AUD B41 First Pre Board Exams Questions Answers Solutions

 

 

ReSA The ReviewSchool of Accountancy Tel. No. 735-9807 & 734-3989   AUDITING First Pre-Board Examination

11 February 2021(Thursday) 6:00 P.M. – 9:00 P.M.

 M  ULTIPLE  C CHOICE   INSTRUCTIONS:

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. STRICTLY NO ERASURES ARE ALLOWED. Use pencil no. 2 only. 1.  Laura is covered member in an audit engagement. Which of the following cannot work in any capacity for a company being audited the Laura? I.  Laura’s spouse  II.  Laura’s dependent daughter  a. b.

I only II only

c. d.

Both I and II Neither I nor II

2.  The following statements relate to assurance engagements. Choose the incorrect statements. 1)  The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter. 2)  Assurance engagements performed by professional accountants are intended to enhance the credibility of information about a subject matter. 3)  Assurance engagements involve two parties: a professional accountant and an intended user. 4)  The subject matter of an assurance engagement is limited to historical or prospective financial information. 5)  The intended user in an assurance engagement is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose. a. b.

2, 3, 4, and 5.  2, 4 and 5.

c. d.

3 and 4. 1, 2, 3, and 4. 

3.  Inquiries of the predecessor auditor prior to acceptance of the engagement should include specific questions regarding: I.  II.  a. b. 4. 

I only  II only

c. d.

Both I and II Neither I nor II

A CPA should not decide NOT to accept a new client for an audit engagement if: I.  II.  a. b.

5. 

disagreements with management as to accounting principles and auditing procedures the integrity of management

the CPA lacks an understanding of the client’s industry and accounting principles prior to acceptance   the client’s management has unusually high turnover

I only  II only

c. d.

Both I and II Neither I nor II

Which statement is incorrect regarding an engagement to perform agreedupon procedures? a. An auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. b. c.

The recipients of the report must form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed

 

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d. 6. 

to the procedures to be performed. The report on factual findings is expressed in the form of negative assurance.

Which of the following procedures would an auditor likely perform in the planning stage of a financial statement audit? I.  II. 

a. b.

Obtaining a signed engagement letter from t he client’s management Examining documents to detect violations of laws and regulations having a material effect on the financial statements. I only  II only

c. d.

Both I and II Neither I nor II

7.  Which of the following procedures is likely to be performed in the planning stage of the audit? I.  II.  a. b.

Determining the extent of involvement of specialists and internal auditors External confirmation of client accounts receivables I only  II only

c. d.

Both I and II Neither I nor II

8.  Internal auditing is considered to be part of an organization's: a. Accounting system.  c. Control activities. b. Monitoring. d. External controls. 9.  All of the following are correct regarding an auditor’s understanding with a potential client prior to beginning an audit EXCEPT: a. the understanding should cover the responsibilities of the independent auditor. b. the understanding should cover the limitations of the engagement. c. d.

the understanding should be in the form of an engagement letter in order to be in conformity with auditing standards. the understanding should list the audit fees and frequency of billing.

10.  Which of the following will cause the auditor to assess inherent risk as high? I.  II.  III.  a. b.

Complex transactions with third parties are discovered. No related-party transactions are discovered. Management relies heavily on estimates in the financial statements. I and II only  I, II and III

c. d.

I and III only III only

11.  Which of the following is correct? I.  II.  a. b.

Control risk is not part of overall audit risk, although it is assessed by the auditor. Detection risk is part of overall audit risk, but it is not assessed by the auditor. I only  II only

c. d.

Both I and II Neither I nor II

12.  The need for independent audits of financial statements can attributed to all of the following conditions except: a. Remoteness  c. Complexity of subject matter b. 13. 

Consequence

d.

be

Validity

Control risk is: I.  influenced by the amount of work or other testing performed by the independent auditor II.  mitigated by good internal controls a. b.

AUDITING

I only  II only

c. d.

Both I and II Neither I nor II

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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14. 

15. 

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is substantially the same as planned audit risk level, the auditor would: a.

decrease detection risk

c.

increase inherent risk

b.

decrease substantive testing

d.

increase materiality levels.

If a company incorrectly applies an accounting principle to a significant transaction, and the misstatement was other than intentional, which of the following could describe the misstatement?  

 

I.   II. a. b. 16. 

c.

d.

a. b.

a. b.

The establishment and maintenance of an adequate internal control system that is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error To provide the auditor with access to all information tha that t is relevant to the preparation of the financial statements such as records, documentation, and other matters To provide the auditor with unrestricted access to persons within the entity from which the auditor determines it necessary to obtain evidence

control environment control activities I only  II only

c. d.

Both I and II Neither I nor II

control environment risk assessment control activities I and II only  I and III only

c. d.

III only I, II and III

In the internal control stage, an independent auditor searches for control activities to:  I.  determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized II.  determine whether procedures and records concerning the safeguarding of assets are reliable a. b.

20. 

Both I and II Neither I nor II

The component of internal control that refers to adequate physical safeguards and segregation of duties is known as: I.  II.  III. 

19. 

c. d.

Management’s ability to foresee problems and take steps in advance to prevent problems is known as:  

I.  II. 

18. 

I only  II only

An audit is conducted on the premise that management and, where appropriate, those charged with governance, have acknowledged and understand that they have responsibilities that are fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not one of those responsibilities? a. The preparation of financial statements in accordance with relevant pronouncements issued by the AASC b.

17. 

Error Fraud

I only  II only

c. d.

Both I and II Neither I nor II

An auditor gains an understanding of the client’s attempt to keep internal controls up to date. This ongoing process of keeping controls effective: 

I.  II.  a. b.

AUDITING

refers to the monitoring component of internal control is often performed by the internal audit function I only  II only

c. d.

Both I and II Neither I nor II

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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21. 

After gaining and documenting an understanding of the components of internal control, the auditor should make a preliminary assessment of control risk. If the auditor’s investigation indicates that internal control is weak, the auditor should: I.  II.  a. b.

22. 

II.  a. b.

c. d.

Both I and II Neither I nor II

seek to identify specific control activities within that system that would reduce control risk if they are operating effectively and efficiently, as intended analyze and confirm I only  II only

c. d.

Both I and II Neither I nor II

The reporting company records sales revenue and accounts receivable near the end of the year because a sales order has been received. However, the earnings process will not be complete until next period. Which assertion is affected in the current year?   I.  II. 

24. 

I only  II only

An auditor is performing tests of controls in hopes of assessing control risk to be less than high in order to reduce overall audit testing. After obtaining an understanding of the design of an individual system, the auditor should:  I. 

