AP Problems 2016
Auditing Problems Question...
AUDITING PROBLEMS FIRST SET OF PROBLEMS PROBLEM NO. 1 The following are selected unadjusted account balances and adjusting information of TANYING CORP. for the year ended December 31, 2015. Retained earnings, January 1, 2015 Sales salaries and commissions Advertising expense Legal services Insurance and licenses Travel expense – sales representatives Depreciation expense – sales/delivery equipment Depreciation expense – office equipment Interest revenue Utilities Telephone and postage Office supplies inventory Miscellaneous selling expenses Dividends Dividend revenue Interest expense Allowance for doubtful accounts (credit balance) Officers’ salaries Sales Sales returns and allowances Sales discounts Gain on sale of assets Inventory, January 1, 2015 Inventory, December 31, 2015 Purchases Freight in Accounts receivable, December 31, 2015 Income from discontinued operations (before income taxes) Loss on sale of equipment Ordinary shares outstanding
P 1,322,010 75,000 48,270 6,675 23,040 13,680 18,300 12,600 1,650 19,200 4,425 6,540 8,220 99,000 15,450 13,560 480 109,800 1,353,000 11,700 2,640 23,460 269,100 61,650 424,800 16,575 783,000 120,000 217,800 117,000
Adjusting information: (a)
Cost of inventory in the possession of consignees as of December 31, 2015, was not included in the ending inventory balance...................................P55,800
After preparing an analysis of aged accounts receivable, a decision was made to increase the allowance for doubtful accounts to a percentage of the ending accounts receivable balance............................................................................2%
(c) Purchase returns and allowances were unrecorded. They are computed as a percentage of purchases (not including freight in)..........................................6% (d)
Sales commissions for the last day of the year had not been accrued. Total sales for the day........................................................................................ P9,180 Average sales commissions as a percent of sales............................................3%
No accrual had been made for a freight bill received on January 2, 2016, for goods received on December 29, 2015.....................................................P1,710
An advertising campaign was initiated November 2, 2015. This amount was recorded as “Prepaid advertising” and should be amortized over a six-month Page 1 of 26 Pages
AUDITING PROBLEMS period. No amortization was recorded......................................................P5,454 Freight charges paid on sold merchandise were netted against sales. Freight charges on sales during 2015..................................................................P10,500 (g)
Interest earned but not accrued.................................................................P1,680
Depreciation expense on a new forklift purchased March 1, 2015, had not been recognized. (Assume all equipment will have no salvage value and the straight-line method is used. Depreciation is calculated to the nearest month.) Purchase price.......................................................................................... P23,400 Estimated life in years...................................................................................... 10
(i) A “real” account is debited upon the receipt of office supplies. Office supplies on hand at year-end..................................................................................................... P3,675 (j)
Income tax rate (on all items)........................................................................30%
Compute the adjusted balances of the following: 1. Net sales A. P1,363,500
2. Cost of goods available for sale A. P684,900 B. P824,697
3. Inventory, December 31, 2015 A. P61,500 B. P61,350
4. Distribution costs A. P181,649
5. Administrative expenses A. P207,345 B. P193,785
6. Allowance for doubtful accounts A. P15,660 B. P16,140
7. Total income A. P817,143
8. Income from continuing operations before taxes A. P231,360 B. P436,795 C. P218,995
9. Office supplies inventory A. P6,540 B. P3,675
D. P 0
10. Net income A. P237,296
-----------------------------oooOOOooo----------------------------PROBLEM NO. 2 The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY as of December 31, 2015: Cash.............................................................................. P 963,200 Accounts receivable.......................................................2,254,000 Inventory.......................................................................6,050,000 Accounts payable...........................................................4,201,000 Accrued expenses.............................................................431,000 Page 2 of 26 Pages
During your audit, you noted that Bunching Company held its cash books open after year-end. In addition, your audit revealed the following: 1. Receipts for January 2016 of P654,600 were recorded in the December 2015 cash receipts book. The receipts of P360,100 represent cash sales and P294,500 represent collections from customers, net of 5% cash discounts. 2. Accounts payable of P372,400 was paid in January 2016. The payments, on which discounts of P12,400 were taken, were included in the December 2015 check register. 3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following information has been found relating to certain inventory transactions: a. The invoice for goods costing P175,000 was received and recorded as a purchase on December 31, 2015. The related goods, shipped FOB destination, were received on January 4, 2016, and thus were not included in the physical inventory. b. A P182,000 shipment of goods to a customer on December 30, 2015, terms FOB destination, are not included in the year-end inventory. The goods cost P130,000 and were delivered to the customer on January 3, 2016. The sale was properly recorded in 2016. c. Goods costing P637,500 were shipped on December 31, 2015, and were delivered to the customer on January 3, 2016. The terms of the invoice were FOB shipping point. The goods were included in the 2015 ending inventory even though the sale was recorded in 2015. d. Goods costing P217,500 were received from a vendor on January 4, 2016. The related invoice was received and recorded on January 6, 2016. The goods were shipped on December 31, 2015, terms FOB shipping point. e. Goods valued at P275,000 are on consignment with a customer. These goods are not included in the inventory figure. f.
Goods valued at P612,800 are on consignment from a vendor. These goods are not included in the physical inventory.
Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2015: 11. Cash A. P963,200
12. Accounts receivable A. P2,908,600 B. P2,564,000
13. Inventory A. P6,035,000
14. Accounts payable A. P4,790,900
15. Current ratio A. 2.00
-----------------------------oooOOOooo----------------------------PROBLEM NO. 3 The following are independent situations: Page 3 of 26 Pages
The Machinery account of PAKO COMPANY contains the following entries during the year: Date 2015 Jan. 1 June 30 Sept.30 Oct. 31 Dec. 1 Dec. 31
Balance P1,800,000 Purchased four new machines 1,080,000 Installation cost of new machines 48,000 Proceeds from sale of old machine, cost P150,000; accumulated depreciation, P105,000 P 66,000 Repairs of machinery 75,000 Cash paid for trade-in of old machines—cost, P90,000; accumulated depreciation, P36,000. Cash price of new machine, P270,000 225,000 Balance 3,162,000 Total P3,228,000 P3,228,000
16. What is the correct balance of the Machinery account on December 31, 2015? A. P3,162,000 B. P3,057,000 C. P3,048,000 D. P2,958,000 17. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the depreciation charge for 2015? A. P234,150 B. P300,000 C. P316,200 D. P227,400 On June 30, 2015, the GENLUNA COPPER MINES, INC. purchased a copper mine for P14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton. Production started immediately after some new machines costing P1,800,000 were bought on June 30, 2015. These new machines had an estimated useful life of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted from the property, at which time the machines will already be useless. Genluna’s books show the following expenses for 2015: Depletion expense..................................P1,215,000 Depreciation—Machinery.............................120,000 18. Recorded depletion expense was A. Overstated by P270,000. B. Understated by P270,000. C. Overstated by P405,000 D. Understated by P405,000. 19. Recorded depreciation expense was A. Understated by P60,000. B. Overstated by P60,000. C. Understated by P30,000. D. Overstated by P30,000. BULKAN COMPANY purchased a machine for P300,000 on January 1, 2012, with the following additional items paid or incurred: Separation pay for laborer laid off upon acquisition of new machine......P3,600 Loss on sale of machine replaced..............................................................3,900 Transportation in....................................................................................... 3,000 Installation cost....................................................................................... 12,000 The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
Page 4 of 26 Pages
AUDITING PROBLEMS On January 1, 2015, new parts which cost P37,800 were added to the machine so as to reduce its fuel consumption, but with no change in its estimated life or residual value. 20. The annual depreciation charge on the machine for 2015 was A. P34,080 B. P35,494 C. P36,450
-----------------------------oooOOOooo----------------------------PROBLEM NO. 4 Presented below are unrelated situations. 1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term differences in price. During 2016, Harlington Company purchased the following trading securities: Fair Value Security Cost Dec. 31, 2016 A P 585,000 P 675,000 B 900,000 486,000 C 1,980,000 2,034,000 Before any adjustments related to these trading securities, Harlington Company had net income of P2,700,000. 21. What is Harlington’s net income after making any necessary trading security adjustments? A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000 22. What would Harlington’s net income be if the fair value of security B were P855,000? A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000 2. LABADA CO.’s portfolio of trading securities includes the following on December 31, 2015: 15,000 ordinary shares of Camias Co. 30,000 ordinary shares of Ganda Co.
Cost P1,431,000 1,638,000 P3,069,000
Fair Value P1,251,000 1,710,000 P2,961,000
All of the above securities have been purchased in 2015. In 2016, Labada Co. completed the following securities transactions: Mar. 1
Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other transaction costs of P4,950. The Labada Co. portfolio of trading securities appeared as follows on December 31, 2016: Cost Fair Value 30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1 1,800 ordinary shares of Waston, Inc. 247,950 225,000 2 P1,885,950 P1,965,000 1 2
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities. Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.
23. What amount of unrealized gain on these securities should be reported in the 2016 income statement? Page 5 of 26 Pages
AUDITING PROBLEMS A. P31,050
24. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016? A. P144,000 B. P27,000 C. P130,500 D. P13,500 25. What amount should be reported as trading securities in Labada’s statement of financial position on December 31, 2016? A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950 -----------------------------oooOOOooo----------------------------PROBLEM NO. 5 On January 1, 2014, SAMSON MFG. CO. began construction of a building to be used as its office headquarters. The building was completed on June 30, 2015. Expenditures on the project were as follows: January 3, 2014 March 31, 2014 June 30, 2014 October 31, 2014 January 31, 2015 March 31, 2015 May 31, 2015
P2,500,000 3,000,000 4,000,000 3,000,000 1,500,000 2,500,000 3,000,000
On January 3, 2014, the company obtained a P5 million construction loan with a 10% interest rate. The loan was outstanding all of 2014 and 2015. The company’s other interest-bearing debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15 million on another building with an interest rate of 6%. Both debts were outstanding during all of 2014 and 2015. The company’s fiscal year-end is December 31. 26. What is the amount of capitalizable interest in 2014? A. P3,400,000 B. P1,043,750 C. P663,125
27. What is the amount of capitalizable interest in 2015? A. P630,625 B. P654,663 C. P361,707
28. What amount of interest should be expensed in 2014? A. P2,736,875 B. P2,356,250 C. P2,900,000
D. P 0
29. What amount of interest should be expensed in 2015? A. P2,769,375 B. P3,038,293 C. P2,600,337
30. What is the total cost of the building (including the interest capitalized in 2014 and 2015)? A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625 -----------------------------oooOOOooo----------------------------PROBLEM NO. 6 At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The grant is conditional upon the executive remaining in the entity’s employ until the end of year 3. The share options can be exercised if the entity’s share price increases from P20 at the beginning of year 1 to above P30 at the end of year 3. If the share price is above P30 at the end of year 3, the share options can be exercised at any time during the next five years, i.e., by the end of year 8.
