AP-59-FinPB_5.06

CPA REVIEW SCHOOL OF THE PHILIPPINES Final Preboard Examination on Auditing Problems Suggested answers/solutions PROBLEM NO. 1 Hangover Company Proof of Cash For the month of July, 2005 Beginning

Receipts

Unadjusted bank balances Outstanding checks June July Deposits in transit June July NSF check redeposited - July Withdrawal error - July

66,405

76,800

Adjusted bank balances

64,819 (1)

Unadjusted book balances Bank service charges June July Interest earned June July Direct deposits June July Book errors June July

62,150

Adjusted book balances

64,819

(4,742)

3,156

3,054

675

Ending

77,395

65,810

(4,742) 5,857

(5,857)

2,238 (472) (386)

386

75,410 (2)

77,652 (3)

62,577 (4)

75,304

77,150

60,304

(165) 175

(175)

(165)

(3,054) 3,160

3,160

(675) 675

675

(895)

1. B 2. A 3. D 4. A 5. C

(3,156) 2,238 (472)

Disb

75,410 -

492

(895) (492)

77,652

62,577

-

-

PROBLEM NO. 2 - Carlos Uno Company

Question No. 6 - B PV of Note (P220,000 x 0.8264) Less cost of land Gain on sale

181,808 125,000 56,808

Amortization schedule: Interest income Jan. 1, 2005 Dec. 31, 2005 18,181 Dec. 31, 2006 20,011

Question No. 7 - C Year 2006 2007 2008

Principal 200,000 200,000 200,000 600,000

Carrying amount 181,808 199,989 220,000

Interest 24,000 16,000 8,000

Total 224,000 216,000 208,000

PV of Note (see above computation) Less cost of land Gain on sale Amortization schedule: Eff. Int. Jan. 1, 2006 Dec. 31, 2006 70,435 Dec. 31, 2007 48,936 Dec. 31, 2008 25,524

PVF 0.8772 0.7695 0.6750

PV 196,493 166,212 140,400 503,105

503,105 400,000 103,105

Nom. Int.

Disc. Amort.

24,000 16,000 8,000

46,435 32,936 17,524

Principal

Carrying amount 503,105 200,000 349,540 200,000 182,476 200,000 -

Question No. 8 - B Interest income for 2005 (P181,808 x 10%)

18,181

Question No. 9 - A NR - 1/1/05 sale [P220,000-(P181,808+P18,181)] NR - 1/1/06 sale (P503,105 x 14%) Total interest income in 2006

20,011 70,435 90,446

Question No. 10 - D Carrying amount, 1/1/06 (NR 1/1/06 sale) Add discount amortization in 2006: Effective interest (P503,105 x 14%) 70,435 Nominal interest (P600,000 x 2%) 24,000 Carrying amount, 12/31/06 before collection of principal Less principal amount received Carrying amount, 12/31/06

503,105

46,435 549,540 200,000 349,540

PROBLEM NO. 3 - J & B Retail Store Question No. 11 - B Accounts receivable, 12/31/06 per books Add credits to accounts receivable in 2006: Accounts written off Sales returns Cash receipts from customers Sales discounts Total Less other debits to accounts receivable in 2006: Accounts receivable, 12/31/05 Erroneous debit to AR for sales returns Gross sales for 2006 Question No. 12 - D Accounts payable, 12/31/06 Add debits to accounts payable in 2006: Purchase returns Cash payments to trade creditors Total Less accounts payable, 12/31/05 Gross purchases for 2006 Less purchase returns Net purchases for 2006

140,000 8,000 4,000 2,400,000 12,000

80,000 3,200

2,424,000 2,564,000

83,200 2,480,800

168,000 12,000 1,600,000

Question No. 13 - A Inventory, 12/31/05 Add net purchases for 2006 Total goods available for sale Less cost of sales for 2006 [(P2,480,800-P4,000) x (960/1,600)] Inventory, 12/31/06 Question No. 14 - D Estimated inventory, 12/31/06 Physical inventory, 12/31/06 Estimated inventory shortage

