Modaud2 Quiz 1 t1 1415 (w Answer)

DE LA SALLE UNIVERSITY Accountancy Department MODAUD2

Quiz No. 1 Units 1 to 3 June 5, 2014

I. TRUE/FALSE (10) Read the statements/questions carefully. Write “A” if the statement is true and “B” if otherwise. Use CAPITAL letters only. 1.

The auditors' approach to the audit of investment property largely results from the fact that relatively few transactions occur. 2. Evidence of continued ownership of investment property is obtained by vouching payments to a mortgage trustee. 3. Noncurrent assets held for sale are classified as noncurrent in the statement of financial position. 4. Discontinued operations are treated as extraordinary items in the financial statements. 5. Confirmation of accounts payable is a required generally accepted auditing procedure. 6. The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis. 7. The auditors are required to confirm notes payable directly with the bondholders. 8. The formal documentation creating notes payable is called the indenture. 9. The primary purpose of internal control over intangible assets is to safeguard the assets from theft. 10. In the audit of goodwill the auditors must often rely on the work of specialists. II. MULTIPLE CHOICE (15) Read the statements/questions carefully. Choose the letter of the best answer from the given choices. Use CAPITAL letters only.

1.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A. The estimated remaining useful lives of equipment were increased. B. Plant assets were retired during the year. C. The prior year's deprecation expense was erroneously understated. D. Overhead allocations were revised at year-end.

2.

In testing for unrecorded retirements of equipment, an auditor might. A. Select items of equipment from the accounting records and then attempt to locate them during the plant tour. B. Compare depreciation expense with the prior year's depreciation expense. C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger. D. Scan the general journal for unusual equipment retirements.

3.

Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A. Requests for major repairs are approved by a higher level than the department initiating the request. B. Prenumbered purchase orders are used for equipment and periodically accounted for. C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids. D. Procedures exist to restrict access to equipment.

4.

When there are numerous intangible asset transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A. Tests of controls and extensive tests of intangible asset balances at the end of the year. B. Analytical procedures for current year intangible asset transactions. C. Tests of controls and limited tests of current year intangible asset transactions. D. Analytical procedures for intangible asset balances at the end of the year.

5.

Which of the following best describes the auditors' approach to the audit of the ending balance of intangible asset for a continuing nonpublic client? A. Direct audit of the ending balance. B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C. Audit of changes in the accounts since inception of the company. D. Audit of selected acquisitions and disposals for the last few years.

6.

Which of the following is not one of the auditors' objectives in auditing amortization? A. Establishing the reasonableness of the client's replacement policy. B. Establishing that the methods used are appropriate. C. Establishing that the methods are consistently applied. D. Establishing the reasonableness of amortization computations.

7.

Which of the following best describes a voucher prepared under good internal control? A. A document prepared by Stores that indicates amount to be purchased. B. A document prepared by Receiving that indicates the quantity received and approves payment. C. A document prepared by Accounts Payable authorizing a cash disbursement. D. A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due.

8.

An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: A. Confirmation and observation. B. Observation and inquiry. C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.

9.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive pre-numbering.

10. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period. B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. 11. In auditing notes payable, an auditor would be most likely to: A. Perform analytical procedures on the prenumbered promissory notes. B. Examine documentation of assets purchased with bond proceeds for liens. C. Compare interest expense with the note payable amount for reasonableness. D. None of these. 12. Which of the following most likely would approve the issuance of notes payable? A. Controller. B. Payroll. C. Personnel. D. Treasurer. 13. An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned because A. its carrying amount will be recovered principally through continuing use. B. its carrying amount will be recovered principally through continuing sale. C. its carrying amount will not be recovered principally through continuing use. D. Either A or C. 14. At initial recognition, an entity shall measure a non-current asset (or disposal group) classified as held for sale A. At fair value less cost to sell. B. At cost C. At fair value. D. None of these.

