AUDITING PROBLEMS

PROBLEM NO. 1 – STATEMENT OF CASH FLOWS

(Intermediate Accounting 16th Edition – Stice)

The schedule below shows the account balances of BENEFICIO CORPORATION at the
beginning and end of the year ended December 31, 2015:

DEBITS Dec. 31, 2015 Dec. 31, 2014

Cash and cash equivalents P222,000 P 50,000
Investment in trading securities 10,000 40,000
Accounts receivable 148,000 100,000
Inventories 291,000 300,000
Prepaid insurance 2,500 2,000
Land and building 195,000 195,000
Equipment 305,000 170,000
Discount on bonds payable 8,500 9,000
Treasury shares (at cost) 5,000 10,000
Cost of goods sold 539,000
Selling and general expenses 287,000
Income taxes 35,000
Unrealized loss on trading securities 4,000
Loss on sale of equipment 1,000
Total debits P2,053,000 P 876,000

CREDITS
Allowance for bad debts P 8,000 P 5,000
Accumulated depreciation – Building 26,250 22,500
Accumulated depreciation – Equipment 39,750 27,500
Accounts payable 55,000 60,000
Notes payable – current 70,000 20,000
Miscellaneous expenses payable 18,000 8,700
Taxes payable 35,000 10,000
Unearned revenue 1,000 9,000
Notes payable – long-term 40,000 60,000
Bonds payable – long-term 250,000 250,000
Deferred income tax liability 47,000 53,300
Ordinary shares, P2 par 359,400 200,000
Retained earnings appropriated for
treasury shares 5,000 10,000
Retained earnings appropriated for
possible building expansion 38,000 23,000
Unappropriated retained earnings 34,600 112,000
Share premium 116,000 5,000
Sales 898,000
Gain on sale of investment securities 12,000
Total credits P2,053,000 P 876,000

Additional information:

a) All purchases and sales were on account.

b) Equipment with an original cost of P15,000 was sold for P7,000.

c) Selling and general expenses include the following:

Building depreciation P 3,750
Equipment depreciation 25,250
Bad debt expense 4,000
Interest expense 18,000
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d) A six-month note payable for P50,000 was issued toward the purchase of new
equipment.

e) The long-term note payable requires the payment of P20,000 per year plus
interest until paid.

f) Treasury shares were sold for P1,000 more than their cost.

g) During the year, a 30% stock dividend was declared and issued. At that time,
there were 100,000 shares of P2 par ordinary shares outstanding. However,
1,000 of these shares were held as treasury shares at the time and were
prohibited from participating in the stock dividend. Market price was P10 per
share when the stock dividend was declared.

h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The
cost was debited to Accumulated Depreciation—Equipment.

i) Beneficio has determined that its purchases and sales of trading securities are
operating activities.

Based on the given data, calculate the following:

1. Net income for 2015

A. P45,000 B. P50,300 C. P43,500 D. P44,000

2. Cash dividends declared and paid during 2015

A. P8,000 B. P52,000 C. P7,400 D. P 0

3. Proceeds from issuance of ordinary shares in 2015

A. P100,000 B. P110,000 C. P210,000 D. P269,400

4. Proceeds from sale of trading securities

A. P26,000 B. P38,000 C. P42,000 D. P14,000

5. Accumulated depreciation of equipment sold

A. P7,000 B. P15,000 C. P8,000 D. P9,000

6. Cash paid for purchase of equipment

A. P50,000 B. P106,000 C. P150,000 D. P100,000

7. Proceeds from sale of treasury shares

A. P6,000 B. P5,000 C. P4,000 D. P10,000

8. Net cash provided by operating activities

A. P45,000 B. P87,000 C. P83,000 D. P89,300

9. Net cash used in investing activities

A. P106,000 B. P99,000 C. P61,000 D. P93,000

10. Net cash provided by financing activities

A. P188,000 B. P187,000 C. P182,000 D. P106,000
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PROBLEM NO. 2 – CORRECTION OF ERRORS

(Test Bank – Intermediate Accounting 14th Edition - Kieso)

The following list of accounts and their balances represents the unadjusted trial
balance of ALTERADO COMPANY at December 31, 2015:

Cash P290,900
Equity investments (trading) 600,000
Accounts receivable 690,000
Allowance for doubtful accounts P 5,000
Inventory 547,200
Prepaid rent 360,000
Plant and equipment 1,600,000
Accumulated depreciation – Plant and equipment 147,400
Accounts payable 113,700
Bonds payable 900,000
Ordinary share capital 1,700,000
Retained earnings 971,800
Sales 2,148,000
Cost of goods sold 1,544,000
Freight-out 110,000
Salaries and wages expense 320,000
Interest expense 20,400
Rental income 216,000
Miscellaneous expense 8,900
Insurance expense 110,500
P6,201,900 P6,201,900

Additional data:

1. The balance in the Insurance expense account contains the premium costs of
three policies:
Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2014;
Policy 2, original cost of P72,000, 3-year term, taken out on October 1,
2015;
Policy 3, original cost of P13,000, 1-year term, taken out on January 1,
2015.

2. On September 30, 2015, Alterado received P216,000 rent from its lessee for
eighteen-month lease beginning on that date.

3. The regular rate of depreciation is 10% per year. Acquisitions and retirements
during a year are depreciated at half this rate. There were no purchases
during the year. On December 31, 2014, the balance of the Plant and
equipment account was P2,400,000.

4. On December 28, 2015, the bookkeeper incorrectly credited Sales for a receipt
on account in the amount of P100,000.

5. At December 31, 2015, salaries and wages accrued but unpaid were
P4,200,000.

6. Alterado estimates that 1% of sales will become uncollectible.

7. On August 1, 2015, Alterado purchased, as a short-term investment, 600

P1,000, 7% bonds of Alendog Corp. at par. The bonds mature on August 1,
2016. Interest payment dates are July 31 and January 31.