1,612,000 1,780,000 200,000 1,580,000 12,000 1,568,000

180,000 1,568,000 1,748,000 1,486,080 261,920

261,920 168,000 93,920

Question No. 15 - C PROBLEM NO. 4 - Remy Company Question No. 16 - C Item a [2,000 units x (P9.50-P5.90)] Item b Item c Item d Net understatement

Under(over) 7,200 17,500 (2,900) 1,500 23,300

Question No. 17 - D Question No. 18 - B Unadjusted net income Add(deduct) adjustments: Item a Item b Item c Item d Corrected net income

2005 370,000

2006 526,000

7,200 17,500 (2,900) 21,800 391,800 (17)

(7,200) (17,500) 2,900 (21,800) 504,200

2005 370,000 391,800 (21,800)

2006 526,000 504,200 21,800

(18)

Question No. 19 - D Originally reported net income Corrected net income Difference Question No. 20 - D

Total 896,000 896,000 -

PROBLEM NO. 5 - Johnnie Marketing Company Question No. 21 - B Total proceeds Less accrued interest (P200,000 x 9% x 5/12) Net proceeds Less cost of treasury notes: Total amount paid Less accrued interest (P200,000 x 9% x 3/12) Gain on sale of treasury notes Question No. 22 - B Sales proceeds Carrying value Realized loss on sale of S-Mart shares

206,500 7,500 199,000 198,500 4,500

70,000 90,000 (20,000)

Question No. 23 - C Interest income on Virgo Co. bonds (P300,000 x 12%) Interest income on Phil. tresury notes (P200,000 x 9% x 8/12) Total Question No. 24 - D Asia Textile Common (6,000 shares x P44) Virgo Co. Bonds (P300,000/P1,000 x P950) Carrying value, 12/31/06 Question No. 25 - C Trading securities, 1/1/06 Purchase of Phil. treasury notes, 4/1 Carrying value of S-Mart shares sold, 7/1 Sale of Phil. treasury notes, 12/1 Trading securities, 12/31/06 before mark-to-market FV of trading securities, 12/31/06 Unrealized loss on TS

194,000 5,000

36,000 12,000 48,000

264,000 285,000 549,000

640,600 194,000 (90,000) (194,000) 550,600 549,000 1,600

PROBLEM NO. 6 - Jose Company Question no. 26 - A Silko Company (3,000 x P1) Monroe Company (2,000 x P3) Barclay Company (3,500 x P2) Total dividend income in 2005

3,000 6,000 7,000 16,000

Question no. 27 - A Silko Company (3,000 x P20) Monroe Company (2,000 x P22) Treasury notes (P40,000 x 1.02) Total FV of trading securities, 12/31/05

60,000 44,000 40,800 144,800

Question no. 28 - C Cost of Silko Company (3,000 x P16) Cost of Monroe Company (2,000 x P33) Cost of Treasury notes (P40,000 x 1.01) Total Total FV of trading securities, 12/31/05 Unrealized loss on trading securities

48,000 66,000 40,400 154,400 144,800 9,600

Question no. 29 - D Monroe shares sold, 3/23/06: Selling price (2,000 shares x P17) Less CV of shares sold Treasury notes sold, 6/30/06 Selling price (P40,000 x 1.005) Less CV of treasury notes Total realized loss Question no. 30 - A

34,000 44,000 40,200 40,800

(10,000)

(600) (10,600)

PROBLEM NO. 7 - Napoleon Manufacturing Company

31 C Balance, 12/31/05 Total cost of building wing Donated building Total Less accumulated depreciation: Balance, 12/31/05 Depreciation for 2006 Main building (P2,400,000/25)

2,400,000 330,000 400,000 3,130,000 1,200,000 96,000

Building wing (P330,000/12 x 6/12) Donated building (P400,000/25 x 3/12) Carrying value, 12/31/06

