Professional Documents
Culture Documents
Docx 4
Docx 4
Docx 4
SOLUTION:
Items included:
Current account at Metrobank 1,800,000
500,
Payroll account 000
Foreign bank account (in equivalent pesos) 800,000
Traveler’s check 50,000
Money order 30,000
Petty cash fund - currency 4,000
Time deposit – 30 days 200,000
1
Treasury bills, due 3/31/13 (purchased
12/31/12) 200,000
3,584,000
You were able to gather the following from the December 31, 2015 trial balance of PRTC
Corporation in connection with your audit of the company:
2
a) Customer's check for P60,000 returned by bank on December 26, 2015 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2016.
b) Customer's check for P30,000 dated January 2, 2016, received on December 29, 2015.
c) Postal money orders received from customers, P36,000.
The petty cash fund consisted of the following items as of December 31, 2015:
Currency and coins P 2,100
Employees' vales 1,600
Currency in an envelope marked "collections for charity" with names 1,200
attached
Unreplenished petty cash vouchers 800
Check drawn by PRTC Corporation, payable to the petty cashier 4,600
P10,300
Included among the checks drawn by PRTC Corporation against the BPI current account and
recorded in December 2015 are the following:
a) Check written and dated December 29, 2015 and delivered to payee on January 2, 2016,
P50,000.
b) Check written on December 27, 2015dated January 2, 2016, delivered to payee on
December 29, 2015, P86,000.
The credit balance in the Security Bank current account No. 2 represents checks drawn in excess
of the deposit balance. These checks were still outstanding at December 31,2015.
The savings account deposit in PNB has been set aside by the board of directors for acquisition
of new equipment. This account is expected to be disbursed in the next 3 months from the
balance sheet date.
REQUIRED:
1. Compute for the adjusted balances of following:
a. Cash on hand
b. Petty cash fund
c. BPI current account
d. Cash and cash equivalents
2. Adjusting entries as of December 31, 2015
3
SOLUTION:
Requirement No. 1.a
372,00
Cash on hand, per trial balance 0
(60,000
(a) NSF check )
(30,000
(b) Postdated check received )
282,00
Cash on hand, as adjusted 0
Computation of shortage:
Currency and coins 2,100
Employees' vales 1,600
Unreplenished petty cash vouchers 800
4
Replenishment check 4,600
Cash and cash items counted 9,100
Cash accountability 10,000
(900
Unaccounted/Shortage )
5
PROBLEM NO. 3 - Cash count and shortage computation
In connection with the audit of the financial statements of Rupee Company for the year ended
December 31, 2015,you performed a surprise count of the petty cash fund and undeposited
collections under the custody of Ms. Jessie at 8:15 a.m. on January 3, 2016. Your count disclosed
the following:
Bills and Coins
Bills Coin
s
P 100 10 pieces P 410 pieces
1.00
50 80 pieces 0.50 324 pieces
20 70 pieces 0.25 64 pieces
10 54 pieces
Unused postage stamps - P730
Checks
Date Payee Drawer Amount
Dec. 30 Cash Ms. Jessie P 2,400
Dec. 30 Rupee Company Robert 28,000
Dec. 31 Rupee Company Jay Ar, sales manager 3,360
Dec. 31 Rupee Company Francis 35,600
Dec. 31 Rupee Company Ryan 16,600
Dec. 31 German Corp. Rupee Company 54,000
Expense Vouchers
Date Payee Description Amount
Dec. 23 Jay Ar, sales Cash advance for trip to Baguio P 14,000
manager City
Dec. 27 Central Post Office Postage stamps 3,240
Dec. 29 Messengers Transportation 300
Dec. 29 PC Express Computer repair 1,600
6
Accounted for as follows:
Cash returned by Roy to the sales manager P 240
Personal check of sales manager 3,360
Total P
3,600
Additional information:
a) The custodian is not authorized to cash checks.
b) The last official receipt included in the deposit on December 30 is No. 351 and the last
official receipt issued for the current year is No. 355. The following official receipts are
all dated December 31, 2015.
O.R. No. Amount Form of payment
352 P Cash
27,200
353 35,600 Check
354 7,200 Cash
355 16,600 Check
c) The Petty Cash balance per general ledger is P20,000. The last replenishment of the fund
was made on December 22, 2015.
REQUIRED:
1. Determine shortage or overage, if any
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1
Bills and coins
Denomination Quantity Amount Total
1,00
P100.00 10 0
4,00
50.00 80 0
1,40
20.00 70 0
54
10.00 54 0
41
1.00 410 0
16
0.50 324 2
7
1 7,5
0.25 64 6 28
Checks
Date Drawer Amount
2,40
Dec. 30 Ms. Jessie 0
28,000
Dec. 30 Robert
3,360
Dec. 31 Jay Ar
35,600
Dec. 31 Francis
16,600 85,96
Dec. 31 Ryan 0
Unreplenished vouchers
Requirement No. 2
1 Advances to officers and 14,0
8
employees 00
3,24
Postage expense 0
30
Transportation expense 0
1,60
Repairs and maintenance 0
19,1
Petty cash fund 40
73
2 Unused postage 0
7
Postage expense 30
10,1
3 Travel expense [P9,000+P800+(P600-P240)] 60
3,36
Petty cash fund (personal check of sales manager) 0
13,5
Advances to officers and employees 20
28,0
4 Cash 00
28,0
Accounts receivable 00
15,0
5 Cash 00
15,0
Salaries payable 00
40,3
6 Cash short/over (Receivable from custodian) 32
40,3
Cash 32
54,0
7 Cash 00
54,0
Accounts payable 00
9
The Cash in Bank account of Dollar Company disclosed a balance of P203,000 as of
December 31. The bank statement as of December 31 showed a balanced of P106,000. Upon
comparing the bank statement with cash records, the following facts were developed:
b. A two-month, 17% P60,000 customer's note dated October 25, discounted on November
25, was dishonored on December 25, and the bank charged the company P62,000, which
included a protest fee of P2,000.
c. A customer's check for P15,400 was entered as P14,500 by both the depositor and the
bank but was later corrected by the bank.
d. Check no. 142 for P12,425 was enter in the cash disbursement journal at P12, 245 and
check no. 156 for P3,290 was entered as P32,900.
e. Bank service charges of P1,830 for December were not yet recorded on the books.
f. A bank memo stated that a customer's note for P25,000 and interest of P1,000 had been
collected on December 28, and the bank charged P500 (No entry was made on the books
when the note was sent to the bank for reconciliation).
i. A deposit of P20,000 was recorded by the bank on December 5, but it should have been
recorded for Dolor Company rather than Dollar Company.
k. Proceeds from cash sales of P60,000 for December 18 were stolen. The company expects
to recover this amount from insurance company. The cash receipts were recorded in the
books, but no entry was made for the loss.
10
l. The December 21 deposit included a check for P20,000 that had been returned on
December 15 marked NSF. Dollar Company had made no entry upon return of the check. the
redeposit of the check on December 21 was recorded in the cash receipts journal of Dollar
Company as collection on account.
REQUIRED:
1. Bank reconciliation using:
a. Bank to book method;
b. Book to bank method; and
c. Adjusted balance method
2. Adjusting entries as of December 31, 2015.
SOLUTION:
DOLLAR COMPANY
Bank Reconciliation - Bank to Book Method
December 31, 2012
11
I) Bank error in recording deposit (20,000)
j) Petty cash fund 10,000
k) Stolen cash sales to be recovered from insurance co. 60,000
l) Double counted deposit - NSF 20,000
DOLLAR COMPANY
Bank Reconciliation - Book to Bank Method
December 31, 2012
12
DOLLAR COMPANY
Bank Reconciliation - Adjusted Balance Method
December 31, 2012
BANK BOOKS
Add (deduct):
k) Stolen cash sales to be recovered from insurance co. (60,000) AJE No. 9
13
2) Notes receivable - dishonored 62,000
Cash in bank 62,000
14
You are conducting an audit of the Swerte Company for the year ended December 31, 2015.
The internal control procedures surrounding cash transactions were not adequate. The
bookkeeper-cashier handles cash receipts, maintains accounting records, and prepares the
monthly bank reconciliations.
The bookkeeper-cashier prepared the following reconciliation at the end of the year:
At December 31, 2015, the bank statements and general ledger showed balances of
P350,000 and P293,500, respectively.
The cut-off bank statement showed a bank charge on January 2,2016 for P30,000
representing correction of an erroneous bank credit.
Included in the list of outstanding checks were the following:
a. A check payable to a supplier, dated December 29, 2015, in the amount of
P14,750, released on January 5,2016.
b. A check representing advance payment to a supplier in the amount of P37,210,
the date of which is January 4, 2016, and released in December, 2015.
On December 31, 2015, the company received and recorded customer's postdated
check amounting to P50,000.
REQUIRED
SOLUTION:
15
175,25
Unadjusted deposit in transit 0
(50,0
Post dated check received 00)
125,25
Adjusted deposit in transit 0
16
Requirement No. 2
50,0
1 Accounts receivable 00
50,00
Cash 0
14,7
2 Cash 50
14,75
Accounts payable 0
37,2
3 Cash 10
37,21
Accounts payable 0
15,0
4 Cash 00
15,00
Notes receivable 0
You were engaged to audit the books of Davao Company. From the records of the company, you
gathered the following information:
Davao Company started operations on October 2, 2015 with the owners investing P150,000 cash.
Monthly bank reconciliation statements have not been prepared; however, bank statements for
October, November, and December were made available to you. Your analysis of these bank
statements showed total bank credits (deposits) of P575,000 including the owners' initial
investment and a bank loan, details of which are in additional data. The bank statement in
December, 2015 showed an ending balance of P91, 500.
Examination of the paid checks disclosed that checks totaling P4,500 were issued by the
company in December, 2015, and were presented for payment only in January, 2016. Cash count
of the cashier's accountability amounted to P5,000. You were told by the cashier that these were
collections from credit sales on December 30, 2015, deposited on January 2, 2016.
17
Additional information are as follows:
a. Accounts receivable subsidiary ledgers had a total balance of P70,000 at December 31,
2015. P5,000 of this was ascertained to be uncollectible.
b. Suppliers' unpaid invoices for merchandise totaled P15,000;while an account for store
fixtures bought for P50,000 had an unpaid balance of P5,000.
c. Merchandise inventory at December 31, 2015 amounted to P30,000 but P5,000 of these
were spoiled with no resale value.
d. The bank statement in October showed a bank credit for P98,000, dated October 2, 2015.
Inquiry from the cashier disclosed that the amount represents proceeds of a 90-day,
discounted bank note.P80,000 o this loan was paid by check in December, 2015.
e. Operating expenses paid during the period totaled P180,000; while merchandise purchase
amounted to P250,000.
f. The gross profit rate is 120% of cost.
REQUIRED:
SOLUTION:
91,50
Unadjusted balance per bank, 12/31 0
(4,500
Outstanding checks , 12/31 )
Cash receipts:
150,00
Owners' investment 0
18
98,00
Proceeds from loan 0
414,00
Collections from customers (see computation below) 0
662,00
Total 0
Cash disbursements:
You were able to obtain the following information during your audit of Euro Company:
Reconciling Items:
Nov. 30 Dec. 31
Undeposited collections P 200,000 P 120,000
Outstanding checks 80,000 60,000
Customer's notes collected by the bank 100,000 120,000
Bank service charges 2,000 3,000
Erroneous bank debits 10,000 20,000
Erroneous bank credits 40,000 30,000
19
NSF checks not redeposited 5,000 7,000
Customer's check deposited December 10,
returned by bank on December 16 10,000
marked NSF, and redeposited
immediately; no entry made on books
for return or redeposit
Unadjusted balances:
Books ? 90,000
Bank 230,000 ?
December Transactions:
Bank Books
Receipts P 420,000 P270,000
Disbursements 500,000 407,000
REQUIRED:
SOLUTION:
Euro Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
Beginnin
g Receipts Disb Ending
500,00
Unadjusted bank balances 230,000 420,000 0 150,000
Undeposited collections
20
(200,000
November 200,000 )
Outstanding checks
(80,000
November (80,000) )
60,00 (60,000
December 0 )
407,00
Unadjusted book balances 227,000 270,000 0 90,000
21
Euro Company
22
Proof of Cash - Book to Bank Method
For the month of December, 2012
407,00
Unadjusted book balances 227,000 270,000 0 90,000
Undeposited collections
November (200,000) 200,000
(120,000
December (120,000) )
Outstanding checks
80,00
November 80,000 0
(60,000
December ) 60,000
Customers' note collected by bank
(100,000
November 100,000 )
December 120,000 120,000
Bank service charges
(2,000
November (2,000) )
3,00 (3,000
December 0 )
Erroneous bank debits
November (10,000) 10,000
20,00 (20,000
December 0 )
Erroneous bank credits
40,00
November 40,000 0
December 30,000 30,000
NSF checks not redeposited
23
(5,000
November (5,000) )
7,00 (7,000
December 0 )
10,00
NSF check redeposited 10,000 0
500,00
Unadjusted bank balances 230,000 420,000 0 150,000
Euro Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
Beginnin
g Receipts Disb Ending
24
Adjusted bank balances 320,000 290,000 410,000 200,000
25
In your audit of the cash account of Cebu Company, you were requested by the client to prepare
a four-column reconciliation of receipts, disbursements, and balances to reconstruct the balances
per books.
Nov. 30 Dec.31
a. Balances per bank P 14,010 P19,630
b. Deposits in transit 2,740 3,110
c. Outstanding checks 4,260 3,870
d. Bank collections not in books 1,200 1,600
e. Bank charges not in books 950 640
f. Of the checks outstanding on December 31, one check for P700 was certified at the
request of the payee.
g. Receipts for December, per bank statements - P281,070.
h. DAIF check from customer was charged by the bank on December 28, and has not been
recorded - P800.
i. DAIF check returned in November and recorded in December, P1,050.
j. DAIF check returned and recorded in December, P900.
k. Check of Cibo Company charged by the bank in error, P2,010.
l. Receipt on December 6 paid out in cash for travel expenses, P750. Recorded as receipts
and disbursements per books.
m. Error in recording customer's check on December 20, P165 instead of P465.
n. Error in disbursements journal for December, P3,250 instead of P325.
You noted in your audit that the DAIF checks returned by the bank are recorded as a reduction
on the cash receipts journal instead of recording it at cash disbursement journal; redeposits are
recorded as regular cash receipts.
REQUIRED:
SOLUTION:
Cebu Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
26
11/30 Receipts Disb. 12/31
DAIF checks
27
Cebu Company
Proof of Cash - Book to Bank Method
For the month of December, 2012
Balances per books (refer to requirement 1.a) 13,290 279,540 274,635 18,195
DAIF checks
Cebu Company
Proof of Cash - Adjusted Balance Method
28
For the month of December, 2012
DAIF checks
29
12,490 282,190 273,100 21,580
1,6
1) Cash in bank 00
1,60
Note receivable 0
6
2) Bank service charge 40
64
Cash in bank 0
8
3) Accounts receivable 00
80
Cash in bank 0
3
4) Cash in bank 00
30
Accounts receivable 0
2,9
5) Cash in bank 25
2,92
Accounts payable 5
In connection with your examination, the MQM Company presented to you the following
information regarding its Cash in Bank account for the month of December 2015:
a) Balance per bank statements: November 30, P215,600, and December 31, P230,400.
b) Balances per bank statement account in the company’s books: November 30, P 165,450
and December 31, P226,800.
c) Total receipts per books were P2, 221,900 of which P12,100was paid in cash to a creditor
on December 24.
d) Total charged in the bank statement during December were P2,189,700.
e) Undeposited receipt were: November 30, P90,600 and December 31, P101,200
30
f) Outstanding checks were: November 30, P26,750, and December 31, P19,100, of which a
check for P5,000 was certified by the bank on December 26.
g) NSF checks returned, recorded as reduction of cash receipts, were:
Returned by the bank on December, recorded also in December, P10,400
Returned by bank on December but recorded in January, P8,600
h) Collections by bank not recorded by Company were P121,500 in November and
P116,400 in December.
i) Banks service charges not entered in the company’s books were: November 30, P7,500
and December 31, P4,200.
j) A check for P9,500 of QMQ Company was charged to MQM Company in error.
k) A check drawn for P8,400 was erroneously entered in the books as P4,800.
REQUIRED:
SOLUTION:
MQM Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
December
Undeposited receipts:
31
November 90,600 (90,600)
Outstanding checks:
NSF checks:
MQM Company
Proof of Cash - Book to Bank Method
For the month of December, 2012
December
Undeposited receipts:
Outstanding checks:
32
November 26,750 26,750
NSF checks:
MQM Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
December
Undeposited receipts:
Outstanding checks:
33
Payment to creditor in cash 12,100 12,100
165,45
Unadjusted book balances 0 2,221,900 2,160,550 226,800
NSF checks:
- - - -
8,60
1) Accounts receivable 0
8,60
Cash in bank 0
116,40
2) Cash in bank 0
116,40
Note receivable 0
4,20
3) Bank service charge 0
4,20
Cash in bank 0
3,60
4) Accounts payable 0
34
3,60
Cash in bank 0
You obtained the following information on the current account of Baht Company during your
examination of its financial statements for the year ended December 31, 2015.
The bank statement on November 30, 2015 showed a balance of P76, 500. Among the bank
credits in November was customer’s note for P25,000 collected for the account of the company
which the company recognized in December among its receipts. Included in the bank debits were
cost of check books amounting to P300 and a P10,000 check which was charged by the bank in
error against Baht Co. Account. Also in November you ascertained that there were deposits in
transit amounting to P20,000 and outstanding checks totaling P42,500.
