbursements per books in April? a.P 89,200 b.P 99,400 c.P109,600 d.P114,400 3.

BRAND CO. reported P9,000 of net income for 2007. The correct net income however was overstated by P1,000. The only other error was with the beginning inventory which must have been: a. Understated by P1,000 b. Understated by P3,000 c. Overstated by P1,000 d. Overstated by P3,000

P11,000. It was determined that the ending inventory was

4.*

On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500; terms net 30, FOB Shipping Point. The sale which is 125% of cost was recorded in January 2007 when the check was received from the customer. Ending inventory was determined by physical count on December 31, 2007. As a result of the above transactions, SWIFT CO.’s cost of goods sold for the year ended December 31, 2007 was: a. Understated by P3,000 b. Overstated by P30,000 c. Overstated by P37,500 d. Correctly stated

5.

BART Company started operations on January 01, 2008. The following are available as of June 30, 2008: Purchase of merchandise P 450,000 Inventory, June 30, 2008 75,000 Goods were sold at 50% above cost; 75% ofsales were on account Estimated bad debts 1% of credit sales Collections from charge customers 315,000 Allowance for doubtful accounts, June 30,2008 after write off of uncollectible accounts 3,903.75 The outstanding accounts receivable as of June 30, 2008 were: a.P110,000 b.P106,875 c.P106,560 d.P285,000

6.

PRIME Co. received from a customer a one year, P500,000 note bearing annual interest of 8%. After holding the note for six months, PRIME discounted the note at Asian Bank at an effective interest rate of 10%.

At the date of discounting, PRIME should recognize a. P 40,000 interest revenue b. P23,810 interest revenue c. P13,000 interest revenue d. P 4,762 interest expense 7.

Information pertaining to Trace Company for the month of August appears below: Balance per bank statement P 310,000 Balance per books 187,500 Deposit in transit 70,000 Service charges 2,500 Note collected by bank 75,000 Outstanding checks ? An analysis of the cancelled checks returned with the bank statement reveals the following: a. Check for the purchase of merchandise was drawn for P155,000 but was recorded as P150,000. b. The management wrote a check for traveling expenses of P25,000 while out of town. The check was not recorded. What is the amount of outstanding checks on August 31, 2006? a.P150,000 b.P140,000 c.P125,000 d.P230,000

8.

The inventory on hand on December 31, 2006 of LEISA CORP. is valued at a cost of P300,000. The following items were not included in the inventory: a. Purchased goods in transit shipped FOB Destination, with price of P30,000 which included freight charge of P5,000. b. Goods held on consignment by LEISA CORP. at a sales price of P10,000, excluding a 20% commission on the sales price. Freight paid by LEISA CORP. was P1,000. c. Goods sold in transit FOB Destination with invoice price of P49,000 which included freight charge of P4,000 to deliver the goods. d. Purchased goods in transit FOB Shipping Point with invoice price of P60,000. Freight costs amount to P6,000. Goods out on consignment with sales price of P30,000. Shipping costs amounts to P3,000. What is the correct inventory on December 31, 2006 assuming LEISA’s selling price is 150% of costs? a.P419,000 b.P416,000 c.P410,000 d.P 17,500

9.

In analyzing the shareholders’ equity section of the PEARSON CORP. The following information was abstracted from the accounts at December 31, 2007: Total income since incorporation P 7,875,000 Total cash dividends paid 2,437,500 Proceeds from sale of donated stock 843,750 Total value of stock dividends distributed 562,500 Excess of proceeds over cost of treasury stock sold 131,250 What should be the balance of the Retained earnings account as of December 31, 2007? a.P 4,875,000 b. P 6,218,750 c. P 7,031,250 d. P 10,031,250

10.

Still Trading made investments in available for sale securities. The Unrealized gain or loss account has a debit balance of P38,700 at December 31, 2006. An analysis of the investment account on December 31, 2006 showed the following: No. of shares Cost Market A common 600 shares P922,500 P810,000 B common 225 shares 229,500 270,000 C common 2,000 shares 808,500 841,800 On July 01, 2007, the shares of B common were sold for P210,000. On December 31, 2007, A shares were quoted at P1,320 per share and C common shares were quoted at P414 per share. How much is the required increase in the Unrealized gain or loss account at the end of 2007? a.P130,500 b.P111,000 c.P 91,800 d.P 31,800

AVERAGE 1. While preparing its 2008 financial statements, Dell Corp. discovered computational errors in its 2007 and 2006 depreciation expenses. These errors resulted in the overstatement of each year’s income by P25,000 net of income taxes. The following amount were reported in the previously issued financial statements. 2007 2006 Retained earnings, January 1 700,000 500,000 Net income 150,000 200,000 Retained earnings, December 31 850,000 700,000 Dell Corp. net income is correctly reported at P180,000.

2.

Which of the following amounts should be reported as prior period adjustments and net income in Dell Corp.’s 2008 and 2007 comparative financial statements? Year Prior period Adj. Net Income a. 2007 150,000 2008 ( 50,000) 180,000 b. 2007 ( 50,000) 150,000 2008 180,000 c. 2007 ( 25,000) 125,000 2008 180,000 d. 2007 125,000 2008 180,000 Henri Company purchased for cash on January 01, 2003, three machines which cost a total of P1,800,000. Estimated selling prices of the machines were: Machine 1 P 600,000

Machine 2 Machine 3

750,000 900,000

The machines were believed to have a useful life of 10 years without residual value. The company records depreciation annually on a monthly basis. On January 01, 2006, Machine 1 was sold for P375,000 cash. The proceeds were credited to the Machinery account. On July 01, 2007, Machine 3 was traded in for a new machine (No. 4) which had a cash price of P750,000, Henri paying P300,000 for the difference with the trade in value of the old machine. What should be the balance of the Accumulated depreciation – Machinery on December 31, 2007 after adjustment of the books? a.P805,500 b.P481,500 c.P337,500 d.P387,500 3.The following data are taken from the shareholders’ equity section of the balance sheet of FLOOD CORP. 12.31.6 12.41.07 Ordinary shares (P100 par value) 625,000 637,500 Share premium in excess of par 312,500 362,500 Retained earnings 625,000 653,750 During 2007, the company declared and paid cash dividend of P93,750 and also declared and issued a stock dividend. There were no other changes in stock issued and outstanding during 2007. Net income for 2006 is: a. P 28,750 b. P 122,500 c. P 135,000 d. P 185,000 4.

During 2007, Pen Corporation acquired common stock of Rap Company as follows: LOT DATE NO. OF SHARES COST PER SHARE TOTAL COST A January 25 800 560 448,000 B April 5 600 600 360,000 Rap Company issued a 20% stock dividend on February 14, 2007. Common stock rights were issued on October 30, 2007 entitling holders to purchase one new common share at P450 for each ten shares held. On this date, the rights were being traded at P20 each and the stock ex-rights were being traded at P620 per share. On November 8, 2007, Pen sold 500 rights that pertained to Lot A. Sales price was P25 per right. The corporation paid a brokerage fee of P500 on the sale of the stock rights. Pen exercised the remaining rights on November 11, 2007. The gain on the sale of right is: a.P5,208 b.P4,708

c.P3,750

d.P3,250

5.

Use the same information used in Number 4. How many new shares of RPP common were acquired by Peninsula through the exercise of the stock rights? a.168 shares b.140 shares c.118 shares d.106 shares

6.

On July 1, 2007, Marcus Company purchased 4,000 of the P1,000 face amount , 8% bonds of Olay Corporation for P3,692,000 to yield 10% per annum. The bonds which mature on July 1, 2010, pay interest semiannually on January 1 and July 1. Marcus Company classifies the securities as held to maturity. What is the investment carrying value at December 31, 2007? a.P3,975,400 b.P3,741,200 c.P3,716,600

7.

d.P3,667,400

Use the same information in number 6 above. How much is the interest revenue reported by Marcus Company’s income statement for year ended December 31, 2007? a.P200,000 b.P190,800 c.P184,600 d.P160,000

Use the following information for questions 8 and 9. Cline Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2007 Dec. 31, 2008_________ Ending inventory P3,000 understated P4,400 overstated Depreciation expense P 800 understated An insurance premium of P7,200 was prepaid in 2007 covering the years 2007, 2008, and 2009. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2008, fully depreciated machinery was sold for P3,800 cash, but the sale was not recorded until 2009. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors. Ignore income tax considerations. 8.

What is the total net effect of the errors on the amount of Cline's working capital at December 31, 2008? a.Working capital overstated by P2,000. b.Working capital overstated by P600. c.Working capital understated by P1,800. d.Working capital understated by P4,800.

9.

What is the total effect of the errors on the balance of Cline's retained earnings at December 31, 2008? a.Retained earnings understated by P4,000. b.Retained earnings understated by P1,800. c.Retained earnings understated by P1,000. d.Retained earnings overstated by P1,400.

10.

In your examination of the books and accounts of PLUM Company for the year 2008, you have noted that the entire past due accounts of the company amounting to P200,000 should be set up as Allowance for Doubtful accounts. On these past due accounts, management with proper recommendation from the company’s legal counsel, has decided to write off accounts with balance totaling P40,000. As of December 31, 2008, the balance of Allowance for Doubtful Accounts was P125,000.

The additional provision required for the company’s doubtful accounts is: a.P 35,000 b.P 75,000 c.P160,000 d.P200,000 DIFFICULT Items 1 and 2 are based on the following: CONCORD CO. purchased real property for P3,225,000 which included P67,500 for realty tax arrears for prior years. A mortgage of P1,500,000 was assumed by CONCORD CO. on the purchase. Twenty percent of the purchase price should be allocated to the land and the balance to the building. In order to make the building suitable for the use of CONCORD CO., remodeling costs had to be incurred in the amount of P337,500. necessitated the demolition of a portion of the building, which resulted in recovery of salvage material sold for P11,250 cash.

This however

Landscaping and parking lot cost the company a total of P120,000 while repairs in the main hall were P16,875. 1. 2.

The cost of the land was: a.P631,500 b.P645,000 c.P765,000 d.P945,000 The cost of the building was: a.P2,467,500 b.P2,923,125 c.P2,906,250

d.P4,123,125

3. On June 30, 2007, COLT INC. had outstanding 10% P250,000 face amount 15 year bonds maturing on June 30, 2017. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2007 of bond discount and bond issue costs were P13,750 and P5,000 respectively. COLT INC. reacquired all of these bonds at 96 on June 30, 2007 and retired them. Ignoring income taxes, compute for the gain or loss on bond retirement. a. Loss of P3,750 b. Loss of P8,750 c. Gain of P1,250 d. Gain of P10,000 Items 4 to 6 are based on the following: You are conducting an audit of the MART CORPORATION for the year ended December 31, 2008. The internal control procedures surrounding cash transactions were not adequate. Jane Quipit, the bookkeeper-cashier handles cash receipts, maintains accounting records and prepares the monthly reconciliations of the bank account. She prepared the following reconciliation at the end of the year: Balance per bank statement P 315,000 Add : Deposit in transit P 157,725 Note collected by bank 13,500 171,225 Balance P 486,225 Less : Outstanding checks 222,075 Balance per general ledger P 264,150 In the process of your audit, you gathered the following:

a.

At December 31, 2008, the bank statement and the general ledger showed balances of P315,000 and P264,150 respectively.

b.

The cut off bank statement showed a bank charge on January 02, 2009 for P35,250 representing a correction of an erroneous bank credit.

c.

Included in the list of outstanding checks were the following: 1. A check payable to a supplier, dated December 29, 2008, in the amount of P13,275, released on January 05, 2009. 2. A check representing advance payment to a supplier in the amount of P33,489, the date of which is January 04, 2009, and released in December 2008.

d.

On December 31, 2008, the company received and recorded customer’s postdated check amounting to P45,000.

4.

Compute the adjusted deposit in transit as of December 31, 2008. a.P157,725 b.P112,725 c.P202,725 d.P112,500

5.

Compute the adjusted outstanding checks as of December 31, 2008. a.P222,075 b.P235,350 c.P255,564 d.P175,311

6.

Compute the adjusted cash to be presented in the balance sheet as at Dec. 31, 2008. a.P211,914 b.P225,414 c.P238,914 d.P279,414

7. You are reviewing the notes payable and interest expense accounts of Cole Manufacturing Co. as of December 31, 2007 and noted that the company regularly borrows from the bank in order to finance working capital. The following schedule shows loans with 12% interest rate, with interest payable at maturity. All loans are repaid at its scheduled maturity date and interest expense is 7recorded when the loans are repaid. DATE OF LOAN AMOUNT MATURITY DATE TERM OF LOAN Nov. 01, 2006 P 500,000 Oct. 31, 2007 1 year Feb. 01, 2007 1,500,000 July 31, 2007 6 months May 01, 2007 800,000 Jan. 31, 2008 9 months The client recorded interest expense of P150,000 for 2007. Compute for the correct amount of interest expense that should be reported in the 2007 income statement. a. P204,000 b. P212,000 c. P222,000 d. P214,000 Use the following information for questions 8 to 9. The balance sheet for the Dixie Corporation on December 31, 2007 includes the following receivables balances: Notes Receivable Less notes discounted

P365,000 155,000

P210,000

Accounts Receivable Less allowance for doubtful accounts

P856,000 41,500

814,500

Selected ransactions during 2008 included the following: a. Notes received in settlement of accounts totaled P825,000. b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of one P30,000 note on which the company had to pay the bank P30,900, which included interest and protest fees. It is expected that recovery will be made on this note early 2009. c. Customers’ notes of P600,000 were discounted with recourse during the year, proceeds from their transfer being P585,000. Of this total, P480,000 matured during the year without notice of protest. h. Notes receivable collected during the year totaled P270,000 and interest collected was P24,500. Determine the adjusted balances of the following accounts as of December 31, 2008: 8. Notes Receivable (including notes receivable discounted). a. P320,000 b. P365,000 c. P165,000 d. P285,000 9. Notes Receivable Discounted a. P155,000 b. P600,000 c. P120,000 d. P105,000 10.