23. 

use the combined (or reliance) approach for further audit procedures emphasize substantive testing rather than test of controls

Occurrence Existence

a.

I only 

c.

b.

II only

d.

Both I and II Neither I nor II

Prior to shipping, a copy of the sales order is:  I.  II.  a. b.

sent to the billings department to verify that the shipment is going to an approved customer who is not over any credit limit sent to the billings department to enable the billings department to prepare a bill of lading I only  II only

c. d.

Both I and II Neither I nor II

25.  If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:  a. sales invoices to the shipping documents b. cash receipts journal to the sales journal  

c. d.

shipping documents to the sales invoice sales journal to the cash receipts journal  

26.  Which assertion is being most directly addressed when an auditor selects a sample of sales invoices and compares it to the subsequent journal entries recorded in the sales journal? a. Occurrence  c. Accuracy b. 27. 

d.

Completeness

Which of the following requires a CPA firm providing audit and attest services to adopt a system of quality control?   I.  II.  a. b.

28. 

Classification

PICPA BIR I only  II only

c. d.

Both I and II Neither I nor II

Which of the following elements of quality control encompasses criteria for recruitment and hiring compensation and advancement? a. Leadership responsibilities c. Risk assessment b.

AUDITING

Human resources

d.

Monitoring

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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29. 

Who normally performs the following functions?

I.  II. 

30. 

Associate, Partner

c.

Partner, associate

b.

Manager, Associate

d.

Partner, Manager

Which is/are normally first granted to the professional accountant after obtaining a minimum of three years meaningful experience? I. 

Certificate of Registration

II.  III. 

Certificate of Accreditation to Practice Public Accounting PRC ID

II.  a. b.

c. d.

I, II and III II only

the firm’s leadership bears the ultimate responsibility for the firm’s quality control systems  the firm must be able to perform the engagement within the reporting deadlines I only  II only

c. d.

Both I and II Neither I nor II

A CPA firm that fails to maintain quality control standards:   I.  II.  a. b.

33. 

I and II only  I and III only

With regard to the elements of quality control at the firm, the category known as leadership responsibilities is essential because:  I. 

32. 

Concludes that the audit engagement team is independent from the client?

a.

a. b. 31. 

Sends the cash confirmation requests to the bank

has not necessarily violated PSAs may still be incompliance with professional standards with respect to individual audit engagements. I only  II only

c. d.

Both I and II Neither I nor II

Which is the appropriate confirmation type for each situation?   I.  II. 

The risk of material misstatement for the existence of receivables is high The account is composed of a small number of subsidiary accounts with high monetary values

a.

Both Negative

c.

Negative, Positive

b.

Both Positive

d.

Positive, Negative

34.  Would an auditor normally confirm the accounts payables? a. No, unless there is a high risk of material misstatement for completeness b.

No, unless there is a high risk of material misstatement for

c.

existence Yes, unless there is a high risk of material misstatement for existence

d.

35. 

Yes, unless there is a high risk of material misstatement for rights

Which assertion is directly related to the auditor selecting an inventory item from the accounting records and searching for it in the warehouse during count observation? a.

Completeness

c.

Obligations

b.

Existence

d.

Valuation

PROBLEM 1: ERROR CORRECTION You were assigned to audit the financial statements of Freya Corp. as of and for the period ended December 31, 2020. This is the first time Freya Corp.’s financial statements are being audited since it started operations in 2018. The following summarizes your audit findings:

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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a.  The following is an analysis of the company’s accumulated profits account: Date Particulars Debit Credit Balance 12/31/18 2018 Net loss 200,000 (200,000) 12/31/19 2019 Net Income 1,500,000 1,300,000 1/31/20 Payment of dividends 300,000 1,000,000 12/31/20 2020 Net Income 800,000 1,800,000 b.  No dividends were declared in 2018. Dividends declared in December 2019 and 2020 were paid on January of the following years. The 2020 dividends were at P500,000. c.  The following items were omitted at each year end: Accrued salaries Unused supplies Unearned rent income

2018 P25,000 15,000 10,000

2019 P45,000 18,000

2020 P60,000 20,000

d.  The following year-end deliveries to customers were recorded as sales only upon collection the following year. The related inventories were excluded from the physical count at each year end. All sales were delivered under FOB shipping point terms. 2018 2019 2020 Sales price P12,000 P15,000 P10,000 Cost of inventory 6,000 7,000 5,000 e.  An equipment with a cost of P240,000 was fully expensed in May 1, 2019. Based on your discussions with the management, the cost should have been capitalized and depreciated using straight-line method over its five-year useful life. Requirements: 36.  What is the adjusted net income in 2018? a. 218,000 c. 208,000 b. 228,000 d. 220,000 37.  What is the adjusted net income in 2020? a. 768,000 c. 770,000 b. 792,000 d. 830,000 38.  What is the retroactive adjustment to the retained earnings beginning 2020? a. 140,000 debit c. 160,000 debit b. 140,000 credit d. 160,000 credit 39.  What is the effect of all errors to the 2020 total assets? a. 190,000 understatement c. 142,000 understatement b. 130,000 understatement d. 160,000 understatement

PROBLEM 2: ERROR CORRECTION You were assigned to audit for the first the time the financial statements of Martis Inc. as of and for the year ended December 31, 2019. Martis Inc. is a merchandiser of baking equipment and supplies and has started operations in early 2018. No audit has been made on its financial statements from its inception. The following was as a result of your audit investigations: a.  The following were omitted   at each year end:  at 2018 P30,000 Advances from customers: (recorded as sales upon collection) Advances to suppliers (recorded as purchases upon payment) 24,000 Accounts payable (goods received at each year-end were recorded as purchases upon payment the following year, the related goods were appropriately included in the year-end physical count) AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

2019 -

2020 P28,000

15,000

19,000

19,000

35,000

 

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b.  The following errors in inventories were also discovered at each year end: 2018 2019 2020 Overstatement P8,000 P4,000 Understatement 6,000 c.  The following routinary repairs to the building were erroneously charged to building account each year and depreciated using the straight-line method over the building’s remaining useful life from date of incurrence of cost. The company’s policy is to record  full years depreciation the year of PPE additions and none on the year of disposal. Repairs and maintenance charged to building account

2019 P90,000

2020 P96,000

*Additional information about the Building Original useful life: 10 years Acquisition date: January 1, 2018 2018    d.  The following information were also ascertained: 2018 2019 Net income, unadjusted P210,000 P257,000