The bank statement for the month of December showed total credits of P104,000 and total
charges of P51,000. The company’s book for December showed total receipts of P183,900
disbursements of P101,800 and a balance of P121,400. Bank debits memos for December were:
No. 143 for service charges, P400 and No. 145 on a customer’s returned check marked “DAIF”
for P6,000.
On December 31,2015 the company placed with the bank a customer’s promissory note with a
faced value of P30,000 for collection. The company treated this note as part of its receipts
although the bank was able to collect on the note only in January, 2016.
A check for P990 was recorded in the company cash payments books in December as P9,900.
REQUIRED:
SOLUTION:
Baht Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
December
35
Receipt
Nov. 30 s Disb. Dec. 31
76,5
Unadjusted bank balances 00 104,000 51,000 129,500
Add (deduct) adjustments:
Customers' note collected by bank
(25,0
November 00) 25,000
Bank service charges
30
November 0 300
December (400) 400
10,0
Erroneous bank debit-November 00 (10,000) -
Undeposited collections
20,0
November 00 (20,000)
December 54,900 54,900
Outstanding checks
(42,5
November 00) (42,500)
December 90,490 (90,490)
NSF checks
December (6,000) 6,000
Book errors in December
Uncollected customer's note treated as receipts 30,000 30,000
Error in recording a check (SB P990, AR
P9,900) 8,910 (8,910)
39,3
Unadjusted book balances 00 183,900 101,800 121,400
36
December book receipts 183,900
Less receipts not representing collections in December:
Customers' note collected by bank, Nov.
30 25,000
Note with the bank treated as receipts 30,000 55,000 128,900
Total 148,900
Less deposits credited by the bank in December:
December bank receipts 104,000
Less receipts not representing
deposits:
Erroneous bank debit, Nov.; corrected
Dec. 10,000 94,000
54,900
Total 135,090
Less checks paid by the bank in
December:
December bank disbursements 51,000
Less disbursements not representing checks:
NSF checks, Dec. 6,000
Bank service charge, Dec. 400 6,400 44,600
90,490
Baht Company
Proof of Cash - Book to Bank Method
37
For the month of December, 2012
December
Nov. 30 Receipts Disb. Dec. 31
Unadjusted book balances 39,300 183,900 101,800 121,400
Undeposited collections
(20,000
November ) 20,000
(54,900 (54,900
December ) )
Outstanding checks
NSF checks
(6,000
December 6,000 )
Baht Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
December
38
Nov. 30 Receipts Disb. Dec. 31
76,50 104,00 51,00 129,50
Unadjusted bank balances 0 0 0 0
Add (deduct) adjustments:
10,00 (10,00
Erroneous bank debit-November 0 0) -
Undeposited collections
20,00 (20,00
November 0 0)
December 54,900 54,900
Outstanding checks
(42,50 (42,50
November 0) 0)
(90,49
December 90,490 0)
64,00 128,90 98,99 93,91
Adjusted bank balances 0 0 0 0
39
64,00 128,90 98,99 93,91
Adjusted book balances 0 0 0 0
- - - -
Adjusting journal entries:
40
13 62,989
15 3,509 66,498
16 9,777 56,721
17 6,221 7,702 58,202
18 6,484 51,718
19 3,418 55,136
20 5,310 60,446
22 6,492 66,938
23 5,546 61,392
24 61,392
25 8,735 52,657
26 8,246 60,903
27 9,385 70,288
29 7,060 63,288
30 63,228
31 6,405 8,987 65,810
TOTALS P77,395 P76,800
Hangover’s cash account shows the following information for the month of July, 2015:
41
Additional information:
1. Hangover makes a journal entry for service charges, direct deposits, and interest earned
in the month subsequent to the month the items are reflected on the bank statement.
2. Barek Co. Makes a direct deposit of P675 to Hangover’s account at the bank on the 30 th
of every month. This payment, which is rent revenue to Hangover, is not recorded by
Hangover until the bank statement is received.
3. In the 23th of July, an NSF check for P472 was returned by the bank. The check was
redeposited on July 27th, and no entry was made by Hangover.
4. Check No. 1145 dated July 29 was written for P1,492 of wages, but recorded by
Hangover on the books as P1,000.
5. On July 16, the bank recorded a withdrawal of P386 for Hangover that should have been
for Handover Company.
6. The bank service charge for June was P165 ND FOR July was P175.
7. The interest earned on June was P3,054 and in July was P3,160.
8. During June, Hangover wrote check no. 1095 for P9,850 for rent expense but recorded
the check on its books as P8,955. Hangover discovered the mistake in July, when the
cancelled checks were returned with the June bank statement but neglected to correct the
error on the books at that time.
9. At the end of June, Hangover had P3,156 of deposits in transit, and checks totalling
P4,742 that had not cleared the bank. In addition, all of Hangover’s transactions with the
bank after July 29 have not cleared the bank.
REQUIRED:
SOLUTION:
Hangover Company
Proof of Cash - Bank to Book Method
For the month of July, 2012
July
Receipt
6/30 s Disb 7/31
42
Unadjusted bank balances 66,405 76,800 77,395 65,810
Direct deposits
June (675) 675
July (675) (675)
NSF check redeposited - July (472) (472)
Book error - July (SB P1,492, AR P1,000) (492) 492
Bank error - July (386) 386
Bank service charges
June 165 165
July (175) 175
Interest earned
June (3,054) 3,054
July (3,160) (3,160)
Book error - June (SB P9,850, AR
P8,955) 895 895
Deposits in transit
June 3,156 (3,156)
July 2,238 2,238
Outstanding checks
June (4,742) (4,742)
July 5,857 (5,857)
Hangover Company
Proof of Cash - Book to Bank Method
For the month of July, 2012
July
Receipt
6/30 s Disb 7/31
43
Unadjusted book balances 62,150 75,304 77,150 60,304
Direct deposits
June 675 (675)
July 675 675
NSF check redeposited - July 472 472
Book error - July (SB P1,492, AR P1,000) 492 (492)
Bank error - July 386 (386)
Bank service charges
June (165) (165)
July 175 (175)
Interest earned
June 3,054 (3,054)
July 3,160 3,160
Book error - June (SB P9,850, AR
P8,955) (895) (895)
Deposits in transit
June (3,156) 3,156
July (2,238) (2,238)
Outstanding checks
June 4,742 4,742
July (5,857) 5,857
Hangover Company
Proof of Cash - Adjusted Balance Method
For the month of July, 2012
July
44
Receipt
6/30 s Disb 7/31
45
Adjusted book balances 64,819 75,410 77,652 62,577
- - - -
Adjusting journal entries:
6
1) Cash in bank 75
Rent income 675
1
2) Bank service charge 75
17
Cash in bank 5
3,1
3) Cash in bank 60
3,16
Interest income 0
8
4) Rent expense 95
89
Cash in bank 5
4
5) Wages expense 92
49
Cash in bank 2
Celtics Company had the following bank reconciliation on June 30, 2015:
The bank statement for the month of July 2015 showed the following:
46
charge)
All reconciling items on June 30,2015 cleared through the bank in july.
The outstanding checks totaled P600,000 and the deposits in transit
amounted to P1,000,000 on July 31, 2015.
REQUIRED:
SOLUTION:
Requirement No. 1
9,000,0
Total deposits per bank statement in June 00
(200,0
Note collected by bank in July 00)
(400,0
Deposits in transit, June 30 00)
1,000,0
Deposits in transit, July 31 00
9,400,0
Cash receipts per books in July 00
Requirement No. 2
7,000,0
Total disbursements per bank statement in June 00
(140,0
July NSF check 00)
(10,0
July service charge 00)
(900,0
Outstanding checks, June 30 00)
600,0
Outstanding checks, July 31 00
6,550,0
Cash disbursements per books in July 00
47
Requirement No. 3
2,500,0
Balance per books, June 30, 2007 00
9,400,0
July receipts per books (see no. 21) 00
(6,550,0
July disbursements per books (see no. 22) 00)
5,350,0
Balance per books, July 31, 2007 00
Requirement No. 4
Balance per bank statement, July 31 (P3M+P9M- 5,000,0
P7M) 00
1,000,0
Deposits in transit, July 31 00
(600,0
Outstanding checks, July 31 00)
5,400,0
Adjusted bank balance, July 31 00
5,350,0
Balance per books, July 31 00
200,0
Note collected by bank in July 00
(140,0
NSF check 00)
(10,0
Bank service charges 00)
5,400,0
Adjusted book balance, July 31 00
You are able to obtain the following information in connection with your audit for the Cash
account of the Syria Company as of December 31, 2015:
November 30 December 31
a. Balance per book P480,000 P420,000
48
b. Undeposited 244,000 300,000
collections
c. Outstanding checks 150,000 120,000
d. The bank statement for the month of December showed total credits of P240,000
e. DAIF checks are recorded as a reduction of cash receipts. DAIF checks which are later
redeposited are then recorded as regular receipts. Data regarding DAIF checks are as
follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.
f. Check of Syria Company amounting to P90,000 was charged to the company’s account
by the bank in error on December 31.
g. A bank memo stated that the company’s account was credited for the net proceeds of a
customer’s note for P106,000.
h. The company has hypothecated its accounts receivable with the bank under an agreement
wherby the bank lends the company 80% of the hypothecated accounts receivable. The
company performs accounting and collection of the accounts. Adjustments of the loan are
made from daily sales reports and deposits.
i. The bank credits the company accounts and increases the amount of the for 80% of the
reported sales. The loan agreement states specifically that the sales report must be
accepted by the bank before the company is credited. Sales reports are forwarded by the
company to the bank on the first day following the date of sale. The bank allocates each
deposit 80% to the payment of the loan, and 20% to the company account. Thus, only
80% of each day’s sales and 20% of each collection deposits are entered on the bank
statement. The company accountant records the hypothecation of new accounts
receivables (80% of sales) as a debit to Cash and a credit to the bank loan as of the date
of the sales. One hundred percent of the collection on accounts receivables is recorded as
cash receipts: 80% of the collection is recorded in the disbursements book as a payment
on the loan. In connection with the hypothecation, the following facts were determined:
REQUIRED:
SOLUTION:
Syria Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
December
Nov. 30 Receipts Disb Dec. 31
Undeposited collections:
Outstanding checks:
DAIF checks:
Returned in Nov.,
recorded in Dec. 10,000 (10,000)
Returned and recorded
in Dec. (25,000) (25,000)
50
Nov. 30 (P100,000 x
80%) (80,000) (80,000)
Dec. 31 (P140,000 x
80%) 112,000 (112,000)
Syria Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
December
Nov. 30 Receipts Disb Dec. 31
51
Nov. 30 sales
(P180,000 x 80%) (144,000) 144,000
Dec. 31 sales (P200,000 x 80%) (160,000) (160,000)
Anticipated loan payment from undeposited collections
Nov. 30 (P100,000 x
80%) 80,000 80,000
Dec. 31 (P140,000 x
80%) (112,000) 112,000
Interest charge for bank loan in Dec. 38,000 (38,000)
Adjusted book balances 430,000 860,000 760,000 530,000
The client, Noel Corporation, obtained bank statements for November 30 and December 31,
2015 and reconciled the balanced. You obtained directly the statements of January 12,2016 and
obtained the necessary confirmation. You have found that there are no errors in addition or
subtraction in the client’s books.
11/30/15 12/31/15
Balance, bank statement P344,420 P275,020
Balance, company records 271,260 226,010
Deposits in transits 35,000 ?
Outstanding checks 88,240 ?
12/1-31/15 1/1-12/16
Receipts, cash records P963,230 P292,500
Credits, bank statement 941,010 321,490
Disbursements, cash records 1,008,480 177,570
Charges, bank statement 1,010,410 230,180
a) Check no. 804 for P340 cleared by the bank in December as P1,340. This was found in
proving the bank statement. The bank made the correction on January 8, 2016.
b) A note of P20,000, sent to the bank for collection on November 15,2015, was collected
and credited to the account on November 28, 2015, net of a collection fee of P80. The
note was recorded in the cash receipts on December 21, 2015, at which date the
collection fee was entered as a disbursement.
c) The client records returned checks in red in the cash receipts journal. The checks listed in
the table were returned by the bank.
52
Amount Returned Recorded Redeposited
Co. A P3,270 12/6/15 No entries 12/8/15
Co. B P6,730 12/27/15 1/3/16 1/15/16
d) Two payroll checks for employee’s vactions totalling P5,500 were drawn on January 3,
2016, and cleared the bank on January 8,2016. Those checks were not entered in the
clients records because semi-monthly payroll summaries are entered only on the 15th and
the last day of each month.
REQUIRED:
SOLUTION:
Requirement 1.a
Deposits in transit, Nov. 35,00
30 0
Add collections in
December:
December book 963,2
receipts 30
Customers' note collected by bank in (20,0 943,23
Nov. 00) 0
978,23
Total 0
Less deposits credited by the bank in
December:
December bank 941,0
receipts 10
(3,2 937,74
NSF check redeposited (Customer A) 70) 0
Deposits in transit, Dec. 40,49
31 0
53
Requirement 1.b
Outstanding checks, 88,24
Nov. 30 0
Add checks issued in December:
1,008,4
December book disbursements 80
( 1,008,40
Collection fee for note collected in Nov. 80) 0
1,096,64
Total 0
Less checks paid by the bank in December:
1,010,4
December bank disbursements 10
Bank error in check payment (P1,340 - (1,0
P340) 00)
NSF check - (3,2
Customer A 70)
NSF check - (6,7 999,41
Customer B 30) 0
Outstanding checks, 97,23
Dec. 31 0
Requirement 1.c
Deposits in transit, Dec. 31 (see Requirement 40,49
1.a) 0
Add collections, Jan. 1-
12:
Jan. 1-12 book 292,5
receipts 00
NSF check - 6,73 299,23
Customer B 0 0
339,72
Total 0
Less deposits credited by the bank, Jan. 1-12:
Jan. 1-12 bank 321,4
receipts 90
Correction of error in check payment in (1,0 320,49
Dec. 00) 0
Deposits in transit, Jan. 19,23
12 0
Requirement 1.d
54
Outstanding checks, Dec. 31 (see 97,23
Requirement 1.b) 0
Add checks issued, Jan. 1-12:
177,5
Jan. 1-12 book disbursements 70
5,50 183,07
Unrecorded payroll checks 0 0
280,30
Total 0
230,18
Less checks paid by the bank, Jan. 1-12: 0
Outstanding checks, Jan. 50,12
12 0
55
Unrecorded payroll in 5,50 (5,50
Jan. 0 0)
291,18 943,2 1,015,1 219,28 299,2 183,07 335,4
Adjusted book balances 0 30 30 0 30 0 40
1. Who is responsible, at all times, for the amount of petty cash fund?
a. General cashier
b. President of the company
c. Petty cash custodian
d. Chairman of the Board of Directors
2. What is the effect of not replenishing the petty cash fund at the year-end and not making
the appropriate adjusting entry?
a. A detailed audit is necessary.
b. The petty cash custodian should turn over the petty cash to the general cashier.
c. Cash will be overstated and expenses understated.
d. Expenses will be overstated and cash will be understated.
4. The auditor should ordinarily mail confirmation request to all banks with which the client
has conducted any business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by GAAS.
d. This procedure relieves the auditor of any responsibility with respect to non-detection
of forged checks.
5. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of
cash?
56
a. The auditor test deposits-in-transit and outstanding items to other corroborating
evidence.
b. The auditor sends the reconciliation to the bank for independent verification.
c. The auditor performs the reconciliation for the client to record the proper cash balance.
d. The auditor traces the book balance of the reconciliation to the cut off bank statement.
6. The auditor will send a standard bank confirmation to which of the following?
a. Financial institutions for which the client has a balance greater than P0 at the end of
the year.
b. Financial institutions with which the client has transacted during the year.
c. Financial institutions of customers using the lockbox.
d. Financial institutions used by significant shareholders.
8. Which of the following cash transfers would appear as a deposit in transit on the
December 31, 2015 bank reconciliation?
9. Which of the following transfers would not appear as an outstanding check on the
December 31, 2015 bank reconciliation?
57
b. 1/2 12/30 12/31 12/31
c. 1/3 12/31 1/2 1/2
d. 1/3 12/31 1/2 12/31
The information below was taken from the bank transfer schedule prepared during the audit of
Khaye Ting Company’s financial statements for the year ended December 31,2015. Assume all
checks are dated and issued on December 30, 2015.
Disbursements Receipts
No. From To Per Books Per Bank Per Books Per Bank
101 Pbcom HSBC 12/30 1/4 12/30 1/3
102 UCPB MBank 1/3 1/2 12/30 12/31
103 HSBC PSBank 12/31 1/3 1/2 1/2
104 MBank PNB 1/2 1/2 1/2 12/31
11. Which of the following checks illustrates deposits/transfers in transit at December 31?
a. Check No. 101 and 102
b. Check No. 101 and 103
c. Check No. 102 and 104
d. Check No. 102 and 104
12. Which of the following cash transfer results in a misstatement of cash at December 31?
Disbursements Receipts
From To Per Books Per Bank Per Books Per Bank
a. Pbcom HSBC 12/31/15 1/4/16 12/31/15 12/31/15
b. UCPB MB 1/4/16 1/5/16 12/31/15 1/4/16
c. HSBC PBank 12/31/15 1/5/16 12/31/15 1/4/16
d. MBank PNB 1/4/16 1/11/16 1/4/16 1/4/16
ANSWERS:
1. C 5. A 9. B
58
2. C 6. B 10. B
3. B 7. B 11. B
4. A 8. D 12. B
II – AUDIT OF RECEIVABLES
On December 21, 2015 the accounts receivable control account of Ipil-ipil Co. had a balance of
P181,100. An analysis of the accounts receivable account showed the following:
59
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Total P181,000
REQUIRED:
Determine the trade and other receivables to be reported on the entity’s December 31, 2015
statement of financial position.