Voltron Inc. reported inventory of P360,000 at December 31, 2006. The following data were gathered to confirm the reported inventory figure. Inventory, December 31, 2005 P 320,00 Purchases during 2006 1,410,000 Cash sales during 2006 350,000 Shipment received on December 26, 2006 included in physical inventory but not recorded as purchases 10,000 Deposit made with suppliers, entered as purchased. goods were not received during 2006 20,000 Collections on accounts receivable during 2006 1,800,000 Accounts receivable, December 31, 2005 250,000 Accounts receivable, December 31, 2006 300,000 Gross profit percentage on sales 40%

What is the estimated inventory shortage at December 31, 2006? a.P60,000 b.P50,000 c.P40,000 d.P 5,000

CLINCHER 1. On October 01, 2006, Aguila Company consigned 50 computers at a unit cost of P15,000 to HP Company for sale at P20,000 each and paid P20,000 transportation cost. On December 31, 2006, HP Company reported the sales of 25 computers and returned 10 units. Cost paid by the consignee on the returned units was P4,000. Amount due to consignor was remitted on the same date. Commission rate as agreed upon was 15%. What amount of inventory on consignment and net income related to the sold units respectively should Aguila Company report on December 31, 2006? a.P225,000 and P36,000 b.P231,000 and P32,000 c.P235,000 and P40,000 d.P375,000 and P44,000 Items 2 and 3 are based on the following information: Some of the information you gathered in the audit of the financial statement of CYNDY CORP. are: 1. The president is to receive a bonus consisting of a basic amount equivalent to 5% of the company’s net income before deduction of bonus but after deduction of corporate income tax. 2. In addition, the basic bonus will be increased by the company’s tax savings because the total amount of bonus is deductible in computing the company’s taxable income. The tax savings is the difference between the income tax the company would have paid if there were no bonus and the taxes the company must pay after deducting the bonus. 3. CYNDY CORPORATION reported a net income of P280,000 in 2007 before deduction of the president’s bonus and the corporate income tax. 4. The company is subject to a corporate income tax of 35% of its net income after deducting the president’s bonus. 2. Compute for the total amount of bonus the president should receive in 2007: a. P 9,100 b. P 9,352 c. P14,387 d. P14,136 3.

Compute for the net profit for 2007 after deducting the president’s bonus and the corporate income tax. a. P 172,649 b. P 170,886 c. P 170,798 d. P 172,900

4. CATER COMPANY pays its sales representatives fixed monthly salaries and commissions on net sales. Commissions are computed and paid on a monthly basis (in the month following the month of sales) net of fixed salaries. However, if the fixed monthly salaries exceed their sales commissions earned for the month, such excess is not charged back to them. Pertinent data for the month of March 2007 are as follows: SALES REP FIXED SALARY NET SALES COMMISSION RATE A P 25,000 P1,000,000 2% B 35,000 2,000,000 3% C 45,000 3,000,000 3% What amount should CATER COMPANY accrue as sales commission payable in March 2007? a. P 65,000 b. P 70,000 c. P170,000 d. P175,000 5. On July 1, 2007, Acro Manufacturing Co. issued a five-year note payable with a face amount of P2,500,000 and an interest rate of 10 percent. The terms of the note require Acro Manufacturing Company to make five annual payments of P500,000 plus accrued interest, with the first payment due June 30, 2008. With respect to the note, the current liabilities section of Acro’s December 31, 2007, balance sheet should include: a. P 250,000 b. P 500,000 c. P 625,000 d. P 750,000

1. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include

a. b. c. d.

Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding the prospective client and its management. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests.

2. An auditor who has been invited to submit a proposal for an audit engagement is a/an

predecessor auditor successor auditor

c. principal auditor d. interim auditor

3. The degree of certainty that the practitioner has attained and wishes to convey is called:

a. b. c. d.

audit risk assurance materiality audit report

4. The information below was taken from the bank transfer schedule prepared during the audit of BAY Co.’s financial statements for the year ended

December 31, 2011. Assume all checks are dated and issued on December 30, 2011. Disbursemen Receipt t date Check From To Per Per Per No. Books Bank Books 101 Nation Federal Dec. Jan. 4 Dec. 30 al 30 202 County State Jan. 3 Jan. 2 Dec. 30 303 404 Which of the above checks might indicate kiting? #101 and #303. #202 and #404.

Federa America Dec. l n 31 State Republi Jan. 2 c

Jan. 3

Jan. 2

Jan. 2

Jan. 2

date Per Bank Jan. 3 Dec. 31 Jan. 2 Dec. 31

#101 and #404. #202 and #303. 5. Which of the following is most likely to be effective in detecting kiting?

a. b. c. d.

Bank Confirmation Bank transfer schedule prepared using only the cash receipts and cash disbursements journals Comparison of bank cutoff statement to the cash receipts and disbursements records Receivable confirmation

6. The work-in process inventory of RHODE ISLAND Constructions Co., was completely destroyed by fire on April 1, 2014. You

were able to establish the

physical inventory figures as follows: Raw materials Work in process Finished goods

January 1, 2014 30,000 100,000 140,000

April 1, 2014 60,000 120,000

Sales from January 1 to March 31, were P 300,000. Purchases of raw materials were P 100,000 and freight on purchases, P 10,000. Direct labor during the period was P 80,000. It was agreed with the insurance adjusters that an average gross profit rate of 32.5% be used and that manufacturing overhead was 45% of direct labor cost. The value of goods manufactured and completed as of April 1, 2014: a. P 120,000 b. P c. P d. 182,500 180,000 190,000 7. On December 31, 2009, Alcoa Co. purchased equity securities as trading securities. Pertinent data are as follows:

P Company Q Company B Company Total

Fair value Cost 12/31/11 P 900,000 P 780,000 1,100,000 1,240,000 2,000,000 1,720,000 P4,000,00 P3,740,000 0

12/31/10 P 880,000 1,120,000 1,920,000 P3,920,000

On December 31, 2011, Alcoa transferred its investment in security B from trading to available-for-sale because Alcoa intends to retain security B as a longterm investment. QUESTION: What total amount of gain or loss on its securities should be included in Alcoa’s 2011 profit or loss? a. P 20,000 gain

b. P 260,000 loss c. P180,000 loss d. P180,000 gain Suggested Solution: Total fair value, 12/31/11 P3,740,000 Total fair value, 12/31/10 3,920,000 Unrealized loss on trading P 180,000 securities Summary of reclassifications of financial assets (based on amended PAS 39 par. 50 to 54):  An entity: a) Shall not reclassify a derivative financial instrument into or out of the FVTPL category while it is held. b) Shall not reclassify any financial instrument out of the FVTPL category if upon initial recognition it was designated by the entity as at fair value through profit and loss; and c) May, if a financial asset is no longer held for the purpose of selling it in the near term (notwithstanding that the financial asset may have been acquired principally for the purpose of selling it in the near term), reclassify that financial asset out of the FVTPL category only in rare circumstances (arising from a single event that is unusual and highly unlikely to recur in the near term).  If an entity reclassifies a financial asset out of the FVTPL category, the financial asset shall be reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in profit or loss shall not be reversed. The fair value of the financial asset on the date of reclassification becomes its new cost.  An entity shall not reclassify any financial instrument into the FVTPL category after initial recognition. Since the reason for the transfer of the investment from trading to available for sale is not a rare situation, the investment should be accounted for under its original classification.

8. Bridgestone Company bought 20% of Spiratone Corporation’s ordinary shares on January 1, 2011 for P11,400,000. Carrying amount of Spiratone’s net

assets at purchase date totaled P50,000,000. Fair value and carrying amounts were the same for all items except for plant and inventory, for which fair values exceed their carrying amount by P10,000,000 and P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2011. During 2011, Spiratone reported profit of P30,000,000 and paid a P10,000,000 cash dividend. QUESTIONS: Based on the above and the result of your audit, answer the following: What amount should Bridgestone report as net income related to this investment in 2011? a. P5,200,000 b. P6,200,000

c. P5,400,000 d. P4,200,000 Share of profit (P30,000,000

×

P6,000,000

20%) Amortization of excess – Inventory ( 400,000) Amortization of excess – Plant ( 400,000) (P2,000,000/5) Income from acquisition (see below) 1,000,000 Net investment income P6,200,000 Acquisition cost P11,400,000 Less carrying amount of net assets 10,000,000 acquired (P50,000,000 × 20%) Excess Attributed to : Undervalued plant asset (P10,000,000 × 20%) Undervalued (P2,000,000 × 20%) Negative goodwill acquisition)

1,400,000 ( 2,000,000) ( 400,000)

inventory

(income

from (P1,000,000)

Any excess of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the investor’s share of the associate’s profit and loss in the period in which the investment is acquired. (PAS 28 par. 23)

9. On January 1, 2011, Mazda Motor Corporation created a special building fund by depositing a single sum of P200,000 with an independent trustee. The

purpose of the fund is to provide resources to build an addition to the older office building during the latter part of 2015. The company anticipates a total construction cost of P1,000,000 and completion by January 1, 2016. The company plans to make equal annual deposit from December 31, 2011 through 2015, to accumulate the P1,000,000. The independent trustee will increase the fund each December 31 at an interest rate of 10%. The accounting periods of the company and the fund end on December 31.

QUESTION: How much is the annual deposit to the fund? (Round off present value factors to four decimal places) a. P163,797 b. P100,944 c. P131,038 d. P111,038 Suggested Solution: Target amount P1,000,000 Less future value of P200,000 (P200,000 322,100 × 1.6105) Balance Divide by future value of ordinary annuity of P1 to 10% for 5 periods Annual deposit

677,900 6.1051 P 111,038

10. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The company’s accounting period is the

calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below: 2011 2012 Dividend received on December 31 10,000 12,000 Cash surrender value 84,000 ? Life insurance expense ? 138,000 QUESTIONS: Based on the above and the result of your audit, answer the following: The life insurance expense in 2011 is a. P160,000 b. P122,000 c. P150,000 d. P 66,000 Annual premium Dividend received in 2011

P160,000 (10,000)

Increase in cash surrender value pertaining to 2011 (28,000) (P84,000 × 1/3) Life insurance expense for P122,000 2011 11. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The company’s accounting period is the

calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below: 2011 2012 Dividend received on December 31 10,000 12,000 Cash surrender value 84,000 ? Life insurance expense ? 138,000 The cash surrender value at December 31, 2012 is a. P106,000 b. P118,000 c. P 94,000 d. P 96,000 Annual premium P160,000 Dividend received in 2012 (12,000) Life insurance expense for (138,000) 2012 Increase in cash surrender 10,000 value for 2012 Cash surrender value, 12/31/11 84,0 00 Cash surrender value, 12/31/12 P94,000 12. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The company’s accounting period is the

calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below: 2011 2012 Dividend received on December 31 10,000 12,000 Cash surrender value 84,000 ? Life insurance expense ? 138,000 Assuming the president dies on July 1, 2012 and the face of the policy is collected on July 31, 2012, the gain on life insurance settlement is a. P 9,831,000 b. P 9,825,000

c. P 9,819,000 d. P10,000,000 Face amount P10,000,000 Unexpired insurance (P160,000 (80,000) × 6/12) Cash surrender value, 7/1/12 [P84,000+(P10,000 6/12)] Gain on life settlement

×

(89,0 00)

insurance P 9,831,000

13. The following items relate to the acquisition of a new machine by Spar Corporation in 2011:

Invoice price of machinery P2,000,000 Cash discount not taken 40,000 Freight on new machine 10,000 Cost of removing the old machine 12,000 Loss on disposal of the old machine 150,000 Gratuity paid to operator of the old 70,000 machine who laid off Installation cost of new machine 60,000 Repair cost of new machine damaged in the process of 8,000 installation Testing costs before machine was put into regular 15,000 operation Salary of engineer for the duration of the 40,000 trial run Operating cost during first month of 250,000 regular use Cash allowance granted because the new machine 100,000

proved to be inferior quality QUESTION: How much should be recognized as cost of the new machine? a. b. c. d.

P1,985,000 P1,993,000 P1,930,000 P2,025,000

Suggested Solution: Invoice price of machinery P2,000,000 Cash discount not taken (40,000) Freight on new machine 10,000 Installation cost of new machine 60,000 Testing costs 15,000 Salary of engineer for the duration of 40,000 the trial run Cash allowance (100,0000) Cost of the new machine P1,985,000

14. In connection with your audit of the Polycom Corporation’s financial statements for the year 2011 you noted the following items relative to the company’s

intangible assets.  A patent was purchased from Polymer Company for P4,000,000 on January 2, 2010. Polycom estimated that the remaining useful life of the patent to be 10 years. The patent was carried in Polymer’s accounting records at a carrying value of P4,000,000 when Polymer sold it to Polycom. 

During 2011, a franchise was purchased from Safeland Company for P960,000. In addition, 5% of the revenue from the franchise must be paid to Safeland. Revenue from the franchise for 2011 was P5,000,000. Polycom estimates the useful life of the franchise to be 10 years and takes full year’s amortization in the year of purchase.