8. On April 30, 2015, Alterado rented a warehouse for P30,000 per month, paying
P360,000 in advance.
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1. What are the adjusted balances of the following accounts on December 31,
2015?
Prepaid insurance Insurance expense
A. P 6,000 P104,500
B. 0 110,500
C. 54,000 56,500
D. 66,000 44,500

2. What is the total depreciation expense for the year ended December 31, 2015?
A. P120,000 B. P240,000 C. P200,000 D. P160,000

3. What is the bad debt expense for the year ended December 31, 2015?
A. P15,480 B. P25,480 C. P21,480 D. P20,480

4. What amount of interest and rent income should be reported in the income
statement for the year ended December 31, 2015?
Interest income Rental income
A. P24,500 P 36,000
B. 17,500 180,000
C. 24,500 180,000
D. 17,500 36,000

5. What adjusting entry is necessary on December 31, 2015 for the Prepaid rent
account?
A. Rent expense 270,000
Prepaid rent 270,000
B. Prepaid rent 270,000
Prepaid rent 270,000
C. Prepaid rent 240,000
Rent expense 240,000
D. Rent expense 240,000
Prepaid rent 240,000
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PROBLEM NO. 3 – PROPERTY, PLANT, AND EQUIPMENT (PPE)

(Intermediate Accounting 14th Edition - Kieso)

A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was

requested by your auditor soon after December 31, 2015, showing the additions,
retirements, depreciation, and other data afecting the income of the company in
the 4-year period 2012 to 2015, inclusive.

The following data were ascertained.

Balance of Trucks account, Jan. 1, 2012
Truck No. 1 purchased Jan. 1, 2009, cost P180,000
Truck No. 2 purchased July 1, 2009, cost 220,000
Truck No. 3 purchased Jan. 1, 2011, cost 300,000
Truck No. 4 purchased July 1, 2011, cost 240,000
Balance, Jan. 1, 2012 P940,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1,

2012, and entered in the ledger, had a balance on that date of P302,000
(depreciation on the four trucks from the respective dates of purchase, based on a
5-year life, no salvage value). No charges had been made against the account
before January 1, 2012.

Transactions between January 1, 2012, and December 31, 2015, which were
recorded in the ledger, areas follows.

July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase
price of which was P400,000. Isidro Mfg. Co. paid the automobile
dealer P220,000 cash on the transaction. The entry was a debit to
Trucks and a credit to Cash, P220,000. The transaction has commercial
substance.

Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited
Trucks, P35,000.

July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged
at that amount to the Trucks account. (Assume truck No. 2 was not
retired.)

July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold
as junk for P7,000 cash. Isidro Mfg. Co. received P25,000 from the
insurance company. The entry made by the bookkeeper was a debit to
Cash, P32,000, and credits to Miscellaneous Income, P7,000, and
Trucks, P25,000.

Entries for depreciation had been made at the close of each year as follows: 2012,
P210,000; 2013, P225,000; 2014, P250,500; 2015, P304,000.

1. What is the total depreciation expense for the year ended December 31, 2012?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

2. What is the gain (loss) on trade in of Truck #3 on July 1, 2012?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

3. What is the net book value of the Trucks on December 31, 2015?
A. P414,000 B. P348,000 C. P228,500 D. P894,000
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4. The total depreciation expense recorded for the 4-year period (2012-2015) is
overstated by
A. P185,500 B. P265,500 C. P287,500 D. P275,500

5. Assuming that the books have not been closed for 2015, what is the compound
journal entry on December 31, 2015 to correct the company’s errors for the 4-
year period (2012-2015)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500
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PROBLEM NO. 4 – PPE AND INTANGIBLES

(Intermediate Accounting 17th Edition – Stice)

The TOY COMPANY completed the following transactions during 2015:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000
representing property tax for March 1 – June 30 which was prepaid by the
vendor. Of the purchase price, 25% is deemed applicable to land and the
remaining 75% to buildings. The Toy Company assumed a mortgage of
P4,600,000 on the purchase and paid cash for the balance.

30 The building acquired necessitates current reconditioning at a cost of

P342,000 because previous owners had failed to take care of normal
maintenance and repair requirements on it.

May 15 Garages in the rear of the building were demolished. The Toy Company
recovered P66,000 on the lumber salvage. It then proceeded to construct
a warehouse at P1,013,000, which was almost exactly the same as bids
made by construction companies. Upon completion of construction, city
inspectors ordered extensive modifications to the warehouse as a result of
failure on the part of the company to comply with building safety code.
Such modifications, which could have been avoided, cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market
value of P640,000 (par, P40,000) for a patent and new toy-making
machine. The machine has a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the
machinery, a new franchise was acquired from the manufacturer of the
machinery to produce toy robots. Payment was made by issuing the
company’s own ordinary shares (par, P1,000,000). The value of the
franchise is set at P500,000, while the machine’s fair value is P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of
P420,000 and P89,000, respectively. The work was completed and paid
for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During
this time, required redecorating and repairs were completed at a cost of
P64,000.

After considering the preceding transactions, compute the year-end balances of the
following:

1. Buildings
A. P7,289,000 B. P7,511,750 C. P7,413,000 D. P7,635,750

2. Land
A. P2,074,250 B. P2,000,000 C. P2,583,250 D. P2,509,000

3. Machinery
A. P1,070,000 B. P920,000 C. P770,000 D. P931,000

4. Share premium
A. P10,000 B. P500,000 C. P710,000 D. P600,000

5. Intangibles
A. P830,000 B. P500,000 C. P330,000 D. P840,000
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PROBLEM NO. 5 – PROVISION FOR WARRANTY

(Intermediate Accounting 17th Edition – Stice)

LAFAYETTE CORPORATION, a client, requests that you compute the appropriate

balance of its estimated liability for product warranty account for a statement as of
June 30, 2015.

Lafayette Corporation manufactures television components and sells them with a 6-

month warranty under which defective components will be replaced without charge.
On December 31, 2014, Estimated Liability for Product warranty had a balance of
P620,000. By June 30, 2015, this balance had been reduced to P120,400 by debits
for estimated net cost of components returned that had been sold in 2014.

The corporation started out in 2015 expecting 7% of the peso volume of sales to be
returned. However, due to the introduction of new models during the year, this
estimated percentage of returns was increased to 10% on May 1. It is assumed that
no components sold during a given month are returned in that month. Each
component is stamped with a date at time of sale so that the warranty may be
properly administered. The following table of percentages indicates the likely
pattern of sales returns during the 6-month period of the warranty, starting with the
month following the sale of components.

Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth—10% each month 30
100%

Gross sales of components were as follows for the first six months of 2015:

Month Amount Month Amount

January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The corporation’s warranty also covers the payment of freight cost on defective
components returned and on the new components sent out as replacements. This
freight cost runs approximately 5% of the sales price of the components returned.
The manufacturing cost of the components is roughly 70% of the sales price, and
the salvage value of returned components averages 10% of their sales price.
Returned components on hand at December 31, 2013, were thus valued in
inventory at 10% of their original sales price.