Page 6 of 26 Pages
AUDITING PROBLEMS The entity estimates the fair value of the share options on grant date to be P5 per option. This estimate takes into account the following market condition: The possibility that the share price will exceed P30 at the end of year 3, i.e., the share options become exercisable; and The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share options will be forfeited. The following actual events occurred in years 1 to 3: Year 1 The share price has increased to P24. The entity’s estimate of the fair value of the options is P4 at the end of year 1. This takes into account whether the market condition will be satisfied by the end of year 3. Year 2 The share price has decreased to P22. However, the entity remains optimistic that the share price target will be met by the end of year 3. The estimated fair value of the share options is P3. Again, this estimate takes into account the market condition noted above. Year 3 The share price only reaches P28 by the end of year 3. The estimated fair value of the share options is zero, as the market condition has not been satisfied. Based on the preceding information, determine the following: 31. Compensation expense for year 1 A. P30,000 B. P40,000
32. Compensation expense for year 2 A. P30,000 B. P40,000
33. Compensation expense for year 3 A. P 0 B. P30,000
34. Share options outstanding at the end of year 2 A. P70,000 B. P80,000 C. P90,000
35. Cumulative compensation expense for the three-year period A. P 0 B. P70,000 C. P100,000
-----------------------------oooOOOooo----------------------------PROBLEM NO. 7 The following independent situations relate to the audit of shareholders’ equity. Answer the questions at the end of each situation. BRANDY CO. was organized at the beginning of the current year. The following shareholders’ equity accounts are included in the entity’s year-end trial balance. Preference share capital, P100 par, authorized 100,000 shares, issued and outstanding, 66,000 shares Preference share capital subscribed, 6,000 shares Share premium – preference Subscriptions receivable – preference Page 7 of 26 Pages
P6,600,000 600,000 240,000 360,000
AUDITING PROBLEMS Ordinary share capital, P10 par value, authorized 200,000 shares, issued and outstanding, 72,000 shares Ordinary share capital subscribed, 72,000 shares Share premium – ordinary Subscriptions receivable – ordinary
720,000 720,000 2,850,000 1,080,000
The following current year transactions relate to Brandy Co.’s shareholders’ equity:
Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference shares. Subscriptions to ordinary shares were also received on the same date.
During the year, subscriptions were received for an additional 12,000 preference shares at a price of P120 per share.
Cash payments were received from subscribers at frequent intervals for several months after subscription. The company’s policy is to issue share certificates only upon full payment of the share subscription.
Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a tract of land with a fair value of P690,000.
36. What is the total subscription price of the ordinary shares originally subscribed? A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000 37. How much was collected from the subscribers of preference shares? A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000 38. The company’s statement of financial position at the end of the current year should report contributed capital of Preference Ordinary A. P7,440,000 P4,290,000 B. 7,080,000 3,210,000 C. 6,480,000 2,490,000 D. 6,840,000 360,000 The following shareholders’ equity accounts are included in the statement of financial position of CONDESSA CO. on December 31, 2014. Preference share capital, 8%, P100 par (200,000 shares authorized, 60,000 shares issued and outstanding) P6,000,000 Ordinary share capital, P5 par (2,000,000 shares authorized, 600,000 shares issued and outstanding) 3,000,000 Share premium 3,750,000 Retained earnings 3,500,000 Total P16,250,000 During 2015, Condessa took part in the following transactions concerning equity. 1. Paid the annual 2014 P8 per share dividend on preference shares and a P2 per share dividend on ordinary shares. These dividends had been declared on December 31, 2014. 2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share. 3. Reissued 21,000 treasury shares for land valued at P900,000. 4. Issued 15,000 preference shares at P105 per share. Page 8 of 26 Pages
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are selling for P45 per share. 6. Issued the stock dividend. 7. Declared the annual 2015 P8 per share dividend on preference shares and the P2 per share dividend on ordinary shares. These dividends are payable in 2016. 8. Reported net income of P9,900,000 for the current year. 39. What is the retained earnings balance (before appropriation for treasury shares) on December 31, 2015? A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000 40. What amount should be reported as total shareholders’ equity on December 31, 2015? A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000 -----------------------------oooOOOooo----------------------------PROBLEM NO. 8 The following independent situations relate to the audit of intangible assets. Answer the questions at the end of each situation. CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows: Date
2005-2006 Research conducted to develop device P1,259,100 Jan. 2007 Design and construction of a prototype 262,800 Mar. 2007 Testing of models 126,000 Jan. 2008 Legal and other fees to process patent application; patent granted June 2008 186,150 Nov. 2009 Engineering activity necessary to advance the design of the device to the manufacturing stage 244,500 April 2011 Research aimed at modifying the design of the patented device 129,000 May 2015 Legal fees paid in a successful patent infringement suit against a competitor 102,000 Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2015. Compute the carrying value of Patent No. 112170 on each of the following dates: 41. December 31, 2008 A. P180,675 B. P186,150
42. December 31, 2012 A. P223,200 B. P52,560
43. December 31, 2015 A. P120,560 B. P78,840
Page 9 of 26 Pages
BARTOLO COMPANY has provided information on intangible assets as follows:
A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting records at a net book value of P4,000,000 when Valenzuela sold it to Bartolo.
During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for 10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the franchise for 2015 was P5,000,000. Bartolo takes a full year amortization in the year of purchase.
The following research and development costs were incurred by Bartolo in 2015: Materials and equipment P284,000 Personnel 378,000 Indirect costs 204,000 P866,000 Bartolo estimates that these costs will be recouped by December 31, 2018. The materials and equipment purchased have no alternative uses.
On January 1, 2015, because of recent events in the field, Bartolo estimates that the remaining life of the patent purchased on January 1, 2014 is only 5 years from January 1, 2015.
44. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015? A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500 45. As a result of the facts above, compute the total amount of charges against income for the year ended December 31, 2015? A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000 -----------------------------oooOOOooo----------------------------PROBLEM NO. 9 The following are two (2) unrelated situations. Answer the questions at the end of each situation. 1. The December 31 year-end financial statements of SAMOA COMPANY contained the following errors: Dec. 31, 2014 Dec. 31, 2015 Ending inventory P48,000 understated Depreciation expense P11,500 understated
P40,500 overstated -------
An insurance premium of P330,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2016. There were no other errors during 2014 and 2015, and no corrections have been made for any of the errors. Ignore income tax effects. 46. What is the total effect of the errors on Samoa’s 2015 net income? A. P123,500 overstatement B. P27,500 overstatement C. P192,500 understatement D. P177,500 understatement
Page 10 of 26 Pages
AUDITING PROBLEMS 47. What is the total effect of the errors on the amount of Samoa’s working capital at December 31, 2015? A. P75,500 overstatement B. P40,500 overstatement C. P225,500 understatement D. P144,500 understatement 48. What is the total effect of the errors on the balance of Samoa’s retained earnings at December 31, 2015? A. P156,000 understatement B. P87,000 overstatement C. P133,000 understatement D. P85,000 understatement 2. CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended December 31, 2014 and 2015, respectively. However, the auditor noted that the following errors had been made: a. Sales for 2014 included amounts of P191,000 which had been received in cash during 2014, but for which the related goods were shipped in 2015. Title did not pass to the buyer until 2015. b. The inventory on December 31, 2014, was understated by P43,200. c. The company’s accountant, in recording interest expense for both 2014 and 2015 on bonds payable, made the following entry on an annual basis: Interest expense Cash
The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They were issued at a discount of P75,000 on January 1, 2014, to yield an effective interest rate of 7%. d. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2014 and 2015. Repairs of P42,500 and P47,000 had been incurred in 2014 and 2015, respectively. In determining depreciation charges, Chile applies a rate of 10% to the balance in the Equipment account at the end of the year. 49. What is the corrected pretax income for 2014? A. P303,200 B. P225,300 C. P311,700
50. What is the corrected pretax income for 2015? A. P480,042 B. P484,292 C. P575,392
-----------------------------oooOOOooo----------------------------PROBLEM NO. 10 The following are two (2) unrelated situations. Answer the questions at the end of each situation. OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Omega accounts for the containers not returned within the time limit as being sold at the deposit amount. Information for 2015 is as follows: Containers held by customers at December 31, 2014, from deliveries in: 2013 85,000 2014 240,000 325,000 Page 11 of 26 Pages
AUDITING PROBLEMS Containers delivered in 2015 430,000 Containers returned in 2015 from deliveries in: 2013 57,500 2014 140,000 2015 157,000 354,500 51. How much revenue from container sales should be recognized for 2015? A. P127,500 B. P267,500 C. P27,500 D. P85,000 52. What is the total amount of Omega Company’s liability for returnable containers at December 31, 2015? A. P373,000 B. P400,500 C. P267,500 D. P430,000
DP, INC., a dealer of household appliances, sells washing machines at an average price of P8,100. The company also offers to each customer a separate 3-year warranty contract for P810 that requires the company to provide periodic maintenance services and to replace defective parts. During 2015, DP sold 300 washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 31, 2015. DP’s policy is to recognize income from the warranties on a straight-line basis. In 2016, DP incurred actual costs relative to 2015 warranty sales of P18,000 for parts and P36,000 for labor. 53. What liability relative to these transactions would appear on the December 31, 2015, statement of financial position and how would it be classified? Current Noncurrent A. P145,800 P72,900 B. P72,900 P72,900 C. P72,900 P145,800 D. P0 P218,700 54. What amount of warranty expense would be shown on the income statement for the year ended December 31, 2015? A. P18,000 B. P 0 C. P 36,000 D. P54,000 55. What liability relative to the 2015 warranties would appear on the December 31, 2016, statement of financial position and how would it be classified? Current Noncurrent A. P145,800 P72,900 B. P72,900 P72,900 C. P72,900 P145,800 D. P145,800 P0 -----------------------------oooOOOooo----------------------------PROBLEM NO. 11 The TGR Company commenced operations on January 1, 2011. machinery account is shown below. Date Particulars Jan. 1, 2011 Purchase
Debit P157,200 120,000 132,000
Sept. 30, 2011 Purchase on installment Payments from Sept. to Dec. 72,000 Oct. 3, 2011 Freight and installation 6,000 Dec. 31, 2011 Depreciation 2012 Installment payments for acquisition on Sept. 30, 2011 144,000 Page 12 of 26 Pages
481,200 487,200 389,760 533,760
AUDITING PROBLEMS June 30, Dec. 31, June 30, Dec. 31, Jan. 1, Dec. 31, Oct. 1, Dec. 31,
2012 2012 2013 2013 2014 2014 2015 2015
Purchase 240,000 Depreciation 154,752 Acquisition – trade in of old machine150,000 Depreciation 153,802 Sale 71,250 Depreciation 108,791 Sale 24,000 Depreciation 82,233
773,760 619,008 769,008 615,206 543,956 435,165 411,165 328,932
