Quizbowl RF12

E1. Accepting an engagement to compile a financial projection for a publicly held company
most liely would be inappropriate if the projection were to be distributed to
a. A ban with which the entry is negotiating for a loan.
b. A labor union with which the entity is negotiating a contract.
c. !he principal stocholder" to the e#clusion of the other stocholders.
d. All stocholders of record as of the report date.
E2. $han Reyes had the following transactions in the capital stoc of %ee $orporation&
2''(
)une 2 *urchased 2'' shares of *1'' par +alue common stoc at *12' per share.
2'',
-ar 1 Recei+ed stoc rights permitting him to purchase at par one new share of
common stoc for e+ery four shares held. .n this date" the bid price for a
share was *1/'0 for a right" *1'.
-ay 1 E#ercised ('1 of the rights recei+ed.
)une 1 2old remaining rights at *3.4' each.
5ec. 1 Recei+ed a cash di+idend of *1' a share and a 2'1 stoc di+idend.
2''4
Apr. 1 2old the shares recei+ed as stoc di+idend on 5ecember 1" 2'', at *11' a
share.
6se the a+erage cost method.
7ow much is the cost of the in+estment after the sale on April 1" 2''48
a. * 21"3(, c. * 2/"'''
* * 22"/'' d. * 2("9('
E9. $omparati+e financial statements include the prior year:s statements that were audited
by a predecessor auditor whose report is not presented. ;f the predecessor:s report was
un<ualified" the successor should
a. E#press an opinion on the current years statements alone and mae no
reference to the prior year:s statements.
b. ;ndicate in the auditor:s report that the predecessor auditor e#pressed an
un<ualified opinion.
c. .btain a letter of representations from the predecessor concerning any
matters that might affect the successor:s opinion.
d. Re<uest the predecessor auditor to reissue the prior year:s report.
E/ =hen reporting on comparati+e financial statements" which of the following
circumstances ordinarily should cause the following circumstances ordinarily should
cause the auditor to change the pre+iously issued opinion on the prior year:s financial
statements8
a. !he prior year:s financial statements are restated following a pooling of interests in
the current years.
b. A departure from generally accepted accounting principles caused an ad+erse opinion
on the prior year:s financial statements and those statements ha+e been property
restated.
c. A change in accounting principle caused the auditor to mae a consistency
modification in the current year:s auditor:s report.
d. A scope limitation caused a <ualified opinion on the prior year:s financial statements
but the current year:s opinion was properly un<ualified.
E> !he following transactions too place in the month of April for 2ure $ompany&
1. !he company was incorporated on April 1 by selling shares for *>(-.
2. %and and office building were purchased for *29-. A down payment of *4-
was paid by chec0 a note was signed for the remaining *1>-" the property being
gi+en a collateral to the note which was due in 9 months time only.
9. A chec for */.9/- was written to pay for the entire purchase price of the
computer e<uipment.
/. A chec in the amount of *'.(2- was written to ac<uire software technology.
>. .ne piece of computer e<uipment was sold to 2orry $ompany at its original
price" and the cash collected was deposited in the company:s checing account.
Assume all transactions of the company were properly recorded and the balance of the
checing account at the end of April was found to be */9.41-" the selling price of the
piece of e<uipment sold in item ?9@ abo+e is&
a. * /.13- c. *1>.,,-
b. * 4(.4>- d. * '.,,-
E(. !read $orp. accountants for the effect of a material accounting change prospecti+ely
when the inclusion of the cumulati+e effect of the change is re<uired in the current year.
!he auditor would choose between e#pressing a?an@
a. Qualified opinion or a disclaimer of opinion.
b. 5isclaimer of opinion or an un<ualified opinion with an e#planatory paragraph.
c. 6n<ualified opinion with an e#planatory paragraph and an ad+erse opinion.
d. Ad+erse opinion and a <ualified opinion.
E,. ;n 2''4" -ount $orporation ac<uired land by paying *9,>"''' down and signing a note
with a maturity +alue of *>"'''"'''. .n the note:s due date" 5ecember 91" 2''4"
-ount owed *2''"''' of accrued interest and *>"'''"''' principal on the note. -ount
was in financial difficulty and was unable to mae any payments. -ount and the ban
agreed to amend the note as follows&
a. !he *2''"''' of interest due on 5ecember 91" 2''4 was forgi+en.
b. !he principal of the note was reduced from *>"'''"''' to */",>'"''' and the
maturity date e#tended 1 year to 5ecember 91" 2''3.
c. -ount would be re<uired to mae one interest payment totaling *1>'"''' on
5ecember 91" 2''4.