Based on the given information, determine the following:

1. Total estimated returns from the sales made during the first 6 months of 2015
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500

2. Total estimated returns subsequent to June 30, 2015

A. P678,250 B. P648,850 C. P591,850 D. P615,950

3. Estimated loss on component replacement (in percentage of sales price)

A. 65% B. 75% C. 70% D. 80%

4. Required Estimated Liability for Product Warranty balance at June 30, 2015
A. P301,353 B. P421,753 C. P120,400 D. P77,847

5. Required adjustment to liability account

A. P301,353 debit C. P421,753 debit
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B. P301,353 credit D. P421,753 credit

PROBLEM NO. 6 - INVENTORIES
(Intermediate Accounting 13TH ED - KIESO)

MALOX Specialty Company manufactures three models of gear shift components for
bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since
beginning operations in 2012, Malox has used normal absorption costing and has
assumed a first-in, first-out cost fow in its perpetual inventory system. The
balances of the inventory accounts at the end of Malox’s fiscal year, November 30,
2015, are shown below. The inventories are stated at cost before any year-end
adjustments.

Finished goods P647,000

Work in process 112,500
Raw materials 264,000
Factory supplies 69,000

The following information relates to Malox’s inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost NRV
Down tube shifter
Standard model P 67,500 P 67,000
Click adjustment model 94,500 89,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 266,000

Bar end shifter

Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
Total finished goods P647,000 P650,550

2. One-half of the head tube shifter finished goods inventory is held by catalog
outlets on consignment.

3. Three-quarters of the bar end shifter finished goods inventory had been
pledged as collateral for a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a

contracted price 20 percent above the net realizable value. The net
realizable value of the rest of the raw materials is P127,400.

5. The total net realizable value of the work in process inventory is P108,700.

6. Included in the cost of factory supplies are obsolete items with historical cost
of P4,200. The net realizable value of the remaining factory supplies is
P65,900.

7. Malox applies the lower of cost or net realizable value method to each of the
three types of shifters in finished goods inventory. For each of the other
three inventory accounts, Malox applies the lower of cost or net realizable
value method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Malox’s

financial statements taken as a whole.
 Page 10

Based on the preceding information, determine the proper values of the following
on November 30, 2015.

1. Finished goods inventory

A. P647,000 B. P643,000 C. P650,550 D. P654,550

2. Work in process inventory

A. P108,300 B. P112,500 C. P108,700 D. P104,500

3. Raw materials inventory

A. P264,000 B. P227,400 C. P242,000 D. P237,400

4. Factory supplies
A. P64,800 B. P65,900 C. P61,700 D. P69,000

5. Which of the following best describes the PAS 2 requirement for applying the
same cost formula to all inventories?
A. When they are purchased from diferent suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.

PROBLEM NO. 7 – BIOLOGICAL ASSETS

(IFRS Practical Implementation Guide and Workbook 2nd edition)
 Page 11

GATAS, INC. produces milk on its farms. It produces 30% of the country’s milk that
is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500
heifers. The farms produce 8 million kilograms of milk a year, and the average
inventory held is 150,000 kilograms of milk. However, the company is currently
holding stocks of 500,000 kilograms of milk in powder form.

At October 31, 2015, the herds are:

 21,000 cows (3 years old), all purchased on or before November 1, 2014

 7,500 heifers, average age 1.5 years, purchased on April 1, 2015
 3,000 heifers, average age 2 years, purchased on November 1, 2014

No animals were born or sold in the year.

The unit fair values less estimated point-of-sale costs were:

1-year-old animal at October 31, 2015 P3,200
2-year-old animal at October 31, 2015 4,500
1.5-year-old animal at October 31, 2015 3,600
3-year-old animal at October 31, 2015 5,000
1-year-old animal at November 1, 2014 and
April 1, 2015 3,000
2-year-old animal at November 1, 2014 4,000

The company has had problems during the year: Contaminated milk was sold to
customers. As a result, milk consumption has gone down. The government has
decided to compensate farmers for potential loss in revenue from the sale of milk.
This fact was published in the national press on September 1, 2015. Gatas received
an ofcial letter on October 10, 2015, stating that P5 million would be paid to it on
January 2, 2016.

The company’s business is spread over diferent parts of the country. The only
region afected by the contamination was Central Visayas, where the government
curtailed milk production in the region. The cattle were unafected by the
contamination and were healthy. The company estimates that the future
discounted cash fow income from the cattle in the Central Visayas region amounted
to P4 million, after taking into account the government restriction order. The
company feels that it cannot measure the fair value of the cows in the region
because of the problems created by the contamination. There are 6,000 cows and
2,000 heifers in the region. All these animals had been purchased on November 1,
2014. A rival company had ofered Gatas P3 million for these animals after point-of-
sale costs and further ofered P6 million for the farms themselves in that region.
Gatas has no intention of selling the farms at present. The company has been
applying PAS 41 since November 1, 2014.

1. What is the fair value of the cattle (excluding Central Visayas region) at
November 1, 2014?
A. P93 million B. P64 million C. P63 million D. P48 million

2. What is the fair value of the cattle (excluding Central Visayas region) at
October 31, 2015?
A. P106.5 million B. P113.25 million C. P105.6 million D. P105.75
million

3. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to price change?
A. P10.7 million B. P12.8 million C. P9.2 million D. P16.7 million

4. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to physical change?
A. P9.2 million B. P11.8 million C. P18.55 million D. P9.4 million

5. On October 31, 2015, the cattle in the Central Visayas region would be valued
at
A. P39 million B. P3 million C. P4 million D. P5 million
 Page 12

PROBLEM NO. 8 - DEPLETION

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining
estimates that the acquired property will yield 120,000 tons of ore with sufcient
mineral content to make mining and processing profitable. It further estimates that
6,000 tons of ore will be mined the first and last year and 12,000 tons every year in
between. (Assume 11 years of mining operations.) The land will have a residual
value of P900,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of
P1,080,000. The company estimates that these structures can be used for 15 years
but, because they must be dismantled if they are to be moved, they have no
residual value. Mina Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of
P1,800,000. The machinery cost the former owner P4,500,000 and was 50%
depreciated when purchased. Mina Mining estimates that about half of this
machinery will still be useful when the present mineral resources have been
exhausted but that dismantling and removal costs will just about ofset its value at
that time. The company does not intend to use the machinery elsewhere. The
remaining machinery will last until about one-half the present estimated mineral ore
has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.