2020 P125,000

Requirements: 40.  What is the correct net income in 2019? a. 231,000 c. 240,000 b. 230,000 d. 241,000 41.  What is the correct net income in 2020? a. (2,400) c. 2,000 b. 1,000 d. (1,000) 42.  What is the effect of errors to the 2020 working capital? a. 48,000 overstated c. 48,000 understated b. 202,000 overstated d. 202,000 understated

PROBLEM 3: CASH/ACCRUAL; SINGLE ENTRY Leslie Company keeps its records under the cash basis of accounting. You were asked to prepare its financial statements under the accrual basis as a requirement of a loan application with a bank. The following information were made available to you based on cash records: Total collections from customers, including recoveries P1,600,000 of previous write-off amounting to P20,000 Total payments to suppliers of merchandise 840,000 Total payments to employees for salaries 400,000 Total payments for rentals 280,000 Cash refund for customer returns 60,000 Cash refund for purchase returns 40,000 Audit notes: a.  Total customer and purchase returns and discounts are as follows: Total customer returns including a P60,000 180,000 cash refund Total purchase returns including a P40,000 200,000 cash refund Discounts taken on purchases 80,000 Discounts taken by customers on sales 140,000 a.  Outstanding customer and supplier invoices at the beginning and at the end of the year are as follows: Beg. End Outstanding customers’ invoices  300,000 450,000 Outstanding suppliers’ invoices  190,000 160,000 b.  Of the outstanding customers’ invoices, P10,000 at the beginning of the year is doubtful of collection while P50,000 is doubtful at the end of the year. No write-off of receivables occurred during the year.

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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c.  Other information: Unsold merchandise inventory Unpaid employees’ salaries  Unexpired portion of rent expense

Beg. 110,000 60,000 -

End 170,000 50,000 50,000

Requirements: 43.  What is the accrual basis gross sales? a. 2,050,000 c. 1,870,000 b. 1,990,000 d. 2,070,000 44.  What is the accrual basis cost of goods sold? a. 870,000 b. 830,000

c. 710,000 d. 750,000

45.  What is the accrual basis salaries expense? a. 450,000 c. 390,000 b. 400,000 d. 340,000 46.  What is the accrual basis net income? a. 320,000 c. 300,000 b. 340,000 d. 280,000

PROBLEM 4: AUDIT OF STOCKHOLDERS’ EQUITY  The shareholders’ equity Hanabi Company on January 1, 2019 showed the following:

Ordinary shares, P50 par, authorized 100,000 shares, 50,000 shares issued Preference shares, P100 par, authorized 50,000 shares, 20,000 shares issued. Each preference share is convertible to 3 ordinary shares. Share premium - Ordinary Share premium – Preference Retained earnings

P2,500,000 2,000,000

600,000 1,200,000 2,750,000

The following transactions occurred during the year: a.  Reacquired 15,000 ordinary shares on February 1 at P90 per share and placed them in the treasury. b.  Reissued 8,000 treasury shares at P122 per share on June 4. c.  Reissued 5,000 treasury shares at P75 per share on August 3. d.  Issued stock rights on ordinary shares on September 30. Five stock right entitles the stockholder to purchase an additional share for P80 per share. The rights shall expire on December 31. e.  On October 1, 5,000 of the preference shares were converted to ordinary shares. f.  All but 3,000 share rights were exercised when the market value of the shares was at P80 per share on October 11. g.  Declared P3 per share cash dividends on ordinary shares and P6 per share on preference shares on December 15, to stockholders as of December 31 payable on January 15, 2018. h.  Reported an adjusted net income of P540,000. Requirements: 47.  The entry to record the reissuance of treasury shares in item c shall involve a: a.  Credit to share premium at P75,000. b.  Credit to treasury shares at P375,000. c.  Debit to retained earnings at P75,000. d.  Debit to share premium at P75,000. 48.  The entry to record the conversion of preference share to ordinary shares in item e shall involve a: a.  Debit to share premium at P50,000 b.  Credit to share premium at P50,000

 

c.  Credit Debit to d. toretained retainedearnings earningsat atP300,000 P300,000

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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49.  The entry to record the exercise of stock rights in item f shall involve a: a.  Credit to ordinary shares at P475,000 b.  Credit to share premium at P250,000 c.  Credit to ordinary shares at P460,000 d.  Credit to share premium at P270,000 50.  The cash dividend declaration in item g shall involve a debit to retained at: a. 261,000 c. 313,200 b. 279,000 d. 306,000 51.  What is the total additional paid in capital as of December 31, 2019? a. 1,951,000 b. 2,001,000

c. 2,150,000 d. 2,070,000

PROBLEM 5: AUDIT OF STOCKHOLDERS’ EQUITY  You were assigned to audit the shareholders’ equity of Gatotkaca Inc. for the year ended December 31, 2019. Gatotkaca Corp. was incorporated in early 2018 when it was authorized by SEC to issue 500,000 ordinary shares (P10 par) and 100,000 preference shares (P20 par). The following schedule reflects the company’s capital balances as of December 31, 2018:

Ordinary shares, 100,000 shares issued during the company’s incorporation in exchange of a l and with and a fair value of P1.8M. Preference shares, 50,000 share issued during the company’s incorporation at P30 per share. Retained earnings, the company’s net income in 2018   Total shareholders’ equity 

P1,800,000

1,500,000 949,000 ?

Your inquiries and investigation revealed the following transactions, which occurred in 2019: a.  On March 1, 30,000 ordinary shares and a 12%, P500,000 face value bonds payable were issued in exchange of a building with a fair market value of P1,200,000. The fair value of the ordinary shares was considerably stable at P25 per share while the fair value of the bonds excluding the accrued interest was at 110. The bonds pay interest annually every December 31. b.  On August 15, the company reacquired 20,000 ordinary shares (from the 2018 issue) at P24 per share and reverted them to treasury since it intends to reissue the same. c.  On September 10, the company declared a 1 to 2 share split on its ordinary shares. Shares are currently selling on this date at P35 for ordinary shares and P53 for preference shares. d.  On October 11, the company reissued 30,000 treasury shares at P11.50 per share. e.  On December 1, the company declared a 20% share dividend on ordinary shares distributable to shareholders as of December 15 distributable on January 31 the following year. The ordinary shares were selling at P9.50 for the entire month. f.  On December 20, 8,000 preference shares were reacquired at P38 per share and were immediately retired. g.  The company registered an adjusted net income in 2019 at P830,000. Based on the information above, answer the following: 52.  The entry to record the issuance of securities on March 1 (item a) involves a: a.  Credit to share premium-OS at P350,000. b.  Debit to interest expense at P10,000. c.  Debit to bonds payable at P550,000. d.  Credit to share premium-OS at P340,000. 53.  The entry to record the share split on September 10 share involve: a.  Debit to retained earnings at P2,300,000. b. Ordinary shares issued to become 260,000 shares. c.   Ordinary shares issued to become 220,000 shares. d.  The par value of ordinary shares to become P20 per share. AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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54.  The entry to record the reissuance of treasury shares on October 11 shall involve: a.  Debit to share premium-OS at P15,000. b.  Credit to treasury shares at P345,000 c.  Debit to retained earnings at P15,000. d.  Credit to share premium-TS at P15,000. 55.  The entry to record the share dividends on December 1, shall require a debit to retained earnings at: a. 475,000 c. 280,000 b. 320,000 d. 250,000 56.  What is the balance of the retained earnings-unappropriated as of December 31, 2019? : a. 1,450,000 b. 1,550,000