SOLUTION:
Items included:
9
Trade accounts receivable (see computation below) 1,500
1
Advance payments to creditors on purchase orders 0,000
1
Interest receivable on bonds 0,000
5
Subscriptions receivable due in 30 days 5,000
166,
Trade and other receivables 500
In the audit of Beatles Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:
Beatles Company
The external auditor submitted the following audit comments for possible adjustments:
This Boy Company Merchandise worth P160,000 was destroyed while in transit on
May 31, 2015, terms FOB Destination. The carrier was billed on
June 15, 2015. (See Ticket To Ride Corp. and Yesterday Corp.)
Girl Corporation Customer billed twice in error for P40,000. Balance is collectible.
Let It Be Corp. Paid in full on December 30, 2015 but not recorded. Collections
were deposited on January 2, 2016.
61
Hey Jude Received account confirmation from customer for P44,000.
Investigation revealed an erroneous credit for P40,000. (See Get
Back Company)
Yesterday Corp. Customer wants to know reason for receipt of P160,000 credit
memo as their accounts payable balance was P400,000.
REQUIRED:
SOLUTION:
Requirement No. 1
1
) Love M. Do
Sales returns 92,000
Accounts receivable
2
) Strawberry Fields
None
3
) This Boy Company
None, this is misposting only in the SL. However, the customers' ledger should
be adjusted.
4
) Girl Corporation
Sales 40,000
Accounts receivable
5
) Ticket To Ride Corp.
Accounts receivable-Nontrade 160,000
62
Accounts receivable
6
) Let It Be Corp
Cash 124,000
Accounts receivable
7
) Hey Jude
None, this is misposting only in the SL. However, the customers' ledger should
be adjusted.
8
) Get Back Company
None, this is misposting only in the SL. However, the customers' ledger should
be adjusted.
9
) Yesterday Corp
None, this is misposting only in the SL. However, the customers' ledger should
be adjusted.
Requirement No. 2
In connection with the audit of the financial statements of Praktis Corporartion, your audit senior
instructed you to examine the company’s accounts receivable.
63
Prior to any adjustments you were able t extract the following balances from Praktis’ trial
balance as of December 31, 2015:
From the schedule of accounts receivable as of December 31, 2015, you determined that this
account includes the following:
61 to 90 days 117,200
The credit balance in customer’s account represents collection from a customer whose account
had been written-off as uncollectible in 2014.
Accounts receivable for more than a year totaling P21,000 should be written off.
Confirmation replies received directly from customers disclosed the following exceptions:
64
reduced by P1,200. company employees were entitled
to a special discount.
Jay-ar We have not yet sold the goods. Merchandise billed for P18,000
We will remit the proceeds as soon were consigned to Jay-ar on
as the goods are sold. December 30, 2015. The goods
cost P13,000.
Roy We do not owe you P20,000. The sale of merchandise on
We already paid our accounts as December 18, 2015 was paid by
evidenced by OR # 1234. Roy on January 6, 2016.
Carla Reduce your bill by P1,500 This amount represents freight paid
by the customer for the
merchandise shipped on December
17, 2015, terms, FOB destination-
collect.
Based on your discussion with Praktis’ Credit Manager, you both agreed that an allowance for
doubtful accounts should be maintained using the following rates:
61 to 90 days 2%
Over 90 days 5%
REQUIRED:
SOLUTION:
Per Adjustmen
Books ts Per Audit
442,5 (16,4 387,4
Accounts receivable 00 1 00) 00
15,0
2 00
(21,0
3 00)
(12,0
4 00)
(1,2
5 00)
65
(18,0
6 00)
(1,5
7 00)
15,0
2 Accounts receivable 00
15,0
Allowance for doubtful accounts 00
Erroneous recording of recovery from written off
account
21,0
3 Allowance for doubtful accounts 00
21,0
Accounts receivable (>90 days) 00
Accounts that should be written off
12,0
4 Net sales 00
66
12,0
Accounts receivable (<60 days) 00
Unrecorded credit memo
1,2
5 Net sales 00
1,2
Accounts receivable (<60 days) 00
Unrecorded employee discount
18,0
6 Net sales 00
18,0
Accounts receivable (<60 days) 00
13,0
Inventory 00
13,0
Cost of sales 00
Goods out on consignment erroneously
billed
1,5
7 Freight out 00
1,5
Accounts receivable (<60 days) 00
Unrecorded freight-out
1,3
8 Allowance for doubtful accounts 78
1,3
Doubtful accounts expense 78
205,8 1 2,0
60 days old and below 00 % 58
117,2 2 2,3
61 to 90 days 00 % 44
64,4 5 3,2
Over 90 days 00 % 20
7,6
Required allowance 22
Balance per books before this adjustment (15,000+15,000- 9,0
21,000) 00
1,3
Adjustment 78
67
PROBLEM NO. 4 – Audit of allowance for doubtful accounts
Professional company produces paints and revealed products for sale to the construction industry
throughout Metro Manila. While sales have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which the
company’s customers are paying their bills.
The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of
the credit customers have taken advantage of the discount by paying within 10 days of the
invoice date. During the year ended December 31, 2015, the number of customers taking the full
30 days to pay has increased. Current indications are that less than 60% of the customers are now
taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from
the 1.5% provided in the past years to 4% in the current year.
In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controller has prepared the following report:
Professional Company
Accounts Receivable Collections
December 31, 2015
The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-
offs had been 1.5% of total credit sales for many years. However, during the year 2015, this
percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of
this balance in terms of age and probability is shown below:
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of
P27,300. The company has provided for a monthly bad debt expense accrual during the year
based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for
the year 2015 amounted to P8,000,000, and write-offs of uncollectible accounts during the year
totaled P292,500.
REQUIRED:
68
1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015.
2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2015.
SOLUTION:
Requirement
No.1
Aging Allowan
Category ratio AR Balance Rate ce
1 – 10 days 9,60
64% 960,000 1.00% 0
11 – 30 days 6,75
18% 270,000 2.50% 0
31 – 60 days 6,00
8% 120,000 5.00% 0
61 – 120 20.00 15,00
days 5% 75,000 % 0
121 – 180 35.00 15,75
days 3% 45,000 % 0
over 180 80.00 24,00
days 2% 30,000 % 0
77,10
100% 1,500,000 0
Requirement
No.2
Doubtful accounts 22,30
expense 0 *
22,30
Allowance for doubtful accounts 0
27,30
Allowance for doubtful accounts, 1/1 0
320,00
Add provisions (P8,000,000 x 4%) 0
347,30
Total 0
292,50
Less accounts written-off 0
Balance before 54,80
adjustment 0
Required allowance (see 77,10
no. 1) 0
69
Additional required allowance for doubtful 22,30
accounts 0
Bad debts are provided for as a percentage of credit sales. The accountant calculates the
percentage annually by using the experience of the three years prior to the current year. The
formula is bad debts written off less recoveries expressed as a percentage of the credit sales for
the same period. Cash receipts in 2015 from credit sales to retail customers was P1,380,000.
REQUIRED:
Determine the following:
1. Adjusted accounts receivable as of December 31, 2015
2. Adjusted allowance for doubtful accounts as of December 31, 2015
SOLUTION:
Requirement No. 1
209,0
Accounts receivable, 1/1/12 00
1,500,0
Credit sales for 2012 00
(1,380,2
Collections during 2012 00)
(31,0
Accounts written off - 2012 00)
Accounts receivable, 297,8
12/31/12 00
Requirement No. 2
70
7,60
Allowance for doubtful accounts, 1/1/12 0
30,00
Doubtful accounts expense - 2012 (see computation below) 0
(31,0
Accounts written off - 2012 00)
4,20
Recovery of accounts written off – 2012 0
10,80
Allowance for doubtful accounts, 12/31/12 0
76,00
Net accounts written off (2009 to 2011) 0
3,800,0
Divide by credit sales (2009 to 2011) 00
The December 31, 2015 balance in the Accounts Receivable control accounts is
P837,900.
71
An aging schedule of the accounts receivable as of December 31, 2015 is presented
below:
SOLUTION:
72
AJE No. 1 (9,0 (9,0
00) 00)
AJE No. 2 (6,1 (6,1
00) 00)
AJE No. 3 11,0 11,00
00 0
Adjusted balances 833,800 387,800 318,100 83,700 44,200
833,800 25,475
Requirement No. 2
Adjusting journal entries:
73
1) Allowance for doubtful 9,00
accounts 0
Accounts receivable - over 120 days 9,00
0
To write off definitely uncollectible
accounts
2) Doubtful account expense 6,10
0
Accounts receivable - 91 to 120 6,10
days 0
To correct entry made in recording accounts written
off
3) Accounts receivable - 61 to 90 days 11,00
0
Advances from 11,00
customers 0
To reclassify advances from customers
74
interest rate for a note of this type at April 1, 2015, was 12%. The present value factor of
1 for two periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co. on July 1, 2015, for P4,000,000
under an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on
July 1,2015, in addition to the down payment of P1,200,000. The equal annual payments
of principal and interest on the note will be P902,500 payable on July 1, 2016, 2017,
2018 and 2019. The land had an established cash price of P4,000,000 and its cost to the
corporation was P3,000,000. The collection of the installments on this note is reasonable
assured.
REQUIRED:
Determine the following as of and for the year ended December 31,2015:
1. Noncurrent receivables
2. Current portion of long-term receivables
3. Accrued interest receivable
4. Interest income
5.
SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000) 4,000,00
0
Less installment due on April 1, 2013 2,000,00 2,000,00
0 0
Note receivable from officer, due 12/31/14 1,600,00
0
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,60
0
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,38 694,98
4 4
Note receivable from sale of
land
Balance, 12/31/12 2,800,00
0
Less principal installment due on 7/1/13
Total amount to be received 902,50
0
Less interest (P2,800,000 x 11%) 308,00 594,50 2,205,50
0 0 0
Total noncurrent receivables, 12/31/12 6,500,48
4
75
Requirement No. 2
Note receivable from sale of plant due on 2,000,00
4/1/13 0
Note receivable from sale of land (see no. 1) 594,50
0
Current portion of long-term receivables 2,594,50
0
Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,00
0
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
0
Accrued interest receivable, 12/31/12 514,00
0
Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12 180,00
0
P4,000,000 x 12% x 9/12 360,00 540,00
0 0
Note receivable from officer (P1,600,000 x 160,00
10%) 0
Note receivable from sale of equipment (P637,600 x 12% x 57,38
9/12) 4
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
0
Total interest income for 2012 911,38
4
On January 1, 2015, Pedro Company sold land that originally cost P400, 000 to Buyer Company.
As payment, Buyer gave Pedro Company a P600, 000 note. The note bears an interest rate of 4%
and is to be repaid in three annual installments of P200, 000 (plus interest on the outstanding
balance). The first payment is due on December 31, 2015. The market price of the land is not
reliably determinable =. The prevailing rate of interest for notes of this type is 14% on January 1,
2015 and 15% on December 31, 2015.
Pedro made the following journal entries in relation to the sale of land and the relate note
receivable.
76
January 1, 2015
Notes Receivable P600,000
Land P400,000
Gain on sale of Land 200,000
Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as
part of trade and other receivables.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Correct gain on sale of land
b. Correct interest income
c. Overstatement of profit
d. Correct carrying amount of note receivable
e. Overstatement of working capital
2. Adjusting entries as of December 31, 2015
SOLUTION:
77
12/31/1 200,000 8,00 208,00 0.6750 140,400 160,056
4 0 0
600,000 503,105 349,531
Requirement No. 2
Adjusting journal
entries:
78
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land 96,89
5
Discount on notes receivable (FV-PV) 96,89
5
My Love Corporation made the following entries in relation to the sale of the equipment and the
related note receivable:
January 1, 2014
Cash P 300,000
Notes Receivable 1,705,900
Cost of goods sold 750,000
Sales P2,005,900
Inventory 750,000
Cash P 341,180
Notes Receivable P 341,180
Cash P 341,180
79
Notes Receivable P 341,180
My Love Corporation reported the notes receivable in its statement of financial position at
December 31, 2014 and 2015 as part of trade and other receivables.
REQUIRED:
SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
Should be (refer to amortization schedule) 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084
Amortization schedule:
80
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900
You are examining the financial statements of Merlyn, In., for the year ended December 31,
2015. Your analysis of the 2015 entries in the Notes Receivable account follows:
Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31,2015
Date
2015 Debit Credit
Jan. 1 Balance Forwarded P118,000
Received P25,000 6% note due
10/29/15 from Anna whose trade
account was past due.
(1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable
account and accredit of P400 in the Unearned Interest Income account. The P118,000
debit in the Note Receivable account consisted the following three notes:
82
(2) No entries were made during 2015 to the Accrued Interest Receivable of the Unearned
Interest Income account and only one entry for a credit of P1,200 on December 31,
appeared in the Interest Income account.
(3) All notes were from the trade customers unless otherwise indicated.
(4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts
indicate otherwise.
REQUIRED:
1. Determine the following as of and for the year ended December 31,2015:
a. Notes receivable- trade
b. Interest income
2. Adjusting entries as of December 31,2015
SOLUTION:.
Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable 25,000
83
Notes receivable 26,031
Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
84
Adjusted notes receivable-trade, 12/31/12 48,000
Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12
3) NR from Julia - non-trade
Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1,2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures
in five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination
cost and P50,000 of indirect loan origination cost. In addition, Bahrain Banks charges the
borrower a 5-point nonrefundable loan origination fee.
The borrower paid the interred due on December 31, 2014. However during 2015 the borrower
began to experience financial difficulties, requiring the bank to reassess the collectability of the
loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be
recovered. The P8,000,000 principal amount is expected to be collected in two equal installments
on December 31,2017 and December 31,2019. The prevailing interest rates for similar type of
note as of December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED:
SOLUTION:
Requirement No.s 1 & 2
85
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900
Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900
12/31/11 1,059,39 1,000,000 59,399 9,690,299
9
12/31/12 1,065,93 1,000,000 65,933 9,756,232
3
12/31/13 1,073,18 1,000,000 73,186 9,829,418
6
12/31/14 1,081,23 1,000,000 81,236 9,910,654
6
12/31/15 1,089,34 1,000,000 89,346 10,000,000
6
826
Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032
1. In the audit of which of the following general ledger accounts will tests of controls be
particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
86
3. The purpose of tests of controls over billing is to determine whether
a. Billed goods have been shipped
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
4. An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial
statement assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation
d. Completeness
5. Which of the following might be detected by an auditor’s review of client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
6. An auditor who has confirmed accounts receivable may discover that the sales journal
was held open past year-end if
a. Positive confirmation sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
7. The auditor finds situation in which one person has the ability to collect receivables,
make deposits, issue credit memos and record receipt of payments. The auditor suspects
the individual may be stealing from cash receipts. Which of the following audit
procedures would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform, a detailed review of debits to customer discounts, sales returns, or other
debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to
the entry in the cash receipts journal.
8. All of the following are examples of substantive tests to verify valuation of net accounts
receivable except the
87
a. Re-computation of the allowance for bad debts
b. Inspection of accounts for current versus non-current status in the statement of
financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.
10. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Number of Consideration by
Level of Inherent Small Business the Recipient is
and Control Risk is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely
11. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second
requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existences assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.
ANSWERS:
1. D 5. D 9. B
2. B 6. D 10. A
3. A 7. C 11. D
4. D 8. B 12. B
88
III – AUDIT OF INVENTORIES
89
Ovation Company asks you to review its December 31, 2015 inventory values and prepare the
necessary adjustments to the books. The following information is given to you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals
P2,348,900 inventory on hand at December 31, 2015.
h. Excluded from inventory was carton labeled, “Please accept for credit.” This carton
contains merchandise costing P15,000 which had been sold to a customer for P25,000.
No entry had been made to the books to reflect the return, but none of the returned
merchandise seemed damaged.
REQUIRED:
SOLUTION:
90
00
Add (deduct) adjustments:
b) Goods in-transit purchased FOB shipping - not 134,2
included 00
c) Goods in-transit sold FOB destination - included -
d) Goods purchased and received already - included -
85,4
e) Goods purchased and received already - not included 00
(104,3
f) Goods held on consignment - included 80)
(105,2
g) Goods in-transit sold FOB shipping point - included 00)
e) Goods returned by customers, received already - not 15,0
included 00
2,373,9
Adjusted inventory 20
a. Goods held on consignment from Chicago to Bulls amounting to P9,000 were included in
the physical count of goods in Bulls’ warehouse on December 31, 2015, and in accounts
payable at December 31, 2015.
b. Retailers were holding P50,000, at cost, of goods on consignment from Bulls, at their
stores on December 31, 2015.
c. Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2015. These goods had a cost of P31,000 and were billed at P40,000. The
shipment was on Bulls’ loading dock waiting to be picked up by the common carrier.
d. P15,000 worth of parts which were purchased from Deng Co. and paid for in December
2015 were sold in the last week of 2015 and appropriately recorded as sales of P21,000.
The parts were included in the physical count on December 31, 2015 because the parts
were on the loading dock waiting to be picked up by the customer.