1. What are the estimated depletion and depreciation charges for the first year?
Depletion Depreciation
A. P2,610,000 P189,000
B. P1,305,000 P378,000
C. P2,610,000 P234,000
D. P1,305,000 P189,000

2. What are the estimated depletion and depreciation charges for the 5 th year?
Depletion Depreciation
A. P1,305,000 P378,000
B. P2,610,000 P234,000
C. P2,610,000 P378,000
D. P1,305,000 P234,000

3. What are the estimated depletion and depreciation charges for the 6 th year?
Depletion Depreciation
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000

4. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion Depreciation
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000

5. What are the depletion and depreciation charges for the first year assuming
actual production of 5,000 tons of mineral ore? (Nothing occurred during the
year to cause the company engineers to change their estimates of either the
mineral resources or the life of the structures and equipment.)
Depletion Depreciation
A. P1,087,500 P157,500
B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500
 Page 13

PROBLEM NO. 9–PPE/DEPRECIATION

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in

the demand for its products over the last several years. This prompted the
company to obtain additional manufacturing facility. A real estate firm located an
available factory near Debby’s production facility, and Debby agreed to purchase
the factory and used machinery from Que Company on October 1, 2014.
Renovations were necessary to convert the factory for Debby’s manufacturing use.

The terms of the agreement required Debby to pay Que P1,500,000 when
renovations started on January 1, 2015, with the balance to be paid as renovations
were completed. The overall purchase price for the factory and machinery was
P12,000,000. The building renovations were contracted to Malibay Construction
Company at P3,000,000. The payments made, as renovations progressed during
2015, are shown below. The factory was placed in service on January 1, 2016.

Que Malibay

January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000

On January 1, 2015, Debby obtained a 2-year, P3 million loan with a 12% interest
rate to finance the renovation of the acquired factory. This is Debby’s only
outstanding loan during 2015.

Debby’s policy regarding purchases of this nature is to use the appraisal value of
the land for book purposes and prorate the balance of the purchase price over the
remaining items. The building had originally cost Que P9,000,000 and had a net
book value of P1,500,000, while the machinery originally cost P3,750,000 and had a
net book value of P1,200,000 on the date of sale. The land was recorded on Que’s
books at P1,200,000.

The following values were determined based on appraisal conducted by

independent appraisers at the time of acquisition.

Land P8,700,000
Building 3,150,000
Machinery 1,350,000

Gin G. Neer, Debby’s chief engineer estimated that the renovated plant would be
used for 15 years, with an estimated residual value of P900,000. Neer estimated
that the productive machinery would have a remaining useful life of 5 years and
residual value of P90,000. Debby’s depreciation policy is to apply the 200%
declining balance method for machinery and the 150% declining balance method
for the plant. One-half year’s depreciation is taken in the year the plant is placed in
service and one-half year is allowed when the property is disposed of or retired.

Determine the amounts to be recorded on the books of Debby Corp. as of December

31, 2015, for each of the following properties.
 Page 14

1. Land
A. P7,909,000 B. P8,700,000 C. P9,060,000 D. P10,909,000

2. Building
A. P5,670,000 B. P6,223,600 C. P3,223,600 D. P5,310,000

3. Machinery
A. P1,227,300 B. P1,098,000 C. P1,335,300 D. P990,000

Calculate the 2016 depreciation expense for each of the following properties.

4. Building
A. P238,500 B. P311,180 C. P283,500 D. P265,500

5. Machinery
A. P180,000 B. P198,000 C. P219,600 D. P227,460

PROBLEM NO. 10 – INVENTORIES/BIOLOGICAL ASSETS

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)
 Page 15

Presented below are two independent situations. Answer the questions at the end
of each situation.

GARLA HOME IMPROVEMENTS installs replacement siding, windows, and louvered

glass doors for single family homes and condominium complexes in Quezon City.
The company is in the process of preparing its annual financial statements for the
fiscal year ended May 31, 2015, and Jimmy Lansang, controller for GARLA, has
gathered the following data concerning inventory.

At May 31, 2015, the balance in GARLA’s Raw Materials Inventory account was
P1,224,000, and the Allowance to Reduce Inventory to NRV had a credit balance of
P82,500. Lansang summarized the relevant inventory cost and market data at May
31, 2015, in the schedule below.

Cost Sales Price Net Realizable Value

Aluminum siding P 210,000 P 192,000 P 168,000
Cedar shake siding 258,000 282,000 254,400
Louvered glass doors 336,000 559,200 504,900
Thermal windows 420,000 464,400 420,000
P1,224,000 P1,497,600 P1,347,300

1. What amount should be reported as Allowance to Reduce Inventory to Net

Realizable Value at May 31, 2015?
A. P168,900 B. P45,600 C. P273,600 D. P123,300

2. What amount of gain or loss should be recorded for the year ended May 31,
2015, due to the change in the Allowance to Reduce Inventory to Net
Realizable Value?
A. P36,900 gain B. P86,400 loss C. P40,800 loss D. P82,500
gain

MANGO BANGGO purchased a mango farm in August 2015 for P2,250,000. The
purchase was risky because the growing season was coming to an end, the
mangoes must be harvested in the next few weeks, and Mango has limited
experience in carrying of a mango harvest.

At the end of the first quarter of operations, Mango is feeling pretty good about his
early results. The first harvest was a success; 30,000 kilos of mangoes were
harvested with a value of P90,000 (based on current local commodity prices at the
time of harvest). The fair value of Mango’s mango farm has increased by P45,000
at the end of the quarter. After storing the mangoes for a short period of time,
Mango was able to sell the entire harvest for P105,000.

3. What amount of gain should be recognized on the change in fair value of

Mango’s mango farm?
A. P150,000 B. P45,000 C. P90,000 D. P135,000

4. At what amount should the mangoes harvested be initially recorded on

Mango’s books?
A. P90,000 B. P105,000 C. P60,000 D. P150,000

5. What is the total efect on income for the quarter related to Mango’s biological
asset and agricultural produce?
A. P150,000 B. P45,000 C. P15,000 D. P60,000
 Page 16

PROBLEM NO. 11 - SMEs

(IFRS for SMEs Training Modules – Modules 14, 18 and 21)

The following independent cases relate to diferent SMALL AND MEDIUM-SIZED

ENTITIES (SMEs):

Case 1

On January 1, 20X4, SME A acquired a trademark for a line of products in a separate

acquisition from a competitor for P300,000. SME A expected to continue marketing
the line of products using the trademark indefinitely. An analysis of (i) product life
cycle studies, (ii) market, competitive and environmental trends, and (iii) brand
extension opportunities provides evidence that the line of trademarked products
may generate net cash infows for the acquiring entity for an indefinite period.
Because management is unable to estimate the useful life of the trademark, SME A
amortizes the cost of the trademark over 10 years (i.e., its presumed useful life)
using the straight-line method.