c. 1,330,000 d. 1,380,000

PROBLEM 6: AUDIT OF STOCKHOLDERS’ EQUITY  In early 2019 Pharsa Corp. granted its 220 employees stock options which can be exercised by the employees remaining in the company’s employ until the end of 2022, provided further that the average increase in sales over the four-year period is at least 10%. The said options are exercisable starting 2023 and shall expire 2 years after. 2 options entitle the employee to acquire 1 share at P38 exercise price. Ordinary shares had a P50 par value and were currently selling in the market at P76 per share. Each share option had a market value of P12.50. The number of option per employee depending on the average increase in sales over the vesting period is as follows: 10% - 15% 100 each 16% - 20% 150 each 20% 25% 25% More-than

175 200 each each

The following information regarding employee turnover are deemed relevant: In 2019, 10 employees left the company. The company estimates that an   additional 25 employees will leave by the end of 2022.

 

In 2020, 10 additional employees actually left. The company estimates that an additional 20 employees will leave by the end of 2022.

 

In 2021, 10 additional employees actually left. The company estimates that 15 additional employees will leave by the end of 2022.

 

In 2022, 10 additional employees actually left.







Actual and estimated Sales at the end of each year are as follows: Actual Estimated Increase in Sales Sales 2020 2021 2022 2018 P10,000,000 2019 11,400,000 14% 15% 15% 2020 13,452,000 20% 20% 2021 16,815,000 30% 2022 25,222,500 Requirements: 57.  What is the salaries expense related to the share option in 2020? a. 57,813 c. 139,063 b. 110,937 d. 110,156 58.  What is the salaries expense related to the share option in 2022? a. 162,891 c. 112,500 b. 110,125 d. 132,500 59.  Assuming that 80% of the share options vested were exercised in 2023, what is the credit to the share premium account as a result of the exercise? a. 187,200 c. 143,000 b. 182,000 d. 171,500

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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PROBLEM 7: AUDIT OF LIABILITIES You auditing Adel Corp.’s various liability accounts. The following schedule of liabilities was presented to you by the company’s accountant in relation to your audit: Accounts payable P460,000 Accrued expenses 29,400 Warranties payable 153,250 Salaries payable 268,500 10%, Note payable – bank 2,000,000 Audit notes: a.  You have rendered a purchases cut-off to ascertain the completeness of the company’s accounts payable balance. The following is the

summary of the entries 10 days before and after the balance sheet date and your audit observations: Purchases Journal Entries: Dec. 20 – Dec. 31, 2018: RR Receiving Suppliers Amount FOB Term/Remark number Report Date Invoice Date 9910 Dec. 20, 2018 Dec. 19, 2018 30,000 From Consignor 9911 Dec. 23, 2018 Dec. 22, 2018 60,000 Shipping Point 9912 Dec. 28, 2018 Dec. 26, 2018 42,000 Destination 9914 Jan. 2, 2019 Dec 29, 2018 45,000 Destination 9915 Jan. 3, 2019 Jan. 2, 2019 30,000 Shipping point Purchases Journal Entries: January 2 – January 10, 2019 RR number Receiving Suppliers Amount FOB Report Date Invoice Date Term/Remark 9916 Jan. 2, 2019 Dec. 28, P20,000 From 2018 Consignor 9917 Jan. 3, 2019 Dec. 30, 55,000 Destination 2018 9918

Jan. 4, 2019

9919

Jan. 5, 2019

Dec. 31, 2018 Jan. 3, 2019

34,000 42,000

Shipping Point Shipping Point

*note 1: RR number 9913    is for goods received on December 30, but related the suppliers’ invoice document has not been received yet , thus was not recorded in the purchases journal yet. Cost of these goods amounts to P25,000. *note 2: assume suppliers’ invoice date as suppliers’ shipment date of goods and ending inventories were appropriately established through an inventory count. b. 

You also conducted a cash disbursement cut-off to search for unrecorded liabilities. Your review is summarized below: Entry date Jan. 3, 2019

c. 

Voucher Reference 1 – 1

Jan. 4, 2019

1 – 2

Jan. 10, 2019

1 – 3

Jan. 12, 2019 Jan. 14, 2019

1 – 4 1 – 5

Description

Amount

Legal services; received 12/2/2018 Repairs services on equipment in 2018 Payroll 12/21/2018 to 1/6/2019 (13 working days, 5 days in Jan.) Electricity bill for December Water bill for December

16,500

22,000

84,500

21,600 12,900

Account Charged Accrued expense Repairs and maintenance expense Salaries and wages expense

Utilities expense Accrued expense

The company started its 1-year warranty program for merchandise sold starting 2017. The company estimates that it will incur P350 in part and labor for repairing each unit of merchandise. The company further estimates that 70% of the units sold shall be returned for repairs. The following information is deemed relevant for your audit:

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

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Number of units sold Actual warranty costs

2017 1,250 153,000

2018 1,410 250,000

The balance of the warranties payable is the accrued warranty cost at the end of 2017. Actual warranty costs were charged to currentyear warranty expense. Adjusting entry at the end of 2018 is yet to be made. Further audit examination revealed that from the amount paid in 2018 for warranties, P143,250 relates to the 2017 sales/warranties. d. 

Salaries payable reflects the probable unused sick leaves and vacation leaves in 2017 and prior to 2017 carried over 2018. 2018 . No entry had been made during the current year affecting the salaries payable account. Employees are allowed to carry-over unused leaves over 2 years from year of grant, thereafter, it shall expire. Salary rates increased for the current year by 10%. An analysis of the cumulative unused sick leaves and vacation leaves are as follows: Prior to 2017 leaves carried over 270 days to 2018 2017 leaves carried over to 2018 625 days Prior to 2018 leaves used in 2018* 700 days Leaves earned in 2018 carried over 550 days 2019 *from prior to 2018 leaves used in 2018, 200 were earned by employees prior to 2017.

e. 