91
e. Goods were in transit from a vendor to Bulls on December 31, 2015. The invoice cost
was P71,000 and the goods were shipped FOB shipping point on December 29, 2015.
f. Work in process inventory costing P30,000 was sent to an outside processor for plating
on December 30, 2015.
g. Goods returned by customers and held pending inspection in the returned goods area on
December 31, 2015 were not included in the physical count. On January 8, 2016, the
tools costing P32,000 were inspected and returned to inventory. Credit memos totaling
P47,000 were issued to the customers on the same date.
h. Goods shipped to a customer FOB destination on December 26, 2015 were in transit at
December 31, 2015, and had a cost of P21,000. Upon notification of receipt by the
customer on January 2, 2016, Bulls issued a sales invoice for P42,000.
i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on
December 31, 2015, were recorded on a receiving report dated January 2, 2016. The
goods were not included in the physical count, but the invoice was included in accounts
payable at December 31, 2015.
j. Goods received from a vendor on December 26, 2015 were included in the physical
count. However, the related P56,000 vendor invoice was not included in accounts
payable at December 31, 2015, because the accounts payable copy of the receiving report
was lost.
k. On January 3, 2016, a monthly freight bill in the amount of P6,000 was received. The bill
specifically related to merchandise purchased in December 2015, one-half of which was
still in the inventory at December 31, 2015. The freight charges were not included in
either the inventory or accounts payable at December 31, 2015.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Inventory
b. Net Sales
c. Accounts Payable
SOLUTION:
Requirement No. 1
Inventor Accts.
y Payable Sales, net
Unadjusted balances
92
10,048,00
980,000 586,000 0
Add (deduct) adjustments:
Requirement No. 2
a
) Accounts payable 9,000
Inventory 9,000
b
) Inventory 50,000
P/L summary (Cost of sales) 50,000
c
) Sales 40,000
Acccounts receivable 40,000
d
) P/L summary (Cost of sales) 15,000
Inventory 15,000
e
) Inventory 71,000
93
Accounts payable 71,000
f) Inventory 30,000
P/L summary (Cost of sales) 30,000
g
) Inventory 32,000
P/L summary (Cost of sales) 32,000
h
) Inventory 21,000
P/L summary (Cost of sales) 21,000
i) Inventory 27,000
P/L summary (Cost of sales) 27,000
k
) Inventory 3,000
You were engaged by Quezon Corporation for the audit of the company’s financial statements
for the year ended December 31, 2015. The company is engaged in the wholesale business and
makes all sales at 25% over cost.
SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded P5,200,000 Balance forwarded P2,700,000
Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000
Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000
Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000
94
Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000
Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000)
P - P -
Inventory P600,000
Accounts Receivable 500,000
Accounts Payable 400,000
You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 1063 and that no shipments had been made in
any Sales Invoices whose number is larger than No. 968. You also obtained the following
additional information:
a) Included in the warehouse physical inventory at December 31 were goods which had
been purchased and received on Receiving Report No. 1060 but for which the invoice
was not received until the following year. Cost was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
Truck No. CPA 123 was unloaded on January 2 of the following year and received on
Receiving Report No. 1063. The freight was paid by the vendor.
Truck No. ILU 143 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks
enroute to Brooks Trading Corporation. Brooks received the goods, which were sold on
Sales Invoice No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 1064. The goods were shipped FOB destination, and freight of
P2,000 was paid by the client. However, the freight was deducted from the purchase price
of P800,000.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Sales
b. Accounts Receivable
95
c. Inventory
d. Accounts Payable
e. Purchases
2. Adjusting entries as of December 31, 2015
SOLUTION:
Adjustmen
ts
Per Per
books Inc.(Dec.) audit
5,250,00
Sales 5,530,000 1 (130,000) 0
5 (150,000)
5 (150,000)
4 80,000
6 120,000
3,018,00
Purchases 3,000,000 2 18,000 0
Adjusting entries
1
Sales (P46,000+P68,000+P16,000) 130,000
2
Purchases 18,000
96
Accounts payable 18,000
To take up unrecorded purchases (RR No. 1060)
3
Inventory 64,000
P/L summary (Cost of
sales) 64,000
To take up goods under RR No.
1063
4
Inventory (P100,000/1.25) 80,000
P/L summary (Cost of
sales) 80,000
To take up unshipped goods under SI
No. 968
5
Sales 150,000
6
Inventory (P150,000/1.25) 120,000
P/L summary (Cost of
sales) 120,000
To take up goods under SI No. 966
During your audit of the Makati Corporation for the year ended December 31, 2015, you found
the following information relating to certain inventory transactions from your observation of the
client’s physical count and review of sales and purchases cutoff:
a. Goods costing P180,000 were received from a vendor on January 3, 2016. The goods
were not included in the physical count. The related invoice was received and recorded
on December 30, 2015. The goods were shipped on December 31, 2015, terms FOB
Shipping Point.
97
b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2015, and
were received by the customer on January 2, 2016. The terms of the invoice were FOB
Shipping Point. The goods were included in the ending inventory for 2015 and the sale
was recorded in 2016.
c. The invoice for goods costing P150,000 was received and recorded as a purchase on
December 31, 2015. The related goods, shipped FOB Destination, were received on
January 2, 2016, but were included in the physical inventory as goods in transit.
e. Goods valued at P250,000 are on consignment from a vendor. These goods are included
in the physical inventory.
f. Goods valued at P160,000 are on consignment with a customer. These goods are not
included in the physical inventory.
REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the year ended
December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Cost of Sales
c. Profit
d. Working Capital
SOLUTION:
(180,000
a - - ) 180,000 (180,000) (180,000)
(200,000
b (300,000) - 200,000 ) (100,000) (100,000)
c - 150,000 150,000 - - -
98
(400,000
d 600,000 ) 400,000 200,000 200,000
(250,000
e 250,000 ) 250,000 250,000
(160,000
f ) 160,000 (160,000) (160,000)
(140,000
300,000 150,000 ) 290,000 10,000 10,000
Requirement No. 2
a) Inventory 180,000
Sales 300,000
d) Sales 600,000
Inventory 400,000
99
y 250,000
f) Inventory 160,000
You were engaged to perform an audit of the accounts of the Oh! Darling Corporation for the
year ended December 31, 2015, and you observed the taking of the physical inventory of the
company on December 30, 2015. Only merchandise shipped by the company to customers up to
and including December 30, 2015 have been eliminated from inventory. The inventory as
determined by physical inventory count has been recorded on the books by the company’s
controller. No perpetual inventory records are maintained. All sales are made on an FOB
Shipping Point basis. You are to assume that all purchase invoices have been correctly recorded.
The inventory was recorded through the cost of sales method.
The following lists of sales invoices are entered in the sales books for the month of December
2015 and January 2016, respectively.
DECEMBER 2015
Sales Invoice Amount Sales Invoice Date Cost Date Shipped
a) P150,000 Dec. 21 P100,000 Dec. 31, 2015
b) 100,000 Dec. 31 40,000 Nov. 03, 2015
c) 50,000 Dec. 29 30,000 Dec. 30, 2015
d) 200,000 Dec. 31 120,000 Jan. 03, 2016
e) 500,000 Dec. 30 280,000 Dec. 29, 2015
(shipped to
consignee)
JANUARY 2016
f) P300,000 Dec. 31 P200,000 Dec. 30, 2015
g) 200,000 Jan. 02 115,000 Jan. 02, 2016
h) 600,000 Jan. 03 475,000 Dec. 31, 2015
REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the year ended
December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Sales
c. Profit
d. Working Capital
100
2. Adjusting entries as of December 31, 2015
Invento
Adjusting journal entries ry Sales COS Profit AR WC
over over over over over over
(under) (under) (under) (under) (under) (under)
a 100,00 (100,00
) Cost of sales 0 0) 100,000
100,00
Inventory 0 100,000 100,000
b
) None
c
) None
d 200,00
) Sales 0 200,000 200,000
Accounts 200,00
receivable 0 200,000 200,000
e 500,00
) Sales 0 500,000 500,000
Accounts 500,00
receivable 0 500,000 500,000
280,00 (280,00
Cost of sales 0 280,000 0)
475,00 (475,00
Cost of sales 0 0) 475,000
475,00
Inventory 0 475,000 475,000
Orang Dampuan Co. wholesales bicycles. It uses the perpetual inventory system. The company’s
reporting date is 31 December. At 1 December 2015, inventory on hand consisted of 350
bicycles at P820 each and 43 bicycles at P850 each. During the month ended 31 December 2015,
the following inventory transactions took place (all purchase and sales transactions are on credit)
December:
03 Five bicycles were returned by a customer. They had originally cost P820 each and were
sold for P1, 200 each.
16 Returned one damaged bicycles to the supplier. This bicycle had been purchased on 9
December.
29 Two bicycles, sold on 22 December, were returned by a customer. The bicycles were
badly damages so it was decided to write them off. They had originally cost P910 each.
REQUIRED:
Determine the cost of inventory as of Dec 31, 3015 and the cost of sales for the month of
December 31, 2015.
SOLUTION:
Units UC TC
82
Dec. 1 350 0 287,000
102
85
43 0 36,550
Dec. 2 (300)
Dec. 3 5
91
Dec. 9 55 0 50,050
96
Dec. 13 76 0 72,960
Dec. 15 (86)
91 (910
Dec. 16 (1) 0 )
Dec. 22 (60)
98
Dec. 26 72 0 70,560
154 516,210
FIFO
Composition of inventory, 12/31
Date Units UC TC
98
Dec. 26 72 0 70,560
96
Dec. 10 76 0 72,960
91
Dec. 9 6 0 5,460
Moving average
103
Purchased COS Balance
Date Units UC TC Units UC TC Units UC TC
35 82 287,00
Dec. 1 0 0 0
4 85 36,55
3 0 0
39 82 323,55
3 3 0
30 82 246,90 9 82 76,65
Dec. 2 0 3 0 3 3 0
( 82 (4,1 9 82 80,76
Dec. 3 5) 3 15) 8 3 5
91 50,0 9 82 80,76
Dec. 9 55 0 50 8 3 5
5 91 50,05
5 0 0
15 85 130,81
3 5 5
Dec. 96 72,9 15 85 130,81
13 76 0 60 3 5 5
7 96 72,96
6 0 0
22 89 203,77
9 0 5
Dec. 8 89 76,54 14 89 127,23
15 6 0 0 3 0 5
Dec. ( 91 (91 14 89 126,32
16 1) 0 0) 2 0 5
Dec. 6 89 53,40 8 89 72,92
22 0 0 0 2 0 5
Dec. 98 70,5 8 89 72,92
26 72 0 60 2 0 5
7 98 70,56
2 0 0
192,6 372,72 15 93 143,48
60 5 4 2 5
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The
company operates a perpetual inventory system, the first in first out method used to assign costs
to inventory items. Transactions and other related information regarding two of the items (baked
beans and plain flour) are given below for June 2015 the last month of the company’s reporting
period.
104
Unit packaging Baked beans Plain Flour
Case containing 25 x Box containing 12 x
410g cans 4kg bags
1. Inventory shortage
105
SOLUTION:
Requirement No. 1
Baked beans Quantity Price Amount
Balance, June 1 35,000 19.60 686,000
Purchase 10 June 20,000 19.50 390,000
Purchase 19 June 47,000 19.70 925,900
(35,000 (686,00
Sales (73,000 cases) ) 19.60 0)
(20,000 (390,00
) 19.50 0)
(18,000 (354,60
) 19.70 0)
Sales returns 5,000 19.70 98,500
106
(936,00
Goods in transit (24,000) 39.00 0)
Requirement No. 2
Quantity Cost NRV LCN
Baked beans 32,600 642,220 945,400 642,220
Plain flour 1,500 57,675 57,750 57,675
Total 699,895
Banger sales company uses FIFO method in calculation cost of goods sold for the three products
that the company sells. At July 1, the balance of inventory account was P658, 500, and the
allowance for inventory write down was P3, 000. Inventories and purchase information
concerning the three products are given for the month of July.
Date Particulars C P A
July 1 Inventory 50,000 units 30,000 units 65, 000 units
at P6 at P10 at P.09
July 1-15 Purchases 70, 000 units 45, 000 units 30,000 units
At P6.50 at P10.50 at P1.25
July 1-31 Sales 105,000 units 50, 000 units 45, 000 units
107
On July 31, the company’s suppliers reduced their prices from the most recent purchase prices by
the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly,
Bangar decided to reduce its sales price on all items by 10%, effective August 1. Bangar selling
cost is 10% of sales price. Products C and P have a normal profit (after selling cost) of 30% on
sales prices, while the normal profit on product A ( after selling cost) is 15% of sales price.
REQUIRED
3. Cost of sales including loss on inventory write down for the month of July 2015
108
SOLUTION:
Requirement No. 1
Units in Ending
Inventory Est. Selling
Item (FIFO) Unit cost Total cost Price (a)
Product C 30,000 8.00 240,000 7.20
15,000 6.50 97,500 7.20
45,000 337,500
50,000 55,500
655,500
109
Est. Cost to Inventory at
Sell (b) NRV LCN Total NRV LCN Allowance
0.72 6.48 6.48 194,400 194,400 45,600
0.72 6.48 6.48 97,200 97,200 300
81,000 55,500 -
595,350 569,850 85,650
Requirement No. 2
Inventory at
Item Total cost LCN Allowance (a)
Product C 337,500 291,600 45,900
Product P 262,500 222,750 39,750
Product A 55,500 55,500 -
Requirement No.
3
658,5
Inventory, 7/1 (at cost) 00
Purchases:
110
Product C [(70,000 units x P6.50)+(30,000 units 695,0
x P8) 00
472,5
Product P (45,000 units x P10.50) 00
Product A (30,000 units x 37,50 1,205,0
P1.25) 0 00
1,863,5
Total goods available for sale 00
(655,5
Inventory, 7/31 (at cost) 00)
1,208,0
Cost of sales before loss on inventory writedown 00
82,65
Loss on inventory writedown 0
1,290,6
Cost of sales including loss on inventory writedown 50
Alternative computation:
Inventory, 7/1 (at LCN) (P658,500 - 655,5
P3,000) 00
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units 695,0
x P8) 00
472,5
Product P (45,000 units x P10.50) 00
Product A (30,000 units x 37,50 1,205,0
P1.25) 0 00
1,860,5
Total goods available for sale 00
(569,8
Inventory, 7/31 (at LCN) 50)
1,290,6
Cost of sales including loss on inventory writedown 50
In conducting your audit for the year ended December 31, 2015, you were satisfied that the
system of internal control was good. Accordingly, you observed the physical inventory at an
interim date, November 30, 2015 instead of at year end. You obtained the following information
from your client’s general ledger:
111
Inventory, January 1, 2015 P1, 312,500
Physical inventory, November 30, 2015 1, 425,000
Sales for 11 months ended Nov. 30, 2015 12,600,000
Sales for the year ended Dec. 31, 2015 14,400,000
Purchases for 11 months ended Nov. 30, 2015 10,125,000
(before audit adjustments)
Purchases for the year ended Dec. 31, 2015 12,000,000
(before audit adjustments)
b.) Shipment received in unsalable condition and excluded from physical inventory. Credit
memos had not been received nor chargebacks to vendors been recorded:
Total at Dec 31, 2015 (including the November unrecorded chargebacks) P22, 500
c.) Deposit made with vendor and charged to purchases in October 2015. Product was shipped in
January 2016 P30, 000
d.) Deposit made with vendor and charged to purchases in November 2015. Product was shipped
FOB destination on November 29, 2015 and was included in November 30, 2015 physical
inventory as goods in transit P82, 500
e.) Through the carelessness of the receiving department shipment in early December 2015 was
damaged by rain. This shipment was later sold on the last week of December at cost.
P150,
000
REQUIRED:
Determine the December 31, 2015 inventory using the gross profit method.
SOLUTION:
112
1,425,00 10,125,0 12,000,0
Unadjusted balances 0 00 00
Add (deduct) adjustments:
112,5
a - 00 -
(15,0 (22,50
b - 00) 0)
(30,0 (30,00
c - 00) 0)
(82,50 (82,5
d 0) 00) -
e - - -
1,342,50 10,110,0 11,947,5
0 00 00
1,312,50
Inventory, January 1 0
Add - Net purchases up to Nov. 10,110,0
30 00
11,422,5
Total goods available for sale 00
1,342,50
Less - Inventory, Nov. 30 0
10,080,0
Cost of sales for 11 months 00
113
Less - Cost of sales
Cost of sales with profit [(14,400,000 - 11,400,0
150,000) x 80%] 00
150,0 11,550,0
Cost of sales without profit 00 00
Estimated inventory, December 1,710,00
31 0
On April 21, 2015 a fire damaged the office and warehouse of Muntinlupa Company. The only
accounting record saved was the general ledger from which the trial balance was prepared.
Muntinlupa Company
Trial Balance
March 31, 2015
Debit Credit
Cash 180,000
Accounts Receivable 400,000
Inventory, Dec 31, 2014 750,000
Land 350,000
Building 1,100,000
Acc. Dep 413,000
Other assets 56,000
Accounts payable 237, 000
Accrued expenses 180, 000
Share capital, 100 par 1,000,000
Retained earnings 520, 000
Sales 1,350,000
Purchases 520, 000
Operating expense 344,000 __________
Totals P3, 700,000 P3, 700,000
b.) And examination of the April bank statement and cancelled checks revealed that checks
written during the period April 1 to 21 totalled P130, 000: P57, 000 paid to accounts payable as
114
of March 31, P34, 000 for April merchandise purchases, and P39, 000 paid for other expenses.