As a result of the troubled debt restructuring" -ount should report a gain" before ta#es"
in its 2''4 income statement of&
a. *2''"''' c. *9''"'''
b. *2>'"''' d. */>'"'''
E4. !he third standard of field wor states that sufficient competent e+idential matter is to
be obtained through inspection" obser+ation" in<uiries" and confirmation to afford a
reasonable basis for an opinion regarding the financial statements under audit. !he
substanti+e e+idential matter re<uired by this standard may be obtained" in part"
through
a. Flowcharting the internal control structure.
b. *roper planning of the audit engagement.
c. Analytical procedures.
d. Auditor woring papers
E3. At )anuary 1" 2''(" Quest $o. had a recei+able from A $ompany of */''"''' that has
been outstanding for <uite some time. ;nitial in+estigation re+ealed that A $ompany is
in deep financial dilemma. At present" A $ompany is unable to settle all outstanding
obligations but further in+estigation re+ealed that F $ompany is taing o+er to run and
operate the business affairs of A $ompany. 7owe+er" F $ompany is more than willing to
assume only ,>1 of A $ompany:s financial obligations and by the end of 2''," all the
assumed financial obligations of A $ompany will be settled. As of 5ecember 91" 2''("
Quest $ompany e#pects to collect *9''"''' that is due from A $ompany. As of
5ecember 91" 2''(" the pre+ailing interest rate for a similar financial asset is 1/1.
=hat amount of bad debtA impairment loss should Quest $ompany recognize related to
its accounts recei+able in 2''(8
a. *19("4/9 c. *9''"'''
b. *2(9"1>, d. */''"'''
E1'. !he 2cope of an audit is not restricted when an attorney:s response to an auditor as
a result of a client:s letter of audit in<uiry limits the response to
a. -atters to which the attorney has gi+en substanti+e attention in the form of
legal representation.
b. An e+aluation of the lielihood of an unfa+orable outcome of the matters
disclosed by the entity.
c. !he attorney:s opinion of the entity:s historical e#perience in recent similar
litigation.
d. !he probable outcome of asserted claims and pending or threatened litigation.
A1. 2yosset $ompany is a *hilippine corporation that purchases in+entory from 62
manufacturers. A recent in+entory purchase in+ol+ed the following e+ents&
Bo+. 12 C *urchased raw materials from 7ampton Days $ompany" a 62 manufacturer"
amounting to 62 2>'"'''" payable in (' days. $urrent e#change rate is
*>'./>. ?2yosset uses perpetual in+entory system and debits in+entory
account@
5ec. 91 C -ade yearEend adjusting entry relating to the 62 2>'"''' accounts payable to
7ampton Days. $urrent e#change rate is *>'.43.
)an. 11 C ;ssued a chec amounting to 62 2>'"''' in full payment of the accounts
payable to 7ampton Days and recorded a gain amounting to *122">''.
=hat is the e#change rate of the *hilippine peso to 62 dollar on )anuary 118
a. * >1.94 c. *
>'.(,
b. * >'.43 d. * >'./'
A2. As auditor ordinarily sends a standard confirmation re<uest to all bans with which the
client has done business during the year under audit" regardless of the yearEend
balance. A purpose of this procedure is to
a. *ro+ide the data necessary to prepare a proof of cash.
b. Re<uest a cutoff ban statement and related checs be sent to the auditor.
c. 5etect iting acti+ities that may otherwise not be disco+ered.
d. 2ee information about contingent liabilities and security agreements.
A9. =hen an auditor tests a computerized accounting system" which of the following is true
of the test data approach8
a. !est data must consist of all possible +alid and in+alid conditions.
b. !he program tested is different from the program used throughout the year
by the client.
c. 2e+eral transactions of each type must be9 tested.
d. !est data are processed by the client:s computer programs under the auditor:s
control.