The details of the transactions are as follows: a) On September 30, 2011, a machine was purchased on an installment basis. The list price was P180,000, but 12 payments of P18,000 each were made by the company. Only the monthly payments were recorded in the machinery account starting with September 30, 2011. Freight and installation charges of P6,000 were paid and charged to the machinery account on October 3, 2011. b) On June 30, 2012, a machine was purchased for P240,000, 2/10, n/30, and recorded at P240,000 when paid for on July 5, 2012. c) On June 30, 2013, the machine acquired for P157,200 was traded for a larger one having a list price of P279,000. Allowance of P129,000 was received on the old machine, the balance of the list price being paid in cash and charged to the machinery account. d) On January 1, 2014, the machine acquired on January 1, 2011 with cost of P132,000 was sold for P75,000. The cost of removal and crating totaled P3,750. e) On October 1, 2015, the machine purchased on January 1, 2011 was sold for P24,000 cash. Assume a 5-year useful life for TGR Company’s machinery. 56. What is the total amount of gain on the sale/trade-in of the machinery acquired on January 1, 2011? A. P50,400 B. P40,200 C. P36,450 D. P86,850 57. What is the adjusted balance of the Machinery account on December 31, 2015? A. P694,200 B. P705,000 C. P700,200 D. P703,950 58. What is the adjusted balance of the Accumulated depreciation account on December 31, 2015? A. P465,600 B. P457,140 C. P462,240 D. P397,740 59. What is the correct total depreciation provision for the years 2011-2015? A. P737,400 B. P734,040 C. P728,940 D. P669,540 60. The entry to correct the depreciation provision for the years 2011-2015 should include a debit (credit) to Depreciation Expense Retained Earnings A. P75,807 P61,215 B. (P18,492) P79,707 C. P18,492 (P79,707) D. P75,807 P55,249 -----------------------------oooOOOooo-----------------------------
Page 13 of 26 Pages
SECOND SET OF PROBLEMS PROBLEM NO. 1 You have been assigned to audit the financial statements of AYALA MERCHANTS CORPORATION for the year 2015. The company is a dealer of appliances and has several branches in Metro Manila. Its main office is located in Makati City. You were given by the company controller the unadjusted balances of the items to be included in the company’s statement of financial position and statement of income as of and for the year ended December 31, 2015. Audit findings are as follows: I. AUDIT OF CASH A cash count was conducted by your staff on January 7, 2016. The petty cash fund of P60,000 maintained by the company on an imprest basis relected a balance of P22,750. Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2016. You were furnished a copy of the company’s bank reconciliation statement with Chartered Bank as follows: Balance per bank Add: Deposit in transit Bank debit memos Returned check Less: Outstanding checks Book error Balance per books
P277,994 248,836 712,750 63,000 (174,580) (72,000) P1,056,000
Your review of the reconciliation statement disclosed the following: 1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These represent collections from various customers whose accounts have been outstanding for less than three months. These checks were actually deposited on January 8, 2016. 2. Included in the deposit in transit is a check from a customer for P63,000 which was returned by the bank on December 27, 2015 for insufficiency of funds. This account has been outstanding for over six months. The check was replaced by the customer on January 15, 2016. 3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes payable including interest of P10,000 due on December 26, 2015. This was not recorded as of year-end. 4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as P102,900. This was in payment of accounts payable. 5. Bank service charges totaling P2,750 were not recorded. II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS It is the company’s policy to provide allowance for doubtful accounts as follows: Less than 3 months 3 to 6 months Over 6 months
P2,500,960 843,200 274,500 Page 14 of 26 Pages
1% 5% 10%
AUDITING PROBLEMS Total
An analysis of the accounts receivable schedule showed that several long outstanding accounts for more than a year totaling P152,460 should be writtenoff. III. AUDIT OF MARKETABLE SECURITIES – TRADING The company’s equity portfolio as of year-end showed the following: Total Shares 7,000 10,000 2,400 2,000 8,000 1,600
Bacnotan Cement Fil-Estate Ionics La Tondena Selecta Union Bank
Market Value Cost P108,500 195,000 49,200 67,000 31,600 50,880 P502,180
per Share P16.00 19.75 24.00 26.00 1.20 27.50
The securities are listed in the stock exchange. The company follows the fair value accounting. IV. AUDIT OF NOTES RECEIVABLE The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary. This is covered by a promissory note with interest at 15% per annum dated November 1, 2015. No interest has been accrued on the note as of December 31, 2015. V. AUDIT OF PREPAYMENTS Prepaid expenses account consists of the following: Prepaid Prepaid Prepaid Unused
advertising insurance rent office supplies
P 640,000 490,000 420,000 361,000 P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion as well as the regular advertisement of its products. It paid a total of P640,000, P100,000 of which is for the Christmas promotion while the balance is for the regular promotion and which will run for one year starting on August 1, 2015. Payment was made on July 20, 2015, and the total amount was reflected as prepaid advertising. The company leases the main office and store in Makati City at a monthly rental of P140,000. On November 5, 2015, a check for P420,000 was issued in payment of three-month rental as per renewal contract which was effective on November 1, 2015. Rental deposit remained at three months and is included under other assets. The company’s delivery equipment is insured with Fortune Insurance Corporation for a total coverage of P2.4 million. Total payment made on November 16, 2015 for the renewal amounted to P490,000 which covers the period from November 1, 2015 to November 1, 2016. No adjustment has been made as of December 31, 2015. To take advantage of volume discount ranging from 10% to 20%, the company buys office and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on June 10, 2015 and included the same in their office supplies inventory. As at year-end, unused office supplies amount to P102,500.
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AUDITING PROBLEMS VI. AUDIT OF INVENTORIES A physical count of inventories was conducted simultaneously in all stores on December 29 and 20, 2015. Your review of the list submitted by the accountant disclosed the following: 1.
Some deliveries made in December 2015 have not been invoiced and recorded as of year-end. These items had a selling price of P146,940 with term of 15 days. The corresponding cost was already deducted from the ending inventory.
Goods on consignment to Ayala Merchants totaling P356,000 were included in the inventory list.
Some appliances worth P138,500 were recorded twice in the inventory list.
Goods costing P153,800 purchased and paid on December 26 was received on January 4, 2016. The goods were shipped by the supplier on December 28, FOB shipping point.
VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT The company purchased additional equipment worth P268,000 on June 30, 2015. At the date of purchase, it incurred the following additional costs which were charged to repairs and maintenance account: Freight-in P30,400 Installation cost 13,000 Total P43,400 The above equipment has an estimated useful life of ten years and estimated salvage value of P20,000. Depreciation for the above equipment has been provided based on original cost. The company discarded some store equipment on October 1, 2015, realizing no salvage value. The cost of these equipment amounted to P165,520 with an accumulated depreciation of P138,620 as of December 31, 2015. Depreciation booked from October 1, 2015 to year-end was P10,480. No entry was made on the disposal of the property. VIII. AUDIT OF ACCRUED EXPENSES Some expenses for December 2015 were recorded when paid in January 2016. These are as follows: Electric bills P73,400 Commission of sales agents 57,000 Telephone charges 42,500 Minor repair of delivery equipment 21,340 Water bills 18,760 Total P213,000 IX. AUDIT OF LIABILITIES Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at an interest rate of 16% per annum on October 1, 2015. Accrued interest on this loan was not taken up at year-end. X. OTHER AUDIT FINDINGS A review of the minutes of meeting showed that a 10% cash dividend was declared to shareholders of record as of December 15, 2015, payable on January 31, 2016. Ayala Merchants Corporation Page 16 of 26 Pages
AUDITING PROBLEMS UNADJUSTED TRIAL BALANCE December 31, 2015 Debit P 60,000 1,056,000 483,640 3,618,660
Petty cash fund Cash in bank Trading securities Accounts receivable – trade Allowance for doubtful accounts Notes receivable Inventories Prepaid advertising Prepaid insurance Prepaid rent Office supplies inventory Furniture and fixtures Delivery equipment Accumulated depreciation Other assets Accounts payable – trade Notes payable Accrued expenses Bonds payable Discount on bonds payable Ordinary share capital Retained earnings Sales Cost of goods sold Operating expenses Other income Other charges
P 110,360 1,300,000 7,274,900 640,000 490,000 420,000 361,000 1,298,400 2,770,000 1,177,500 548,000 2,356,320 3,300,000 169,040 5,000,000 500,000 5,400,000 792,160 13,078,000 8,034,000 3,357,000 1,453,500 625,280 P32,836,880 P32,836,880
Based on the above information, determine the adjusted balances of the following: (Ignore tax implications.) 1. Petty cash fund A. P37,250
2. Cash in bank A. P522,650
3. Trading securities A. P403,640
4. Accounts receivable A. P3,936,000 B. P3,618,660
5. Allowance for doubtful accounts A. P110,360 B. P152,640
6. Notes and interest receivable A. P1,331,960 B. P1,332,160
7. Inventories A. P6,934,200
8. Prepaid insurance A. P449,167
9. Prepaid rent A. P140,000
B. P 0
Page 17 of 26 Pages
10. Prepaid advertising A. P325,000 B. P640,000
11. Office supplies inventory A. P258,500 B. P117,500
12. Total current assets A. P14,0333,612 B. P13,523,866
13. Property, plant, and equipment A. P4,068,400 B. P2,905,228
14. Accumulated depreciation A. P1,038,880 B. P1,041,050
15. Accounts payable A. P2,525,360
16. Interest payable A. P104,000
17. Total current liabilities A. P6,803,798 B. P6,103,798
18. Sales A. P13,068,440
19. Cost of goods sold A. P8,034,000
20. Operating expenses A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514 -----------------------------oooOOOooo----------------------------PROBLEM NO. 2 To substantiate the existence of the accounts receivable balances as at December 31, 2015 of LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a summary of the confirmation replies together with the exceptions and audit findings. Gross profit on sales is 20%. The company is under the perpetual inventory method. Name of Custome r Concordi a
Balance Per Books P150,000
Comments From Customers P90,000 was returned on December 30, 2015. Correct balance as is P60,000. Your CM representing price adjustment dated December 28, 2015 cancels this. You have overpriced us by P150. Correct price should be P300. We received the goods only on January 6, 2016. Balance was offset by our December shipment of your raw materials.
Page 18 of 26 Pages
Audit Findings Returned goods were received December 31, 2015. The CM was taken up by Lukas Company in 2016. The complaint is valid. Term is shipping point. Shipped in 2015. Lukas Company credited accounts payable for P135,000 to record purchases. Yakal is a supplier.
21. If the necessary adjusting journal entry is made regarding the case of Concordia, the net income will A. Decrease by P18,000. C. Increase by P18,000. B. Decrease by P90,000. D. Increase by P90,000. 22. The effect on 2015 net income of Lukas Company of its failure to record the CM involving transaction with Falcon: A. P30,000 over. C. P6,000 over. B. P30,000 under. D. P6,000 under. 23. The overstatement of receivable from Lazaro is A. P96,000 B. P24,000 C. P72,000
24. The accounts receivable from Silang is A. Correctly stated. C. P112,500 under. B. P112,500 over. D. P225,000 under. 25. The adjusting entry to correct the receivable from Yakal is A. Purchases 135,000 Accounts receivable B. Accounts payable 135,000 Purchases C. Accounts receivable 135,000 Accounts payable D. Accounts payable 135,000 Accounts receivable -----------------------------oooOOOooo-----------------------------
135,000 135,000 135,000 135,000
PROBLEM NO. 3 Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile, Inc. for the year ending December 31, 2015. After obtaining an understanding of the client’s design of the accounting and internal control systems and their operation, he then proceeded in performing test of controls related to production cycle. The following questions related to test of controls of the production cycle: 26. Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories: A. Trace the test counts noted during the entity’s physical count to the entity’s summarization of quantities. B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. C. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales. D. Inspect the open purchase order file for significant commitments that should be considered for disclosure. 27. Which of the following internal control activities most likely addresses the completeness assertion for inventory? A. The work-in-process account is periodically reconciled with subsidiary inventory records. B. Employees responsible for custody of finished goods do not perform the receiving function C. Receiving reports are prenumbered and the numbering sequence is checked periodically. D. There is a separation of duties between the payroll department and inventory accounting personnel.