Deposits during the same period amounted to 129,500 which consisted of receipts on account
from customers with the exception of a 9,500 refund from a vendor for merchandise in April
c.) Correspondence with the suppliers revealed unrecorded obligations at April 21 of 106,000 for
April merchandise purchases including 23,000 for shipments in transit on that date.
d.) Customers acknowledge indebtedness of 360,000 at April 21 2015. It was also estimated that
customers owed another 80,000 that will never be acknowledge or recovered. Of the
acknowledge indebtedness, 6,000 will probably be uncollectible.
e.) The insurance company agreed that the fire loss claim should be based on the assumption that
that the overall gross profit ratio for the past two years was in effect during the current year. The
company’s audited financial statements disclosed the following information.
2014 2015
f.) Inventory with a cost of 70, 000 was salvaged and sold for 35, 000. The balance of the
inventory was a total loss.
REQUIRED:
SOLUTION:
750,0
Inventory, December 31, 2011 00
Add purchases for the period Jan. 1 to
April 21
520,0
Purchases up to March 31, 2012 00
34,0
Payments for April purchases 00
115
Unrecorded obligations for April 106,0
purchases 00
(9,5 650,5
Purchase returns 00) 00
1,400,5
Total goods available for sale 00
Less cost of sales (see computation 830,5
below) 00
570,0
Estimated inventory on the date of fire 00
Less: Proceeds from sale of salvaged 35,0
merchandise 00
23,0 58,00
Shipments in transit 00 0
512,0
Inventory fire loss 00
116
00
9,200,0
/ Net sales (2010 and 2011) 00
0.5
Overall cost ratio 5
You are engaged in the regular annual examination of the accounts and records of Valenzuela
manufacturing for the year ended December 31, 2015. To reduce the workload at year end, the
company upon your recommendation, took its annual physical inventory in November 30, 2015.
You observed the taking of the inventory and made tests of the inventory count and inventory
records.
The company’s inventory account, which includes raw materials and work in process, is on
perpetual basis. Inventories are valued at cost, FIFO method. There is no finished goods
inventory. The company’s physical inventory revealed that the book inventory of 1,695,960 was
understated by 84,000. To avoid delay in completing its monthly financial statements, the
company decided not to adjust the book inventory until year end except for obsolete inventory
items.
Your examination disclosed the following information regarding the November 30 inventory
1. Pricing tests showed that the physical inventory was overstated by 61, 600.
2. An understatement of the physical inventory by 4,200 due to errors in footings and extensions.
3. Direct labor included in the inventory amounted to 280,000. Overhead was included at the rate
of 200% of direct labor. You have ascertained that the amount of direct labor was correct and
that the overhead rate was proper.
4. The physical inventory included obsolete materials with a total cost of 7,000. During
December the obsolete materials were written off by a charge to cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
117
REQUIRED
SOLUTION:
Requirement No. 1
1,695,9
Inventory per books, 11/30 60
Add understatement of booked 84,0
inventory 00
1,779,9
Physical inventory,11/30, per client 60
Add (deduct) adjustments
Overstatement due to pricing (61,6
errors 00)
Understatement due to footing and extension 4,2
errors 00
(7,0
Obsolete materials 00)
Inventory per physical count, as 1,715,5
adjusted 60
Requirement No. 2
1,715,5
Adjusted balance of inventory, 11/30 60
691,6
Purchases 00
338,8
Direct labor 00
118
Factory overhead (200% of direct 677,6
labor) 00
3,423,5
Total 60
Less cost of sales:
1,920,
Per books 800
Obsolete materials written off (7, 1,913,8
through COS 000) 00
1,509,7
Inventory, 12/31 60
Requirement No. 3
1,715,5
Inventory, 11/30 (see no. 1) 60
(280,0
Direct labor 00)
Factory overhead (200% of direct (560,0
labor) 00)
875,5
Raw materials, 11/30 60
691,6
Purchases 00
1,567,1
Total 60
Less: Materials included in cost of
sales
1,913,
Adjusted cost of sales (see no. 2) 800
(386,
Direct labor 400)
(772, 754,6
Factory overhead 800) 00
Cost of materials on hand and materials included in 812,5
WIP 60
Labor cost in the WIP:
Labor included in 11/30 280,
inventory 000
338,
Labor incurred in December 800
618,
Total 800
(386, 232,4
Labor included in COS 400) 00
119
464,8
Applied factory overhead (200% of direct labor) 00
1,509,7
Total, as shown in no.2 60
IV – AUDIT OF INVESTMENTS
On January 1, 2015, Isabela Corporation purchase P1,000,000 8% bonds for P924,164 (including
broker’s commission of P50,000). The bonds were purchased to yield 10%. Interest is payable
annually every January 1. The bonds mature on January 1, 2020.
Quoted price of the bonds as of the dates indicated follows:
REQUIRED:
A. Prepare the journal entries on the books of Isabela Corporation to record the following:
(Round off present value factors to four decimal places)
a) Purchase of the investment on January 1, 2015;
b) Accrual of interest income on December 31, 2015;
120
c) Amortization of premium or discount on December 31, 2015; and
d) Fair value adjustment as of December 31, 2015
Under the following assumptions:
B. Compute for the carrying amount of the investment in bonds at December 31, 2015 if:
a. The investment is designated as FA@FVTPL;
b. The investment is available-for-sale; and
c. The investment is held-to-maturity
C. Assuming the bonds were sold on December 31, 2016 at 99, prepare the journal entry to
record the sale under the following assumptions:
a) The investment is designated as FA@FVTPL;
b) The investment is available-for-sale; and
c) The investment is held-to-maturity
SOLUTION:
Requirement A
1) Purchase of investment:
2) Accrual of interest:
3) Amortization of discount:
121
FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420
Purchase of investment:
Accrual of interest:
FV adjustment:
No entry
Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
1/1/2012 P 924,164
12/31/2012 P92,416 P80,000 P12,416 936,580
12/31/2013 93,658 80,000 13,658 950,238
12/31/2014 95,024 80,000 15,024 965,262
12/31/2015 96,526 80,000 16,526 981,788
12/31/2016 98,212 80,000 18,212 1,000,000
122
Requirement B
Requirement C
To update amortization
No entry
123
Disposal entry
Cash P1,070,000
HTM securities P950,238
Interest income 80,000
Gain on sale of HTMS 39,762
You were able to obtain the following ledger details of Trading Securities in connection with
your audit of the IMBC Corporation for the year ended December 31, 2015:
From the Philippine Stock Exchange, the 4WARD dividends were analyzed as follows:
At December 31, 2015, 4WARD and BACK shares were selling at P210 and P240 per share,
respectively.
124
REQUIRED:
SOLUTION:
Requirement 1
a. (60,000)
Sales proceeds 540,000
CA of investment sold (P1,800,000 x 2,400/7,200) 600,000
Loss on sale of 2,400 BACK shares on 3/1/12 (60,000)
b. 108,000
Total proceeds 1,176,000
Less dividends sold (4,800 shares x P30) 144,000
Net proceeds 1,032,000
CA of investment sold (P1,320,000* x
4,800/6,600**) 960,000
Gain on sale of 4,800 4WARD shares on 8/15/12 72,000
Total cash paid 1,440,000
Less purchased dividend (6,000 x P20) 120,000
Adjusted cost 1,320,000
** after 10% share dividend
c. 198,000
Declared January 2 -
Declared May 2 -
125
Declared August 1 (6,600 shares x P30) 198,000
Total dividend income for 2012 198,000
d. 1,278,000
4WARD Co. [(6,000 x 1.1) - 4,800 - 1,200] = 600 x P210 126,000
BACK Co. (7,200 - 2,400) = 4,800 x P240 1,152,000
CA of trading securities (FV), 12/31/12 1,278,000
Requirement 2
Feb. 20
No AJE
May 31
Retained earnings 132,000
Trading securities - 4WARD 132,000
Correct entry
Cash 1,176,000
Trading securities - 4WARD 960,000
Dividend income 144,000
Gain on sale of TS - 4WARD 72,000
Adjusting entry
126
FV adjustment loss (P/L) 42,000
Trading securities 42,000
In connection with your audit of the financial statements of the Pin Shop Company for the year
2015, the following Available for Sale Securities and Dividend Income accounts were presented
to you:
Bid Asked
SPIKES Company Ordinary 13-4/4 16-1/2
REQUIRED:
127
b. Carrying amount of investment as of December 31, 2015
2. Assuming the entity applies PFRS 9, determine the following if the investment is
designated as a financial asset at fair value through other comprehensive income:
SOLUTION:
Investment ledger
Particulars Shares Cost/share Total
Balance, 1/1/2012 10,000 39.00 390,000
Share dividend, 4/30/12 5,000 -
Balance 15,000 26.00 390,000
Sale of 5,000 shares, 5/20/2012 (5,000) 26.00 (130,000)
Balance 10,000 26.00 260,000
Sale of 2,000 shares, 12/10/2012 (2,000) 26.00 (52,000)
Balance, 12/31/2012 8,000 208,000
Requirement 1
a. 193,000
Loss on sale 5/20 (see computation below) (5,000)
Gain on sale 12/10 (see computation below) 48,000
Dividend income (see computation below) 150,000
Net amount to be recognized in P/L 193,000
Loss on sale 5/20:
Sales proceeds (5,000 shares x P25) 125,000
Cost of investment sold (see investment ledger) (130,000)
Loss on sale of investment (5,000)
Gain on sale 12/10:
Sales proceeds (2,000 shares x P60) 120,000
Dividends sold (2,000 shares x P50 x 20%) (20,000)
Net sales proceeds 100,000
Cost of investment sold (see investment ledger) (52,000)
Gain on sale of investment 48,000
Dividend income:
Cash dividends declared, 11/1/2012 (10,000 shares x P5) 50,000
Cash dividends declared, 12/1/2012 (10,000 shares x P50 x 20%) 100,000
Total dividend income 150,000
128
FV adjustment:
Fair value 110,000
Cost 208,000
Unrealized loss (FV adjustment) - OCI (98,000)
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75) 110,000
Requirement 2
a. 150,000
Amount to be recognized in P/L - Dividend income 150,000
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75) 110,000
On December 31 2014, L Cost Company’s financial statements showed the following balances
related to its securities accounts:
129
La Cost’s securities portfolio on December 31, 2014, was made up of the following securities:
Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. for P229,500, classified as
held for trading
Apr. 15 Sold 4,000 shares of Totoy Bibo Inc. for P69 per share
May 4 Sold 4,000 shares of Bulaklak Inc. for P62 per share
Oct. 30 Purchased 15,000 shares of Pasaway Co. for P832,500, classified as held for trading
The fair values of the shares and bonds on December 31, 2015, are as follows:
REQUIRED:
1. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2015
2. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2015
3. Carrying of trading securities and AFS AS OF December 31, 2015
SOLUTION:
1. 11,875
Selling price (4,000 shares x P69) 276,000
CA of shares sold (P528,250 x 4/8) (264,125)
Gain on sale of Totoy Bibo shares 11,875
130
2. 12,000
3. 2,304,100 & 906,000
Selling price (4,000 shares x P62) 248,000
YeyeofBonel
Cost shares[(10,000+ 3,000) xx P76.60]
sold (P590,000 4/10) 995,800
(236,000)
Totoy Bibo [(8,000 - 4,000)
Gain on sale of Bulaklak sharesx P68.50] 274,000
12,000
Pasaway (15,000 x P55.25) 828,750
Mayniladlad 205,550
Total fair value - Trading securities 2,304,100
Bulaklak Inc. [(10,000 - 4,000) x P61] 366,000
Jumbo Hotdog (20,000 x P27) 540,000
Total fair value - AFS 906,000
The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver Tab
Company. During your audit of the company’s accounts for the year 2015, which was a fist
audit, you obtained the following:
Dividend Income
2015 – Jan. 2 P120,000
Apr. 1 150,000
Aug. 10 10,000
Dec. 20 100,000
131
Jan. 2 Received cash dividend (declared on December 1) of P1 per share
Received cash dividend of P1 per share, declared December 1, out of Silver Tab
Dec. 20
Company’s “Reserve for Depletion”.
Sold 10,000 Silver Tab Company shares at P90. Cash was received on January 5,
29
2016
REQUIRED:
SOLUTION:
Entry made
1/2 Cash 120,000
Dividend income 120,000
3/2 Investment in Silver Tab 2,100,000
Cash 2,100,000
7/15 Cash 2,000,000
Investment in Silver Tab 2,000,000
(50,000 shares x P40)
8/10 Investment in Red Tab 10,000
Dividend income 10,000
(100,000/10 x P1)
12/20 Cash 100,000
Dividend income 100,000
12/29 None
Should be entry
Note: the entry made can be considered correct if the company accrued the dividend
1/2 in 2011 and reversed in 2012. Since there was no debit entry in the "Dividend
Income" account, we will assume that no accrual was made in 2011.
132
3/2 Investment in Silver Tab 2,070,000
Dividend income 30,000 *
Cash 2,100,000
*(30,000 x P1) - purchased dividend
7/15 Cash 2,000,000
Loss on sale 250,000
Investment in Silver Tab 2,250,000
Note: in the absence of specific identification,
use FIFO to determine cost of investment sold
From 2010 lot (30,000 x P35) 1,050,000
From 2011 lot (20,000 x P60) 1,200,000
2,250,000
8/10 Investment in Red Tab 30,000
Dividend income 30,000
(100,000/10 x P3)
Note: Property dividend received is recorded at FV
12/20 Cash 100,000
Investment in Silver Tab 100,000
Note: the dividend received is a liquidating dividend.
12/29 AR - non trade 900,000 *
Investment in Silver Tab 590,000
Gain on sale 310,000
* (10,000 x P90)
133
Investment in Silver Tab 250,000
8/10 Investment in Red Tab 20,000
Dividend income 20,000
Your audit of the Norte Corp. disclosed that the company owned the following securities on
December 31, 2014:
Trading Securities:
Security Shares Cost Fair Value
Vigan, Inc. 9,600 P144,000 P184,000
Laoag, Inc. 16,000 432,000 288,000
10%, P200,000 face value,Santiago bonds
158,400 163,440
(interest payable every Jan. 1 and Jul. 1)
Total P734,400 P635,440
Available-for-sale Securities:
Security Shares Cost Fair Value
Candon Products 32,000 P1,376,000 P1,440,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000
Batac, Inc. 80,000 960,000 1,280,000
Total 8,576,000 8,560,000
Held to Maturity:
Cost Book Value
12%, 2,000,000 face value, Ilocos bonds
P1,900,000 1,926,000
(interest payable annually every Dec. 31)
134
Dec. 31 Received interest on the Ilocos bonds.
31 Transferred the Ilocos bonds to the available-for-sale portfolio. The bonds
were selling at 101 on this date. The bonds were purchased on January 2,
2014. The discount was amortized using the effective interest method.
The fair values of the shares and bonds on December 31, 2015, are as follows:
REQUIRED:
SOLUTION:
1. P 8,000 gain
Sales proceeds 152,000
CA of shares sold (P288,000 x 8/16) (144,000)
Gain on sale of 8,000 Laoag, Inc. shares 8,000
2. P9,600 gain
Sales proceeds (3,200 shares x P15) 48,000
Cost of shares sold (P960,000 x 3.2/80) (38,400)
Gain on sale of 3,200 Batac, Inc. shares 9,600
3. P289,640
Santiago bonds (P200,000 x 10%) 20,000
Ilocos bonds (P1,926,000 x 14%*) 269,640
Total interest income for 2012 289,640
135
Discount amortization for 2011 26,000
Add nominal interest (P2,000,000 x 12%) 240,000
Effective interest 266,000
Divide by carrying amount, 1/2/11 1,900,000
Effective interest rate 14.00%
4. Trading Securities: P482,400; AFS: P11,466,400
Trading securities
Vigan, Inc. (9,600 x P22) 211,200
Laoag, Inc. [(16,000 - 8,000) x P15] 120,000
10% , P200,000 face value , Santiago bonds 151,200
Total fair value 482,400
Available-for-sale securities
Candon Products (32,000 x P42) 1,344,000
Pagudpud, Inc. (240,000 x P28) 6,720,000
Batac, Inc. [(80,000 - 3,200) x P18] 1,382,400
Ilocos bonds (P2,000,000 x 1.01) 2,020,000
Total fair value 11,466,400
The following subsidiary ledger reflects the trading securities of Gateway Company for the year
of 2015:
TEMPLAR CORPORATION
136
05 Sold 20,000 shares at P5 1,000,000
Cash collected for sale of 20,000 shares
made on Nov. 1 declaration of P5 cash
Nov. 30 3,300,000
dividend per share to stockholders on
record as of December 1
Dec. 15 Cash dividend received 150,000
Total P3,600,000 P4,500,000
On January 2, 2015, Gateway Company purchased 39,000 ordinary shares of Dark Co.’s 200,000
shares outstanding for P1,170,000. On the date, the carrying amount of the acquired shares on
Dark Co.’s books was P810,000. Gateway attributed the excess of cost over carrying amount to
goodwill.
During 2015, Gateway’s president gained a seat on Dark’s board of directors, which enables
Gateway to exercise significant influence over Dark. Dark reported profit of P800,000 for the
year ended December 31, 2015, and declared and paid cash dividends of P200,000 during 2015.
REQUIRED:
Determine the amount to be included in Gateway’s 2015 profit or loss and the carrying amount
of investments as of December 31, 2015 to be reported on the statement of financial position.