A/. .n 5ecember 91" 2''3" the balance sheet of !imo $ompany showed the following
property and e<uipment after charging depreciation&
Duilding 9"'''"'''
Accumulated depreciation 1"'''"''' 2"'''"'''
E<uipment 1"2''"'''
Accumulated depreciation /''"''' 4''"'''
!he company has adopted the re+aluation model for the +aluation of property and
e<uipment. !his has resulted in the recognition in prior periods of an asset re+aluation
surplus for the building of *1>'"'''. .n 5ecember 91" 2''3" an independent +aluer
assessed the fair +alue of the building to be *1"(''"''' and the e<uipment to be
*3''"'''.
!he building and e<uipment had remaining useful li+es of 2> years and / years"
respecti+ely" as of 5ecember 91" 2''3.
Amount to be recognized in 2''3 profit or loss related to the re+aluation of property and
e<uipment
a. * /''"''' b. * 9''"''' c. * 2>'"''' d. * 1>'"'''
A>. A primary ad+antage of using generalized audit software pacages to audit the financial
statements of a client that uses an E5* system is that the auditor may
a. $onsider increasing the use of substanti+e test of transactions in place of
analytical procedures.
b. 2ubstantiate the accuracy of data through spellchecing digits and hash
totals.
c. Reduce the le+el of re<uired tests of controls to a relati+ely small amount.
d. Access information stored on computer files while ha+ing a limited
understanding of the client:s hardware and software features.
A(. .n )anuary 1" 2''9" the *aul $ompany purchased a machine for *1"9''"''' which it
installed in a rented factory. ;t is depreciating the machine o+er 12 years by the 2%- to
a residual +alue of *1''"'''. %ate in 2''," because of increasing competition in the
industry" the company belie+es that its asset may be impaired and will ha+e a remaining
useful life of > years o+er which it estimates the asset will produce total cash inflows of
*2"'''"''' and will incur total cash outflows of *1"(>'"'''. !he cash flows are
independent of the company:s other acti+ities and will occur e+enly each year. !he fair
+alue of the machine is *24'"'''. !he cost to sell the machine is */'"'''. !he
company:s discount rate is 1'1.
!he Reco+erable $ost of the machine is
a. * 24'"''' b. * 2/'"''' c. 2(>"9>( d. * 232"(,(
A,. 2tratified mean per unit ?-*6@ sampling is a statistical techni<ue that may be more
efficient than uncertified -*6 because it usually
a. -ay be applied to populations where many monetary errors are e#pected to
occur.
b. *roduces an estimate ha+ing a desired le+el of precision with a smaller
sample size.
c. ;ncreases the +ariability among items in a stratum by grouping sampling units
with similar characteristics.
d. Fields a weighted sum of the strata standard de+iations that is greater than
the standard de+iation of the population.
A4. .n )anuary 1" 2''," $harmaine $orporation decided to dispose of an item of plant that
is carried in its records at a cost of *3''"'''" with accumulated depreciation of
*1('"'''. 5epreciation on the plant since it was originally ac<uired has been charged of
*1'"''' per month. !he plant will continue to be operated until it is sold" at which time
the operations of the plant will be outsourced. !he company undertoo all the necessary
actions to be able to classify the asset as held for sale. ;t is estimated that it could sell
the plant for its fair +alue" *,2'"'''" incurring *2'"''' selling costs in the process. !he
plant has been depreciated at an amount of *1'"''' per month.
.n -arch 91" 2''," the plant had not been sold but" due to shortage of this type of
plant" there had been an increase in the fair +alue to *,,'"'''. .n )une 9'" 2'',"
$harmaine sold the plant for *,4>"''' incurring *2>"''' selling costs.
!he depreciation e#pense to be recognized in 2'', is
a. * ('"''' b. * >(",(' c. * >4"94' d. * '
A3. Decause of the per+asi+e effects of laws and regulations on the financials statements of
go+ernmental units" an auditor should obtain written management representations
acnowledging that management has
a. ;mplemented internal control policies and procedures designed to detect all
illegal acts"
b. 5ocumented the procedures performed to e+aluate the go+ernmental unit:s
compliance with laws and regulations.
c. ;dentified and disclosed all laws and regulations that ha+e a direct and
material effect on its financial statements.
d. Reported all nown illegal acts and material weanesses in internal control
structure to the funding agency or regulatory body.