Polycom incurred research and development costs of P866,000 in 2011. Polycom estimates that these costs will be recouped by December 31, 2014.



On January 1, 2011, Polycom, because of the recent events in the industry, estimates that the remaining life of the patent purchased on January 2, 2010, is only 5 years from January 1, 2011.

QUESTIONS: Based on the above and the result of your audit, determine the following: Amortization of patent for 2011 a. P900,000 b. P800,000 c. P720,000 d. P400,000 Cost of patent

P4,000,0 00 Less amortization in 2010 400, (P4,000,000/10) 000 Carrying amount, 1/1/11 P3,600,0 00 Divide by revised remaining useful life 5 Patent amortization for 2011 P 720,0 00

15. On January 2, 2003, Bambino Company spent P480,000 to apply for and obtain a patent on a newly developed product. The patent had an estimated

useful life of 10 years. At the beginning of 2007, the company spent P144,000 in successfully prosecuting an attempted patent infringement. At the beginning of 2008, the company purchased for P280,000 a patent that was expected to prolong the life of its original patent by 5 years. On July 1,2011, a competitor obtained rights to a patent that made the company’s patent obsolete. QUESTIONS: Based on the above and the result of your audit, determine the following:

Carrying amount of patent as of December 31, 2007 a. P360,000 b. P240,000 c. P369,600 d. P355,200 Question No. 1 Cost of patent Less amortization up to 12/31/07 (P480,000 × 5/10) Carrying amount of patent, 12/31/07

P480,000 240,000 P240,000

16. Perkins Corporation authorized the sale of P2,000,000 of 12%, 10 year debentures on January 1, 2006. Interest is payable on January 1 and July 1. The

entire issue was sold on April 1, 2006, at 102 plus accrued interest. On April 1, 2011, P1,000,000 of the bond issue was reacquired and retired at 99 plus accrued interest. On June 30, 2011, the remaining bonds were reacquired at 97 plus accrued interest and refunded with an issue of P1,600,000 of 9% bonds which were sold at 100. QUESTIONS: Based on the above and the result of your audit, determine the following: (Use straight line method to amortize premium or discount) 1. Total cash received from the sale of P2 million bonds on April 1, 2006 a. P2,100,000 b. P2,000,000 c. P2,040,000 d. P2,120,000 Question No. 1 Issue price (P2,000,000

×

P2,040,000

1.02)

Accrued interest (P2,000,000 12% × 3/12)

×

60,000

Total cash received from sale of P2,100,000 bonds 17. Intel Inc., leases equipment to its customers under noncancelable leases. On January 1, 2011, Intel leased equipment costing P4,000,000 to Asus Co., for

nine years. The rental cost was P440,000 payable in advance semiannually (January 1 and July 1), plus P20,000 semiannually for executor costs. The equipment had an estimated life of 15 years and sold for P5,330,250 with an estimated unguaranteed residual value of P800,000. The implicit interest rate is 12 percent.

QUESTIONS: Based on the foregoing and the result of your audit, compute for the following: (Round off present value factors to four decimal places). How much is the total interest income from lease that will be earned by Intel, Inc.? a. P2,869,988 b. P3,389,748 c. P3,675,616 d. P 0 Suggested Solution: Gross investment in the lease: Minimum lease payments (P440,000 × 18) Unguaranteed residual value

P7,920,000 800,00 P8,720,000 0

Net investment in the lease: PV of minimum lease payments (P440,000 × 11.4773)

5,050,012

PV of unguaranteed residual value (P800,000 × 0.3503)

280,240

Total unearned interest income

P5,330,252 P3,389,748

18. At the beginning of 2011, Golem Company grants 100 share options to each of its 200 employees. Each grant is conditional upon the employees working

for the entity over the next three years. The entity estimates that the fair value of each share option is P45. On the basis weighted average probability, the entity estimated that 25 percent of employees will leave during the three-year period and therefore forfeit their rights to the share options.

During 2011, 10 employees leave. The entity revises its estimate of total employee departure over the three-year period from 25 percent to 20 percent. During 2012, a further 8 employees leave. The entity revises its estimate of total employee departure over the three-year period from 20 percent to 15 per cent. During 2013, a further 6 employees leave. Questions: Based on the above and result of the audit, determine the following: Compensation expense in 2011 a. P 240,000 b. P 225,000

c. P 720,000 d. P

0

Compensation expense in 2011 (200 employees × 100 options P240,00 0 × 80% × P45 × 1/3)

19. The income statement of BrightStar Corporation for 2011 included the following items:

Interest income Salaries expense Insurance expense

P2,101,000 1,650,000 277,200

The following balances have been excerpted from BrightStar Corporation’s statement of financial position: 12/31/2010 interest P 165,000

Accrued receivable Accrued salaries payable Prepaid insurance

92,400 33,000

12/31/2011 P 200,200 195,800 24,200

QUESTIONS: Based on the above and the result of your audit, determine the following:

The cash received for interest during 2011 was a. P1,900,800 c. P2,065,800 b. P2,101,000 d. P2,136,200 Question No. 1 Interest income P2,101,000 Accrued interest receivable, 12/31/10 165,000 Accrued interest receivable, 12/31/11 (200,200) Cash received for interest during P2,065,800 2011 20. In your audit of Saga Company’s statement of comprehensive income for the year ended December 31, 2011, you noted that company reported profit of

P10,000,000. You raised questions about the following amounts that had been included in profit: Unrealized loss on decline in value of available for sale securities Loss on write-off of inventory due to a government ban net of tax Adjustment of profit of prior year netdebit Loss from expropriation of property, net of tax Exchange differences gain on translating foreign operations Realized revaluation surplus

P 500,000 1,500,000 2,000,000 3,500,000 4,500,000 1,000,000

The loss from expropriation was unusual in occurrence in Sagas line of business. QUESTIONS: Saga Company’s 2011 statement of comprehensive income should report profit at a. P9,000,000 b. P6,500,000 c. P7,000,000

d. P8,500,000 Question No. 1 Reported profit P10,000,000 Unrealized loss on decline in value of available for 500,000 sale securities Adjustment of profit of prior year net-debit 2,000,000 Exchange differences gain on translating foreign (4,500,000) operation Realized revaluation surplus (1,000,000) Adjusted profit P7,000,000

58 | P a g e PROBLEM 1 Shown below is the bank reconciliation for Orchid Company for November 2013: Balance per bank, Nov. 30, 2013 P 150,000 Add: Deposits in transit 24,000 Total 174,000 Less: Outstanding checks P 28,000 Bank credit recorded in error 10,000 38,000 Cash balance per books, Nov. 30, 2013 P 136,000 The bank statement for December 2013 contains the following data: Total deposits P 110,000 Total charges, including NSF check of P 8,000 and a service charge of P 400 96,000 All outstanding checks on November 30, 2013, including the bank credit, were cleared in the bank in December 2013. There were outstanding checks of P 30,000 and deposits in transit of P 38,000 on December 31, 2013. Based on the above result of your audit, answer the following: 1. How much is the cash balance per bank on December 31, 2013? a. P 154,000 b. P 150,000 c. P 164,000 d. P 172,400 C 2. How much is the December receipts per books? a. P 124,000 b. P 96,000 c. P 110,000 d. P 148,000 A 3. How much is the December disbursements per books? a. P 96,000 b. P 79,600 c. P 89,600 d. P 98,000 B 4. How much is the cash balance per books on December 31, 2013? a. P 150,000 b. P 170,400 c. P 180,400 d. P 162,000 C 5. In auditing bank reconciliation, which of the following is/are true? I. The auditor obtains copies of the entity’s reconciliation and agrees the bank balance to the bank confirmation and the book balance to the general ledger. II. The auditor note the date on which outstanding items are shown on subsequent bank statements and obtain explanations for all material items cleared within the reasonable time of the date of receipt of the cash or the drawing of the checks a. I only A PROBLEM 2

b. II only

c. I and II

d. None of the above

59 | P a g e On April 1, 2014, Anabelle Co., purchased land and building for a lump-sum price of P80,000,000. The existing building (with a remaining useful life of 4 years) was demolished late 2015 to make way for the construction of a new. The following data were collected concerning the property at the same date: Land P P 50,000,000 96,000,000 Building 25,000,000 24,000,000 6. Assume that the Anabelle Co., at date of acquisition, has decided to use the property as owner-occupied property under cost model, what is the value of the acquired Old Building at the end of calendar year 2015 in accordance with PAS 16 – Property, plant and equipment? a. P 26,666,667

b. P 24,000,000

c. P 16,000,000

d. P -0-

D 7. Assuming the fair value of the old building and land on fiscal year ending June 30, 2015 were P13,000,000 and P44,000,000, respectively, how much is the net impact on the comprehensive income of Anabelle Co. on the said fiscal year under revaluation model? a. P 22,000,000

b. P 23,000,000

c. P 3,000,000

d. P -0-

A 8. Assume Anabelle Co. is a property developer and paid P2,500,000 to demolish the building on the land, determine the appropriate amount that the Company should debit to PPE if its policy is to consider the demolition cost as directly attributable cost in constructing the new asset. a. P 24,000,000

b. P 2,500,000

c. P 17,500,000

d. P -0-

D PROBLEM 3 On December 31, 2013, Nicole Co. identified that its building with a carrying amount of P2,400,000 has been impaired. In estimating the recoverable amount, Nicole has determined that the fair value of the asset is P2,000,000. In estimating the value in use, Nicole determined the following: Year Future cash Future cash inflows outflows 2014 P 1,200,000 P 400,000

60 | P a g e 2015 2016

1,120,000 1,040,000

400,000 320,000

Each year’s estimated future cash flows include P40,000 representing cash outflows from future restructuring not yet committed and P20,000 representing cash outflows on planned improvement and enhancement. Not included in the estimated future cash flows are costs of day-to-day servicing of the asset amounting to P8,000 per year. The discount rate applicable for the computation of the value in use is 10%. (Round-off PV factors in to 6 decimal places and amounts in whole number) 9. Assume that the following costs were also estimated for purposes of computing the fair value less cost to sell: Transaction taxes – P200,000; Legal costs, stamp duty, commissions, and similar fees – P40,000; Cost of dismantling or removing the asset included in provision for restoration and decommissioning cost – P20,000; Termination benefits and costs associated with reducing or reorganizing the business following the disposal of an asset – P60,000. How much is the fair value less costs to sell? a. P 1,680,000

b. P 1,740,000

c. P 1,760,000

d. P 2,000,000

C 10. Based on the previous item and information provided above, how much is the impairment loss? a. P 407,424 b. P 456,773 c. P 365,472 d. P 412,365 A PROBLEM 4 You noted the following items relative to the company’s intangible assets in connection with your audit of Familiar Corporation’s financial statements for the year 2014. Franchise - On January 1, 2014, Familiar signed an agreement to operate as franchisee of Tricky Copy Service, Inc. for an initial franchise fee of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was payable in four annual payments of P120,000 each, beginning January 1, 2015. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit rate for the loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must be paid to the franchisor. Tricky’s revenue from the franchise for 2014 was P8,000,000. Tricky estimates the useful life of the franchise to be ten years. Patent - On July 1, 2014, Familiar purchased a patent from the inventor, who asked P1,100,000 for it. Familiar paid for the

61 | P a g e patent as follows: cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10 (market value, P20 per share); and a note payable due at the end of three years, face amount, P500,000, noninterest-bearing. The current interest rate for this type of financing is 12%. The total consideration represents the fair value of the patent. Familiar estimates the useful life of the patent to be 10 years. Trademark - Familiar purchased for P1,200,000 a trademark for a very successful soft drink it markets under the name POWER!. The trademark was determined to have an indefinite life. A competitor recently introduced a product that is in direct competition with the POWER!, thus suggesting the need for an impairment test. Data gathered by Familiar suggests that the useful life of trademark is still indefinite, but the cash flows expected to be generated by the trademark have been reduced either to P40,000 per year (with a probability of 70%) or to P80,000 per year (with 30% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted interest rate is 10%. Based on the above and the result of your audit, determine the following: (Round off present value factors to 4 decimal places 11. Total expenses related to franchise in 2014 a. P 503,914

b. P 535,200

c. P 448,950

d. P 454,964

A 12. Carrying amount of the patent as of December 31, 2014 a. P 1,045,000

b. P 955,900

c. P 860,310

d. P 908,105

D 13. Total expenses related to the above intangible assets in 2014 a. P 662,759

b. P 711,709

c. P 733,063

d. P 802,212

C 14. In evaluating control risk and effectiveness for intangible assets, controls should be designed for numerous purposes. Which of the following is not a usual control for intangible assets? a. Ensure decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Identify and account for intangible asset impairment. d. All of the above are usual controls for intangible assets. D PROBLEM 5