Templar
Dark
SOLUTION:
137
FV adjustment gain 240,000
Net amount to be recognized in P/L 3,000,000
FV adjustment gain:
Fair value, 12/31/12 (30,000 x P60) 1,800,000
Balance before FV adjustment (see investment ledger) 1,560,000
FV adjustment gain 240,000
138
Amount to be recognized in SFP - Investment in Dark
Acquisition cost 1,170,000
Share of profit (P800,000 x .195) 156,000
Dividends received (P200,000 x .195) (39,000)
Investment in stock balance, 12.31.11 1,287,000
* Use equity method since there is a significant influence, i.e. Gateway's President
is represented in the board of directors.
On January 3, 2013, JR Company purchased for P500,000 cash a 10% interest in Judi Corp. On
that date, the net assets of Judi had a book value of P3,750,000. The excess of cost over the
underlying equity in the net assets is attributable to undervalued depreciable assets having a
remaining life of 10 years from the date of JR’s purchase. The investment in Judi Corp. is not
intended for trading.
On January 2, 2015, JR purchased an additional 30% of Judi’s stock for P1,575,000 cash when
the book value of Judi’s net assets was P4,150,000. The excess was attributable to depreciable
assets having a remaining life of 8 years.
REQUIRED:
139
2. The net amount to be recognized in 2014 comprehensive income related to this
investment?
3. The adjustment to retained earnings as of January 1, 2015 as a result of the acquisition of
the additional 30% interest in Judi Corp. is?
4. The carrying amount of the investment in Judi Corp. as of December 31, 2015 is?
SOLUTION:
1. P 85,000
Profit or loss - Dividend income 15,000
OCI - FV adjustment (P570,000 - P500,000) 70,000
Net amount in comprehensive income - 2010 85,000
2. (P25,000)
Profit or loss - Dividend income 20,000
OCI - FV adjustment (P525,000 - P570,000) (45,000)
Net amount in comprehensive income - 2011 (25,000)
3. Nil
4. P2,195,000
Fair value of original investment 525,000
Purchase price of 30% interest 1,575,000
Total cost of 40% interest 2,100,000
Share of profit - 2012
Based on reported amount (P550,000 x .4) 220,000
Excess of cost over underlying equity amortization
{[P2.1M - (P4.15M x .4)]/8} (55,000) 165,000
Dividends received (70,000)
Carrying amount, 12/31/12 2,195,000
On June 1, 2014, Panday Corporation purchased as a long term investment 6,000 of the P1,000
face value, 8% bonds of Pira Corporation. Panday Corporation has the positive intention and
ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest
is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2020. On
November 1,2015, Panday Corporation sold the bonds for a total consideration of P5,887,500.
REQUIRED:
Determine the following: (Round off present value factors to four decimal places)
140
1. The purchase price of the bonds on June 1, 2014
2. The carrying amount of the investment in bonds as of December 31, 2014.
3. The interest income for the year 2015
4. The gain on sale of investment in bonds on November 1, 2015.
SOLUTION:
1. P5,467,992
2. P5,507,237
3. P459,911
4. P120,352
141
PROBLEM NO. 10 – Impairment of investments in debt instruments (HTM)
On April 1, 2012, KLOOTZ Corporation purchased a 5-year P10,000,000 10% bonds dated
January 1, 2012. The bonds were purchased to yield 8%. Interest is payable annually every
December 31. KLOOTZ Corporation has the positive intention and ability to hold these bonds to
maturity. This issuer paid the interest as scheduled in 2012 and 2013. During 2014, the issuer of
the bonds is in financial difficulties and it becomes probable that the issuer will be put into
administration by a receiver. On December 31, 2014, KLOOTZ estimated that none of the
interest will be collected and only P8,000,000 of the principal will be collected on maturity date.
No cash flows are received during 2015. At the end of 2015, the issuer is released from
administration and KLOOTZ receives a letter from the receiver stating that the issuer will be
able to meet its remaining obligations, including interest and repayment of principal.
REQUIRED:
Answer the following: (Round off present value to four decimal places)
1. How much was the total amount paid to acquire the investment in bonds on April
1, 2012?
2. How much is the carrying amount of the investment in bonds on December 31,
2012?
3. How much should be recognized as impairment loss in 2014?
4. How much is the interest income to be recognized in 2015?
5. How much should be recognized as reversal of impairment loss in 2015?
SOLUTION:
1. P11,014,674
Amortization schedule:
EI (8%) NI (10%) Amort CA
1/1/09 10,798,700
12/31/09 863,896 1,000,000 (136,104) 10,662,596
12/31/10 853,008 1,000,000 (146,992) 10,515,604
12/31/11 841,248 1,000,000 (158,752) 10,356,852
142
12/31/12 828,548 1,000,000 (171,452) 10,185,400
12/31/13 814,832 1,000,000 (185,400) 10,000,000
2. P10,662,100
Refer to the amortization schedule 10,662,596
Alternative computation:
Cash flow PVF@8% PV, 12/31/09
Principal 10,000,000 0.7350 7,350,000
Interest 1,000,000 3.3121 3,312,100
Carrying amount, 12/31/11 10,662,100
3. P3,497,900
Alternative computation:
Cash flow PVF@8% PV, 12/31/11 4.
P548,672
Principal 10,000,000 0.8573 8,573,000
Interest 1,000,000 1.7833 1,783,300
EI (8%)
Carrying amount, 12/31/11 NI (10%) Amort 10,356,300CA
PV12/31/11
of expected cash flows (P8,000,000 x 0.8573) 6,858,400
6,858,400
12/31/12 loss 548,672
Impairment - 548,672 3,497,900
7,407,072
12/31/13 592,928 - 592,928 8,000,000
5. P2,777,828
143
Interest 1,000,000 0.9259 925,900
Carrying amount, 12/31/12 - without impairment 10,184,900
Carrying amount, 12/31/12 - with impairment 7,407,072
Impairment loss 2,777,828
You were engaged by Spurs Corporation, a small and medium-sized entity, to audit its financial
statements for the year 2015. During the course of your audit , you noted the following regarding
its recent acquisitions of investments in equity securities:
a. On January 1, 2015, the entity acquired 25 percent of the equity of each of entities B, C
and D for P10 million, P15 million and P28 million respectively. Transaction costs of 1
percent of the purchase price of the shares were incurred by the entity.
b. On January 2, 2015, entity B declared and paid dividends of P1 million for the year ended
2014.
c. On December 31, 2015, entity C declared a dividend of P8 million for the year ended
2015. The dividend declared by entity C was paid in 2016.
d. For the year ended December 31, 2015, entities B and C recognized profit of respectively
P5 million and P18 million. However, entity D recognized a loss of P20 million for the
year.
e. Published price quotations do not exist for the shares of entities B, C and D. Using
appropriate valuation techniques the entity determined the fair value of its investments in
entities B, C and D at December 31, 2015 as P13 million, P29 million and P15 million
respectively. Costs to sell are estimated at 5 percent of the fair value investments.
f. The entity has no subsidiaries and therefore does not produce consolidated financial
statements.
In accordance with section 14.4 of the PFRS for SMEs, an investor shall account for all of its
investments in associates using one of the following: (a) the cost model in paragraph 14.5, (b) the
equity method in paragraph 14.8, or (c) the fair value model in paragraph 14.9. The entity is
seeking your advice on the effect of each method on the carrying amount of the investment and
its effect on profit or loss.
REQUIRED:
Determine the net amount to be recognized in 2015 profit or loss and the total carrying amount
of the investments as of December 31, 2015 using:
144
1. Cost Model
2. Fair Value Model
3. Equity Method
SOLUTION:
145
3. P/L:P(8.28) million ; CA:P43.00 million
SFP amount (Equity Method) B C D Total
Purchase price 10,000,000 15,000,000 28,000,000 53,000,000
Transaction costs 100,000 150,000 280,000 530,000
SOPA (SOLA) 1,250,000 4,500,000 (5,000,000) 750,000
1. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
2. An auditor who physically examines securities should insist that a client representative be
present in order to
146
3. A client has a large and active investment portfolio that is kept in a bank safe-deposit
box. If the auditor is unable to count the securities at the end of the reporting period, the
auditor most likely will:
a. Request the bank to confirm to the auditor the contents of the safe deposit box at
the end of the reporting period
b. Examine supporting evidence for transactions occurring during the year
c. Count the securities at a subsequent date and confirm with the bank whether
securities were added or removed since the end of the reporting period
d. Request the client to have a bank seal the safe-deposit box until the auditor can
count the securities at a subsequent date
4. When an auditor is unable to inspect and count a client’s investment securities until after
the end of the reporting period, the bank where the securities are held in a safe deposit
box should be asked to
a. Verify any differences between the contents of the box and the balances in the
client’s subsidiary ledger
b. Provide a list of securities added and removed from the box between the end of
the reporting period and the security count date
c. Count the securities in the box so that the auditor will have an independent direct
verification
d. Confirm that there has been no access to the box between the end of the reporting
period and the security-count date
6. Which of the following is the least effective audit procedure regarding the existence
assertion for the securities held by the auditee?
147
d. Confirmation from the custodian
7. Which of the following is the most effective audit procedure for verification of dividends
earned on investments in equity securities?
8. In performing tests of the carrying amount of trading securities, the auditor would
usually:
9. An audit procedure that provides evidence about proper valuation of trading securities
arising from a short term investment of excess cash is
10. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditor’s client owns a 30% voting
interest?
a. Market quotations of the investee company’s stock
b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company
ANSWERS:
1. A 5. C 9. C
2. D 6. A 10. D
148
3. D 7. B
4. D 8. B
While searching for a suitable block of land, White Company placed an option to
buy with three real estate agents at a cost of P1,000 each. One of these blocks of
land was later acquired.
149
Payment for land 1,000,000
Payment for demolition of current 120,000
building on land
Proceeds from sale of material 55,000
from old building
Payment to architect 230,000
Payment to council for approval of 120,000
building construction
Payment for safety fence around 34,000
construction site
Payment to construction contractor 2,400,000
for factory building
Payment for external driveways, 540,000
parking bays and safety lighting
Payment for safety inspection on 30,000
building
Payment for equipment 640,000
Payment of freight and insurance 56,000
costs on delivery of equipment
Payment of installation costs on 120,000
equipment
REQUIRED:
1. Land
2. Land improvements
3. Building
4. Equipment
150
SOLUTION:
Land
Rates 50,000
1,000,00
Payment for land 0
1,216,00
0
Land improvements
Driveway et al 540,000
620,000
Building
2,400,00
Payment to construction contractor 0
2,834,00
0
Equipment
151
Payment for equipment 640,000
Installation 120,000
959,000
Purchase of Land P
3,9,000,000
Land survey 52,000
Fees for search of title for land 6,000
Building permit 35,000
Temporary quarters for 107,500
construction crews
Payment to tenants of old 46,000
building for vacating premises
Razing old building 470,000
Excavating basement 100,000
Special assessment tax for street 20,000
project
Dividends 50,000
Damaged awarded for injuries 84,000
sustained in construction (no
insurance was carried)
Costs of construction 29,000,000
Cost of paving parking lot 400,000
adjoining building
Cost of shrubs, trees, and other 330,000
landscaping
152
REQUIRED:
1. Land
2. Land improvements
3. Building
SOLUTION:
Land
Purchase of land 3,900,000
Land survey 52,000
Fees for search of title for land 6,000
Payment to tenants of old building for vacating
46,000
premises
Razing old building 470,000
Special assessment tax for street project 20,000
4,494,000
Land improvements
Cost of paving parking lot adjoining building 400,000
Cost of shrubs, trees, and other landscaping 330,000
730,000
Building
Building permit 35,000
Temporary quarters for construction crews 107,500
Excavating basement 100,000
29,000,00
Costs of construction
0
29,242,50
0
Machinery
153
01/01/15 Balance 500,000 09/01/15 Sale of 10,000
Machin
e No. 3
Accumulated Depreciation
12/31/15 Balance 344,000 01/01/15 Balance 280,000
12/31/15 Depreciation 64,400
344,400 344,400
01/01.16 Balance 344,400
REQUIRED:
154
2. Adjusted entries as of December 31, 2015
SOLUTION:
Requirement No. 1. a
Cost 80,000
Accumulated dep. (80,000 x 10%
x 4) (32,000) 48,000
Gain (Loss) on sale of machine no.
3 (42,000)
Requirement No. 1. b
Requirement No. 1. c
Requirement No. 1. d
155
Requirement No. 2
AJE 1 - To correct recording of sale of machine
no. 3
Machinery 74,000
Machinery 35,000
Repairs and
maintenance 35,000
Depreciation 3,900
In the audit of the books of yellow orporation for the year 2015, the following
items and information appeared in the Production Machine account of the client:
156
Machi P6,
ne 1 000
09 Machi 192,
/0 ne 6 000
1
12 Machi 432,
/0 ne 7 000
1
The Accumulated Depreciation account contained no entries for the year 2015.
The balance on January 1, 2015 per your audit, as as follows:
Machin P
e1 168,750
Machin 78,750
e2
Machin 67,500
e3
Machin 45,000
e4
Based on your further inquiry and verification, you noticed the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on
this date for P 6,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to
explosion on December 1, 2015. Machine 7 was to replace Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P 24,000; the
difference was paid in cash and charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.
REQUIRED:
SOLUTION:
Requirement No. 1
Adjusted DA Fractio Depreciatio AD CA
157
bal. n n
180,00
Machine 1 - sold 2/28 - 0 2/12 7,500 - -
180,00
Machine 4 180,000 0 12/12 45,000 90,000 90,000
199,50 1,024,50
Total 1,224,000 233,250 0 0
(1.a) (1.b)
Requirement No. 2
AJE 1 - To correct recording of sale of Machine
1
176,25
Accumulated depreciation (P180,000 - P3,750) 0
Production machine (P180,000 - P6,000) 174,000
Gain on sale (see computation
below) 2,250
Computation of gain on sale of
Machine 1:
Sales proceeds 6,000
Less carrying amount, 2/28/12
Carrying amount, 1/1/12 (P180,000 -
P168,750) 11,250
Depreciation - 2012 (P180,000 x .25 x
2/12) (7,500) 3,750
Gain (loss) on sale of Machine 1 2,250
158
AJE 2 - To correct non-recording of destruction of
Machine 2
120,00
Accumulated depreciation (P180,000 - P60,000) 0
101,25
Carrying amount, 1/1/12 (P180,000 - P78,750) 0
(41,250
Depreciation - 2012 (P180,000 x .25 x 11/12) )
Land P
175,000
Buildings 1,500,000
Machinery 1,125,000
and
equipment
Automobiles 172,000
Leasehold 216,000
improvements
Land 0
improvements
Transactions for 2015 included the following:
160
of disposition was scrapped without
cash recovery.
REQUIRED:
Based on the above and the result of your audit, calculate the balance of the
following as of December 31, 2015.
1. Land
2. Buildings
3. Machinery and equipment
4. Property, plant and equipment
SOLUTION:
Disposa
12/31/11 Addition l 12/31/12
Cost
a (1
Land 175,000 312,500 ) - 487,500 )
1,500,00 b (2
Buildings 0 937,500 ) - 2,437,500 )
161
Olive company’s property, plant, and equipment, accumulated depreciation, and
amortization balances at December 31,2014 are:
Accumulated
Cost Depreciation
Land P
275,000
Buildings 2,800,00 P 672,900
Machinery 2,380,00 367,500
and 0
equipment
Automobile 210,000 114,326
and trucks
Leasehold 432,000 108,000
improvements
Totals P P 1,262,726
5,097,00
0
Salvage values of depreciable assets are immaterial except for automobiles and
trucks which have estimated salvage values equal to 15% of cost.
162
Olive entered into a twelve-year operating lease starting January 1, 2012. The
leasehold improvements were completed on December 31, 2011 and the facility
was occupied on January 1, 2012.
On July 1, 2015 machinery and equipment were purchased at a total invoice cost
of P325,000. Additional costs of P23,000 to rectify damage on delivery and
P18,000 for concrete embedding of machinery were incurred. A wall had to be
demolished to enable a large machine to be moved into the plant. The wall
demolition cost P7,000, and rebuilding of the wall cost P19,000.
REQUIRED:
Based on the above and the result of your audit, compute for the following as of
and for the year ended December 31,2015:
1. Total depreciation
2. Carrying amount of buildings
3. Carrying amount of machinery and equipment
4. Carrying amount of automobiles and trucks
163
5. Carrying amount of property, plant and equipment
SOLUTION:
Disposa CA,
12/31/11 Addition l 12/31/12 12/31/12
Cost
2,800,00 a 4,675,00 (2
Buildings 0 1,875,000 ) - 0 3,761,974 )
Automobile and (4
trucks 210,000 25,000 48,000 187,000 68,472 )
Leasehold
improvements 432,000 - - 432,000 288,000
5,097,00 7,301,00 (5
0 2,269,000 65,000 0 5,615,521 )
Accumulated
depreciation
Land - -
c
Buildings 672,900 240,126 ) - 913,026
Machinery and d g
equipment 367,500 156,450 ) 14,025 ) 509,925
Automobile and e h
trucks 114,326 28,952 ) 24,750 ) 118,528
Leasehold
improvements 108,000 36,000 f) 144,000
1,262,72 1,685,47
6 461,528 38,775 9
(1)
164
x .06
d) [(P1,380,000 x .1) + (P369,000 x .1 x
6/12)]
e) [(P210,000 - P114,326 - P30,000) x .3 + (P30,000 x .3 x 9/12) + (P25,000 x .3 x 4/12)]
f) P432,000/ 12
g) P17,000 - P2,975
h) (P48,000 - P30,000) + (P30,000 x 0.3 x
9/12)
The following data relate on the Plant Assets account of Survive, Inc. at
December 31, 2014:
Plant Assets
P R T C
Original Cost P 175,000 P 255,000 P 400,000 P 400,000
Note: in the year an asset is purchased, Survive, Inc. does not record any
depreciation expense on the asset.