A1'. 2i# months after issuing an un<ualified opinion on audited financial statements" an
auditor disco+ered that the engagement personnel failed to confirm se+eral of the
client:s material accounts recei+able balances. !he auditor should first
a. Re<uest the permission of the client to undertae the confirmation of
accounts recei+able.
b. *erform alternati+e procedures to pro+ide a satisfactory basis for the
un<ualified opinion.
c. Assess the importance of the omitted procedures to the auditor:s ability to
support the pre+iously e#pressed opinion.
d. ;n<uire whether there are persons currently relying" or liely to rely" on the
un<ualified opinion.
51.7AR*ER %EE !RA5;BG $.R*.RA!;.B is in the process of filing an insurance claim in
connection with a fire on 2eptember 1>" 2'', that destroyed its in+entory and
accounting records. As the e#ternal auditor of the company" you were re<uested the
company to determine the amount of loss and in filing the said insurance claim. Fou
obtained the following information based on your in+estigation&
a. ;n+entory as reported in the latest annual financial statements" dated 5ecember 91"
2''( amounted to *(92"9(3./' this amount is based on the physical in+entory count
conducted by the 7arper %ee under you obser+ation on 5ecember 91"2''(.
b. Accounts payable and accounts recei+able as reported in the latest annual financial
statements amounted to *99'"913.29 and */'>"'2,.>/.
c. 6npaid open in+oices due to the suppliers as of the date of the fire were ascertained
to be *94'"49(.11.
d. All sales are on account and unpaid open in+oices due from customer as of the date
of the fire were ascertained to be *921"/9>.,>.
e. *ayments to +endors from 5ecember 91"2''( to the date of the fire totaled to
*1"32>"(1/.(4 while total collections on recei+ables during the same inclusi+e dates
totaled to *2"(24">4(.>'.
f. Almost all the merchandise items are sold at appro#imately 9'1 in e#cess of cost.
As at 2eptember 1>" 2''," the total cost of in+entory items not destroyed by the fire
amounted to */9/"(/(.33.
g. !he annual premium of *29"(/' on the insurance carried was due and paid on
)anuary 1" 2''(. !he policy" which has a face amount of */(>"''' carries an 4'1
coinsurance clause ?applied to the estimated boo +alue of in+entories on the date of
the fire.@
=hat is the estimated amount to be reco+ered from the insurance company8 ?7int&
reco+erable amount H I?Face of policyA $oEinsurance re<uirement@JFire %ossK
a. 2,>",,(.(, b. 139"'('.(> c. 121",22./4 d. /(>"'''
52.An auditor:s report contains the following&
=e did not audit the financial statement of D $ompany" a consolidated subsidiary" which
statements reflect total assets and re+enues constituting 2' percent and 22 percent"
respecti+ely" of the related consolidated totals. !hese statements were audited by other
auditors" whose report has been furnished to us" and our opinion" insofar as it relates to
the amounts included for D $ompany" is based solely upon the report of other auditors.
!hese sentences
a. 5isclaim an opinion. c. 5i+ide responsibility.
b. Qualify the opinion. d. 2hould no be part of the audit report.
59.*.R!ER $.-*ABF is in its first year of operation and is using the cash basis of
accounting. !he company presented the foll'owing cash receipts and disbursement
records for 2'',&
$ash receipts *94/"'''
$ash disbursements ?2/,">''@
*19(">''
!he management re<uested you to compute its income under accrual basis.
!he following information are deemed rele+ant in your analysis&
a. 5epreciation of plant assets for 2'', computed by straightEline method is *91">''.
b. *repaid insurance f *>"/''" twoEthirds of which relates to 2''4" is included in the
2'', cash disbursement figure. !his amount was recognized as insurance e#pense
when it was paid.
c. *orter $ompany recei+ed *9("''' in ad+ance rent for space in its building. !he
entire amount is included in the cash receipts figure and was recognized as rent
re+enue when recei+ed. 7owe+er" *21"''' of it was space that will be pro+ided in
2''4.
d. Employees are due *4"/'' at the end of 2'',.
e. ;nterest amounting to *3">1' from in+estment is recei+able at the end of 2'',.
f. Fou estimate that your 2'', fee for accounting ser+ices that ha+e not been billed will
be *1">''.