13,750 4,000

*

Original life Less expired life: Age on 12/31/05 (P1,200,000/P2,400,000) x 25 yrs Additional expired life (from Jan. to June)

1,313,750 1,816,250 25 12.50 0.50

Remaining life of main building on 6/30/06 32 A Land, 12/31/05 Donated land Carrying value, 12/31/06

13 12

*

450,000 200,000 650,000

33 A Proceeds from sale Less book value on the date of sale (10/1/06) Cost Accumulated depreciation (P960,000/10 x 4)

520,000 960,000 (384,000)

Loss on sale

576,000 56,000

34 C

Land Land improvements Buildings Machinery & equipment Total

Balance 12.31.05 450,000 2,400,000 2,770,000 5,620,000

Accumulated depreciation Land improvements Buildings Machinery & equipment Total

1,200,000 546,500 1,746,500

Cost

Carrying value Land Land improvements Buildings Machinery & equipment

35 A

450,000 1,200,000 2,223,500 3,873,500

Additions Retirements 200,000 100,000 730,000 960,000 1,030,000 960,000

5,000 113,750 253,000 371,750

384,000 384,000

Balance 12.31.06 650,000 100,000 3,130,000 1,810,000 5,690,000

5,000 1,313,750 415,500 1,734,250

650,000 95,000 1,816,250 1,394,500 3,955,750

PROBLEM NO. 8 - Matador Corporation Question No. 36 - A

Semitruck No. 2 (fully depreciated as of 7/1/05) Semitruck No. 5 (P340,000/5) Semitruck No. 6 (P360,000/5) Should be depreciation expense for 2006 Depreciation expense per books Overstatement

68,000 72,000 140,000 278,000 138,000

Question No. 37 - D

Cost, 12/31/06 Semitruck No. 1 (sold, 1/1/04) Semitruck No. 2 (acquired, 7/1/00) Semitruck No. 3 (traded-in, 7/1/03) Semitruck No. 4 (damaged and sold, 7/1/05 Semitruck No. 5 (acquired, 7/1/03) Semitruck No. 6 (acquired, 7/1/05) Accumulated depreciation, 12/31/06 Semitruck No. 2 (fully depreciated as of 7/1/05) Semitruck No. 5 (P340,000 x 3.5/5) Semitruck No. 6 (P360,000 x 1.5/5) Carrying amount, 12/31/06

220,000 340,000 360,000 220,000 238,000 108,000

920,000

566,000 354,000

Question No. 38 - A Question No. 39 - B Question No. 40 - A

Net income over (under) 2003: Unrecorded loss on trade-in: Trade-in value (P340,000 - P150,000) 190,000 Carrying value (P300,000 x 3.5/5) 210,000 Overstatement of depreciation expense: Semitruck No. 1 (P180,000/5) 36,000 Semitruck No. 2 (P220,000/5) 44,000 Semitruck No. 3 (P300,000/5 x 6/12) 30,000 Semitruck No. 4 (P240,000/5) 48,000 Semitruck No. 5 (P340,000/5 x 6/12) 34,000 Should be depreciation expense 192,000 Depreciation expense per books 203,000 2004: Unrecorded loss on sale: Sales proceeds 35,000 Carrying value (P180,000 x 1/5) 36,000 Overstatement of depreciation expense: Semitruck No. 2 (P220,000/5) 44,000 Semitruck No. 4 (P240,000/5) 48,000 Semitruck No. 5 (P340,000/5) 68,000 Should be depreciation expense 160,000 Depreciation expense per books 211,000 2005: Unrecorded loss on disposal: Sales proceeds 7,000 Insurance proceeds 25,000 Total 32,000 Carrying value (P240,000 x 2/5) 96,000 Erroneous credit to Miscellaneous Income Overstatement of depreciation expense: Semitruck No. 2 (P220,000/5 x 6/12) 22,000 Semitruck No. 4 (P240,000/5 x 6/12) 24,000 Semitruck No. 5 (P340,000/5) 68,000 Semitruck No. 6 (P360,000/5 x 6/12) 36,000 Should be depreciation expense 150,000 Depreciation expense per books 244,500 2006: Overstatement of depreciation expense (see no. 36) Net understatement of Retained Earnings as of 12/31/06