15. An entity shall recognize a gain for any subsequent increase in fair value less costs to sell of an asset, A. to the extent that it has not been recognized B. but not in excess of the cumulative impairment loss that has been recognized previously. C. but in excess of the cumulative impairment loss that has been recognized previously. D. but to the extent of the ultimate extent. III. PROBLEMS (50) Read the problems carefully. Answer the requirements stated by showing all necessary computations on a clean worksheet. DOUBLE RULE all final answers except for journal entries. PROBLEM 1: Ford Company acquired several small business enterprises at the end of 2012 and reported the following intangibles in its December 31, 2012 balance sheet: Patent P200,000 Copyright 400,000

Trademark Customer List Goodwill

450,000 330,000 2,250,000

The company’s accountant determines that the patent has an expected life of 10 years with no residual value. The company expects to use the copyright and trademark for the foreseeable future. The customer list is expected to have an economic value for just 3 years. The following information relates to the other intangible assets: a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P15,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon. b) The goodwill is associated with Hanks Manufacturing reporting unit. The expected cash flows of the reporting unit is P375,000 per year for the next 22 years. Carrying amounts and fair values of the assets and liabilities of the unit are as follows: Carrying Amount Fair Values Identifiable Assets P4,050,000 P4,500,000 Goodwill 2,250,000 ? Liabilities 2,700,000 2,700,000 c)

The cash flows expected to be generated by the customer list are P180,000 in 2011 and P120,000 in 2013.

Assume a discount rate of 6% for all items. 1. How much is the total amortization of intangible assets in 2013? A. P130,000 B. C. 2.

3.

4.

How much is the loss on impairment in 2013? A. B.

D.

C. P200,000

D.

Carrying amount of goodwill on December 31, 2013 is: A. P2,250,000 B. C.

D.

Carrying amount of identifiable intangible assets on December 31, 2013 is: A. B. C.

D. P3,300,000

Requirement 1: Patent

20,000.00

List

110,000.00

Total

130,000.00

Requirement 2: Trademark

Goodwill

Customer List

CV Recoverable amount

450,000.00

2,250,000.00

220,000.00

(250,000.00)

(4,515,600.00)

(276,612.00)

Impairment

200,000.00

-

-

Requirement 3: Since goodwill is not amortized and is not impaired as of 12/31/12, the carrying amount is P2,250,000 Requirement 4: Patent

180,000.00

Copyright

400,000.00

Trademark

250,000.00

Customer List

220,000.00

Goodwill

2,250,000.00

Total

3,300,000.00

PROBLEM 2:

You are auditing the records of Nichole Corp. for the year ended December 31, 2013. Records show that total patent of Nichole totaled P1,725,000. Transactions relating to the patent are shown below:      

During 2007 and 2008, Nichole spent a total of P500,000 in developing a new process that was patented as Patent A on April 1, 2009. Legal costs and other costs of registering the patent totaled P50,000. Patent B was developed by Josh was purchased for P200,000 on December 1, 2010. Estimated remaining useful life of the patent was 12 years. During 2009, 2010 and 2011, research and development activities related expenditures amounted to P550,000. No additional patents resulted from these R&D activities. A patent infringement case (for Patent B) against a competitor was filed by Nichole Corp. The lawsuit was successfully prosecuted at a cost of P50,000. A decision in the case was rendered on June 2011. On July 1, 2012, Patent C was purchased for P175,000. Estimated remaining useful life was 16 years. During 2013, Nichole expended P200,000 on patent development. However, Nichole is still unsure of future economic benefits that will be generated by the patent developed.

5. What is Patent A’s carrying value on December 31, 2013? 50k x 15.25/20 = 38,125 6. What is Patent B’s carrying value on December 31, 2013? 200k x 8 years, 11 months / 12 = 148,611 7. What is Patent C’s carrying value on December 31, 2013? 175k x 14.5/16 = 158,594 8. How much should be reported as total patent amortization expense for the year ended 2013? A = 2,500; B=16,667; C= 10,938 Total = 30,105 PROBLEM 3: You were assigned on the audit of G Company for the year ended December 31, 2013. G Company ventured into construction of a condominium in Makati which is rated as the largest state-of-the-art structure. The entity’s board of directors decided that instead of selling the condominium, the entity would hold this property for purposes of earning rentals by letting out space to business executives in the area. The construction of the condominium was completed and the property was placed in service on January 1, 2012. The cost of the construction was P50,000,000. The useful life of the condominium is 25 years and its residual value is P5,000,000. An independent valuation expert provided the following fair value at each subsequent year-end: December 31, 2012 December 31, 2013 December 31, 2014

P55,000,000 P53,000,000 P60,000,000

9.