The 12% note payable to the bank was originated on June 30, 2016 and is due on June 30, 2019. Semi-annual interest on the note is payable every June 30 and December 31. On December 31, 2018 the company has the option of refinancing the liability by issuing another long-term debt security to be themade, same as bank on Juneshall 30, 2020. The proceeds of the loan to perdue agreement not exceed 80% of the fair market value of the property to be attached to the loan as a collateral. As of the balance sheet date, the said property has a fair value of P2,000,000 and is not expected to materially change until the refinancing transaction is completed.

Required: 60.  What is the adjusted balance of the accounts payable account? a. 389,000 c. 414,000 b. 380,000 d. 444,000 61.  What is the correct balance of the accrued expenses account? a. 125,000 c. 137,900 b. 141,500 d. 154,400 62.  What is the balance of warranties payable as of December 31, 2018? a. 248,700 c. 238,700 b. 345,450 d. 95,450 63.  What is the correct balance of the salaries payable in the form of liability for compensated absences as of December 31, 2018? a. 200,740 c. 244,700 b. 245,540 d. 222,750 64.  How much from the 10% notes payable shall be presented as noncurrent? a. None c. 2,000,000 b. 400,000 d. 1,600,000

PROBLEM 8: AUDIT OF LIABILITIES Your audit of the liabilities account of Paquito Inc. for the period ended December 31, 2020 revealed the following information: Balances per GL 8% Bonds Payable, Due December 31, 5,000,000 2023 12% Bonds Payable, Due January 1, 2,250,000 2023 Lease Liability 2,000,000

AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

ReSA: The Review School of Accountancy

Page 13 of 18 

 

Audit notes: a.  The 8% Bonds Payable were dated January 1, 2014 with a face value of P5M. These bonds were issued on January 1, 2019 when the prevailing market rate of interest was at 10%. The issuance was recorded by the client as a debit to cash for the cash consideration received based on the prevailing market rate, a credit to bonds payable at face value, with the balance being charged to interest expense. The annual interest payment on the bonds every December 31 had been charged appropriately to interest expense. b.  The 12% Bonds Payable are convertible to 5 (P100 par value) ordinary shares (per P1,000 bonds). These were issued at the beginning of 2020 when the prevailing market rate of interest for bonds without the conversion option was at 9%. The bonds had a face value of P2M with interest payable semi-annually every January 1 and July 1. The entry made by the client upon issuance was a debit to cash and credit bonds payable at P2,250,000, the lump-sum consideration received on that date. Interest paid on July 1, was appropriately debited to interest expense, while accrual of interest at year-end is yet to be made. c.  The company entered into a 5-year lease agreement for a building (with a useful life of 20 years) with Chou Leasing Inc. The lease agreement calls for 5 payments of P500,000 every January 1 starting at the commencement of the lease on January of 2020. The client recorded the lease agreement as a debit to Right to Use Asset at P2.5M, credit to lease liability at P2M and credit to cash for the first payment made at P500,000. Depreciation on the asset is yet to be made at year-end. The company also paid a lease bonus at inception of the lease amounting to P200,000 which the company charged to outright expense. The company has an option of renewing the lease for another 5 years after original lease term expiry at a reduced annual rent of P300,000 payable every January. The implicit lease rate known to the Paquito Inc. was at 10%. At inception, it is probable that the company will be taking advantage of the renewal option.  option.   The building had a residual value of P1M after 10 years, and P50,000 after 20 years.

after

5

years,

P400,000

Required: 65.  What is the correct carrying value of the 8% Bonds Payable as of December 31, 2020? a. 4,620,921 c. 4,751,315 b. 4,683,013 d. 4,862,446 66.  What is the retrospective adjustment to retained earnings, beg in 2020 in relation to the 8% Bonds Payable? a. 379,079 credit c. 248,685 debit b. 316,987 credit d. 316,987 debit 67.  What is the carrying value as of December 31, 2020 of the additional paid-in capital resulting from the 12% Convertible Bonds? a. 250,000 c. 95,264 b. 154,736 d. 54,736 68.  Assuming that on January 1, 2021, 60% of the bonds were settled at 110 (excluding interest) when the prevailing market rate of interest without the conversion option is at 10% on January 1, 2021, how much gain/loss should be recognized in the net income for 2021? a. 42,314 c. 20,290 b. 1,734 d. 22,024 69.  What is the interest expense on the lease liability for 2020? a. 236,168 c. 263,832 b. 189,539 d. 286,168 70.  What is the depreciation expense on the right to use asset for 2020? a. 286,168 c. 288,933 b. 306,168 d. 266,168 - 

End of examination – 

NOTE: Solutions to selected items are found on the next page.(Page 14) AUDITING

- FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH 41) 

 

 ReSA: The Review School of Accountancy

 

1 2 3 4 5 6 7 8 9 10 11 12

D C C D D A A B C C B D

21 22 23 24 25 26 27 28 29 30 31 32

13 14 15 16 17 18 19 20

B A A A D C C C

33 B 34 B 35 B

14 of 18

B A C D C D D B A D A C

PROBLEM 1: FREYA CORP.

2018 Net Income b. c.

d.

Unrecorded dividend declaration Accrued salaries, understatement 2018 Accrued salaries, understatement 2019 Accrued salaries, understatement 2020 Unused supplies, understatement 2018 Unused supplies, understatement 2020 Unearned rent income, understatement 2018 Unearned rent income, understatement 2019 Unrecorded/understatement in AR/Sales 2018 Unrecorded/understatement in AR/Sales 2019 Unrecorded/understatement in AR/Sales 2020

E Dqeu pirpem cie an tito,nJuulnyd,e2 rs0t1a8 tement, 2019 - 8 months Depreciation understatement, 2020 - 12 months Net Adjustments a. Unadjusted balances Adjusted Balances

 

(25,000)

2019 Net Income    

25,000 (45,000)

 

15,000

 

(15,000)

 

(10,000)

 

12,000

       

10,000 (18,000) (12,000) 15,000

e.

      

2020 Net Income

   

45,000 (60,000)

 

20,000

 

18,000

 

(18,000)

   

(15,000) 10,000

 

15,000

     

(48,000) (30,000) 800,000

2(4 30 2,,0 00 00 0)

(8,000) (200,000)

   

168,000 1,500,000

  (208,000) 36. Ans. C.