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AUDITING PROBLEMS 28. From the auditor’s point of view, inventory counts are more acceptable prior to the year-end when A. Internal control is weak. B. Accurate perpetual inventory records are maintained. C. Inventory is slow moving. D. Significant amounts of inventory are held on a consignment basis. 29. A retailer’s physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? A. Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets. B. Credit memos for several items returned by customers had not been recorded. C. No journal entry had been made on the retailer’s books for several items returned to its suppliers. D. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records. 30. An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are A. Owned by the client. B. Not obsolete. C. Physically present at the time of the preparation of the final inventory schedule. D. Included in the final inventory schedule. -----------------------------oooOOOooo----------------------------PROBLEM NO. 4 A portion of the SPARK COMPANY’s statement of financial position appears as follows: December 31, 2015 Assets: Cash Notes receivable Inventory Liabilities: Accounts payable
December 31, 2014
P353,300 0 ?
P100,000 25,000 199,875
Spark Company pays for all operating expenses with cash and purchases all inventory on credit. During 2015, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2015 totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was P32.60 during January 2015 and increased P0.10 per month during the year. Spark sells only one product. All sales are made for P50 per unit. The ending inventory for 2014 was valued at P32.50 per unit. Based on the preceding information, compute the following: 31. Number of units sold during 2015 A. 7,066 B. 18,400
32. Accounts payable balance at December 31, 2015 A. P190,100 B. P50,000 C. P199,100
33. Inventory quantity on December 31, 2015 A. 5,750 B. 2,750 C. 17,084
Page 20 of 26 Pages
AUDITING PROBLEMS 34. Cost of inventory on December 31, 2015 A. P187,450 B. P186,875 C. P192,950
35. Cost of goods sold for the year ended December 31, 2015 A. P609,125 B. P609,700 C. P606,915 D. P603,625 -----------------------------oooOOOooo----------------------------PROBLEM NO. 5 A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested by your auditor soon after December 31, 2015, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2012 to 2015, inclusive. The following data were ascertained. Balance of Trucks account, Jan. 1, 2012 Truck No. 1 purchased Jan. 1, 2009, cost Truck No. 2 purchased July 1, 2009, cost Truck No. 3 purchased Jan. 1, 2011, cost Truck No. 4 purchased July 1, 2011, cost Balance, Jan. 1, 2012
P180,000 220,000 300,000 240,000 P940,000
The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2012, and entered in the ledger, had a balance on that date of P302,000 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2012. Transactions between January 1, 2012, and December 31, 2015, which were recorded in the ledger, are as follows. July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, P220,000. The transaction has commercial substance. Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks, P35,000. July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.) July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company. The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to Miscellaneous Income, P7,000, and Trucks, P25,000. Entries for depreciation had been made at the close of each year as follows: 2012, P210,000; 2013, P225,000; 2014, P250,500; 2015, P304,000. 36. What is the total depreciation expense for the year ended December 31, 2012? A. P180,000 B. P198,000 C. P172,000 D. P228,000 37. What is the gain (loss) on trade in of Truck #3 on July 1, 2012? A. (P30,000) B. P10,000 C. (P60,000) D. P190,000 38. What is the net book value of the Trucks on December 31, 2015? A. P414,000 B. P348,000 C. P228,500 D. P894,000
Page 21 of 26 Pages
AUDITING PROBLEMS 39. The total depreciation expense recorded for the 4-year period (2012-2015) is overstated by A. P185,500 B. P265,500 C. P287,500 D. P275,500 40. Assuming that the books have not been closed for 2015, what is the compound journal entry on December 31, 2015 to correct the company’s errors for the 4year period (2012-2015)? A. Accumulated depreciation 629,500 Trucks 480,000 Retained earnings 9,500 Depreciation expense 140,000 B. Accumulated depreciation 665,500 Trucks 480,000 Retained earnings 45,500 Depreciation expense 140,000 C. Accumulated depreciation 665,500 Trucks 480,000 Retained earnings 185,500 D. Accumulated depreciation 665,500 Trucks 665,500 -----------------------------oooOOOooo----------------------------PROBLEM NO. 6 The cash account of NUNAL COMPANY shows the following activities: Date Nov. 30 Dec. 2 4 15 20 21 31 31
Debit Balance November bank charges November bank credit for notes receivable collected P 30,000 NSF check Loan proceeds 145,500 December bank charges Cash receipts book 2,121,900 Cash disbursements book
150 3,900 180
Balance P345,000 344,850 374,850 370,950 516,450 516,270 2,638,170 1,414,170
CASH BOOKS RECEIPTS Date Dec. 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28
OR No. 110-120 121-136 137-150 151-165 166-190 191-210 211-232 233-250 251-275 276-300 301-309 310-350 351-390 391-420 421-480 481-500 501-525 526-555 556-611 -
PAYMENTS Amount P 33,000 63,900 60,000 168,000 117,000 198,000 264,000 231,000 63,000 90,000 165,000 24,000 57,000 27,000 51,000 63,000 96,000 222,000 15,000 Page 22 of 26 Pages
Check No. 801 802 803 804 805 806 807 808 809 810 811 812 813 814 816 817 818 819 820 821 822 823
Amount P 6,000 9,000 3,000 9,000 36,000 57,000 78,000 90,000 183,000 21,000 24,000 48,000 60,000 66,000 108,000 33,000 150,000 21,000 12,000 9,000 36,000 39,000
AUDITING PROBLEMS 29 29 29 Totals
824 825 826
87,000 6,000 33,000 P1,224,000
BANK STATEMENT Date Dec. 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29 Totals
Check 792 802 804 EC 805 CM 16 799 DM 57 808 803 809 DM 61 813 CM 20 815 816 811 801 814 818 DM 112 821 CM 36 820
Charges P 7,500 9,000 9,000 243,000 36,000 21,150 3.900 90,000 3,000 183,000 180 60,000 18,000 108,000 24,000 6,000 66,000 150,000 360 9,000 12,000 P1,059,090
Credits P 25,500 33,000 63,900 60,000 243,000 285,000 36,000 462,000 231,000 63,000 255,000 24,000 57,000 145,500 141,000 96,000 222,000 15,000 36,000 P2,493,900
Additional information: 1. 2. 3. 4. 5. 6. 7.