In the year an asset is retired or traded in, Survive, Inc. takes a full year
depreciation on the asst.
165
the double-declining balance for this asset, which can be referred to as “Asset
I.”
REQUIRED:
Based on the above and the result of your audit, compute for the following as of
and for the year ended December 31, 2015:
SOLUTION:
Requirement No. 1
Cost 400,000
Acc. depreciation, 12/31/11 [(P400,000 - P25,000) x
3/15] (75,000)
30,000
Requirement No. 2
Asset P (Sold) -
Asset R 255,000
166
Asset T 400,000
Asset C 400,000
Asset I 110,000
The draft balance sheet of Four Corporation as of December 31, 2015 reported
the net property, plany and equipment at P 6,270,000. Details of the amount
follow:
(a) The company policy for all depreciation is that it is charged to cost of sales
and a full year’s charge is made in the year of acquisition or completion and
none in the year of disposal.
(b) Included in the sales revenue is P 300,000 being the sales proceeds of an item
of plant that was sold on June 30,2015. The plant had originally cost P
900,000 and had been depreciated by P 630,000 as of December 31, 2014.
Other that recording the proceeds in sales and cash, no other accounting
entries for the disposal of the plant have been made. All plant is depreciated
at 25% per annum on the reducing balance basis.
(c) On September 30, 2015, the company completed the construction of a new
warehouse. The construction was achieved using the company’s own
resources as follows:
167
Included in the above figures are P 10,000 for materials and P 25,000 for
labor costs that were effectively lost due to the foundations being too close to
a neighboring property. All the above costs are included in cost of sales. The
building was brought into immediate use upon completion and has an
estimated useful life of 20 years (straight-line depreciation).
(d) At the beginning of the current year, the company had an open market basis
valuation of its properties (excluding the newly constructed warehouse).
Land was valued at P1.2 million and the property at 4.8 million. The
directors with these values to be incorporated into the financial statements.
The properties had an estimated remaining life of 20 years at the date of the
valuation (straight-line depreciation is used). The company makes a transfer
to retained earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2015 has not been accounted for the in the draft
financial statements.
REQUIRED:
Compute for the following as of and for the year ended December 31, 2015:
SOLUTION:
Requirement No. 1
Supervision 65,000
20,00
Design and planning costs 0
Total 1,035,000
168
Requirement No. 2
Carrying amount of plant, 12/31/11 (P5,200,000-
P3,130,000) 2,070,000
Requirement No. 3
Requirement No. 4
Land Building Total
You requested a depreciation schedule for Delivery Trucks of Woman Corporation showing the
additions, retirements, depreciation and other data affecting the income of the Company in the 4-
year period 2012 to 2015, inclusive. The Delivery Trucks account consists of the following as of
January 1, 2012:
169
Truck No. 1 purchased Jan. 1, 2009, cost P 180,000
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
P 940,000
July 1, 2012 – Truck No. 3 was traded for larger one (No.5), the agreed purchase price of which
was P340,000. Woman Mfg. Co. paid the automobile dealer P150,000 cash on the
transaction. The entry was debit to Delivery Trucks and credit to cash, P150,000.
Jan. 1, 2013 – Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Delivery
Trucks, P35,000.
July 1, 2014 – A new truck (No. 6) was acquired for P360,000 cash and was charged at that
amount to Delivery 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. Woman 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 Delivery Trucks P25,000.
Entries for depreciation had been made for the close of each year as follows: 2012, P203,000;
2013, P211,000; 2014, P244,500; 2015, P278,000
REQUIRED:
Based on the above and the result of your audit, determine the following:
170
1. The 2012 profit is overstated by
2. The 2013 profit is understated by
3. The 2014 profit is understated by
4. The 2015 profit is understated by
5. Adjusted carrying amount of Delivery Trucks as of December 31, 2015
SOLUTION:
2009:
Unrecorded loss on trade-in of Truck 3:
190,00
Trade-in value (P340,000 - P150,000) 0
210,00 20,00
Carrying amount,7/1/09 (P300,000 x 3.5/5) 0 0
2010:
Unrecorded loss on sale of Truck 1:
35,00
Sales proceeds 0
36,00 1,00
Carrying amount, 1/1/10 (P180,000 x 1/5) 0 0
171
0
48,00
Truck No. 4 (P240,000/5) 0
68,00
Truck No. 5 (P340,000/5) 0
160,00
Should be depreciation expense 0
211,00 (51,00 (50,00
Depreciation expense per books 0 0) 0) (2)
2011:
Unrecorded loss on disposal of Truck 4:
7,00
Sales proceeds 0
25,00
Insurance proceeds 0
32,00
Total 0
96,00 64,00
Carrying amount, 7/1/11 (P240,000 x 2/5) 0 0
7,00
Erroneous credit to Miscellaneous Income 0
Overstatement of depreciation expense:
22,00
Truck No. 2 (P220,000/5 x 6/12) 0
24,00
Truck No. 4 (P240,000/5 x 6/12) 0
68,00
Truck No. 5 (P340,000/5) 0
36,00
Truck No. 6 (P360,000/5 x 6/12) 0
150,00
Should be depreciation expense 0
244,50 (94,50 (23,50
Depreciation expense per books 0 0) 0) (3)
2012:
Overstatement of depreciation expense:
Truck No. 2 (fully depreciated as of
7/1/11) -
68,00
Truck No. 5 (P340,000/5) 0
Truck No. 6 (P360,000/5) 72,00
172
0
140,00
Should be depreciation expense 0
278,00 (138,00
Depreciation expense per books 0 0) (4)
Requirement No. 5
Acc. CA,
Cost Dep. 12/31/12
Truck No. 1 (sold, 1/1/09) - - -
220,00 220,00
Truck No. 2 (acquired, 7/1/06) 0 0 -
Truck No. 3 (traded-in, 7/1/10) - - -
Truck No. 4 (damaged and sold, 7/1/11) - - -
340,00 238,00 102,00
Truck No. 5 (acquired, 7/1/09) 0 0 0
360,00 108,00 252,00
Truck No. 6 (acquired, 7/1/11) 0 0 0
920,00 566,00 354,00
0 0 0
The machines are expected to generate benefits evenly over their useful lives. The class of plant
and equipment is measured using the revaluation model.
At 31 December 2014, information about the assets follows:
173
Fair value Expected useful life
Machine A P 84,000 4 years
Machine B 38,000 2 years
On1 July 2015, machine B was sold for P32,000 cash. On the same day, Afternoon Corporation
acquired machine C for P80,000 cash. Machine C has expected useful life of four years.
REQUIRED:
Based on the above and the result of your audit, determine the following:
1. The amount to be recognized in 2014 profit or loss related to the revaluation of the assets
2. The amount to be recognized in 2014 comprehensive income related to the revaluation of the
assets
3. The gain or loss on sale of Machine B
4. The total depreciation for the year 2015
5. The amount to be recognized in 2015 profit or loss related to the revaluation of the assets
SOLUTION:
Requirement No. 1
Machine
A Machine B
84,00 38,00
Fair value 0 0
174
100,00 60,00
Cost 0 0
(20,00 (20,00
Accumulated depreciation 0) 0)
80,00 40,00
0 0
4,00 (2,00
Increase (Decrease) 0 0)
Requirement No. 2
(2,00
Profit or loss 0)
4,00
Other comprehensive income (OCI) 0
2,00
Comprehensive income 0
Requirement No. 3
32,00
Sales proceeds 0
Less carrying amount, 7/1/12:
38,00
Carrying amount, 12/31/11 0
(9,50 28,50
Depreciation up to 7/1, (P38,000/2 x 6/12) 0) 0
3,50
Gain on sale of Machine B 0
Requirement No. 4
21,00
Machine A (P84,000/4) 0
9,50
Machine B (P38,000/2 x 6/12) 0
10,00
Machine C (P80,000/4 x 6/12) 0
175
40,50
Total depreciation - 2012 0
Requirement No. 5
Machine
A Machine C
61,00 68,50
Fair value 0 0
*Ship 340 was completed and ready for use in October 2014 and will be placed in service May
1, 2015.
Construction costs for 2015, and the dates the expenditures were made, were as follow:
176
344 September 1, 2015 810,000
345 November 1, 2015 360,000
Requirement No. 1
CA Interest
2,000,00 240,00
12%, 5 year note 0 0
8,000,00 800,00
10%, 10 year bonds 0 0
10,000,00 1,040,00
Total 0 0
Requirement No. 2
Fraction of
the year Capitalize
Date Amount CR outstanding d interest
Ship No. 341
177
1/1 1,150,00 10.4 59,80
0 % 6/12 0
4/1 1,200,00 10.4 31,20
0 % 3/12 0
91,00
0
Requirement No. 3
Fraction of
the year Capitalize
Date Amount CR outstanding d interest
Ship No. 342
1/1 1,200,00 10.4 93,60
0 % 9/12 0
5/1 1,600,00 10.4 69,33
0 % 5/12 3
162,93
3
Requirement No. 4
Fraction of
the year Capitalize
Date Amount CR outstanding d interest
Ship No. 343
1/1 750,00 13.0 97,50
0 % 12/12 0
7/1 1,250,00 13.0 81,25
0 % 6/12 0
7/1 950,00 10.4 49,40
0 % 6/12 0
228,15
0
Requirement No. 5
Ship No. 340 (completed 10/31/11)
-
Ship No. 341 (see no. 2) 91,00
0
178
Ship No. 342 (see no. 3) 162,93
3
Ship No. 343 (see no. 4) 228,15
0
Ship No. 344 (P810,000 x 10.4% x 4/12) 28,08
0
Ship No. 345 (P360,000 x 10.4% x 2/12) 6,24
0
Total 516,40
3
REQUIRED:
Based on the above and the result of your audit, compute for the following: (Round depletion
rate to two decimal places)
1. Depletion for 2014
2. Depletion for 2015 is
3. Depletion included in 2015 cost of sales
4. Carrying amount of the natural resources as of December 31, 2015
Answer:
Requirement No. 1
450,00
Cost of land 0
80,00
Estimated restoration cost 0
530,00
Total cost 0
179
30,00
Less residual value 0
500,00
Cost subject to depletion 0
400,00
Divide by total estimated reserves 0
1.2
2010 and 2011 depletion per ton 5
125,00
Depletion for 2011 (100,000 x P1.25) 0
Requirement No. 2
500,00
Original cost to be depleted 0
225,00
Less accumulated depletion, 1/1/12 (180,000 x P1.25) 0
275,00
Remaining DA, 1/1/12 0
100,00
2012 mine improvements 0
375,00
New cost to deplete 0
Divide by remaining estimated reserves
280,00
(400,000 - 180,000 + 60,000) 0
1.3
2012 depletion per ton 4
187,60
Depletion for 2012 (140,000 x P1.34) 0
Requirement No. 3
12,50
From 1/1/12 inventory (10,000 x 1.25) 0
160,80
From 2012 extraction (120,000 x 1.34) 0
173,30
Depletion included cost of sales for 2012 0
Requirement No. 4
630,00
Cost (P450T + P80T + P100T) 0
180
Less accumulated depletion, 12/31/12
225,00
Accumulated depletion, 1/1/12 0
187,60 412,60
Depletion for 2012 0 0
217,40
CA, 12/31/12 0
Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated
as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is
chargeable to production.
REQUIRED:
Based on the above and the result of your audit, answer the following: (Disregard tax
implications)
1. How much is the depletion for 2015?
2. Total inventoriable depreciation for 2015?
3. How much is the Inventory as of December 31,2015?
4. How much is the cost of sales for the year ended December 31, 2015?
5. How much is the maximum amount that may be declared as dividends at the end of the
company’s first year of operations?
Answer:
181
Requirement No. 1
16,640,0
Acquisition cost 00
1,280,0
Less residual value 00
15,360,0
Depletable cost 00
12,800,0
Divide by total estimated reserves 00
1.
Depletion rate 20
1,280,0
Tons mined in 2012 00
1,536,0
Depletion for 2012 00
Requirement No. 2
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x 102,40
80%] 0
512,00
Depreciation - Machinery [(P2,560,000-P512,000/4] 0
614,4
Total 00
Requirement No. 3
1,536,0
Depletion (see no. 1) 00
1,024,0
Direct labor 00
614,4
Depreciation (see no. 2) 00
204,8
Miscellaneous mining overhead 00
3,379,2
Total available for sale 00
1,280,0
Divide by tons mined 00
2.
Cost per ton 64
182
256,0
Tons remaining (1,280,000 - 1,024,000) 00
675,8
Inventory, 12/31/12 40
Requirement No. 4
2,703,3
Cost of sales (1,024,000 tons x P2.64) 60
Requirement No. 5
4,505,60
Sales (1,024,000 x P4.4) 0
(2,703,36
Cost of sales (see no. 4) 0)
1,802,24
Gross profit 0
(921,60
Operating expenses 0)
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x (25,60
20%] 0)
855,04
Net income 0
1,228,80
Realized depletion (1,024,000 tons x P1.2) 0
2,083,84
Maximum amount that may be declared as dividends 0
PROBLEM NO. 14 – Analysis of property, plant and equipment and investment property
of an SME
In 2015, your audit client Hawks Corporation, a small and medium-sized entity, incurred (and
paid) the following expenditures in acquiring property consisting of ten identical freehold
detached houses each with separate legal title including the land on which it is built:
183
Non-refundable transfer taxes (not included in the
1-Jan-15 20,000,000 P200,000,000 purchase price
The entity uses one of the ten units to accommodate its administration and maintenance staff.
The other nine units are rented to independent third parties under non-cancellable operating
leases.
At 31 December 2015, the entity made the following assessments about the units:
184
The fair value of the units can be determined reliably without undue cost or effort on an ongoing
basis and that the residual value of the owner-occupied unit is nil.
At 31 December 2015 the fair value of each unit was reliably estimated as P25,000,000.
REQUIRED:
Based on the above and the result of your audit, answer the following as of and for the year
ended December 31, 2015:
1. How much should be reported as property, plant and equipment?
2. How much should be recognized in profit or loss regarding the increase in fair value of
investment properties?
3. How much is the total expense to be recognized in profit or loss?
4. Assume that the fair value of the units cannot be determined reliably without undue cost
or effort on an ongoing basis, how much should be reported as line item for investment
properties in the entity’s statement of financial position?
5. Assume that the fair value of the units cannot be determined reliably without undue cost
or effort on an ongoing basis, how much is the total expense to be recognized in profit or
loss?
Answer:
Requirement No. 1
Purchase price 200,000,000
Non-refundable transfer taxes 20,000,000
Legal costs 1,000,000
Requirement No. 2
Fair value of investment properties (P25 million x 9) 225,000,000
Cost of investment properties (P221 million x 9/10) 198,900,000
Requirement No. 3
185
Property taxes for 2012 20,000
Advertising 500,000
Opening function 200,000
Day-to-day repairs and maintenance 120,000
Depreciation of owner-occupied property (see no. 1) 353,600
Requirement No. 4
The fair value of the units cannot be determined reliably without undue cost or effort on an
ongoing basis.
Therefore, the entity accounts for the units as property, plant and equipment using the
cost-depreciation-impairment model in Section 17. However, in accordance with paragraph
17.31, it discloses investment property as a separate class of property, plant and equipment.
Requirement No. 5
Property taxes for 2012 20,000
Advertising 500,000
Opening function 200,000
Day-to-day repairs and maintenance 120,000
Depreciation of properties (P221 million x .8 x 1/50) 3,536,000
186
1. Property, plant and equipment is typically judged to be one of the accounts least
susceptible to fraud because
a. The amounts recorded on the balance sheet for most companies are immaterial
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2. Which one of the following procedures would provide the best evidence about the
original cost of a piece of equipment?
a. Fixed asset schedule
b. Purchase invoice
c. Receiving report
d. Inquiry of the purchasing agent
3. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertions of values and
a. Presentation and disclosure.
b. Rights and obligations.
c. Completeness.
d. Existence or occurrence.
4. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
6. When few property and equipment transactions occur during the year the continuing
auditor usually obtains an understanding of internal control and performs
a. Test of controls
b. Analytical procedures to verify current year additions to property equipment
c. A thorough examination of the balances at the beginning of the year,
d. Extensive tests of current year property and equipment transactions.
187
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.
10. The auditor is least likely to learn of retirements of equipment through which of the
following?
a. Review of the purchase return and allowance account
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy.
11. Which of the following procedures would least likely lead the auditor to detect
unrecorded fixed asset disposals?
a. Examine insurance policies.
b. Review repairs and maintenance expense.
c. Review property tax files.
d. Scan invoices for fixed asset additions.
12. The auditor selects a sample of asset disposals and examines the sales documentation
evidencing disposal of the equipment and recomputes gain or loss on the disposal. This
audit steps primarily tests which of the following assertions for the equipment account?
a. Existence assertion
b. Rights assertion
c. Presentation assertion
d. Valuation assertion
13. Additions to equipment are sometimes understated. Which of the following accounts
would be reviewed by the auditor to gain reasonable assurance that additions are not
understated?
188
a. Accounts payable
b. Depreciation expense
c. Gain on disposal of equipment
d. Repair and maintenance expense
14. In violation of company policy, Coatsen Company erroneously capitalized the cost of
painting its warehouse. An auditor would most likely detect this when
a. Discussing capitalization polices with Coatsen’s controller.
b. Examining maintenance expense accounts.
c. Observing the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
15. The most significant audit step in substantiating additions to the equipment account
balance is
a. Comparison to prior year’s acquisitions.
b. Review of transactions near the end of the reporting period for proper period cutoff.
c. Calculation of ratio of depreciation expense to gross office equipment cost.
d. Examination of vendor’s invoices and receiving reports for current year’s
acquisitions.