62 | P a g e You have obtained the latest actuarial report prepared for Renzel Corp’s pension plan. Information about the actuarial reports are presented below: From the December 31, 2015 actuarial report Present value 3,600,000 3,500,000 of defined benefit obligation Fair value of 3,900,000 3,800,000 plan assets at end of year Current service 345,000 320,000 cost for year Benefits paid 240,000 230,000 in year Contributions 430,000 410,000 paid in year Discount rate 4.5% 5.0% at end of year Assume contributions and benefit payments occurred evenly throughout the year. Based on the above information and assumptions determine the following: (Round of any components in the computation to the nearest thousands) 15. Net interest cost (income) for 2015 a. (P 23,000)

b. (P 14,000)

c. (P 15,000)

d. P 162,000

A 16. Net amount recognized in OCI for 2015 a. P 113,000 b. P 106,000 c. P 105,000 d. P 0 A PROBLEM 6 17. Aiza Co. determined that one of its cash-generating units is impaired. Information on the assets of the CGU is shown below: Assets Carrying Amount Inventory P 800,000 Investment property 1,600,000 (at cost model) Building 2,400,000 Goodwill 1,200,000 It was estimated that the value in use of the CGU is P3,600,000 and its fair value less costs to sell is P2,400,000. How much is the carrying amount of the building after the impairment testing? a. P 1,680,000 A

b. P 1,120,000

c. P 1,800,000

d. P 2,040,000

63 | P a g e PROBLEM 7 A recent fire severely damaged EL COMPANY’s administration building and destroyed many of its financial records. You have been contracted by EL’s management to reconstruct as much financial information as possible for the month of July. You learned that EL makes a physical inventory count at the end of each month to determine monthly ending inventory values. You also find out that the company applies the average cost method. You are able to gather the following information by examining various documents: Inventory, July 31 150,000 units Total cost of goods P 356,400 available for sale in July Cost of goods sold P 297,000 during July P 303,000 Gross profit on sales for 0.35 per unit July Cost of inventory, July1 The following are EL’s July purchases of merchandise: Date Quantity Unit Cost July 6 180,000 P 0.40 July 12 150,000 0.41 July 16 120,000 0.42 July 17 150,000 0.45 EL’s management has asked you to provide the following information: 18. Number of units on hand, July 1 a. 450,000 b. 848,571 c. 169,714 d. 300,000 D 19. Units sold during July a. 600,000 b. 300,000 c. 750,000 d. 450,000 C 20. Unit cost of inventory at July a. P 0.35 b. P 0.396 c. P 0.419 d. P 0.279 B 21. Value of inventory at July 31 a. P 59,400 b. P 52,500 c. P 62,850 d. P 41,850 A PROBLEM 8 On January 1, 2013, Zest Airways, Inc. issued P 100,000, 10% 10 year bonds when the market rate of interest was 8%. Interest is payable on June 30 and December 31. The following financial information is available: Sales P 300,000 Cost of sales 180,000 Gross profit 120,000 Interest expense ? Depreciation (14,500) expense (82,000) Other expenses ?

64 | P a g e Net income Accounts receivable Inventory Accounts payable

December 31, January 1, 2013 2013 P 48,000 P 55,000 93,000 87,000 58,000 60,000 All purchases of inventory are on account. Other expenses are paid for in cash. 22. What is the carrying value of the bonds on December 31, 2013 a. P 100,000 b. P 112,233 c. P 112,661 d. P 113,592 C 23. What is the interest expense for 2013 a. P 4,544 b. P 8,641 c. P 9,069 d. P 10,000 C 24. How much was paid for inventory purchases a. P 172,000 b. P 174,000 c. P 184,000 d. P 186,000 A 25. What is Zest Airway’s net income for 2013 a. P 13,500 b. P 14,431 c. P 14,859 d. P 23,000 B 26. How much was received from customers in 2013 a. P 245,000 b. P 283,000 c. P 293,000 d. P 307,000 C 27. On January 1, 2014, SEXY Bank extended a P2,000,000, zero-interest loan to one of its directors Ms. Nan-Lu Wang. The loan matures in lump sum on January 1, 2017. The prevailing market interest for this type of loan is 10%. The loan proceeds (transaction price) extended to Ms. Nan-Lu Wang is equal to the face amount of the loan. SEXY Bank’s personnel failed to journalize the entry on January 1, 2014, hence, no interest income was recorded for 2014 related to this loan. Because of this error, profit or loss for the year ended December 31, 2014 will be overstated (understated) by a. P0 D

b. (P200,000)

c. (P150,263) d. P347,107

PROBLEM 10 On January 1, 2013, Voice Company acquired 100% of the outstanding shares of Idol Company by issuing 200,000 shares of its P10 par ordinary with market price of P12 per share. The book value of Idol Company’s net assets was P2,500,000. Voice Company journalized the said acquisition as follows: Investment in Subsidiary P2,400,000 Expenses 40,000 Ordinary share capital, P10 par 2,000,000 Share Premium 400,000 Cash 40,000

65 | P a g e Voice Company paid direct acquisition costs and issuance/registration costs of shares of P25,000 and P15,000, respectively (refer to the entry above). The book value of Idol Company’s net assets were the same with their fair value except for a liability item which was understated by P3,000. For purposes of preparing the separate financial statement of Voice Company, the auditor noted the error on the entry above. 28. The correct journal entry to record the transaction costs in Voice books includes a debit to a. Direct acquisition expenses of P40,000 P40,000 c. Investment in Subsidiary of P40,000

b. Share premium d. Cash P40,000

C 29. The correcting entry on the separate books of Voice Company includes a credit to? a. Share premium of P15,000 b. Expenses P40,000 c. Investment in Subsidiary of P25,000 d. No entry needed B 30. What is the best basis for the correcting entry related to the error above, if any? a. IAS 8 B

b. IAS 27

c. IFRS 3

d. Both b and c

PROBLEM 11 On January 1, 2013 investor KITAKITS acquired a 30% interest in entity BEH! at a cost of P500,000. Investor KITAKITS has significant influence over entity BEH! and accounts for its investment in the associate under the equity method. The associate has net assets of P1,000,000 at the date of acquisition, which have a fair value of P1,200,000. During the year ended December 31, 2013 entity BEH! recognized a posttax profit of P200,000, and paid a dividend of P18,000. Entity BEH! also recognized foreign exchange losses of P40,000 in OCI. On January 1, 2014, entity BEH! has a rights issue that investor KITAKITS does not participate in. The rights issue brings in an additional P150,000 in cash, and dilutes investor KITAKITS's interest in entity BEH! to 25%. KITAKITS inquired for the proper accounting treatment of the dilution from his auditor. 31. Determine the net increase (decrease) on comprehensive income of the dilution on January 1, 2014. a. (P54,933)

b. (P52,933)

c. (P53,266)

d. (P55,266)

66 | P a g e B 32. The entry on January 1, 2014 will increase (decrease) the carrying amount of the investment account by a. (P90,433) b. (P52,933)

c. (P37,500) d. P0

B 33. Impairment losses on equity securities classified at amortized cost under PFRS 9 are recognized in a. profit or b. OCI c. Equity d. None loss D PROBLEM 12 Earl Company has the following capital structure at the beginning of 2015: 6% Cumulative, fullyP 600,000 participating preferred stock, P50 par value, 50,000 shares authorized, 12,000 shares issued and outstanding Common stock, P10 par value, 1,475,000 200,000 authorized; 147,500 issued and outstanding Additional paid-in capital in 180,000 excess of par – preferred Additional paid-in capital in 1,180,000 excess of par – common Retained earnings (P2,500,000 4,500,000 appropriated for plant expansion) 7,935,000 During 2015 the following Earl Company acquired 6,000 transactions occurred: February preferred shares at P70 per share 11 and 40,000 common shares at P22 per share. Earl Company is using the cost-method in recording treasury shares March 31

Issued 2,000 preferred treasury shares at P73 per share

April 7

Issued 15,000 common shares at P25 per share

July 1

Issued 1,500 preferred treasury shares at P68 per share & 20,000 common shares at P19 per share

August 15

Retired the remaining preferred

67 | P a g e and common treasury shares September 1

Plant expansion was completed

November 22

Board of directors appropriated P2,000,000 for plant expansion in Mactan, Cebu. Likewise, the Board issued a 3-year, 10% P1,500,000 face value bonds to partially fund the construction. A sinking fund was set-up for the extinguishment of the bonds at their maturity

December 31

Net income for the period P1,400,000. Total cash dividend declared and paid P500,000. No dividends have been declared in 2014. A property dividend was likewise declared, the distribution of which is on January 6, 2016. The carrying amount of the property declared as dividend was P800,000; the fair value of which was P1,000,000

34. Upon the retirement of the preferred shares, retained earnings shall be debited by a. 0

b. 6,500

c. 9,500

d. 12,500

C 35. Upon the retirement of the common shares, retained earnings shall be debited by a. 0

b. 14,000

c. 17,000

d. 20,000

D 36. The amount of cash dividends to be distributed to the common shareholders is a. 329,800 b. 351,375 c. 355,420 d. 375,000 B 37. The retained earnings – appropriated at the end of 2011 is a. 1.5M

b. 2M

c. 3.5M

d. 6M

B 38. The total stockholders’ equity at December 31, 2011 is

68 | P a g e a. 7,538,000 b. 7,738,000 c. 7,118,000 d. 8,038,000 A PROBLEM 13 Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity DP) for the purpose of acquiring and operating a shopping center. The contractual agreement between the parties establishes joint control of the activities that are conducted by entity DP. The main feature of entity DP’s legal form is that the entity, not the parties, has rights to the assets and obligations for the liabilities relating to the arrangement. These activities include the rental of the retail units, managing the car park, maintaining the center and its equipment, such as lifts and building the reputation and customer base for the center as a whole. The terms of contractual arrangement are such that: a. Entity DP owns the shopping center. The contractual arrangement does not specify that the parties have rights to the shopping center b. The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to pay any of its liabilities, the liability of each to any third party will be limited to the parties unpaid contribution. c. The parties have the right to sell or pledge their interest in entity DP d. Each party receives a share of the income from the shopping center (rental income net of operating costs) in accordance with its interest in entity DP. Transactions of the contractual arrangement for 2013 and 2014 follow: 2013: RK and SV contributed P60M each for ½ interest in the net assets of entity DP Organization expenses incurred amounts to P600,000 Entity DP acquired land at a cost of P12M Constructed building (shopping center) at a cost of P90M Operating expenses for the year amounts to P6M Rental income collected from tenants, P60M Net income or loss is distributed to the venturers in accordance with their interest 2014: Operating expenses (including depreciation) incurred for the year, P21M Rental income collected for the year, P72M Each venture receives a share of the income or loss 39. What is the interest of RK Developers in the joint venture as of December 31, 2013? a. P60M b. P87M c. P113.4 d. P86.7M

69 | P a g e 40. What is the interest of SV Holdings in the joint arrangement as of December 31, 2014? a. P60M b. P164.4M c. P112.2M d. P86.7M C PROBLEM 14 41. On April 1, 2014, Gerald Company engages in the development of a property, which is expected to take five years to complete, at a cost of P6M. the statements of financial position at December 31, 2013 and December 31, 2014, prior to capitalization of interest are as follows: 12/31/14 12/31/13 Development PP1,200,000 property Other assets 6,000,000 6,000,000 P P7,200,000 6,000,000 Loans 5.5% P 2,500,000 P2,500,000 debenture stock Bank loan at 1,200,000 6% per annum Bank loan at 1,000,000 1,000,000 7% per annum P P4,700,000 3,000,000 Shareholders’ 2,500,000 2,500,000 equity April 1, July 1, and October 1 2014. The 5.5% debenture stocks were irredeemable. Expenditure was incurred on the development as follows: April 1 – P600,000; July 1 – P400,000; October 1 – P200,000. If all the borrowing were general (i.e., the bank loan 6% was not specific to the development) and would have been avoided but for the development, then the amount of interest to be capitalized would be (Round-off to 2 decimal % for the general borrowing rate) A. P42,000 B. P41,580 C. P46,130 D. P0 PROBLEM 15 Kheen Company offers a cash rebate of P1 on each P4 package of batteries sold during 2013. Historically, 10% of customers mail in the rebate form. During 2013, 6,000,000 packages of batteries are sold, and 210,000 P1 rebates are mailed to customers. 42. What is the rebate expense shown on the 2013 financial statements? a. P 600,000

b. P 390,000

c. P 201,000

d. P -0-

70 | P a g e B 43. What is the rebate liability shown on the 2013 financial statements? a. P 600,000 b. P 390,000 c. P 201,000 d. P -0C PROBLEM 16 44. What earnings figure should be used for determining basic EPS? a. Consolidated net profit after tax attributable to parent b. Consolidated profit after tax c. A and B d. None of the choices A 45. For the year ended December 31, 2013, the following information relates to AA Ltd.: - Profit for the year was P900,000 - No preference dividends were declared during the year - 1,000,000 10% cumulative shares of P1 (classified as equity) were on issue for the entire year Earnings used to determine Basic EPS will be? a. P900,000 b. P800,000 c. P1,000,000 d. None of the choices B 46. For the year ending December 31, 2014, the following data relates to GG Ltd. 1. At January 1, there were 200,000 ordinary shares on issue 2. 100,000 fully paid ordinary shares issued on March 1 3. 25,000 ordinary shares repurchased on August 1 4. 70,000 partly paid ordinary shares issued on October 1, for P2.00 partly paid to P1.30, with right to participate in dividends in proportion to the amount paid relative to the issue price 5. 1,000,000 10% cumulative preference shares of P1.00 (classified as equity) were on issue for the entire year Which items above will have an impact on the weighted average number of shares outstanding during the year for basic EPS? a. Items 1 to 2 b. Items 1 to 3 c. Items 1 to 4 d. Items 1 to 5 C 47. Following the information in item 46: 70,000 partly paid ordinary shares issued on October 1 for P2.00 partly paid to P1.30, with right to participate in dividends in proportion to the amount paid relative to the issue price. How are these incorporated into the weighted average ordinary share calculation for basic EPS?