DMs 61 and 112 are for service charges. EC is error corrected. DM 57 is for an NSF check. CM 20 is for loan proceeds, net of P450 interest charges for 90 days. CM 16 is for the correction of an erroneous November bank charge. CM 36 is for customers’ notes collected by bank in December. Bank balance on December 31 is P1,776,810
Based on the preceding information, determine the following: 41. Outstanding checks at November 30 A. P39,150 B. P28,650
42. Outstanding checks at December 31 A. P459,000 B. P477,000
43. Deposit in transit at November 30 A. P58,500 B. P145,500
C. P 0
44. Deposit in transit at December 31 A. P114,000 B. P139,500
D. P 0
45. Adjusted book balance at November 30 A. P410,850 B. P345,000
46. Adjusted bank receipts for the month of December A. P2,297,400 B. P2,291,400 C. P2,303,400 Page 23 of 26 Pages
47. Adjusted book disbursements for the month of December A. P1,228,440 B. P1,246,440 C. P1,210,440
48. Adjusted bank balance at December 31 A. P1,449,810 B. P1,674,810
49. Unadjusted bank balance at November 30 A. P555,060 B. P94,560 C. P1,776,810
50. The best evidence regarding year-end bank balances is documented in the A. Cutoff bank statements. B. Bank reconciliations. C. Interbank transfer schedule. D. Bank deposit lead schedule. -----------------------------oooOOOooo----------------------------PROBLEM NO. 7 MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the first and last year and 15,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a residual value of P1,550,000. Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000. The company estimates that these structures can be used for 15 years but, because they must be dismantled if they are to be moved, they have no residual value. Mina Mining does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000. The machinery cost the former owner P9,000,000 and was 50% depreciated when purchased. Mina Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery. 51. What are the estimated depletion and depreciation charges for the 1 st year? Depletion Depreciation A. P4,845,000 P870,000 B. P4,845,000 P780,000 C. P2,422,500 P870,000 D. P2,422,500 P780,000 52. What are the estimated depletion and depreciation charges for the 5 th year? Depletion Depreciation A. P2,422,500 P1,740,000 B. P2,422,500 P1,560,000 C. P4,845,000 P1,560,000 D. P4,845,000 P1,740,000 53. What are the estimated depletion and depreciation charges for the 6 th year? Depletion Depreciation A. P2,422,500 P1,560,000 B. P2,422,500 P1,740,000 C. P4,845,000 P1,560,000 D. P4,845,000 P1,740,000 54. What are the estimated depletion and depreciation charges for the 7 th year? Page 24 of 26 Pages
A. B. C. D.
Depletion P2,422,500 P2,422,500 P4,845,000 P4,845,000
Depreciation P1,380,000 P1,560,000 P1,380,000 P1,560,000
55. What are the estimated depletion and depreciation charges for the 11 th year? Depletion Depreciation A. P4,845,000 P1,380,000 B. P4,845,000 P690,000 C. P2,422,500 P1,380,000 D. P2,422,500 P690,000 -----------------------------oooOOOooo----------------------------PROBLEM NO. 8 The HVR Company included the following in its notes receivable as of December 31, 2015: Note receivable from sale of land Note receivable from consultation Note receivable from sale of equipment
P2,640,000 3,600,000 4,800,000
The following transactions during 2015 and other information relate to the company’s notes receceivable: a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land, purchased 10 years ago, was carried on HVR’s books at P1,500,000. HVR received a noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31, 2016. There was no established exchange price for the land. The prevailing interest rate for this note on January 1, 2015 was 10%. b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange for the consultation services rendered. The note will mature on December 31, 2017, with interest receivable every December 31. The fair value of the services rendered is not readily determinable. The prevailing rate of interest for a note of this type was 10% on January 1, 2015. c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first payment on December 31, 2015. There is no established market value for the equipment. The market interest rate for similar notes was 14% on January 1, 2015. Note: Round off present value factors to four decimal places and final answers to the nearest hundred. 56. What amount of consultation fee revenue should be recognized in 2015? A. P3,600,000 B. P2,705,000 C. P4,047,500 D. P3,152,500 57. What amount should be reported as gain on sale of equipment? A. P994,800 B. P2,400,000 C. P1,162,700 D. P1,237,300 58. The amount to be reported as noncurrent notes receivable on December 31, 2015 is A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600 59. The amount to be reported as current notes receivable on December 31, 2015 is A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000 Page 25 of 26 Pages
AUDITING PROBLEMS 60. How much interest income should be recognized in 2015? A. P974,200 B. P756,000 C. P1,378,700 --- END OF EXAMINATION ---
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