20,000

(11,000)

9,000 (38)

1,000

(51,000)

(50,000) (39)

64,000 7,000

(94,500)

(23,500) (40) (138,000) (202,500)

PROBLEM NO. 9 - ESQ Corporation Question no. 41 - A Projected benefit obligation, 1/1/06 Benefits paid to retirees Interest cost (P9,200,000 x 10%) Current service cost (squeeze) Projected benefit obligation, 12/31/06

9,200,000 (780,000) 920,000 118,000 9,458,000

Question no. 42 - A Current service cost (see no. 41) Interest cost (P9,200,000 x 10%) Expected return on plan assets Amortization of deferred gain Net benefit expense

118,000 920,000 (900,000) (65,000) 73,000

Question no. 43 - C Fair value of plan assets, January 1 Employer contributions Actual return on plan assets Benefits paid to retirees Fair value of plan assets, 12/31/06

10,070,000 850,000 990,000 (780,000) 11,130,000

Question no. 44 - B Excess over corridor (P65,000 x 10) Corridor (P10,070,000 x 10%) Unrecognized gain, 1/1/06 Amortization of deferred gain - 2006 Excess actual over expected return on plan assets (P990,000 - P900,000) Unrecognized gain, 12/31/06

650,000 1,007,000 1,657,000 (65,000) 90,000 1,682,000

Question no. 45 - D Jan. 1, 2006 Dec. 31, 2006 Debit: Fair value of plan assets

10,070,000

11,130,000

Credit: Projected benefit obligation Unrecognized gain

9,200,000 1,657,000 10,857,000

9,458,000 1,682,000 11,140,000

(787,000)

(10,000)

Prepaid (Accrued) benefit cost

PROBLEM NO. 10 - Ginebra Corporation 2006 Transactions

12.31.05 Preferred stock Common stock

48,000

1/15 2/01 4/15 6/01

Additional paid in capital

832,000

1/15 2/01 4/15 5/01 5/31

Retained earnings

220,000

3/15 5/01 9/15 12/31

Treasury stock - common

(75,000)

4/15 5/31

80,000 6,000 4,000 5,320 8,000 120,000 96,000 127,680 12,000 (3,750) (133,000) (8,494) 100,000 (17,200) 27,900

1,025,000

12.31.06 80,000 63,320

46 B 47 A

1,195,680

48 B

174,756

50 D

(64,300) 49 A 1,449,456

Journal entries for 2006 affecting stockholders' equity accounts: 1/15

2/01

3/15

Cash (1,600 shares x P55) Preferred stock (1,600 shares x P50) APIC - excess over par value of preferred

88,000

Cash (3,000 shares x P42) Common stock (3,000 shares x P2) APIC - excess over par value of common

126,000

Retained earnings Dividends payable - common

80,000 8,000 6,000 120,000 3,750 3,750

* (22,000 + 3,000) x P0.15

4/15 4/15

5/01

5/31

6/01 9/15

Treasury stock Cash (400 shares x P43) Cash (2,000 shares x P50) Common stock (2,000 shares x P2) APIC - excess over par value of common

17,200 17,200 100,000 4,000 96,000

Retained earnings (26,600 x 10% x P50) 133,000 Stock dividends payable - common (26,600 x 10% x P2) APIC - excess over par value of common Cash (700 shares x P57) Treasury stock [(300 shares x P43) + P15,000] APIC - treasury stock

39,900 27,900 12,000

Stock dividends payable - common Common stock

5,320

Retained earnings Dividends payable - preferred (80,000 x 5%) Dividends payable - common (29,960 x P15)

8,494

12/31 Income summary Retained earnings

5,320 127,680

5,320 4,000 4,494 100,000 100,000