71 | P a g e a. Excluded from the calculation as they are not fully paid up b. Weighted as if they were fully paid up on the date that the first installment was receivable c. Weighted based on their paid up portion – each partly paid share would represent 0.65 ordinary shares d. None of the above C 48. For the year ending December 31, 2013:  At January 1 there were 800,000 ordinary shares on issue  On March 1 200,000 fully paid ordinary shares were issued by way of rights issue, providing one share for each four shares held in return for payment of P1.50 What information is needed to determine whether the rights issue contains a bonus element? a. Original issue price b. Fair value of shares prior to exercise c. Profit for the year (excluding preference share impact d. All of the above B Use the following information for the next 2 items  IAS 33 requires diluted EPS be calculated where an entity has on issue potential ordinary shares that are dilutive. In assessing whether potential ordinary shares are dilutive: 49. What measure of profit do we use? a. Total profit/loss b. Profit/loss from continuing operations c. Profit/loss from discontinuing operations d. All of the above B 50. How are different instruments assessed? a. Assess each independently b. Depends on accounting policy c. In series from most dilutive to least dilutive d. All of the above C Page 1 of 5 AP-5901Q CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS AUDIT OF STOCKHOLDERS’ EQUITY - QUIZZERS PROBLEM NO. 1 Resolve Corporation began operations on January 1, 2005. The company was authorized to issue 60,000 shares of P10 par value common stock and 120,000 shares of 10%, P100 par value convertible preferred stock.

72 | P a g e In connection with your audit of the company’s financial statements, you noted the following transactions involving stockholders’ equity during 2005: Jan. 1 Issued 1,500 shares of common stock to the corporation promoters in exchange for property valued at P510,000 and services valued at P210,000. The property costs P270,000 3 years ago and was carried on the promoters’ books at P150,000. Jan. 31 Issued 30,000 shares of convertible preferred stock at P150 per share. Each share can be converted to five shares of common stock. The corporation paid P225,000 to an agent for selling the shares. Feb. 15 Sold 9,000 shares of common stock at P390 per share. The corporation paid issue costs of P75,000. May 30 Received subscriptions for 12,000 shares of common stock at P450 per share. Aug. 30 Issued 2,100 shares of common stock and 4,200 shares of preferred stock in exchanged for a building with a fair market value of P1,530,000. The building was originally purchased for P1,140,000 by the investors and has a book value of P660,000. In addition, 1,800 shares of common stock were sold for P720,000 cash. Nov. 15 Payments in full for half of the subscriptions and partial payments for the rest of the subscriptions were received. Total cash received was P4,200,000. Shares of stock were issued for the fully paid subscriptions. Dec. 1 Declared a cash dividend of P10 per share on preferred stock, payable on December 31 to stockholders of record on December 15, and P20 per share cash dividend on common stock, payable on January 15, 2006 to stockholders of record on December 15. Dec. 31 Paid the preferred stock dividend. Net income for the first year of operations was P1,800,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2005: 1. Common stock

73 | P a g e a. P264,000 b. P144,000 c. P204,000 d. P186,000 2. Paid-in capital in excess of par value of preferred stock a. P1,500,000 b. P1,275,000 c. P1,545,000 d. P1,860,000 Page 2 of 5 AP-5901Q 3. Paid-in capital in excess of par value of common stock a. P8,211,000 b. P11,121,000 c. P10,851,000 d. P10,032,000 4. Retained earnings a. P1,050,000 b. P1,170,000 c. P1,458,000 d. P930,000 5. Total stockholders’ equity a. P17,295,000 b. P15,810,000 c. P16,950,000 d. P17,010,000 SUGGESTED ANSWERS: C, C, C, D, B PROBLEM NO. 2 The Perseverance Corporation has requested you to audit its financial statements for the year 2005. During your audit, Perseverance presented to you its balance sheet as of December 31, 2004 containing the following capital section: Preferred stock P10 par; 60,000 shares authorized and issued, of which 6,000 are treasury shares costing P90,000 and shown as an asset P600,000 Common stock, par value P4; 600,000 shares authorized, of which 450,000 are issued and outstanding 1,800,000 Additional paid in capital (P5 per share on preferred stock issued in 2000) 300,000 Allowance for doubtful accounts receivable 12,000 Reserve for depreciation 840,000 Reserve for fire insurance 198,000 Retained earnings 2,250,000 P6,000,000 Additional information: 1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005. Perseverance credited the proceeds to the Preferred Stock account. The treasury shares as of December 31, 2004 were acquired in one purchase in 2004. 2) The preferred stock carries an annual dividend of P1 per share. The dividend is cumulative. As of December 31, 2004, unpaid cumulative dividends amounted to P5 per share. The entire accumulation was liquidated in June, 2005, by issuing to the preferred stockholders 54,000 shares of common stock. 3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred

74 | P a g e stockholders of record December 15, 2005. The dividend is payable on January 15, 2006. 4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had balances of P25,000 and P1,050,000, respectively. 5) On March 1, 2005, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings was debited. 6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P30,000, which represents the carrying value of a machine destroyed by fire on that date. Estimated fire cleanup costs of P6,000 does not appear on the records. 7) The December 31, 2004 Retained Earnings consists of the following: Donated land from a stockholder (Market value on date of donation) P450,000 Gains from treasury stock transactions 51,000 Earnings retained in business 1,749,000 P2,250,000 Page 3 of 5 AP-5901Q 8) Net income for the year ended December 31, 2005 was P1,297,500 per company’s records. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2005. (Disregard tax implications) ABCD 1. Preferred stock A.555,000 B. 630,000 C. 570,000 D. 600,000 2. Common stock A. 2,070,000 B.2,016,000 C.1,800,000 D.1,854,000 3. Additional paid in capital A. 810,000 B. 864,000 C.414,000 D. 804,000 4. Appropriated retained earnings A. 0 B.303,000 C. 258,000 D 228,000 5. Unappropriated retained earnings A 2,623,500 B. 2,677,500 C. 2,578,500 D. 2,626,500 6. Treasury stock A.0 B.36,000 C.45,000 D.90,000 7. Total stockholders’ equity A. 6,316,500 B.3,700,500 C.6,319,500 D.5,812,500 SUGGESTED ANSWERS: D, B, B, B, C, C, A PROBLEM NO. 3

75 | P a g e The stockholders equity of Willpower Corporation showed the following data on December 31, 2004: 12% preferred stock, P30 par, 135,000 shares issued and outstanding P4,050,000 Common stock, P50 par, 180,000 shares issued and outstanding 9,000,000 Premium on preferred stock 1,080,000 Premium on common stock 3,240,000 Retained earnings 1,395,000 The 2005 transactions of the company affecting its stockholders’ equity are summarized chronologically as follows: 1. Issued 27,000 shares of preferred stock at P40. 2. Issued 94,500 shares of common stock at P70. 3. Retired 5,400 shares of preferred stock at P45. 4. Purchased 13,500 shares of its common stock at P80. 5. Split common stock two for one (par value reduce to P25). 6. Reissued 13,500 shares of treasury stock – common at P50. 7. Stockholders donated to the company 9,000 shares of common stock when shares had a market price of P52. One half of these shares were subsequently issued for P54. 8. Dividends were paid at the end of the calendar year on the common stock at P2 per share and on the preferred stock at the preferred rate. 9. Net income for the year was P2,520,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2005: 1. Preferred stock a. P4,617,000 b. P4,968,000 c. P4,698,000 d. P4,860,000 2. Common stock a. P15,615,000 b. P13,968,000 c. P13,500,000 d. P13,725,000 3. Additional paid-in capital a. P6,777,000 b. P6,679,800 c. P6,858,000 d. P6,814,800 Page 4 of 5 AP-5901Q 4. Unappropriated retained earnings a. P1,749,240 b. P1,711,440 c. P2,251,440 d. P1,684,440 5. Total stockholders’ equity a. P26,949,240 b. P26,958,960 c. P26,922,240 d. P26,940,240 SUGGESTED ANSWERS: C, D, D, B, A PROBLEM NO. 4 Grit Corp., organized on June 1, 2004, was authorized to issue stock as follows: • 800,000 shares of 9% preferred stock, convertible, P100 par • 2,500,000 shares of common stock, P2.50 stated value During the remainder of the fiscal year ended May 31, 2005, the following transactions

76 | P a g e were completed in the order given: • 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares of common stock were subscribed for at P26. Both subscriptions were payable 30% upon subscription, the balance in one payment. • The second subscription payment was received, except one subscriber for 60,000 shares of common stock defaulted on payment. The full amount paid by this subscriber was returned, and all of the fully paid stock was issued. • 150,000 shares of common stock were reacquired by purchase at P28. • Each share of preferred was converted into four shares of common stock. • The treasury stock was exchanged for machinery with a fair market value of P4,300,000. • There was a 2-for-1 stock split, and the stated value of the new common stock is P1.25. • Net income was P830,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2005: 1. Common stock a. P2,550,000 b. P2,100,000 c. P5,100,000 d. P4,200,000 2. Total additional paid-in capital a. P50,890,000 b. P48,340,000 c. P48,808,000 d. P48,240,000 3. Total contributed capital a. P53,908,000 b. P53,440,000 c. P55,990,000 d. P53,340,000 4. Total stockholders’ equity a. P54,270,000 b. P54,738,000 c. P56,820,000 d. P54,170,000 SUGGESTED ANSWERS: C, B, B, A Page 5 of 5 AP-5901Q PROBLEM NO. 5 The year-end audit of the records of Stamina Farms disclosed a shortage in cash amounting to P600,000. The treasurer had concealed the fraud by increasing inventories by P300,000, land by P100,000 and accounts receivable by P200,000. Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares owned by him. The board of directors accepted the offer, with the agreement that the treasurer would pay any deficiency between the shortage and the book value of the

77 | P a g e shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any, of the book value over the shortage. As of December 31, 2005, there were 40,000 common shares issued and outstanding with a par value of P100; Retained earnings as of January 1, 2005 was P1,600,000 and net income from 2005 operations was P1,400,000. REQUIRED: Considering the above information, answer the following: 1. What would be the book value per share for purposes of the agreement? a. P175 b. P206 c. P150 d. None of these 2. How much would the company pay the treasurer, if any? a. P450,000 b. P300,000 c. P636,000 d. None of these 3. Assuming further the company distributes the 6,000 shares as dividend to the remaining stockholders, what would be the balance of the Retained earnings as of December 31, 2005? a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these SUGGESTED ANSWERS: A, A, A – End of AP-5901Q Page 1 of 10 AP-5902 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS AUDIT OF LIABILITIES PROBLEM NO. 1 In the audit of the Heats Corporation’s financial statements at December 31, 2005, the chief accountant of the said corporation provided the following information: Notes payable: Arising from purchase of goods 304,000 Arising from 5 year-bank loans, on which marketable securities valued at P600,000 have been pledged as security, P400,000 due on June 30, 2006; P100,000 due on Dec. 31, 2006 500,000 Arising from advances by officers, due June 30, 2006 50,000 Reserve for general contingencies 400,000 Employees’ income tax withheld 20,000 Advances received from customers on purchase orders 64,000 Containers’ deposit 50,000 Accounts payable arising from purchase of goods, net of debit balances of P30,000 170,000 Accounts receivable, net of credit balances P40,000 360,000 Cash dividends payable 80,000 Stock dividends payable 100,000

78 | P a g e Dividends in arrears on preferred stock, not yet declared 200,000 Convertible bonds, due January 31, 2007 1,000,000 First mortgage serial bonds, payable in semi-annual installments of P50,000, due April 1 and October 1 of each year 2,000,000 Overdraft with Allied Bank 90,000 Cash in bank balance with PNB 390,000 Estimated damages to be paid as a result of unsatisfactory performance on a contract 160,000 Estimated expenses on meeting guarantee for service requirements on merchandise sold 120,000 Estimated premiums payable 75,000 Deferred revenue 87,000 Accrued interest on bonds payable 360,000 Common stock warrants outstanding 120,000 Common stock options outstanding 210,000 Unused letters of credit 400,000 Deficiency VAT assessment being contested 500,000 Notes receivable discounted 200,000 On March 1, 2006, the P400,000 note payable was replaced by an 18-month note for the same amount. Heats is considering similar action on the P100,000 note payable due on December 31, 2006. The 2005 financial statements were issued on March 31, 2006. On December 1, 2005, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. Heats’ attorneys believe that the suit is without merit. No court date has been set. On January 15, 2006, the BIR assessed Heats an additional income tax of P300,000 for the 2003 tax year. Heats’ attorneys and tax accountants have stated that it is likely that the BIR will agree to a P200,000 settlement. Page 2 of 10 AP-5902 REQUIRED: Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. Total current liabilities a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000 2. Total noncurrent liabilities a. P3,300,000 b. P2,900,000 c. P3,000,000 d. P3,400,000 3. Total liabilities a. P5,200,000 b. P5,000,000 c. P5,400,000 d. P5,800,000 A,B,C

79 | P a g e PROBLEM NO. 2 The following information relates to Sonic Company’s obligations as of December 31, 2005. For each of the numbered items, determine the amount if any, that should be reported as current liability in Sonic’s December 31, 2005 balance sheet. 1. Accounts payable: Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in suppliers’ accounts. The unpaid voucher file included the following items that not had been recorded as of December 31, 2005: a) A Company – P224,000 merchandise shipped on December 31, 2005, FOB destination; received on January 10, 2006. b) B, Inc. – P192,000 merchandise shipped on December 26, 2005, FOB shipping point; received on January 16, 2006. c) C Super Services – P144,000 janitorial services for the threemonth period ending January 31, 2006. d) MERALCO – P67,200 electric bill covering the period December 16, 2005 to January 15, 2006. On December 28, 2005, a supplier authorized Sonic to return goods billed at P160,000 and shipped on December 20, 2005. The goods were returned by Sonic on December 28, 2005, but the P160,000 credit memo was not received until January 6, 2006. a. P5,923,200 b. P5,712,000 c. P5,601,600 d. P5,841,600 2. Payroll: Items related to Sonic’s payroll as of December 31, 2005 are: Accrued salaries and wages P776,000 Payroll deductions for: Income taxes withheld 56,000 SSS contributions 64,000 Philhealth contributions 16,000 Advances to employees 80,000 a. P776,000 b. P992,000 c. P832,000 d. P912,000 3. Litigation: In May, 2005, Sonic became involved in a litigation. The suit is being contested, but Sonic’s lawyer believes it is possible that Sonic may be held liable for damages estimated in the range between P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other amount.