Under the cost model, what amount should G Company report as depreciation of investment property for 2012? 10. Under the cost model, what amount should G Company recognize as gain from change in fair value in 2012? 11. Under the fair value model, what amount should G Company recognize as gain from change in fair value in 2012? PROBLEM 4: Your examination of the books of E Company and its subsidiaries revealed the following properties that are accounted for in accordance with PAS 40 as of December 31, 2013:

Land held by E for undetermined use A vacant building owned by E and to be leased out under an operating lease Property held by a subsidiary of E, a real estate firm, in the ordinary course of business Property held by E for use in production Building owned by a subsidiary of E and for which the subsidiary provides security and maintenance services to the lessees Land leased by E to a subsidiary under an operating lease Property under construction for use as investment property Land held for future factory site Machinery leased out by E to an unrelated party under an operating lease The Company uses the fair value model to account for the investment properties. All amounts stated above are assumed to be the fair value of the properties as of December 31, 2013. 12. What is the total investment property that should be reported in the consolidated statement of financial position of E and its subsidiaries as of December 31, 2013?

5,000,000 3,000,000 2,000,000 4,000,000 1,500,000 2,500,000 6,000,000 3,500,000 1,000,000

13. What is the total investment property that should be reported in the separate statement of financial position of E as of December 31, 2013? 14. If on December 31, 2014, E Company decided to reclassify its separate investment properties to owner-occupied properties, how much should be recognized as gain on reclassification in the profit or loss assuming that the fair value as of the said date is P15,000,000? 15. If on December 31, 2014, E Company decided to reclassify its separate investment properties to inventories, how much should be recognized as gain on reclassification in the profit or loss assuming that the fair value as of the said date is P15,000,000? PROBLEM 5: On February 10, 2013, after the issuance of its financial statements for 2012, Bruzon Company entered into a financing agreement with Dave Bank, allowing Bruzon Company to borrow up to P4,000,000 at any time through 2015. Amounts borrowed under the agreement bear interest at 12% and mature two years from the date of the loan. Bruzon Company presently has P1,500,000 of notes payable with BPI maturing March 15, 2013. The company intends to borrow P2,500,000 under the agreement with Dave and liquidate its notes payable to BPI. The agreement with Dave also requires Bruzon to maintain a working capital level of P6,000,000 and prohibits distribution of dividends without prior approval. 16. How much is the current liabilities to be reported as of December 31, 2012? P1,500,000 17. How much is the noncurrent liabilities to be reported as of December 31, 2012? Zero PROBLEM 6: On January 1,2013, Elesterio Co. leased a building to Miko Corp. for a ten-year term at an annual rental of P80,000. At inception of the lease, Elesterio received P320,000 covering the rent for the first two years and a security deposit of P160,000 that will be applied on the last two years of the lease. 18. How much would be reported as current liability as of December 31, 2013? P80,000 19. How much would be reported as non-current liability as of December 31, 2013? P160,000 PROBLEM 7: On September 1, 2012, Val Co. issued a note payable to Edz Bank in the amount of P1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of P400,000. On this date, the effective rate was 10%. The first payment was made on September 1, 2013. 20. How much is the accrued interest payable as of December 31, 2013? P32K 21. How much is the proceeds of the loan? 1,241,066 22. How much is the interest expense for the year ended 2013? 110,100 23. How much is the carrying value of the liability as of December 31, 2013? 816,545 PROBLEM 8: During your audit of the purchases of Lashon Inc. for 2013, you noticed that several invoices were found to be erroneously recorded. Due to the increased risk, you have decided to perform additional cut-off procedures for purchases. It is the practice of the company to record sale with a debit to Cost of Sales. The invoice details sampled for your procedure are shown below: Invoice No.

Shipping Terms

016 051 078 066 198 199 177 074

Shipping point Shipping point Destination Shipping point Destination Shipping point Destination Shipping point

Invoice Date 01/04/2014 12/30/2013 01/04/2014 12/30/2013 01/04/2014 01/04/2014 12/30/2013 01/06/2014

Invoice Amount P15,000 5,000 20,000 50,000 7,500 10,000 30,000 10,000

Receiving Report Date 12/29/2013 01/04/2014 12/30/2013 01/04/2014 01/04/2014 01/04/2014 01/04/2014 01/05/2014

Assume that all related inventory were shipped before December 31, 2013. Last physical count performed was on December 31, 2013. 24. How much is the net adjustment to the accounts payable?

25. What is the net adjustment to inventories, end? Accounts Payable 016

15,000.00

051 078

Inventory -

-

5,000.00

20,000.00

066 198

-

50,000.00 -

199

10,000.00

10,000.00

177

(30,000.00)

074

10,000.00

10,000.00

Net adjustment

25,000.00

75,000.00

-