=hat is the total liabilities to be reported as of the balance sheet date under the accrual
basis8
a. 9/">'' b. //"'1' c. /'"/1' d. 9'"3''
5/. .n )anuary 1" 2''2" DR6$E %td. Granted stoc options to its chief e#ecuti+e officer
?$E.@. !his is the only stoc option plan that DR6$E offers. !he details of the stoc
options are set out below&
.ption to purchase >"''' noEparE+alue common shares
.ption price per share *(2.''
-aret price per share at grant date *>,.''
2toc options e#pire !he earlier of 4 years after issuance or the
employee:s cessation of employment with the
company for any reason other than retirement.
!he options are first e#ercisable !he earlier of / years after issuance or the date
on which an employee reaches the retirement
age of (>.
Fair +alue at grant date" as determined
by using a binomial +aluation model *1'.''
.n )anuary 1" 2''," /"''' of the options were e#ercised when the maret price of the
common shares was *,4.''. !he rest of the options were allowed to e#pire.
!he journal entry to record the e#ercise of /"''' options on )anuary 1" 2'', will re<uire
a. a debit to cash *912"'''
b. a debit to contributed surplus of */'"'''
c. a credit to common shares of */'"'''
d. a credit to contributed surplus of *2/4"'''
5>.=hich of the following is least considered if the auditor has to determine whether
specialized $;2 sills are needed in an audit8
a. !he auditor needs to obtain a sufficient understanding of the
accounting and internal control system affected by the $;2 en+ironment.
b. !he auditor needs to determine the effect of the $;2 en+ironment on
the assessment of o+erall ris and of ris at the account balance and class of
transactions le+el.
c. 5esign and perform appropriate tests of controls and substanti+e
procedures.
d. !he need of the auditor to mae analytical procedures during the
completion stage of audit.
5(..n 5ecember 91" 2''>" Rebecca Rose $orporation ac<uired the following three
intangible assets&
A trademar for *9''"'''. !he trademar has , years remaining legal life. ;t is
anticipated that the trademar will be renewed in the future" indefinitely" without
problem.
Goodwill for *1">''"'''. !he goodwill is associated with Rebecca Rose:s 7ayo
-anufacturing reporting unit.
A customer list for *22'"'''. Dy contract" Rebecca Rose has e#clusi+e use of the list
for> years. Decause of maret conditions" it is e#pected that the list will ha+e
economic +alue for just 9 years.
.n 5ecember 91" 2''(" before any adjusting entries for the year were made" the
following information was assembled about each of the intangible assets&
a@ Decause of a decline in the economy" trademar is now e#pected to generate cash
flows of just *1'"''' per year. !he useful life of trademar still e#tends beyond the
foreseeable horizon.
b@ !he cash flows e#pected to be generated by the 7ayo -anufacturing reporting unit is
*2>'"''' per year for the ne#t 22 years. Doo +alues and fair +alues of the assets
and liabilities of the 7ayo -anufacturing reporting unit are as follows&
Doo +alues Fair +alues
;dentifiable assets *2",''"''' *9"'''"'''
Goodwill 1">''"''' 8
%iabilities 1"4''"''' 1"4''"'''
c@ !he cash flows e#pected to be generated by the customers list are *12'"''' in 2'',
and *4'"''' in 2''4.
Assume that the appropriate discount rate for all items is (1
;mpairment loss for the year 2''(
a. *3'"/,( b. *199"999 c. *1,3">4/ d. *'
5,.!he following procedures may be performed by $*As in an engagement&
;. $onsideration of internal control
;;. .bser+ation
;;;. ;n<uiry and analysis
;L. ;nspection
L. $onfirmation
L;. .btaining management representation letter
=hich of the foregoing are normally performed in an agreedEupon procedures
engagement8
a. ;; and L; only c. ;;" ;;;" ;L" and L only
b. ;" ;;" and L; only d. ;;" ;;;" ;L" and L; only
54.!he 2!E*7ABF $.. sold *("'''"''' of 31 bonds on .ctober 1" 2''1" at *>",/,"24'
plus accrued interest. !he bonds were dated )uly 1" 2''10 interest payable
semiannually on )anuary 1" and )uly 10 redeemable after )une 9'" 2''> to )une 9'"
2''3" at 1'1" and thereafter until maturity at 1'' and con+ertible into *1' par +alue
common stoc as follows&
6ntil )une 9'" 2''(" at the rate of ( shares for each *1"''' bond
Form )uly 1" 2''(" to )une 9'" 2''3 at the rate of > shares for each *1"'''
bond.