In 20X7, a competitor unexpectedly revealed a technological breakthrough that is

expected to result in a product, that when launched by the competitor, will
extinguish for SME A’s patented product-line. Demand for SME A’s patented
product-line is expected to remain strong until December 20X9, when the
competitor is expected to launch its new product.

On December 31, 20X7, SME A assessed the recoverable amount of the trademark
at P50,000. SME A intends to continue manufacturing the patented products until
December 31, 20X9. SME A has a December 31 financial year-end.

Case 2

SME B gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract of sale, SME B undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from
the date of sale. On the basis of experience, it is probable (i.e., more likely than
not) that there will be some claims under the warranties.

At December 31, 20X1, SME B appropriately recognized P50,000 warranty provision.

SME B incurred and charged P140,000 against the warranty provision in 20X2.
P80,000 of this related to warranties for sales made in 20X2. The increase during
20X2 in the discounted amount recognized as a provision at December 31, 20X2
arising from the passage of time is P2,000.

At December 31, 20X2, SME B estimated that it would incur expenditures in 20X3 to
meet its warranty obligations at December 31, 20X2, as follows:

 5 percent probability of P400,000

 20 percent probability of P200,000
 50 percent probability of P80,000
 25 percent probability of P20,000

Assume for simplicity that the 20X3 cash fows for warranty repairs and
replacements take place, on average, on June 30, 20X3.

An appropriate discount rate is 10 percent per year. An appropriate risk adjustment

factor to refect the uncertainties in the cash fow estimates is an increment of 6
percent to the probability-weighted expected cash fows.
 Page 17

SME B is also the defendant in a breach of patent lawsuit. Its lawyers believe there
is a 70 percent chance that SME B will successfully defend the case. However, if the
court rules in favor of the claimant, the lawyers believe that there is a 60 percent
chance that the entity will be required to pay damages of P2 million (the amount
sought by the claimant) and a 40 percent chance that the entity will be required to
pay damages of P1 million (the amount that was recently awarded by the same
judge in a similar case). Other amounts of damages are unlikely.

The court is expected to rule in late December 20X3. There is no indication that the
claimant will settle out of court.

A 7 percent risk adjustment factor to the cash fows is considered appropriate to

refect the uncertainties in the cash fow estimates. An appropriate discount rate is
10 percent per year.

Case 3

On January 1, 20X1, SME AA acquired 25 percent of the equity of each of entities

BB, CC and DD for P10,000, P15,000 and P28,000, respectively. SME AA has
significant infuence over entities BB, CC and DD. Transaction costs of 1 percent of
the purchase price of the shares were incurred by SME AA.

On January 2, 20X1, entity BB declared and paid dividends of P1,000 for the year
ended 20X0. On December 31, 20X1, entity CC declared a dividend of P8,000 for
the year ended 20X1. The dividend declared by entity CC was paid in 20X2.

For the year ended December 31, 20X1, entities BB and CC recognized profit of
respectively P5,000 and P18,000. However, entity DD recognized a loss of P20,000
for that year.

Published price quotations do not exist for the shares of entities BB, CC and DD.
Using appropriate valuation techniques, SME AA determined the fair value of its
investment in entities BB, CC and DD at December 31, 20X1 as P13,000, P29,000
and P15,000, respectively. Costs to sell are estimated at 5 percent of the fair value
of the investments.

Based on the above information, calculate the following:

1. Trademark amortization for the year ended December 31, 20X7

A. P90,000 B. P70,000 C. P30,000 D. P 0

2. Impairment loss to be recognized for the trademark at December 31, 20X7

A. P90,000 B. P50,000 C. P130,000 D. P60,000

3. The carrying amount of the warranties provision at December 31, 20X2

A. P88,000 B. P50,000 C. P52,000 D. P106,000

4. The amount of loss on litigation that should be reported by SME B at December

31, 20X2
A. P1,000,000 B. P1,070,000 C. P1,019,050 D. P 0
 Page 18

Assume SME AA measures all its investments in associates using the

cost model.

5. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

6. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P11,780 B. P14,030 C. P2,000 D. P2,250

Assume SME AA measures all its investments in associates using the

equity method. Assume that there is neither implicit goodwill nor fair
value adjustments.

7. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

8. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P8,280 B. P6,030 C. P6,780 D. P2,250

Assume SME AA measures all its investments in associates after initial

recognition using the fair value model.

9. The increase in fair value that SME AA should recognize in profit or loss for the
year ended December 31, 20X1
A. P4,000 B. P3,470 C. P1,150 D. P620

10. The carrying amount of the investment in associates under each of the
following assumptions
Cost Equity Fair Value
Model Method Model
A. P38,970 P43,000 P57,000
B. 38,970 52,030 54,150
C. 39,500 43,000 57,000
D. 39,500 52,030 54,150
 Page 19

PROBLEM NO. 12 – CORRECTION OF ERRORS

(Intermediate Accounting 17Th Edition – Stice)

HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The
bank has requested audited financial statements. Hiatt’s financial statements have
never been audited before. It has prepared the following comparative financial
statements for the years ended December 31, 2015 and 2014.

HIATT TEXTILE CORPORATION

COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2015 and 2014
2015 2014
Assets
Current assets:
Cash and cash equivalents P1,205,000 P 800,000
Accounts receivable 1,960,000 1,480,000
Allowance for bad debts (185,000) (90,000)
Inventory 1,035,000 1,010,000
Total current assets 4,015,000 3,200,000
Noncurrent assets:
Property, plant, and equipment 835,000 847,500
Accumulated depreciation (608,000) (532,000)
Total noncurrent assets 227,000 315,500
Total assets P4,242,000 P3,515,500

Liabilities and Shareholders’ Equity

Liabilities:
Accounts payable P 607,000 P 980,500
Shareholders’ equity:
Ordinary shares, P20 par value;
150,000 shares authorized;
65,000 shares issued and outstanding 1,300,000 1,300,000
Retained earnings 2,335,000 1,235,000
Total shareholders’ equity 3,635,000 2,535,000
Total liabilities and shareholders’ equity P4,242,000 P3,515,500

HIATT TEXTILE CORPORATION

COMPARATIVE INCOME STATEMENTS
For the Years Ended December 31, 2015 and 2014

2015 2014
Sales P5,000,000 P4,500,000
Cost of goods sold 2,150,000 1,975,000
Gross income 2,850,000 2,525,000
Operating expenses:
Selling expenses 1,150,000 1,025,000
Administrative expenses 600,000 525,000
Total operating expenses 1,750,000 1,550,000
Net income P1,100,000 P 975,000

The 2015 audit revealed the following facts:

 Page 20

a. On January 5, 2014, Hiatt Textile Corporation had charged a 5-year insurance

premium to expense. The premium totaled P31,000.

b. The amount of loss due to bad debts has steadily decreased over the last 2
years. Hiatt Textile Corporation has decided to reduce the amount of bad debt
expense from 2% to 1½ % of sales, beginning with 2015. (A charge of 2% has
already been made for 2014.)

c. Hiatt Textile Corporation uses the periodic inventory system. The following are
the inventory errors for the last 2 years.
2014 - Ending inventory overstated by P75,500
2015 - Ending inventory overstated by P99,000

d. An equipment costing P150,000 was acquired on January 3, 2014. The purchase

was recorded by a charge to operating expense. The equipment has a useful life
of 10 years and a residual value of P25,000. Hiatt Textile Corporation uses the
straight-line method in depreciating its assets.

e. Assume that the books for 2015 have not yet been closed. Ignore tax
implications.