80 | P a g e a. P0 b. P2,000,000 c. P3,000,000 d. P2,500,000 Page 3 of 10 D,D,A AP-5902 4. Bonus obligation: Sonic Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the tax rate of 30% and the correct income before bonus and tax is P9,600,000. (Ignore the effects of other given items on net income.) a. P722,600 b. P395,000 c. P2,240,000 d. P628,000 5. Note payable: A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31, 2005. The note is dated October 1, 2004, bears interest at 18%, and is payable in three equal annual installment of P800,000. The first interest and principal payment was made on October 1, 2005. a. P800,000 b. P908,000 c. P72,000 d. P872,000 6. Purchase commitment: During 2005, Sonic entered in a noncancellable commitment to purchase 320,000 units of inventory at fixed price of P5 per unit, delivery to be made in 2006. On December 31, 2005, the purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the purchase contract were delivered on January 28, 2006. a. P0 b. P1,600,000 c. P1,408,000 d. P192,000 7. Deferred taxes: On December 31, 2005, Sonic’s deferred income tax account has a 2005 ending credit balance of P772,800, consisting of the following items: Caused by temporary differences in accounting Deferred tax For gross profit on installment sales P376,000 Cr. For depreciation on property and equipment 576,000 Cr For product warranty expense 179,200 Dr P772,800 Cr. a. P772,800 b. P952,000 c. P196,800 d. P0 8. Product warranty: Sonic has a one year product warranty on selected items in its product line. The estimated warranty liability on sales made during 2004, which was outstanding as of

81 | P a g e December 31, 2004, amounted to P416,000. The warranty costs on sales made in 2005 are estimated at P1,504,000. Actual warranty costs incurred during the current 2005 fiscal year are as follows: Warranty claims honored on 2004 sales P 416,000 Warranty claims honored on 2005 sales 992,000 Total warranty claims honored P1,408,000 a. P0 b. P1,504,000 c. P96,000 d. P512,000 9. Premiums: To increase sales, Sonic Company inaugurated a promotional campaign on June 30, 2005. Sonic placed a coupon redeemable for a premium in each package of product sold. Each premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20. Sonic estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2005, the following is available: Packages of product sold 160,000 Premiums purchased 16,000 Coupons redeemed 64,000 a. P1,728,000 b. P1,152,000 c. P1,600,000 d. P576,000 D,D,D,D,D,D Page 4 of 10 AP-5902 10.Due to Five Six Finance company: Sonic’s accounting records show that as of December 31, 2005, P1,280,000 was due to Five Six Finance Company for advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse. a. P0 b. P1,600,000 c. P320,000 d. P1,280,000 D PROBLEM NO. 3 In conjunction with your firm’s examination of the financial statements of Pistons Company as of December 31, 2005, you obtained from the voucher register the information shown in the working paper below. Item No. Entry Date Voucher Ref. Description Amount

82 | P a g e Account Charged 1 12.18.05 12-202 Supplies, purchased FOB destination, 12.15.05; received, 12.17.05 20,000 Supplies on hand 2 12.18.05 12-204 Auto insurance, 12.15.05 to 12.15.06 24,000 Prepaid insurance 3 12.21.05 12-206 Repair services; received 12.20.05 24,000 Repairs and maintenance 4 12.21.05 12-214 Merchandise shipped FOB shipping point, 11.20.05; received, 12.4.05 17,000 Inventory 5 12.21.05 12-219 Payroll, 12.6.05 to 12.20.05 (12 working days) 69,000 Salaries and wages 6 12.26.05 12-221 Subscription to tax reporting service for 2006 5,000 Dues and subscription expense 7 12.28.05 12-230 Utilities for December 2005 29,000 Utilities expense 8 12.28.05 12-234 Merchandise shipped FOB destination, 12.24.05; received, 1.2.06 111,500 Inventory 9 12.28.05 12-243 Merchandise shipped FOB destination, 12.26.05; received, 12.29.05 84,000 Inventory 10 01.02.06 01-001 Legal services, received 12.28.05 46,000 Legal and professional expense 11 01.02.06 01-002 Medical services for employees for December 2005 25,000 Medical expense 12 01.05.06 01-003 Merchandise shipped FOB shipping point, 12.29.05; received, 1.4.06 55,000 Inventory 13 01.10.06 01-004 Payroll, 12.21.05 to 01.05.06 (12 working days in total, 4 working days in Jan.) 72,000 Salaries and wages

83 | P a g e 14 01.10.06 01-005 Merchandise shipped FOB shipping point, 1.2.06; received, 1.5.06 64,000 Inventory 15 01.12.06 01-006 Manufacturing royalties, Dec. 2005 39,000 Manufacturing costs Page 5 of 10 AP-5902 Item No. Entry Date Voucher Ref. Description Amount Account Charged 16 01.12.06 01-007 Merchandise shipped FOB destination, 1.3.06; received, 1.10.06 38,000 Inventory 17 01.13.06 01-008 Maintenance services, received 1.9.06 9,000 Repairs and maintenance 18 01.14.06 01-009 Interest on bank loan, 10.12.05 to 1.10.06 30,000 Interest expense 19 01.15.06 01-010 Manufacturing equipment, installed on 12.29.05 254,000 Machinery and equipment 20 01.15.06 01-011 Dividends declared, 12.15.05 160,000 Dividends payable Accrued liabilities as of December 31, 2005 were as follows: Accrued payroll 48,000 Accrued interest payable 26,667 Dividends payable 160,000 Accrued royalties payable 39,000 The Accrued payroll, Accrued interest payable, and Accrued royalties payable accounts were reversed on January 1, 2006. REQUIRED: Prepare adjusting entries as of December 31, 2005 based on your review of the data given above. PROBLEM NO. 4 During your regular annual audit of Rockets Company for the year ended December 31,

84 | P a g e 2005, you obtain the following evidence and data relative to your examination of the bonds payable and related accounts. From your permanent file working papers: Client is authorized to issue 20,000 bonds with par value of P1,000 each. Bonds are dated May 1, 2002 and are due May 1, 2012. Interest at 12% per annum is due semiannually every May 1 and November 1. The December 31, 2004 balance of P9,500,000 represents proceeds from issuance of 10,000 bonds on November 2, 2003. From the client’s ledger: 12%, 10-year Bonds Payable 12/31/2004 Balance P9,500,000 07/01/2005 CR 2,100,000 Interest Expense 05/01/2005 CV-120 P600,000 07/01/2005 CR P40,000 11/01/2005 CV-531 720,000 Page 6 of 10 AP-5902 From supporting documents: CR Cash receipts entry for issuance of 2,000 bonds for a total of P2,100,000 on July 1, 2005. Trustee’s remittance statement attached. Entry recorded Cash P2,140,000 Bonds Payable P2,100,000 Interest expense 40,000 CV-120 Cash payment to trustee for November 1, 2004 through April 30, 2005 interest. Paid check to trustee attached. CV-531 Cash payment to trustee for May 1, 2005 through October 31, 2005 interest. Paid check to trustee attached. REQUIRED: 1. Adjusting journal entries as of December 31, 2005. Use the straight line method to amortize bond discount and premium, if any. 2. Compute for the adjusted balances of the following as of December 31, 2005: a. Bonds payable d. Accrued interest b. Bond discount e. Interest expense c. Bond premium Requirement no. 1 1) Discount on bonds payable (P10,000,000 - P9,500,000) 500,000 Bonds payable 500,000 To correct the original entry on issuance of 10,000 bonds Retained earnings (P500,000 x 14/102) 68,627

85 | P a g e Interest expense (P500,000 x 12/102) 58,824 Discount on bonds payable 127,451 To record discount amortization for the prior and current years 2) Bonds payable (P2,100,000 - P2,000,000) 100,000 Premium on bonds payable 100,000 To recognize premium on bonds payable Premium on bonds payable (P100,000 x 6/82) 7,317 Interest expense 7,317 To record premium amortization for the year 3) Retained earnings (P10,000,000 x 12% x 2/12) 200,000 Interest expense 200,000 To correct interest exp pertaining to year 2004 4) Interest expense (P12,000,000 x 12% x 2/12) 240,000 Accrued interest payable 240,000 To record accrual of interest Requirement no. 2 a) Bonds payable (P10,000,000 + P2,000,000) 12,000,000 b) Bond discount (P500,000 x 76/102) 372,549 c) Bond premium (P100,000 x 76/82) 92,683 d) Accrued interest (P12,000,000 x 12% x 2/12) 240,000 e) Interest expense P10,000,000 x 12% 1,200,000 P2,000,000 x 12% x 6/12 120,000 Bond discount amortization (P500,000 x 12/102) 58,824 Bond premium amortization (P100,000 x 6/82) (7,317) 1,371,506 PROBLEM NO. 5 Wizards Company presented to you their records in connection with the audit of the company’s financial statements for the year ended December 31, 2005. This is the first time the company has been audited. The company floated a serial bond issue in 2003. Your audit showed the following details of the issue and the accounts as of December 31, 2005: Total amount P5,000,000 Date of issue October 2, 2003 Proceeds from issue P4,900,000 Interest rate 5% per annum Interest payment date October 1 Maturity date P1,000,000 annually, starting October 1, 2005 5% Serial Bonds Payable 10/02/2005 VR P1,000,000 10/02/2003 CR P4,900,000 Accrued Interest Payable 01/02/05 P62,500 REQUIRED:

86 | P a g e 1. Adjusting journal entries as of December 31, 2005. Use the bond outstanding method to amortize bond discount and premium, if any. 2. Compute for the adjusted balances of the following as of December 31, 2005: a. Bonds payable b. Bond discount c. Accrued interest payable d. Bond interest expense Page 7 of 10 PROBLEM NO. 5 - Wizards Company Computation of amortization rate Amount Percent Bond year From To Outstanding to total 1st 10.02.03 09.30.04 5,000,000 25% 2nd 10.01.04 09.30.05 5,000,000 25% 3rd 10.01.05 09.30.06 4,000,000 20% 4th 10.01.06 09.30.07 3,000,000 15% 5th 10.01.07 09.30.08 2,000,000 10% 6th 10.01.08 09.30.09 1,000,000 5% 20,000,000 100% Computation of amortization amount 2003 October to December (P100,000 x 25% x 3/12) 6,250 2004 January to September (P100,000 x 25% X 9/12) 18,750 October to December (P100,000 x 25% x 3/12) 6,250 25,000 2005 January to September (P100,000 x 25% X 9/12) 18,750 October to December (P100,000 x 20% x 3/12) 5,000 23,750 2006 January to September (P100,000 x 20% X 9/12) 15,000 October to December (P100,000 x 15% x 3/12) 3,750 18,750 2007 January to September (P100,000 x 15% X 9/12) 11,250 October to December (P100,000 x 10% x 3/12) 2,500 13,750 2008 January to September (P100,000 x 10% X 9/12) 7,500 October to December (P100,000 x 5% x 3/12) 1,250 8,750 2009 January to September (P100,000 x 5% X 9/12) 3,750 100,000 Requirement no. 1 a) Bonds payable (P5,000,000 - P1,000,000) 4,000,000 b) Bond discount Original amount 100,000 Amortization : Prior years (2003 and 2004) 31,250 Current year (2005) 23,750 55,000 45,000 c) Accrued interest (P4,000,000 x 5% x 3/12) 50,000 e) Interest expense P4,000,000 x 5% 200,000 P1,000,000 x 5% x 9/12 37,500 Bond discount amortization (see letter b above) 23,750 261,250 Requirement no. 2 1) Discount on bonds payable 100,000 Bond payable 100,000

87 | P a g e 2) Retained earnings 31,250 Bond interest expense 23,750 Discount on bonds payable 55,000 3) Accrued interest payable 62,500 Bond interest expense 62,500 4) Bond interest expense 50,000 Accrued interest payable 50,000 Period covered AP-5902 PROBLEM NO. 6 On January 2, 2004, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will mature on January 1, 2008 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 10%. On December 31, 2005, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege. In addition, the company reacquired at 110, bonds with a face value of P500,000. The balances in the capital accounts as of December 31, 2004 were: Common stock, P100 par, authorized 50,000 shares, issued and outstanding, 30,000 shares P3,000,000 Premium on common stock 500,000 Market value of the common stock and bonds were as follows: Date Bonds Common stock December 31, 2004 118 40 December 31, 2005 110 42 QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much of the proceeds from the issuance of convertible bonds should be allocated to equity? a. P634,000 b. P126,816 c. P221,664 d. P0 B 2. How much is the carrying value of the bonds payable as of December 31, 2004? a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502 D 3. How much is the interest expense for the year 2005? a. P160,000 b. P138,940 c. P179,617 d. P190,050 D