After )une 9'" 2''3" at the rate of / shares for each *1"''' bond.
!he bonds mature 1' years from their issue date. !he company adjust its boos
monthly and closes its boos as of 5ecember 91" each year.
!he following transactions occur in connection with the bonds&
2'',
)uly 1 *2"'''"''' of bonds were con+erted into stoc.
2''4
5ec. 91 *1"'''"''' face +alue of bonds were reac<uired at 33E1A/ plus accrued
interest. !hese were immediately retired.
2''3
)uly 1 the remaining bonds were called for redemption and accrued interest
was paid. For purposes of obtaining funds for re/demption and business
e#pansion" an *4"'''"''' issue of ,1 bonds was sold at 3,. !hese
bonds are dated )uly 1" 2''2" and are due in 2' years.
;n recording the bond con+ersion on )uly 1" 2''," how much should be credited to the
additional paidEin capital account8
a. *1",3("92' b. *1"3(>"//' c. *1"4/>"//' d.
*1"4(>"//'
53.=hich of the following is not an objecti+e of re<uiring registration of indi+idual $*As and
Firms of partnership of $*As engaged in public accounting practice8
a. !he re<uired registration will gi+e e<ual opportunities to $*As in the practice
of their profession.
b. ;t will enable the Doard of Accountancy to formulate and implement rules and
regulations more effecti+ely for the enhancement and maintenance of high
professional" ethical" and technical standards of the accounting profession.
c. !o protect the public against fraud" deception" unethical practices and from
the conse<uences of ignorance" incompetence and incapacity in the practice of public
accounting.
d. ;t will help *R$ and D.A to identify and impose corresponding sanctions and
penalties on indi+idual $*As.
51'. )ennifer 2ales $ompany uses the firstEin" firstEout method in calculating cost of goods
sold for the three products that the company handles. ;n+entories and purchase
information concerning the three products are gi+en for the month of .ctober.
*roduct $ *roduct * *roduct A
.ct. 1 ;n+entory >'"''' units 9'"''' units (>"''' units
at *(.'' at *1'.'' at *'.3'
.ct. 1E1> *urchases ,'"''' units />"''' units 9'"''' units
at *(.>' at *1'.>' at *1.2>
.ct. 1(E91 *urchases 9'"''' units
at *4.''
.ct. 1E91 2ales 1'>"''' units >'"''' units />"''' units
.ct. 91 2ales price *4.''Aunit *11.''Aunit *2.''Aunit
.n .ctober 91" the company:s suppliers reduced their prices from the most recent
purchase prices by the following percentages& product $" 2'10 product *" 1'10
product A" 41. Accordingly" )ennifer decided to reduce its sales price on all items by
1'1" effecti+e Bo+ember 1. )ennifer:s selling cost is 1'1 of sales price. *roducts $
and * ha+e a normal profit ?after selling costs@ of 9'1 on sales prices" while the
normal profit on product A ?after selling cost@ is 1>1 of sales price.
!he Allowance for in+entory write down at .ctober 91 is
a. *>"(>' b. *4>"(>' c. *19">'' d. *('"1>'
$lincher M 1
Fou were able to gather the following in connection with your audit to the $7.BAEABB
$ompany for the year ended 5ecember 91" 2''4&
1A1A2''4 12A91A2''4
Accounts recei+able *("/''"''' */"'''"'''
6npaid merchandise in+oices 8 2"(21"'''
Accrued wages 4>"''' 12>"'''
Ad+ertising supplies in+entory 9>"''' ,>"'''
Accrued ad+ertising 1/"2>' /'"'''
*repaid ;nsurance 2>"''' E
6ne#pired insurance E /1"'''
5uring the year&
Amount collected from customers *1'"'''"'''
!otal payments to suppliers of merchandise 19"(14"'''
!otal payments to suppliers of merchandise of prior years /"(92"'''
=ages paid 9"'>'"'''
Ad+ertising paid which includes */'"''' applicable in 2''( 9''"'''
;nsurance premium paid 12>"'''
1. =hat is the net purchases for 2''48 NNNNNNNNNNNNNNNNNN
a. *11"(',"'''
$lincher M 2
;nformation about accounts recei+able during the year follows&
?a@ An aging schedule of the accounts as of 5ecember 91" 2'', showed the
following&
1 to be applied
Age Bet debit balance after correct made
6nder (' days *1,2">'' 91
(1E3' days 19("3'' 41
31 C 12' days 93"('' J 121
o+er 12' days 24",'' */"/'' definitely
uncollectible
estimated remainder
is 2>1 uncollectible
J!he *2"''' writeEoff of recei+ables belongs to this category.