Based on the above information, answer the following:

1. The December 31, 2015 adjusting entry to correct the expensing of insurance
premium paid is
A. Prepaid insurance 18,600
Insurance expense 6,200
Retained earnings 24,800
B. Prepaid insurance 18,600
Retained earnings 18,600
C. Insurance expense 18,600
Retained earnings 18,600
D. Insurance expense 6,200
Retained earnings 6,200

2. The December 31, 2015 adjusting entry to correct the expensing of the
equipment purchased on January 3, 2014 should include a credit to
A. Accumulated depreciation—P12,500.
B. Retained earnings—P137,500.
C. Equipment—P12,500.
D. Depreciation expense—P12,500.

3. The December 31, 2015 adjusting entry to correct the inventory errors should
include a debit to
A. Cost of goods sold—P99,000.
B. Inventory—P23,500.
C. Retained earnings—P75,500.
D. Cost of goods sold—P75,500.

4. What is Hiatt’s corrected net income for the year ended December 31, 2014?
A. P1,012,200 B. P1,212,800 C. P786,800 D. P1,061,800

5. What is Hiatt’s corrected net income for the year ended December 31, 2015?
A. P1,095,200 B. P1,129,800 C. P1,082,800 D. P1,107,800

--- END ---

AUDITING PROBLEMS

SOLUTIONS
PROBLEM NO. 1 – BENEFICIO CORPORATION

1.
Sales P 898,000
Gain on sale of trading securities 12,000
Cost of goods sold (539,000)
Selling and general expenses (287,000)
Income taxes (35,000)
Unrealized loss on trading securities (4,000)
Loss on sale of equipment (1,000)
Net income P 44,000
Answer: D

2.
Unappropriated retained earnings, Dec. 31, 2014 P112,000
Net income (see no. 1) 44,000
Decrease in appropriation for treasury shares 5,000
Increase in appropriation for possible building expansion (15,000)
Stock dividend declared (100,000 issued – 1,000 treasury =
99,000 outstanding x 30% x P2) (59,400)
Remaining unappropriated retained earnings 86,600
Unappropriated retained earnings, Dec. 31, 2015, including
net income for 2015* 78,600
Assumed cash dividends declared and paid during 2014 P 8,000
Answer: A

3.
Increase in ordinary shares (P359,400 – P200,000) P159,400
Less: Stock dividend (P2 x 99,000 x 30%) 59,400
Par value of additional ordinary shares issued in 2015 P100,000

Increase in share premium (P116,000 – P5,000) P111,000

Less:Share prem. from resale of treasury shares at more than cost 1,000
Share premium from shares issued in 2015 P110,000
Proceeds from issuance of ordinary shares in 2015
(P100,000 + P110,000) P210,000
Answer: C

4.
Net decrease in investment in trading securities P 30,000
Less: Unrealized loss on trading securities 4,000
Carrying value of trading securities sold 26,000
Add: Gain on sale of trading securities 12,000
Proceeds from sale of trading securities P38,000
Answer: B

5.
Proceeds from sale of equipment (see information “b”) P 7,000
Add: Loss on sale of equipment 1,000
Book value of equipment sold 8,000
Cost of equipment sold (see information “b”) 15,000
Accumulated depreciation of equipment sold P 7,000
Answer: A
 Page 2

6.
Net increase in equipment (P305,000 – P170,000) P135,000
Sale of equipment (see information “b”) 15,000
Purchase of equipment 150,000*
Less:Note payable issued 50,000
Cash paid P100,000
Answer: D

* Equipment
Bal. 12/31/14 170,000 15,000 Sale
Purchase
(SQUEEZE) 150,000
Bal. 12/31/15 305,000

7.
Cost of treasury shares sold (P10,000 – P5,000) P5,000
Share premium from sale of treasury shares 1,000
Proceeds from sale of treasury shares P6,000
Answer: A

8. CASH FLOWS FROM OPERATING ACTIVITIES

Net income P 44,000

Depreciation expense (P3,750 + P25,250) 29,000
Loss on sale of equipment 1,000
Unrealized loss on trading securities 4,000
Amortization of bond discount (P9,000 – P8,500) 500
Gain on sale of trading securities (12,000)
Proceeds from sale of trading securities (see no. 4) 38,000*
Decrease in deferred tax liability (6,300)
Increase in net accounts receivable (45,000)
Decrease in inventories 9,000
Increase in prepaid insurance (500)
Decrease in accounts payable (5,000)
Increase in accrued expenses payable 9,300
Increase in income taxes payable 25,000
Decrease in unearned revenue (8,000)
Net cash provided by operating activities P 83,000
Answer: C

9. CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of equipment (see no. 6) P(100,000)

Overhaul of equipment (see information “h”) (6,000)
Sale of equipment (see information “b”) 7,000
Net cash used in investing activities P(99,000)
Answer: B

10. CASH FLOWS FROM FINANCING ACTIVITIES

Payment of cash dividends (see no. 2) P (8,000)

Retirement of notes payable (P60,000 – P40,000) (20,000)
Sale of treasury stock (see no. 7) 6,000
Issuance of common stock (see no. 3) 210,000
Net cash provided by financing activities P188,000
Answer: A
 Page 3

PROBLEM NO. 2 – ALTERADO COMPANY

1. D Policy 1 P25,500
Policy 2 (P72,000 x 3/36) 6,000
Policy 3 13,000
Insurance expense P44,500

2. C Equipment retired during 2015 (P2,400,000 – P1,600,000 =

P800,000 x 5%) P 40,000
(P1,600,000 x 10% 160,000
Total depreciation expense P200,000