 

1,668,000

2018 Net Income   210,000   (30,000)

2019 Net Income   257,000   30,000

2020 2020 RE, Beg. Total Assets   (300,000)  

  

  770,000 37. Ans. C.

(45,000)

240,000 (32,000)

  (140,000)

38. Ans. A.

PROBLEM 2: MARTIS INC.

Balance a. 2 20 018 Advances from customers, understated 2020 Advances from customers, understated 2019 Advances to suppliers, understated 2020 Advances to suppliers, understated 2018 Accounts payable, understated 2019 Accounts payable, understated 2020 Accounts payable, understated b. 2018 Inventory, overstated 2019 Inventory, understated 2020 Inventory, overstated c. 2019 Repairs charged to building 2019/2020 Depreciation oversated 2020 Repairs charged to building 2019 Depreciation understated

 

 

(24,000)

(8,000)

 

15,000

   

24,000 (19,000)

       

 

148,000

Collections from customers Add: Sales returns, without refund Accounts receivable, end Sales discounts Less: Recoveries of previous write-off Accounts receivable, beg.

           

1,600,000 120,000 450,000 140,000 (20,000) (300,000)

Gross sales, accrual basis

  1,990,000

Payments to suppliers of merchandise Add: Purchase returns, without refund Purchase discount Accounts payable, end Less: Accounts payable, beg. Gross purchases, accrual basis

           

840,000 160,000 80,000 160,000 (190,000) 1,050,000

Gross purchases Less: Purchase returns (total) Purchase discount Net Purchases Add: Merchandise inventory, beg. Cost of goods available for sale Less: Merchandise inventory, end

             

1,050,000 (200,000) (80,000) 770,000 110,000 880,000 (170,000)

Cost of goods sold

 

710,000

Payments of employee salaries Add: Salaries payable, end Less: Salaries payable, beg.

     

Salaries expense, accrual basis

 

Net sales (1,990,000 - 180,000 - 140,000) Cost of sales Salaries expense Rent expense

       

 

8,000 6,000 (90,000) 10,000

241,000 40. Ans. D.

PROBLEM 3: LESLIE COMPANY

43. Ans. B.

44. Ans. C.

400,000 50,000 (60,000) 390,000

45. Ans. C.

1,670,000 (710,000) (390,000) (230,000) *

2020 2020 Net Income Working Capital   125,000      

(28,000) (15,000) 19,000

 

(28,000)

 

19,000

   

19,000 (35,000)

 

(35,000)

   

(6,000) (4,000)

 

(4,000)

   

10,000 (96,000)

  

11,000 2,000 41. Ans. B.

  (48,000) 42. Ans. A.

 

20,000

 

10,000

    

240,000 (32,000) (48,000)

  190,000

39. Ans. A.

Bad debt expense

 

Net income

 

(20,000) 320,000

46. Ans. A.

 AUDITING - FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH (BATCH 41)

 

 ReSA: The Review School of Accountancy

*

Payments for rentals Less: Prepaid rent, end Rent exepnse, accrual basis

     

280,000 (50,000) 230,000

Allowance for bad debts, end Less: Recoveries of previous write off Allowance for bad debts, beg. Bad debt expense

       

50,000 (20,000) (10,000) 20,000

 

PROBLEM 4: HANABI COMPANY

Entries: a. Treasury shares Cash (15,000 P90)

 

b.

Cash (8,000 P122) Treasury shares (8,000*P90) Share premium - TS

 

Cash (5,000 P75)

 

375,000

Share premium - TS

 

75,000

c.

 

1,350,000

d.

Memo: Issued 48,000 share rights. rights. Ex Exercise ercise rate, 5 rights rights is is to 1 share share at P80.

e.

Preference shares (5,000 10 100) Share premium - PS (1.2M/20K)*5K Ordinary shares (15,000 50)

Cash (48,000-3,000)/5 P80 Ordinary shares (9,000sh *P50)

 

Retained earnings   Cash dividends payable

Outstanding 1/1 Treasury shares reacquisition Treasury shares reissuance PS coversion to OS Stock rights exercise, Shares issuance Multiply by: Cash dividends per share Total cash dividends h.

Income summary Retained earnings

 

720,000 256,000

 

450,000

 

750,000

 

50,000

47. Ans. D.

48. Ans. B.

720,000

Share premium - OS

g.

   

500,000 300,000

Share premium - OS

f.

1,350,000

976,000

Treasury shares (5,000*P90)

   

 

 

450,000

 

270,000

 

306,000

306,000

OS                

50,000 (15,000) 13,000 15,000 9,000 72,000 3 216,000

 

540,000

49. Ans. D. 50. Ans. D.

PS  

20,000

 

(5,000)

     

15,000 6 90,000

 

540,000

   

1,000,000 800,000

   

1,000,000 500,000

 

949,000

     

10,000 550,000 300,000

 

340,000

 

306,000

51. Ans. B.

Share premium - Ordinary shares Shre premium - Preference shares Share premium - Treasury shares

     

920,000 900,000 181,000

Total APIC

  2,001,000

PROBLEM 5: GATOTKACA INC.

Correct entries to record transactions in 2018: (a) Land Ordinary shares (100,000 P10) Share premium-OS (b)

(c)

 

Cash (50,000 P30) Preference shares (50,000 P20) Share premium-PS

 

Income summary Retained earnings

 

Correct entries to record transaction in 2019: (a) Building (@fair value) Interest expense (500,000 12% 2/12) Bonds payable (@ fair value: 500,000 1 11 10%) Ordinary shares (30,000 P10)

 

1,800,000

1,500,000

949,000

1,200,000

Share pr emium-OS (640,000-300,000)

(b)

(c)

  Allocation:   Fair value of the Building Fair value of Bonds payable (500,000 1 11 10) Accrued interest (500,000*12%*2/12) Residual amount allocated to ordinary shares Treasury shares (20,000 P2 P24) Cash

52. Ans. D.

         

1,200,000 (550,000) (10,000) 640,000

480,000  

480,000

Memo entry: *Ordinary shares issued: from 130,000 shares to 260,000 shares with par value from P10/share to P5/share *Treasury shares: from 20,000 shares to 40,000 shares with cost per share from P24 to P12 53. Ans. B.