?b@ !he accounts recei+able control account has a debit balance of *934"''' on
5ecember 91" 2'',. !he difference between this amount and the adjusted balance
was established as ad+ances to officers and employees.
?c@ !wo entries were made in the Dad 5ebts account during the year0?1@ a
debit for the amount credited to Allowance for 5oubtful Accounts" and ?2@ credit for
*2"''' on Bo+ember /" 2'', and a debit to Allowance for 5oubtful Accounts because
of Danruptcy.
?d@ !he allowance for 5oubtful accounts showed a debit of *2"''' and a credit
e<ual to >1 of the 5ecember 91" 2'', Accounts Recei+able balance aside from the
beginning balance which amount to *2'"'''.
?e@ A credit balance e#ists in the Accounts Recei+able ?(1 C 3' days@ of */"2''
which represents an ad+ance on a sales contract.
!o correct the entry to writeEoff the accounts recei+able" the account debited and
credited" respecti+ely are ?Gi+e the entry@
Dad 5ebts
Accounts Recei+able
$lincher M 9
.n )anuary 2" 2''4" a tract of land that originally cost *4''"''' was sold by %ABG;!
$orporation. !he company recei+ed a *1"2''"''' note as payment. ;t bears interest rate
of /1 and is payable in 9 annual installments of */''"''' plus interest on the outstanding
balance. !he pre+ailing rate of interest for a note of this type is 1'1. !he present +alue
table shows the following present +alue factors of 1 at 1'1.
*resent +alue factor of 1 for 9 periods '.,>192
*resent +alue factor of 1 for 2 periods '.42(/>
*resent +alue factor of 1 for 1 period '.3'3'3
*resent +alue of an ordinary annuity of 1 for 9 periods 2./4(4>
!he effecti+e interest income on the note recei+able for the year ended 5ecember 91"
2''4 is NNNNNNNNNNNNNNNNNN
a. 1',"(4>
$lincher M /
!he following information pertains to Fou$an*ass $ompany:s intangible assets&
a. .n )anuary 1" 2''," Fou$an*ass signed an agreement to operate as a franchise of
)olibee for an initial franchise fee of *1">''"'''. .f this amount" *9''"''' was paid
when the agreement was signed and the balance is payable in / annual payments of
*9''"''' each" beginning )anuary 1" 2''4. !he agreement pro+ides that the down
payment is not refundable and no future ser+ices are re<uired of the franchisor. !he
present +alue at )anuary 1" 2''," of the / annual payments discounted at 1/1 ?the
implicit rate for a loan of this type@ is *4,/"'''. !he agreement also pro+ides that >1
of the re+enue from the franchise must be paid to the franchisor annually. Fou$an*ass
$ompany estimates the useful life of the franchise to be 1' years.
b. Fou$an*ass incurred *1"9''"''' of e#perimental and de+elopment costs in its
laboratory to de+elop a patent which was granted on )anuary 2" 2'',. %egal fees and
other costs associated with registration of the patent totaled *2,2"'''. Fou$an*ass
estimates that the useful life of the patent will be 4 years.
c. A trademar was purchased from -c5onalds for *(/'"''' on )uly 1" 2''/.
E#penditures for successful litigation is defense of the trademar totaling *1(9"2'' were
paid on )uly 1" 2''(. Fou$an*ass $ompany estimates that the useful life of the
trademar will be 2' years from the date of ac<uisition.
!he total e#penses resulting from the transactions that would appear on Fou$an*ass
$ompany:s income statement for the year ended 5ecember 91" 2'', should be
a. * 149"/'' b. * 1"199"/'' c. * 1"2('">(' d. * 1"2>>",('