3. D Bad debt expense (P2,148,000 – P100,000 = P2,048,000 x 1%) P20,480

4. D Interest income (P600,000 x 7% x 5/12) P17,500

Rental income (P216,000 x 3/18) P36,000

5. D Expired rent (P30,000 x 8 months) P240,000

PROBLEM NO. 3 – ISIDRO MANUFACTURING COMPANY

 Page 4

1. B Depreciation expense for 2012:

Truck # 1 (P180,000/5) P 36,000
Truck # 2 (P220,000/5) 44,000
Truck # 3 (P300,000/5 x ½) 30,000
Truck # 4 (P240,000/5) 48,000
Truck # 5 (P400,000/5 x ½) 40,000
Total P198,000

2. A Trade-in value of Truck #3 (P400,000 – P220,000) P180,000

Book value of Truck #3:
Cost P300,000
Accumulated depreciation, 1/1/11 – 7/1/12
(P300,000/5 x 1.5) (90,000) 210,000
Loss on trade-in P30,000

3. A Cost:
Truck #2 P220,000
Truck #5 400,000
Truck #6 420,000P1,040,000
Accumulated depreciation:
Truck #2 (fully depreciated 7/1/14) P220,000
Truck #5, 7/1/12 – 12/31/15 (P400,000/5 x 3.5) 280,000
Truck #6, 7/1/14 – 12/31/15 (P420,000/5 x 1.5) 126,000 626,000
Book value, Dec. 31, 2015 P414,000

4. C 2012 2013 2014 2015 Total

Truck #1 P36,000 -- -- -- P36,000
Truck #2 44,000 44,000 22,000 -- 110,000
Truck #3 30,000 -- -- -- 30,000
Truck #4 48,000 48,000 24,000 -- 120,000
Truck #5 40,000 80,000 80,000 80,000 280,000
Truck #6 -- -- 42,000 84,000 126,000
Correct depreciation P198,000 P172,000 P168,000 P164,000 P702,000
Per client 210,000 225,000 250,500 304,000 989,500
Overstatement P12,000 P53,000 P82,500 P140,000 P287,500

5. B Accumulated depreciation 665,500

Trucks 480,000
Retained earnings 45,500

PROBLEM NO. 4 – TOY COMPANY

 Page 5

1. A Acquisition cost (P8,297,000 – P297,000 = P8,000,000 x75%) P6,000,000

Reconditioning cost 342,000
Salvaged materials – garage (66,000)
Construction of warehouse 1,013,000
Total cost - Buildings P7,289,000

2. B Land - acquisition cost (P8,000,000 x 25%) P2,000,000

3. B Machinery (P310,000 + P610,000) P920,000

4. C Share premium (P640,000 – P40,000) + (P1,110,000 – P1,000,000)P710,000

5. A Patent (P640,000 – P310,000) P330,000

Franchise 500,000
Total intangibles P830,000

PROBLEM NO. 5 – LAFAYETTE CORPORATION

Computation of Estimated Loss on Returns on Sales Warranties

Subsequent to June 30, 2015
Percentage of Total
Percentage Estimated Estimated
of Total Returns Sub- Returns Sub-
Estimated Estimated sequent to sequent to
Month Sales Returns Returns 6/30/15 6/30/15
January P4,200,000 7% P294,000 10% P29,400
February 4,700,000 7 329,000 20 65,800
March 3,900,000 7 273,000 30 81,900
April 3,250,000 7 227,500 50 113,750
May 2,400,000 10 240,000 70 168,000
June 1,900,000 10 190,000 100 190,000
P1,553,500 P648,850

Total estimated returns............... P648,850 Required liability balance....... P421,753

Loss percentage on returns......... 65%* Less balance, 6/30/14............ 120,400
Total estimated loss on returns. . . P421,753 Required adjustment to
liability account P301,353

*Estimated loss on component replacement (in percentage of sales price):

Cost of unit replacement 70%
Add freight charges on return and replacement 5
75%
Deduct salvage value of components returned 10
Net loss on components returned 65%

Adjusting Entry

Warranty Expense 301,353

Estimated Liability for Product Warranty 301,353

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

PROBLEM NO. 6 – MALOX SPECIALTY COMPANY

FG WIP RM FS
 Page 6

Down tube shifters at NRV P266,000

Bar end shifters at cost 182,000
Head tube shifters at cost 195,000
Work-in-process at NRV P108,700
Derailleurs at NRV P110,0001
Remaining items at NRV 127,400
Supplies at cost P64,8002
Totals P643,000 P108,700 P237,400 P64,800
1
P264,000 x ½ = P132,000; P132,000/1.2 = P110,000
2
P69,000 – P4,200 = P64,800
1. B 2. C 3. D 4. A 5. C

PROBLEM NO. 7 – GATAS COMPANY

1. C Cows (15,000 x P4,000) P60,000,000

Heifers (1,000 x P3,000) 3,000,000
Fair value, Nov. 1, 2014 P63,000,000
2. A Cows (15,000 x P5,000) P 75,000,000
Heifers (1,000 x P4,500) 4,500,000
Heifers (7,500 x P3,600) 27,000,000
Fair value, Oct. 31, 2015 P106,500,000
3. C Increase in fair value due to price change:
Cows 15,000 x P(4,500-4,000) P7,500,000
Heifers 1,000 x P(3,200-3,000) 200,000
Heifers 7,500 x P(3,200-3,000) 1,500,000
Total P9,200,000
4. B Increase in fair value due to physical change:
Cows 15,000 x P(5,000-4,500) P7,500,000
Heifers 1,000 x P(4,500-3,200) 1,300,000
Heifers 7,500 x P(3,600-3,200) 3,000,000
Total P11,800,000
5. A Fair value of cattle in Central Visayas:
Cows (6,000 x P5,000) P30,000,000
Heifers (2,000 x P4,500) 9,000,000
Total P39,000,000

PROBLEM NO. 8 – MINA MINING CO.