88 | P a g e 4. The entry to record the conversion on December 31, 2005 will include a credit to APIC of a. P365,276 b. P400,000 c. P307,893 d. P0 A 5. How much is the loss on bond reacquisition on December 31, 2005? a. P50,000 b. P96,053 c. P67,362 d. P0 C PROBLEM NO. 7 In connection with your audit of Ginebra Corporation’s financial statements for the year 2005, you noted the following liability account balances as of December 31, 2004: Note payable, bank P 5,600,000 Liability under finance lease 430,000 Deferred income taxes 700,000 Transactions during 2005 and other information relating to Ginebra’s liabilities were as follows: a. The principal amount of the note payable is P5,600,000 and bears interest at 12%. The note is dated April 1, 2004 and is payable in four equal annual installments of P1,400,000 beginning April 1, 2005. The first principal and interest payment was made on April 1, 2005. Page 8 of 10 AP-5902 b. The capitalized lease is for a ten-year period beginning December 31, 2002. Equal annual payments of P100,000 are due on December 31 of each year, and the 14% interest rate implicit in the lease known by Ginebra. The present value at December 31, 2004 of the seven remaining lease payments (due December 31, 2005 through December 31, 2011) discounted at 14% was P430,000. c. Deferred income taxes are provided in recognition of timing differences between financial and income tax reporting of depreciation. For the year ended December 31, 2005, depreciation per tax return exceeded book depreciation by P312,500. Ginebra’s effective income tax rate for 2004 was 32%. d. On July 1, 2005, Ginebra issued for P1,774,000, P2,000,000 face amount of its 10%, P1,000 bonds. The Bonds were issued to yield 12%. The bonds are dated July 1, 2004 and will mature on July 1, 2014. Interest is payable annually on July 1. Ginebra

89 | P a g e uses the interest method to amortize bond discount. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Liability under finance lease as of December 31, 2005 a. P381,600 b. P390,200 c. P344,828 d. P330,000 B 2. Total noncurrent liabilities as of December 31, 2005 a. P5,610,440 b. P5,770,640 c. P5,931,328 d. P5,725,268 D 3. Current portion of long-term liabilities as of December 31, 2005 a. P1,445,372 b. P1,400,000 c. P1,500,000 d. P1,446,576 A 4. Accrued interest payable as of December 31, 2005 a. P484,440 b. P432,628 c. P532,628 d. P478,000 D 5. Total interest expense for the year 2005 a. P652,440 b. P707,068 c. P712,640 d. P699,760 C PROBLEM NO. 8 Select the best answer for each of the following: 1. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of a. Existence or occurrence c. Completeness b. Presentation and disclosure d. Valuation or allocation C 2. 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 c. Canceled checks b. Vendors’ invoices d. Receiving reports B 3. The primary audit test to determine if accounts payable are valued properly is a. Confirmation of accounts payable b. Vouching accounts payable to supporting documentation c. An analytical procedure d. Verification that accounts payable was reported as a current liability in the balance sheet. B 4. Which of the following procedures is least likely to be performed before the balance sheet date? a. Observation of inventory c. Search for unrecorded liabilities

90 | P a g e b. Testing of internal control over cash d. Confirmation of receivables Page 9 of 10 C AP-5902 5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order was dated after receipt of goods. The purchasing agent had forgotten to issue purchase order. Also a disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often. c. Disagree with the assistant because two problems have an equal risk of loss associated with them. d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it. D 6. When using confirmation to provide evidence about completeness assertion for accounts payable, the appropriate population most likely is a. Vendors with whom the entity has previously done business. b. Amounts recorded in the accounts payable subsidiary ledger. c. Payees of checks drawn in the month after the year end. d. Invoices filed in the entity’s open invoice file. A 7. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable? a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for. b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices.

91 | P a g e c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. d. Confirming accounts payable balances with known suppliers who have zero balances. C 8. Only one of the following four statements, which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors is false. The false statement is that a. Confirmation of accounts receivable with debtors is a more widely accepted auditing procedures than is confirmation of accounts payable with suppliers. b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable. c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date. d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount due. B 9. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the a. Quantity b. Quality c. Price d. Terms B 10. 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 meetings of the board directors. B 11. Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. Unpaid bills c. Bills of lading b. Shipping records d. Unmatched sales invoices A Page 10 of 10

92 | P a g e AP-5902 12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. c. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. d. Reconciling vendors’ statement to the file of receiving reports to identify items received just prior to the balance sheet date. A 13. In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor is most interested in examining the purchase a. Journal b. Requisitions c. Orders d. Invoices D 14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client’s employees? a. Test footings in the accounts payable ledger b. Reconcile unpaid invoices to vendors statements c. Prepare a schedule of accounts payable d. Mail confirmations for selected account balances C 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 c. Completeness b. Presentation and disclosure d. Valuation or allocation. B 16. 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. A 17. 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.

93 | P a g e c. Subscription list. d. Description of the collateral D 18. 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. C 19. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because a. Accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of completed transactions b. Accrued liability balances are less material than accounts payable balances. c. Evidence supporting accrued liabilities in nonexistence while evidence supporting accounts payable is readily available. d. Accrued liabilities at year-end will become accounts payable during the following year. A 20. 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 A – End of AP-5902 – Page 1 of 4 AP-5902Q CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS AUDIT OF LIABILITIES – QUIZZERS PROBLEM NO. 1 Cavaliers Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31, 2005: Notes payable

94 | P a g e Cavaliers has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2005. Due date Amount April 31, 2005 P 600,000 July 31, 2005 900,000 September 1, 2005 450,000 February 1, 2006 450,000 April 1, 2006 – March 31, 2007 2,700,000 P 5,100,000 Estimated warranties Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2003 – 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred during 2004 – 2005 fiscal year are as follows: Warranty claims honored on 2003 – 2004 sales P 252,000 Warranty claims honored on 2004 – 2005 sales 285,000 Total P 537,000 Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of March 31, 2005. Dividends On March 10, 2005, Cavaliers’ board of directors declared a cash dividend of P0.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2005 to common stockholders on record at the close of business on March 31, 2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common shares issued and outstanding. Bonds payable Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will mature on October 1, 2009. Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight line method to amortize bond discount. QUESTIONS: Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2005: 1. Estimated warranty payable

95 | P a g e a. P252,000 b. P345,000 c. P630,000 d. P882,000 B Page 2 of 4 AP-5902Q 2. Unamortized bond discount a. P110,000 b. P200,000 c. P100,000 d. P90,000 D 3. Bond interest payable a. P0 b. P300,000 c. P150,000 d. P250,000 B 4. Total current liabilities a. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,945,000 C 5. Total noncurrent liabilities a. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,000 D SUGGESTED ANSWERS: B, D, B, C, D PROBLEM NO. 2 Pirates’ Music Emporium carries a wide variety of music promotion techniques - warranties and premiums – to attract customers. Musical instrument and sound equipment are sold in a oneyear warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Pirates pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Pirates’ total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument and sound reproduction equipment and P1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P164,000 during 2005. A total of 6,500 AM/FM radio used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2005. The accrual method is used by Pirates to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2005, were as shown below: Inventory of Premium AM/FM radio P39,950 Estimated Premium Claims Outstanding 44,800 Estimated Liability from Warranties 136,000 QUESTIONS:

96 | P a g e Based on the above and the result of your audit, determine the amounts that will be shown on the 2005 financial statements for the following: 1. Warranty expense a. P108,000 b. P164,000 c. P144,000 d. P80,000 A 2. Estimated liability from warranties a. P108,000 b. P136,000 c. P164,000 d. P80,000 D 3. Premium expense a. P 75,600 b. P108,000 c. P183,600 d. P126,000 A 4. Inventory of AM/FM radio a. P46,950 b. P77,350 c. P39,950 d. P56,950 D 5. Estimated liability for premiums a. P75,600 b. P63,450 c. P36,400 d. P44,800 C SUGGESTED ANSWERS: A, D, A, D, C Page 3 of 4 AP-5902Q PROBLEM NO. 3 In the audit process, the following data were obtained from the books of the Spurs Company which uses a voucher system. All invoices are subject to term 2/10, n/30 and are entered net with the discount entered in the Purchase Discount column of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New Jersey. A fresh accounting graduate has been assigned to record the transactions. At year-end, the substitute accountant finds that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the matter. A schedule of unpaid vouchers as of December 31, 2005, all of which are net of discount, is presented to you: Date Voucher No. Supplier Amount Nov. 27 797 Duncan Supply Co. P 78,400 Dec. 02 821 Ginobili Distributors 19,600 11 829 Parker Sales 44,100 20 836 Mohamed Dealers 17,150 21 842 Bowen Merchandising 22,050 22 856 Horry Mercantile 80,850 31 865 Jackson Traders 78,400 P340,550 Vouchers Payable (control account) Cash disbursements P1,309,500 Purchases journal P1,645,000 Purchase returns journal 36,750*

97 | P a g e * Voucher Nos. 821 and 836 cancelled as goods were returned in December. REQUIRED: Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. Adjusted balance of Vouchers Payable a. P310,000 b. P306,750 c. P303,800 d. P344,250 2. Purchase discounts lost on unpaid vouchers a. P6,200 b. P2,950 c. P3,700 d. P0 3. Purchase discounts lost on paid vouchers a. P28,750 b. P8,000 c. P5,050 d. P41,800 4. Adjusting journal entry or entries to correct the accounts will include a. A debit to Purchase Discounts Lost of P11,250. b. A debit to Purchase Discounts Lost of P5,050. c. A credit to Vouchers Payable of P8,000. d. A credit to Vouchers Payable of P11,250. SUGGESTED ANSWERS: B, B, C, C PROBLEM NO. 4 In your initial audit of Bulls Finance Co., you find the following ledger account balances. 12%, 25-year Bonds Payable, 2001 issue 01/01/2001 CR P 1,600,000 Page 4 of 4 AP-5902Q Treasury Bonds 10/01/2005 CD P 216,000 Bond Premium 01/01/2001 CR P 80,000 Bond Interest Expense 01/01/2005 CD P 96,000 07/01/2005 CD 96,000 The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus accrued interest. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. The adjusted balance of bonds payable as of December 31, 2005 is a. P1,400,000 b. P1,600,000 c. P1,000,000 d. P1,384,000 2. The unamortized bond premium on December 31, 2005 is a. P80,000 b. P64,000 c. P56,000 d. P58,800 3. The total bond interest expense for the year 2005 is a. P189,100 b. P182,900 c. P188,800 d. P182,800 4. The gain or loss on partial bond redemption is a. P1,900 loss b. P1,900 gain c. P18,100 loss d. P18,100 gain SUGGESTED ANSWERS: A, C, B, A – End of AP-5902Q – Page 1 of 10

98 | P a g e AP-5903 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS AUDIT OF PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS PROBLEM NO. 1 The property, plant and equipment section of White Corporation’s balance sheet at December 31, 2004 included the following items: Land P 2,500,000 Land improvements 560,000 Building 3,600,000 Machinery and equipment 6,600,000 During 2005 the following data were available to you upon your analysis of the accounts: Cash paid on purchase of land P10,000,000 Mortgage assumed on the land bought, including interest at 16% 16,000,000 Realtor’s commission 1,200,000 Legal fees, realty taxes and documentation expenses 200,000 Amount paid to relocate persons squatting on the property 400,000 Cost of tearing down an old building on the land 300,000 Amount recovered from the salvage of the building demolished 600,000 Cost of fencing the property 440,000 Amount paid to a contractor for the building erected 8,000,000 Building permit fees 50,000 Excavation expenses 250,000 Architect’s fee 100,000 Interest that would have been earned had the money used during the period of construction been invested in the money market 600,000 Invoice cost of machinery acquired 8,000,000 Freight, unloading, and delivery charges 240,000 Customs duties and other charges 560,000 Allowances, hotel accommodations, etc., paid to foreign technicians during instillation and test run of machines 1,600,000 Royalty payment on machines purchased (based on units produced and sold) 480,000 REQUIRED: Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. Land 2. Land improvements 3. Building 4. Machinery and equipment

99 | P a g e 5. Total depreciable property, plant and equipment PROBLEM NO. 2 The following were discovered during your audit of Black Company’s financial statements for the year ended December 31, 2005: a. On December 24, 2005, Black purchased an office equipment for P400,000, terms 2/5, n/15. No entry was made on the date of purchase. The same was paid on December 31, 2005 and the accountant debited Office Equipment and credited cash for P400,000. Page 2 of 10 AP-5903 b. Machine C, with a cash price of P128,000, was purchased on January 2, 2005. The company paid P20,000 down and P10,000 for 12 months. The last payment was made on December 30, 2005. Straight line depreciation, based on a five-year useful life and no salvage value, was recorded at P28,000 for the year. Freight of P4,000 on machine C was debited to the Freight in account. c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2005, in exchange for P400,000 face amount of bonds payable selling at 94, and maturing on April 1, 2015. The accountant recorded the acquisition by a debit to Machinery and a credit to Bonds Payable for P400,000. Straight line depreciation was recorded based on a five-year economic life and amounted to P54,000 for nine months. In the computation of depreciation, residual value of P40,000 was used. d. Machine A was acquired on January 22, 2005, in exchange for past due accounts receivable of P140,000, on which an allowance of 20% was established at the end of 2004. The current fair value of the machine on January 22 was estimated at P110,000. The machine was recorded by a debit to Machinery and a credit to Accounts Receivable for P140,000. No depreciation was recorded on Machine A, because it was not installed and never used in operations. On February 2, 2005, Machine A was exchanged for 1,000 shares of the company’s outstanding capital stock with market price of P105 per share. The Treasury Stock account was debited