(d)

Cash (30,00*P11.50)

 

345,000

Retained earnings

 

15,000

  Treasury shares (30,000 P12)

54. Ans. C.

 

360,000

15 of 18

(e)

Retained earnings (250 (250,0 ,000 00 20 20%) %) P5   Share dividends payable (50,000shares*P5)

 

250,000

Computation:   Outstanding shares, after the split (260,000 - 40,000) Reissue of treasury shares Outstanding shares upon declaration of share dividends

55. Ans. D.

 

250,000

     

220,000 30,000 250,000

*share divideds in large, thus at par value

 AUDITING - FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH (BATCH 41)

 

 ReSA: The Review School of Accountancy

(f)

(g)

-

Preference shares (8,000 P2 P20) Share pr premium-PS (P500,000/50,000)*8,000sh Retained earnings Cash (8,000 P38)

     

Income summary Retained earnings

 

Retained earinings (10,000 P1 P12) Retained earinings appropriated for Treasury

 

 

160,000 80,000 64,000  

304,000

 

830,000

 

120,000

830,000

120,000

56. Ans. C.

SUMMARY January 1 Balance d) Reissue of treasury e) Share dividends declaration f) Retirement of Preference shares g) Net income for 2019 - Appropriation for Treasury Shares

           

Retained earnings, unappropriated

  1,330,000

949,000 (15,000) (250,000) (64,000) 830,000 (120,000)

PROBLEM 6: PHARSA CORP.

Dec. 2019: Actual increase sales in 2019 (11.4M - 10 10M) Estimated increase in sales in 2020 Estimated increase in sales in 2021 Estimated increase in sales in 2022

In PHP   1,400,000

In % 14% 14% 15% 15% 15% Services were received 

Pr ojected average annual increase in sales

Estimated number of options per employee

100 each

Estimated employees who will stay (220 - 10 - 25) Mulitply by estimated number of options per employee Estimated number of options to vest by 2019 Multiply by: FMV of options on grant date Total value of services to be received over 4 years Divide by: Vesting period

           

185 100 18,500 12.50 231,250 4

Salaries expense in 2019

 

57,813

57. Ans. B.

Dec. 2020: Actual increase sales in 2019 (11.4M - 10 10M) Increase in sales in 2020 (13,452M - 11.4M) Estimated increase in sales in 2021 Estimated increase in sales in 2022

In PHP   1,400,000   2,052,000

In % 14% 18% 20% 20% 18% Services were received 

Average annual increase in sales

Estimated number of options per employee

150 each

Estimated employees who will stay (220 - 20 - 20) Mulitply by estimated number of options per employee Estimated number of options to vest by 2022 Multiply by: FMV of options on grant date Total value of services to be received over 4 years Multiply by: 2/4 years Cummulative salaries expense for 2019 and 2020 Less: Prior year salaries expense

   

Salaries expense in 2020

 

Dec. 2021: Actual increase sales in 2019 (11.4M - 10 10M) Increase in sales in 2020 (13.452M - 11.4M) Increase in sales in 2021 (16.815M - 13.452M) Estimated increase in sales in 2022 Average annual increase in sales Estimated number of options per employee Estimated employees who will stay (220 - 30 - 15) Mulitply by estimated number of options per employee Estimated number of options to vest by 2022 Multiply by: FMV of options on grant date Total value of services to be received over 4 years Multiply by: 3/4 years Cummulative salaries expense for 2019 - 2021 Less: Prior year salaries expense Salaries expense in 2021

         

180 150 27,000 12.50 337,500 2/4 168,750 (57,813) 110,937

In PHP   1,400,000   2,052,000   3,363,000   5,825,000

               

In % 14% 18% 25% 30% 22% Services were received  175 each

175 175 30,625 12.50 382,813 3/4 287,109 (168,750) 118,359

58. Ans. A.

Dec. 2019: Actual increase sales in 2019 (11.4M - 10 10M) Increase in sales in 2020 (13.452M - 11.4M) Increase in sales in 2021 (16.815M - 13.452M) Increase in sales in 2022 (25,222,500 - 16.815M) Average annual increase in sales

Estimated number of options per employee

In PHP   1,400,000   2,052,000   3,363,000   8,407,500

In % 14% 18% 25% 50% 27% Services were received 

200 each

16 of 18

Estimated employees who will stay (220 - 40)

 

180

Mulitply by estimated number of options per employee Actual number of options to vest by 2022 Multiply by: FMV of options on grant date Total value of services to be received over 4 years Multiply by: 4/4 years Cummulative salaries expense for 2019 - 2022 Less: Prior year salaries expense

           

200 36,000 12.50 450,000 4/4 450,000 (287,109)

Salaries expense in 2022

 

162,891

   

547,200 360,000

59. Ans. A.

Entry upon exercise of 80% of options vested Cash (36,000*80%)/2= 14,400sh*P38) Ordinary share warrants outstanding (450K*80%) Ordinary shares (14,400sh*P50) Share premium

 

720,000

 

187,200

 AUDITING - FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH (BATCH 41)

 

 ReSA: The Review School of Accountancy

 

17 of 18

PROBLEM 7: ADEL CORP. 60. Ans. C.

Accounts payable, unadjusted balance 9910: From consignor 9913: Unrecorded purchase (goods already received) 9914: In transit, FOB Destination (not yet valid) 9915: Not valid Dec purchase (goods received in Jan) 9918: In transit, FOB Shipping point (recorded in Jan)

           

Accounts payable, adjusted

 

460,000 (30,000)  AJE 1: Accounts Payable 25,000 Purchases (45,000) (30,000) 34,000

 

46,000   46,000

414,000

61. Ans. A.

Accrued Accrued Accrued Accrued

expenses, unadjusted balance repairs and maintenance expense salaries and wages (84,500/13days) 8days utilities (electricity bill for December)

       

29,400  AJE 2: Repairs and maintenanc Salaries and wages 22,000 Utilities expense 52,000  Accrued expenses 21,600

     

22,000 52,000 21,600   95,600

Accrued expenses, adjusted   125,000 *Note that the legal services and water bills were debited to accrued exepnses which suggests   that these has been appropriately accrued in December. 62. Ans. C.