Depletable/Depreciable CostEstimated ReservesDepletion/Depreciation

Mineral propertyP 26,100,0001 120,000 P217.50
 Page 7

Building 1,080,000 120,000 9.00

Machinery (1/2) 900,000 120,000 7.50
2
Machinery (1/2) 900,000 120,000 15.00
1
P27,000,000 – P900,000
2
P900,000/120,000) x 2

1. D Year 1
Depletion Depreciation
Mineral property (P217.50 x 6,000) P1,305,000
Building (P9 x 6,000) P 54,000
Machinery (1/2) (P7.50 x 6,000) 45,000
Machinery (1/2) (P15 x 6,000) 90,000
P1,305,000
P189,000

2. C Year 5
Depletion Depreciation
Mineral property (P217.50 x 12,000) P2,610,000
Building (P9 x 12,000) P108,000
Machinery (1/2) (P7.50 x 12,000) 90,000
Machinery (1/2) (P15 x 12,000) 180,000
P2,610,000
P378,000

3. D Year 6
Depletion Depreciation
Mineral property (P217.50 x 12,000) P2,610,000
Building (P9 x 12,000) P108,000
Machinery (1/2) (P7.50 x 12,000) 90,000
Machinery (1/2) (P15 x 6,000) 90,000
P2,610,000
P288,000

4. A Year 11
Depletion Depreciation
Mineral property (P217.50 x 6,000) P1,305,000
Building (P9 x 6,000) P54,000
Machinery (1/2) (P7.50 x 6,000) 45,000
Machinery (1/2) (P15 x 6,000) --
P1,305,000
P99,000
5. A Year 1
Depletion Depreciation
Mineral property (P217.50 x 5,000) P1,087,500
Building (P9 x 5,000) P 45,000
Machinery (1/2) (P7.50 x 5,000) 37,500
Machinery (1/2) (P15 x 5,000) 75,000
P1,087,500
P157,500

PROBLEM NO. 9 – DEBBY CORP.

 Page 8

1. B Land (appraised value) P8,700,000

2. A Total purchase price P12,000,000

Less: Land appraisal 8,700,000
Balance of purchase price to be allocated P 3,300,000
Appraisal Value Ratios Allocated Values
Building P3,150,000 315/450 = 0.70 x P3,300,000 P2,310,000
Machinery 1,350,000 135/450 = 0.30 x P3,300,000 990,000
P4,500,000 P3,300,000

Building (allocated value) P2,310,000

Renovations
3,000,000
Capitalized interest (P3,000,000 x 12%) 360,000
Total cost of building P5,670,000

3. D Machinery (allocated value) P990,000

4. C 2016 Depreciation – Building (P5,670,000 x 10%* x ½) P283,500

* 150% x 1/15

5. B 2016 Depreciation – Machinery (P990,000 x 40%* x ½) P198,000

* 200% x 1/5

PROBLEM NO. 10 – GARLA HOME IPROVEMENTS/MANGO BANGGO

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1. B Allowance to reduce inventory to NRV, May 31, 2015

(P1,224,000 – P1,178,400) P45,600

2. A Allowance balance prior to adjustment P82,500

Required allowance balance 45,600
Gain to be recorded P36,900

3. B Gain from change in fair value of biological asset P45,000

4. A Agricultural produce, at fair value P90,000

5. A Gain from change in fair value – biological asset P 45,000

Gain from change in fair value – agricultural produce 90,000
Gross proft on sold mangoes 15,000
Total efect on income P150,000

PROBLEM NO. 11
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1.
Cost of trademark P300,000
Less: Accumulated amortization, 20X4 – 20X6 (P300,000/10 x 3 yrs.) 90,000
Carrying value, December 31, 20X6 P210,000
Remaining useful life, 20X7 – 20X9 3 years
Amortization for 20X7 P 70,000
Answer: B

2.
Cost P300,000
Less: Accumulated amortization, 20X4 – 20X7 (P90,000 + P70,000) 160,000
Carrying value, December 31, 20X7 P140,000
Recoverable value 50,000
Impairment loss P 90,000
Answer: A

3.
Probability-weighted expected cash flows:
P400,000 x 5% P 20,000
P200,000 x 20% 40,000
P80,000 x 50% 40,000
P20,000 x 25% 5,000
Total P105,000
Add: 6% risk adjustment 6,300
Total P111,300
Present value factor (at 5% for 6 months) 0.95238
Present value of warranties, December 31, 20X2 P106,000
Answer: D

4. It is probable that SME B will successfully defend the court case. Therefore, SME B has a
possible obligation and hence a contingent liability. No amounts are recognized for
contingent liabilities. However, disclosure is necessary.
Answer: D

5.
Cost of investment in entity DD (P28,000 x 101%) P28,280
Fair value less cost to sell (P15,000 x 95%) 14,250
Impairment loss P14,030
Answer: B
6.
Impairment loss P(14,030)
Cash dividends (P2,000 + P250) 2,250
Net P(11,780)
Answer: A

7.
Cost of investment in entity DD (P28,000 x 101%) P28,280
Less: Share of entity DD’s loss (P20,000 x 25%) 5,000
Carrying value, December 31, 20X1 P23,280
Fair value less cost to sell (P15,000 x 95%) 14,250
Impairment loss P 9,030
Answer: C

8.
Share of income, entities BB and CC (P1,250 + P4,500) P5,750
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Share of loss, entity DD (5,000)

Impairment loss (9,030)
Net P(8,280)
Answer: A

9.
Cost Fair Value
BB P10,000 P13,000
CC 15,000 29,000
DD 28,000 15,000
P53,000 P57,000

Increase in fair value (P57,000 – P53,000) P4,000

Answer: A
10.
Cost model:
Acquisition cost, including transaction cost (P53,000 + P530) P53,530
Less: Impairment loss 14,030
Carrying value, December 31, 20X1 P39,500

Equity method:
Acquisition cost, including transaction cost P53,530
Cash dividends (P250 + P2,000) (2,250)
Share of income, entities BB and CC (P1,250 + P4,500) 5,750
Share of loss, entity DD (5,000)
Impairment loss (9,030)
Carrying value, December 31, 20X1 P43,000

Fair value model:

BB P13,000
CC 29,000
DD 15,000
Carrying value, December 31, 20X1 P57,000
Answer: C

PROBLEM NO. 12 – HIATT TEXTILE CORPORATION

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ADJUSTING JOURNAL ENTRIES

December 31, 2015

1. Prepaid insurance (P31,000 x 3/5) 18,600

Insurance expense (P31,000 x 1/5) 6,200
Retained earnings (P31,000 x 4/5) 24,800

2. Allowance for bad debts 25,000

Bad debt expense 25,000
(2% - 1 ½% = ½% x P5,000,000)

3. Retained earnings 75,500

Cost of goods sold (P99,000 – P75,500) 23,500
Inventory 99,000

4. Equipment 150,000
Depreciation expense
(P125,000 x 1/10) 12,500
Retained earnings (P150,000 – P12,500) 137,500
Accumulated depreciation – Equipment 25,000
(P125,000 x 2/10)

2011 2010
Reported net income P1,100,000 P975,000
Prepaid insurance charged to expense (6,200) 24,800
Decrease in bad debt expense rate 25,000
Ending inventory – overstated:
Cost of machine charged to expense 150,000
Unrecorded depreciation (12,500) (12,500)
Corrected net income P1,082,800 P1,061,800

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

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