100 | P a g e for P140,000 with the corresponding credit to Machinery. e. On December 29, 2005, the company exchanged 10,000 shares of Emong, Inc. common stock, which Black was holding as an investment, for an equipment from De Leon Corporation. The common stock of Emong, Inc., which had been purchased by Black for P45 per share, had a quoted market value of P50 per share on the date of exchange. The equipment had a market value of P470,000. The transaction was recorded by a debit to Equipment and a credit to Investment in Emong, Inc.-Common for P450,000. f. On December 30, 2005, Machine M with a carrying amount of P120,000 (cost P400,000) was exchanged for a similar asset with a fair value of P150,000. In addition, Black paid P20,000 to acquire the new machine. The exchange, which lacks commercial substance, was recorded by a debit to Machinery and a credit to cash for P20,000. g. Machine E was recorded at P102,000, which included the carrying amount of P22,000 for an old machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was P90,000, and the trade in allowance was P10,000. This transaction took place on December 31, 2005. h. Ms. Beauty, the company’s president, donated land and building appraised at P200,000 and P400,000, respectively, to the company to be used as plant site. The company began operating the plant on September 30, 2005. The building is estimated to have a useful life of 25 years. Since no money was involved, no journal entry was made for the above transaction. i. On July 1, 2004, the national government granted a parcel of land located in Baliuag, Bulacan to Black. On the date of grant, the land had a fair value of P2,000,000. The grant required Black to construct a cold storage building on the site. Black finished the construction of the building, which has an estimated useful life of 25 years, on January 2, 2005. Black appropriately recorded the cost of the building of P4,000,000 (which include direct materials, direct labor, and indirect cost and incremental

101 | P a g e overhead) but failed to provide depreciation in 2005. Unaware of the accounting procedures for government grants, the company did not reflect the grant on its books. Page 3 of 10 AP-5903 REQUIRED: As Black’s external auditor, you are required to prepare any necessary adjusting journal entries as of December 31, 2005. PROBLEM NO. 3 The Blue Corporation was incorporated on January 2, 2005, but was unable to begin manufacturing activities until July 1, 2005 because the new factory facilities were not completed until that date. The “Land and Building” account at December 31, 2005 follows: Date Particulars Amount Jan. 31 Land and building P 1,098,000 Feb. 28 Cost of removal of old building 60,000 May 02 Partial payment on new construction 700,000 02 Legal fees paid 15,000 June 01 Second payment on new construction 600,000 July 01 Fire insurance premium – 1 year 26,000 01 Final payment on new construction 200,000 Dec. 31 Asset write-up 500,000 P 3,199,000 Dec. 31 Depreciation – 2005, at 1% of account balance 31,990 P 3,167,010 You were able to gather the following during your audit: a. To acquire land and building, the company paid P98,000 cash and 10,000 shares of its 9% cumulative preferred shares, P100 par value per share. The shares were then selling at P120. b. Legal fees covered the following: Cost of incorporation P 9,500 Examination of title covering purchase of the land 4,000 Legal work in connection with construction contract 1,500 P 15,000 c. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building by P500,000, believing such increase is justified to reflect current market value at the time the building was completed. Retained earnings was credited for this amount. d. Estimated useful life of the building is 25 years. REQUIRED:

102 | P a g e 1. Prepare the necessary adjusting journal entries as of December 31, 2005. 2. Determine the adjusted balances of the following as of December 31, 2005: a. Land and building b. Land c. Carrying value of building d. Organization cost, net (presented under Noncurrent Assets) Page 4 of 10 AP-5903 PROBLEM NO. 4 In the audit of the books of Green Company for the year 2005, the following items and information appeared in the Production Machines account of the auditee: Date Particulars Debit Credit 2005 Jan. 01 Balance–Machines 1, 2, 3, and 4 at P90,000 each P 360,000 Aug 31 Machine 5 Machine 1 198,000 P 3,000 Sept 30 Machine 6 96,000 Dec 01 Machines 7 and 8 at P216,000 each 432,000 Dec 01 Machine 2 21,000 31 Balance . 1,062,000 P1,086,000 P1,086,000 The Accumulated Depreciation account contained no entries for the year 2005. The balance on January 1, 2005 per your audit, was as follows: Machine 1 P 84,375 Machine 2 39,375 Machine 3 33,750 Machine 4 22,500 Total P 180,000 Based on your further inquiry and verification, you noted the following: 1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P3,000. 2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2005. Insurance of P21,000 was recovered. Machine 7 was to replace Machine 2. 3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in cash and charged to Production Machine account. 4. Depreciation rate is recognized at 25% per annum. REQUIRED:

103 | P a g e Determine the adjusted balance of the Production Machine as of December 31, 2005 and Depreciation Expense for the year 2005. PROBLEM NO. 5 You obtain the following information pertaining to Red Co.’s property, plant, and equipment for 2005 in connection with your audit of the company’s financial statements. Audited balances at December 31, 2004: Debit Credit Land Buildings Accumulated depreciation – buildings Machinery and equipment Accumulated depreciation – Machinery and Equipment Delivery Equipment Accumulated Depreciation – Delivery Equipment P 3,750,000 30,000,000 22,500,000 2,875,000 P 6,577,500 6,250,000 2,115,000 Page 5 of 10 AP-5903 Depreciation Data: Depreciation Method Useful Life Buildings Machinery and Equipment Delivery Equipment Leasehold Improvements 150% declining – balance Straight-line Sum-of-the-years’-digits Straight-line 25 years 10 years 4 years Transaction during 2005 and other information are as follows: a. On January 2, 2005, Red purchased a new truck for P500,000 cash and traded-in a 2-year-old truck with a cost of P450,000 and a book value of P135,000. The new truck has a cash price of P600,000; the market value of the old truck is not known. b. On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyed

104 | P a g e by fire. Red recovered P387,500 from its insurance company. c. On May 1, 2005, cost of P4,200,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2011. d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional cost of P125,000 for freight and P625,000 for installation were incurred. e. Red determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2005, would have been depreciated at a total amount of P450,000 for the year ended December 31, 2005. The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute depreciation to the nearest month. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much is the Accumulated depreciation – Buildings as of December 31, 2005? a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700 B 2. How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2005? a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875 D 3. How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2005? a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000 B 4. How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2005? a. P420,000 b. P525,000 c. P350,000 d. P630,000 A 5. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2005? a. P100,000 b. (P35,000) c. P65,000 d. (P65,000) C PROBLEM NO. 6 In connection with your audit of the Josef Mining Corporation for the year ended December 31, 2005, you noted that the company purchased for P10,400,000 mining property

105 | P a g e estimated to contain 8,000,000 tons of ore. The residual value of the property is P800,000. Page 6 of 10 AP-5903 Building used in mine operations costs P800,000 and have estimated life of fifteen years with no residual value. Mine machinery costs P1,600,000 with an estimated residual value P320,000 after its physical life of 4 years. Following is the summary of the company’s operations for first year of operations. Tons mined 800,000 tons Tons sold 640,000 tons Unit selling price per ton P4.40 Direct labor 640,000 Miscellaneous mining overhead 128,000 Operating expenses (excluding depreciation) 576,000 Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is chargeable to production. QUESTIONS: Based on the above and the result of your audit, answer the following: (Disregard tax implications) 1. How much is the depletion for 2005? a. P768,000 b. P960,000 c. P192,000 d. P1,040,000 B 2. Total inventoriable depreciation for 2005? a. P400,000 b. P362,667 c. P384,000 d. P0 C 3. How much is the Inventory as of December 31, 2005? a. P438,400 b. P422,400 c. P425,600 d. P418,133 B 4. How much is the cost of sales for the year ended December 31, 2005? a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533 A 5. How much is the maximum amount that may be declared as dividends at the end of the company’s first year of operations? a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467 C PROBLEM NO. 7 Transactions during 2005 of the newly organized Pink Corporation included the following: Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete organization of the corporation.

106 | P a g e 15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and candy to create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000. Apr. 1 Patented a newly developed process with costs as follows: Legal fees to obtain patent P 429,000 Patent application and licensing fees 63,500 Total P 492,500 It is estimated that in 6 years other companies will have developed improved processes, making the Pink Corporation process obsolete. May 1 Acquired both a license to use a special type of container and a distinctive trademark to be printed on the container in exchange for 6,000 shares of Pink’s no-par common stock selling for P50 per share. The license is worth twice as much as the trademark, both of which may be used for 6 years. Page 7 of 10 AP-5903 July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed in future research projects. Dec. 31 Incurred salaries for an engineer and chemist involved in product development totaling P1,750,000 in 2005. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cost of patent a. P492,500 b. P429,000 c. P63,500 d. P0 A 2. Cost of licenses a. P150,000 b. P200,000 c. P100,000 d. P0 B 3. Cost of trademark a. P150,000 b. P200,000 c. P100,000 d. P0 C 4. Carrying amount of Intangible Assets a. P712,604 b. P2,477,604 c. P697,604 d. P0 C 5. Total amount resulting from the foregoing transactions that should be expensed when incurred a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0 C

107 | P a g e PROBLEM NO. 8 On December 31, 2004, Silver Corporation acquired the following three intangible assets: • A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem. • Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing reporting unit. • A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years. On December 31, 2005, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets: a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon. b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the Hayo Manufacturing reporting unit are as follows: Book values Fair values Identifiable assets P2,700,000 P3,000,000 Goodwill 1,500,000 ? Liabilities 1,800,000 1,800,000 c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000 in 2007. Page 8 of 10 AP-5903 REQUIRED: Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%): 1. Total amortization for the year 2005 a. P73,333 b. P141,515 c. P116,190 d. P86,857 2. Impairment loss for the year 2005 a. P90,476 b. P133,333 c. P179,584 d. P0 3. Carrying value of Trademark as of December 31, 2005 a. P300,000 b. P257,143 c. P166,667 d. P120,416 4. Carrying value of Goodwill as of December 31, 2005

108 | P a g e a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500 5. Carrying value of Customer list as of December 31, 2005 a. P220,000 b. P146,667 c. P176,000 d. P0 A,B,C,A,B PROBLEM NO. 9 Select the best answer for each of the following: 1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud because a. The amounts recorded on the balance sheet for most companies are immaterial. b. The inherent risk is usually low. c. The depreciated values are always smaller than cost. d. Internal control is inherently effective regarding this account. 2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property? a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real property. b. Examination of closing documents, deeds and ownership documents registered and on file at the register of deeds. c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property. d. Confirmation with the title company that handled the escrow account and disbursement of proceeds for the closing of the property. 3. When few property and equipment transactions occur during the year the continuing auditor usually obtains and understanding of internal control and performs a. Tests of controls b. Analytical procedures to verify current year additions to property and equipment c. A thorough examination of the balances at the beginning of the year. d. Extensive tests of current year property and equipment transactions. 4. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset addition? a. Inspecting documents and physically examining assets. b. Recomputing calculations and obtaining written management representations. c. Observing operating activities and comparing balances to prior period balances.

109 | P a g e d. Confirming ownership and corroborating transactions through inquiries of client personnel. B,B,D,A Page 9 of 10 AP-5903 5. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to be detected by the audit procedures specified? a. Depreciation expense on fully depreciated machinery has been recognized. b. Overhead has been overapplied. c. Necessary facility maintenance has not been performed. d. Insurance coverage on the facility has lapsed. 6. In testing for unrecorded retirements of equipment, an auditor is most likely to a. Select items of equipment from the accounting records and then locate them during the plant tour. b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. c. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. d. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense. 7. Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions of valuation and a. Presentation and disclosure. c. Rights and obligations. b. Completeness. d. Existence or occurrence. 8. The auditor may conclude that depreciation charges are insufficient by noting a. Insured values greatly in excess of book values. b. Large numbers of fully depreciated assets. c. Continuous trade-in of relatively new assets. d. Excessive recurring losses on assets retired. 9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. b. Expenditures for property and equipment have been recorded in the proper period.

110 | P a g e c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. d. Expenditures for property and equipment have not been charged expense. 10. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse. An auditor would most likely detect this when a. Discussing capitalization policies with Coatsen's controller. b. Examining maintenance expense accounts. c. Observing that the warehouse had been painted. d. Examining construction work orders that support items capitalized during the year. 11. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the auditor to gain reasonable assurance that additions are not understated? a. Accounts payable c. Depreciation expense b. Gain on disposal of equipment d. Repair and maintenance expense 12. When an auditor interviews the plant manager, he will most likely seek from the plant manager information regarding a. Appropriateness of physical inventory observation procedures. b. Existence of obsolete machinery. c. Deferral of procurement of certain necessary insurance coverage. d. Adequacy of the provision for uncollectible accounts. Page 10 of 10 C,A,A,D,D,D,B AP-5903 13. The auditor is least likely to learn of retirements of equipment through which of the following? a. Review of the purchase return and allowance account. b. Review of depreciation. c. Analysis of the debits to the accumulated depreciation account. d. Review of insurance policy riders. 14. Which of the following is not likely a motive for management to manipulate the timing and amount of impaired asset writedowns? a. Steady increases in earnings per share over the past 5 years. b. Income smoothing. c. A "big bath." d. An abnormally unprofitable year.

111 | P a g e 15. There is goodwill involved in the acquisition of a business if the purchase price paid is in excess of the proprietorship of the business acquired. Goodwill might be viewed as the enjoyment of a profit by a company in excess of the normal or usual return for the industry as a whole but such goodwill is not recorded if it has not been purchased or paid for. a. False; True. c. True; False. b. False; False. d. True; True. 16. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of a. Valuation. c. Completeness. b. Existence or occurrence. d. Rights and obligations. A,A,D,A – End of AP-5903 –