Warranty expense in 2017 (1,250 7 70 0%) P P3 350 Less: Actual warranty cost incurred in 2017 Warranties payable, 2017 Warranty expense in 2018 (1,410 7 70 0%) P P3 350 Less: Actual warranty cost incurred in 2018 Warranties payable, 2018 2017 Warranties (Expired): 153,250 - 143,250

             

306,250 (153,000)  AJE 3: Warranties Expense Warranties payable 153,250 345,450 (250,000) 248,700 (10,000)

Warranties payable, 2018

 

238,700

 

85,450   85,450

63. Ans. D.

2017 unused leaves forwarded to 2019 (625-(700-200))* 2018 unused leaves forwarded to 2019 Total unused leaves that may be forwarded to 2019 Multiply by current salary rate in 2018: (268,500/895days) 1.1

       

Salaries payable (Liab for compensated absences) *any unused prior to 2017 leaves are forfieted by the end of 2018

 

125 550  AJE 4: Salaries payable   45,750 675 Salaries expense 330 (268,500-222,750) 222,750

64. Ans. D. *There is a right/option to refinance the obligation on a long-term basis as of December 31, 2018. However, based on the probable

proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.

PROBLEM 8: PAQUITO INC.

a. 8% Bonds Payable analysis Proceeds from issue based on 10% effective inter est Principal PV factor of 1 at 10% for 5 period without annuity Annual Interest PV factor of 1 at 10% for 5 period with annuity FMV of bonds at 10% effective rate

       

5,000,000 0.620921 400,000 3.790787

Jan. 1, 2019: Cash Interest expense Bonds payable

   

4,620,921 379,079

Dec. 31, 2019: Interest expense Cash

 

Dec. 31, 2020 Interest expense Cash

 

 

3,104,607

    `

1,516,315 4,620,921

 

5,000,000

 

400,000

 

400,000

 

4,620,921

 

400,000

Entry made by the client:

400,000

400,000

Corret entries:

Jan. 1, 2019: Cash Bonds payable

 

Dec. 31, 2019: Interest expense Cash

 

4,620,921

400,000

  45,750

Interest expense Bonds payable Dec. 31, 2020 Interest expense Cash Interest expense Bonds payable 65. Ans. C. AMORTIZATION TABLE:

 

 

62,092  

62,092

 

400,000

 

68,301

400,000

 

68,301

N OM OMI N NA AL I N NT T

EF EFF FECTI ECTIV VE I N NT T AMO MOR RTI TIZ ZATI TIO ON (CV of liab 10%)   462,092   62,092

BALANCE   4,620,921   4,683,013

January 1, 2019: December 31, 2019, Amortization

 

400,000

December 31, 2020, Amortization

 

400,000

 

468,301

 

68,301

  4,751,315

December 31, 2021, Amortization December 31, 2022, Amortization December 31, 2023, Amortization

     

400,000 400,000 400,000

     

475,131 482,645 490,909

     

75,131 82,645 90,909

  4,826,446   4,909,091   5,000,000

   

379,079 400,000

   

779,079 462,092

 

316,987  

 Adjusting Journal Journal Entries

To adjust the beginning balances: Interest expense per books Discount charged to interest (Jan 1, 2019) Interest paid charged to interest expense Interest exense per audit (see amortization) Overstatement in interest expense in 2019

 AUDITING - FIRST PRE-BOARD EXAMINATION EXAMINATION (BATCH (BATCH 41)

 

 ReSA: The Review School of Accountancy

66. Ans. B. Bonds payable (Discount on bonds payable) Retained earnings, beg

Current year adjustment Interest expense Bonds payable

 

 

 

316,987    

316,987

 

68,301

 

68,301

b. 12% Convertible Bonds Payable analysis 67. Ans. C.

Lump Sum Proceeds from Issuance on Jan. 1, 2020: FMV based on 9% effective interest (4.5% semi-annual) Principal PV fact factor or of 1 a att 4 4.5 .5% % for for 6 s sem emii-an annu nual al pe peri riod ods sw wit itho hout ut an annu nuit ity y Semi-annual Interest PV f ac ac tto o r of 1 at 4.5% 4.5% f or or 6 semiemi-a annua nnuall per erio iod ds with ith annui nnuitty FMV of bonds at 9% effective rate

       

2,000,000 0. 0.76 7678 7896 96 120,000 5. 5.15 1578 7872 72

 

1,535,791

 

618,945

Residual Amount (APIC-Bond Conversion Option) AMORTIZATION TABLE:

January 1, 2020: July 1, 2020 Amo January 1, 2021 Amo July 1, 2021 Amo January 1, 2022 Amo July 1, 2022 Amo January 1, 2023 Amo

Lump Sum Retirement price on Jan. 1, 2021 (1.2M 110%) FMV based on 10% effective interest (5% semi-annual) Principal PV ffa ac tto o r of 1 at 5 5% % ffo or 4 s emi emi--annua nnuall p per erio iod ds wit witho hout ut ann nnui uitty Semi-annual Interest PV factor of 1 at 5% for 4 semi-an nu nual per iio ods with an nu nuity Retirment price for the bonds at 10% effective rate

N OM OMI N NA AL I N NT T            

       

120,000 120,000 120,000 120,000 120,000 120,000

1,200,000 0. 0.82 8227 2702 02 72,000 3.5459 51 51

 

2,250,000

 

2,154,736

 

95,264

EF EFF FECTI ECTIV VE I N NT T AMO MOR RTI TIZ ZATI TIO ON BALANCE (CV of liab 4.5%)   2,154,736   96,963   (23,037)   2,131,699   95,926   (24,074)   2,107,626   94,843   (25,157)   2,082,469   93,711   (26,289)   2,056,180   92,528   (27,472)   2,028,708   91,292   (28,708)   2,000,000

 

987,243

 

255,308

Residual Amount (Retirement price for APIC component)

 

1,320,000

 

1,242,551

 

77,449

68. Ans. D.

Entry: Bonds payable (2,107,626*60%) APIC-Bond Coversion Option (95,264*60%) Retained earnings

     

1,264,575 57,158 20,290

Gain on early settlemet of bonds

 

22,024

Cash

 

1,320,000

Retirement price Carrying values Gain/Loss

Bonds   1,242,551   1,264,575

APIC    

77,449 57,158

  22,024 Ga aii n ( P/ P/ L) L)

  (20,290) Cap . L os oss ( (R RE )

   

500,000 4.169865

 

       

300,000 4.169865 1,250,960 0.620921

Total   1,320,000   1,321,734

c. Lease Liability analysis

PV of MLP: Periodic Payments over the original lease term PV factor of 1 at 10% for 5 period in advance Periodic Payments over the extension lease term PV factor of 1 at 10% for 5 period in advance PV of extension lease term payments as at 12/31/24 PV factor of 1 at 10% for 5 periods without annuity PV of extension lease term payments as at 1/1/20 PV of MLP 69. Ans. A. Proof: Amortization Table

PV of MLP

Periodic Pymnt

2,084,933

 

776,748

 

2,861,680

Interest Principal (CV of Liab. 10%)

Balance   2,861,680

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