ANSWERS:
1. B 5. D 9. A 13. D
2. B 6. D 10. A 14. D
3. A 7. A 11. B 15. D
4. D 8. C 12. D
The accountant of the newly organized Zerg Corporation provided to you the details the
company’s Intangible Assets account as follows:
Jan 2 Paid legal fees of P 150,000 and stock certificate costs of P83,000 to complete
organization of the corporation of the corporation.
189
15 Hired a clown to stand in front of the corporate office for 2 weeks and hand out
pamphlets and candy to create goodwill for the new enterprise. Clown cost,
P10,000; pamphlets and candy, P5,000.
May 1 Acquired both a license to use a special type of container and a distinctive
trademark to be printed on the container in exchange for 6, 000, no-par, ordinary
shares of Zerg selling for P50 per share. The license is worth twice as much as the
trademark, both of which may be used for 5 years.
Dec. 31 Paid salaries for an engineer and chemist involved in research and development
totaling P1,720,000 in 2015.
It is the company’s policy to take full year amortization in the year of acquisition.
REQUIRED:
2. Compute the carrying amount of the Intangible assets as of December 31, 2015.
3. Compute the total amount resulting from the foregoing transactions that should be
expensed when incurred.
SOLUTION:
Requirement No. 1
233,0
1/2 Organization expenses 00
233,0
Intangible assets 00
190
15,0
1/15 Advertising expense 00
15,0
Intangible assets 00
490,0
4/1 Patents 00
490,0
Intangible assets 00
200,0
5/1 Licences (P300,000 x 2/3) 00
100,0
Trademark 00
300,0
Intangible assets 00
1,310,0
7/1 Building 00
1,310,0
Intangible assets 00
158,0
Amortization expense 00
98,0
Patent (P490,000/5) 00
40,0
Licences (P200,000/5) 00
20,0
Trademark (P100,000/5) 00
Requirement No. 2
Cost
490,0
Patent 00
200,0
Licences 00
100,0 790,0
Trademark 00 00
Less amortization
191
98,0
Patent (P490,000/5) 00
40,0
Licences (P200,000/5) 00
20,0 158,0
Trademark (P100,000/5) 00 00
632,0
Carrying amount, 12/31/12 00
Requirement No. 3
233,0
Organization expenses (Jan. 2 transaction) 00
15,0
Advertising expense (Jan. 15 transaction) 00
1,750,0
R and D expense (Dec. 31 transaction) 00
1,998,0
Total 00
You gathered the following information related to the Patents account of the Templar Cookie
Corporation in connection with your audit of the company’s financial statements for the year
2015.
In 2014, Templar developed a new machine that reduces the time required to insert the fortunes
into its fortune cookies. Because the process is considered very valuable to the fortune cookie
industry, Templar patented the machine. The following expenses were incurred in developing
and patenting the machine:
Duting 2015, Templar paid P225,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.
192
It is the company’s policy to take full year amortization in the year of acquisition.
REQUIRED:
Based on the above and the result of your audit, determine the following:
1. Cost of machine
2. Amount that should charged to expense when incurred in connection with the development
of the patented machine.
SOLUTION:
Requirement No. 1
480,0
Metal used in the construction of the machine 00
Blueprints used to design the 192,0
machine 00
1,080,0
Wages paid to the employees (P1,800,000 x 60%) 00
1,752,0
Cost of machine 00
Requirement No. 2
1,500,0
Research and development laboratory expenses 00
720,0
Wages paid to the employees (P1,800,000 x 40%) 00
2,220,0
R & D expense 00
Requirement No. 3
720,0
Legal expenses to obtain patent 00
102,0
Expense of drawing required by the patent office 00
Fees paid to the government patent 150,0
office 00
972,0
Cost of patent 00
97,2
Less amortization up to 12/31/12 (P972,000 x 2/20) 00
193
874,8
Carrying amount of patent, 12/31/12 00
Notes: Cost of defending the patent should be
expensed
Since the useful life is not given, the patent was
amortized using
the legal life of 20
years.
The Terran Company acquired several small companies at the end of 2014 and, based on the
acquisitions, reported the following intangibles in its December 31, 2014 statement of financial
position:
Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000
The company’s accountant determines the patent has an expected life of 10 years and no
expected residual value, and that it will generate approximately equal benefits each year. The
company expects to use the copyright and tradename for the foreseeable future. The accountant
knows that the computer software is used in the company’s 120 sales offices. The company has
replaced the software in 60 offices in 2015, and expects to replace the software in 40 more
offices in 2016 and the remainder in 2017.
In December 31, 2015, there are no indications of impairment of patent and computer software.
The following information relate to the other intangible assets:
a.) Because of the rampant piracy, the copyright is expected to generate cash flows of just
P8,000 per year.
b.) The tradename is expected to generate cash flows of P15,000 per year.
c.) The goodwill is associated with Terran’s SCV Manufacturing reporting unit. The cash
flows expected to be generated by the SCV Manufacturing reporting unit is P200,000 per
year for the next 24 years. The reporting unit has a carrying amount of P2,100,000.
REQUIRED:
194
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for al litems is 5%)
SOLUTION:
Requirement No. 1
20,0
Patent (P200,000/10) 00
50,0
Computer software [P100,000 x (60/120)] 00
70,0
Total amortization 00
*The useful lives of copyright and tradename are indefinite, so no amortization expense is
recognized.
** Goodwill is not amortized.
Requirement No. 2
Impairment loss
Copyright:
400,0
Carrying amount 00
160,0 240,0
Recoverable amount (P8,000/0.05) 00 00
Tradename:
350,0
Carrying amount 00
300,0 50,0
Recoverable amount (P15,000/0.05) 00 00
Goodwill:
Carrying amount of Anne Manufacturing 3,000,0
unit 00
2,818,7 181,2
Recoverable amount (P200,000 x 14.0939) 80 20
471,2
Total impairment loss 20
195
Requirement No. 3
900,0
Original amount of Goodwill 00
181,2
Less impairment loss 20
718,7
Carrying amount of Goodwill, 12/31/12 80
Question No. 4 - A
180,0
Patent (P200,000 - P20,000) 00
160,0
Copyright (recoverable amount) 00
300,0
Tradename (recoverable amount) 00
50,0
Computer software (P100,000 - P50,000) 00
Carrying amount of other intangible assets, 690,0
12/31/12 00
On December 31, 2014, Probe Corporation acquired the following three intangible assets:
A trademark for P300,000. The trademark has 7 years remaining legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without
problem.
Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just
3 years.
On December 31, 2015, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:
a.) Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P10,000 per year. The useful life of trademark still extends beyond the
foreseeable horizon.
196
b.) The cash flows expected to be generated by the Nexus Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Nexus Manufacturing reporting unitare as follows:
c.) The cash flows expected to be generated by the customer list are P120,000 in 2016 and P
80,000 in 2017.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
SOLUTION:
Requirement No. 1
Trademark* -
Goodwill* -
73,3
Customer list (P220,000/3) 33
73,3
Total amortization 33
*The useful life is indefinite, so no amortization expense is
recognized.
Requirement No. 2
Impairment
loss
197
Trademark:
300,0
Carrying amount 00
166,6 133,3
Recoverable amount (P10,000/0.06) 67 33
Goodwill*:
Carrying amount of Manufacturing
unit
2,400,0
(P2,700,000 + P1,500,000 - P1,800,000) 00
Recoverable amount (P250,000 x 3,010,4
12.0416) 00 -
Customer list
Carrying amount (P220,000 - 146,6
P73,333) 67
Recoverable amount:
113,2
2013: (P120,000 x 0.9434) 08
71,2 184,4
2014: (P80,000 x 0.8900) 00 08 -
133,3
Total impairment loss 33
*Since goodwill does not generate cash flows independently from other assets
or group
of assets, the recoverable amount of goodwill as an individual asset cannot be
determined. Therefore, the recoverable amount is determined for the cash
generating unit to which goodwill
belongs.
Requirement No. 3
300,0
Cost 00
133,3
Less impairment loss 33
Carrying amount of Trademark, 166,6
12/31/12 67
Requirement No. 4
Since goodwill is not amortized and is not impaired as of
12/31/12,
198
the carrying amount is P1,500,000.
Requirement No. 5
220,0
Cost 00
73,3
Less amortization for 2012 33
Carrying amount of Customer List, 146,6
12/31/12 67
You noted the following items relative to the company’s Intangible assets in connection with
your audit of the Five Corporation’s financial statements for the year 2015.
Franchise
On January 1, 2015, Five signed an agreement to operate as franchisee of Clear Copy Service,
Inc. for an initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement
was signed and the balance was payable in four annual payments of P120,000 each, beginning
January 1, 2016. The agreement provides that the down payment is not refundable and no future
services are required of the franchisor. The implicit rate for loan of this type is 14%. The
agreement also provides the 5% of the revenue from the franchise for 2015 was P8,000,000. Five
estimates the useful life of the franchise to be ten years.
Patent
On July 1, 2015, Five purchased a patent from the inventor, who asked P1,100,000 for it. Five
paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its ordinary shares,
par P10 (market value, P20 per share); and a note payable due at the end of three years, face
amount, P500,000, noninterest-bearing. The current interest rate for this type of financing is 12
percent. Five estimates the useful life of the patent to be ten years.
Trademark
Five purchased for P1,200,000 a trademark for a very successful soft drink it markets under the
name POWER! The trademark was determined to have an indefinite life. A competitor recently
introduced a product that is in direct competition with the POWER! Product, thus suggesting the
need for an impairment test. Data gathered by the entity suggests that the useful life of the
trademark is still indefinite, but the cash flows expected to be generated by the trademark have
been reduced either to P40,000 per year (with a probability of 70%) or to P80,000 per year (with
30% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted
interest rate is 10%.
199
REQUIRED:
Based on the above and the result of your audit, determine the following: (Round off present
value factors to 4 decimal places)
SOLUTION:
Requirement No. 1
200,0
Down payment 00
Add PV of installment payments (P120,000 x 349,6
2.9137) 44
549,6
Cost of franchise 44
(54,9
2012 amortization (P549,644/10) 64)
494,6
Carrying amount of franchise, 12/31/12 80
Requirement No. 2
400,0
Cash paid 00
200,0
Fair value of shares issued (10,000 x P20) 00
355,9
PV of note payable (P500,000 x 0.7118) 00
955,9
Cost of patent 00
(47,7
2012 amortization (P955,900/10 x 6/12) 95)
908,1
Carrying amount of patent, 12/31/12 05
Requirement No. 3
Franchise related expenses
200
54,9
Amortization of franchise (see no. 1) 64
400,0
Periodic franchise fee (P8,000,000 x .05) 00
48,9 503,9
Interest expense (P349,644 x .14) 50 14
Recoverable amount:
560,0
Outcome 1 (P40,000/.05 x .7) 00
480,0
Outcome 2 (P80,000/.05 x .3) 00
1,040,0 160,0
00 00
733,0
Total expenses - 2012 63
On November 15, 2015, Rodeo Corporation acquired Rapids, a company that operates a scenic
railway along the coast of a popular tourist area. The summarized statement of financial position
at fair values of Rapids on July 1, 2015, reflecting the terms of acquisition was.
Goodwill P 200,000
Operating license 1,200,000
Property-train stations and land 300,000
Rail track and coaches 300,000
Steam engines (2) 1,000,000
Purchase consideration P3,000,000
The operating license is for ten years. It has recently been renewed by the transport authority and
is stated at the cost of its renewal. The carrying amounts of the property and rail track and
coaches are based on their estimated replacement cost. The engines are valued at their net selling
price.
201
On December 1,2015, the boiler of one of the steam engines exploded, completely destroying the
whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its age,
a replacement could not be obtained. Because of the reduced passenger capacity, the estimated
value in use of the business after the accident was assessed at P2million.
Passenger numbers after the accident were below the expectations even after allowing for the
reduced capacity. A market research report concluded that the tourists were not using the railway
because of the fear of a similar accident occurring to the remaining engine. In the light of this,
the value in use of the business was re-assessed on December 31,2015 at P1.8 million. On this
date Rodeo received an offer of P900,000 in respect of the transferable operating license.
REQUIRED:
Based on the above and the result of your audit, compute the carrying amount of the following as
of December 31,2015 after recognizing the impairment loss, if any:
1. Goodwill
2. Operating license
5. Steam engines
SOLUTION:
CA after
Impairme impairmen
Impairme CA after nt t
Carryin nt impairmen reallocatio reallocatio
Assets g amount allocated t n n
1 200,0 (200,0
Goodwill 00 00) - - -
202
4
00 3) 67 67) 00
Alternative solution:
Impairme CA after
Carryin nt impairmen
Assets g amount allocated t
1 200,0 (200,0
Goodwill 00 00) -
203
5 1,000,0 (500,0 500,0
Steam engines (2) 00 00) 00
3,000,0 (1,200,0 1,800,0
00 00) 00
One of the cash-generating units of Tweak Corporation is the associated with the manufacture of
wine barrels. At 31 December 2014, Tweak Corporation believed, based on an analysis of
economic indicators, that the assets of the unit were impaired. The carrying amounts of the assets
of the unit at 31 December 2014 were:
Tweak Corporation determined the value in use of the unit to be P535,000. The receivables were
considered to be collectible, except those considered doubtful.
During 2015, Tweak Corporation increased the depreciation charge on buildings to P65,000 per
annum, and to P50,000 per annum for factory machinery. The inventory on hand at 31,
December 2014 was sold by the end of 2015. At 31 December,2015, Tweak Corporation, due to
return in the market to the use of traditional barrels for wines and an increase in wine production,
204
assessed the recoverable amount of the cash-generating unit to be P20,000 greater than the
carrying amount of the unit.
REQUIRED:
1. Carrying amount of the assets at 31 December 2014 after allocating impairment loss.
2. Carrying amount of the assets at 31 December 2015 after the reversal of impairment loss.
SOLUTION:
500,00
Requirement No. 1 0
I.L.
Allocation
CA * CA after
(9,60 230,4
Buildings 240,000 0) 00
(7,20 172,8
Factory machinery 180,000 0) 00
(15,00
Goodwill 15,000 0) -
(3,20 76,8
Inventory 80,000 0) 00
35,0
Receivables 35,000 00
20,0
Cash 20,000 00
(35,00 535,0
570,000 0) 00
* Charge the impairment loss first to goodwill. The balance (P20,000) will be
allocated pro rata to the other assets in the unit except cash and receivables.
Requirement No. 2
205
- Allowed subject to
Machinery limit.
Allocation
CA * CA after
11,47 176,8
Buildings 165,400 8 78
8,52 131,3
Machinery 122,800 2 22
20,00 308,2
288,200 0 00
206
Protoss Corporation acquired a patent right on July 1, 2012 for P250,000. The remaining legal
life on the date of purchase is 15 years. However, due to rapidly changing technology,
management estimates that the remaining useful life on July 1, 2012 is only 5 years.
At January 1, 2013, management is uncertain that the process can actually be made economically
feasible, and decides to write down the patent to an estimated recoverable amount of P75,000.
Amortization will be taken over 3 years from that point.
On January 1, 2015, having perfected the related production process, the entity adopts the
revaluation model to measure the patent. The patent now has a fair value of P300,000.
Furthermore, the estimated remaining useful life is now believed to be 5 years.
REQUIRED:
:
Based on the above and the result of your audit, determine the following:
SOLUTION:
Requirement No. 1
225,0
Carrying amount, 1/1/10 (P250,000 x 4.5/5) 00
75,0
Recoverable amount 00
150,0
Impairment loss 00
Requirement No. 2
300,0
Fair value, 1/1/12 00
25,0
Carrying amount, 1/1/12 (P75,000 x 1/3) 00
207
275,0
Revaluation increase 00
CA without impairment, 1/1/12 (P250,000 125,0
x 2.5/5) 00
25,0
Carrying amount, 1/1/12 (P75,000 x 1/3) 00
Gain on impairment 100,0
recovery 00
Requirement No. 3
275,0
Revaluation increase 00
Gain on impairment (100,0
recovery 00)
175,0
Revaluation surplus, 1/1/12 00
Realized - 2012 (35,0
(P175,000/5) 00)
Revaluation surplus, 140,0
12/31/12 00
Requirement No. 4
300,0
Carrying amount (Fair value), 1/1/12 00
(60,0
Amortization - 2012 (P300,000/5) 00)
240,0
Carrying amount, 12/31/12 00
Among the account balances of Naga Corporation at December 31, 2014 are the following:
c.) On January 2, 2015, Naga purchase a trademark from Cool Corporation for P2,500,000.
Naga considers the life of the trademark to be indefinite.
d.) On May 1, 2015, Naga sold the patent to Simple Company in exchange for a P5,000,000
non-interest bearing note due on May 1, 2018. There was no established exchange price
for the patent, and the note had no ready market. The prevailing rate of interest for a note
this type at May 1, 2015 was 14%. The present value of 1 for three period at 14% is
0.675. The collection of the note receivable from Simple is reasonably assured.
e.) On July 1, 2015, Naga paid P18,800,000 for 750,000 ordinary shares of Pure
Corporation, which represented 25% investment in Pure. The fair value of all of Pure’s
identifiable assets net of liabilities equals their carrying amount of P64,000,000. The
market price of Pure’s ordinary share on December 31, 2015 was P26.00 per share.
QUESTIONS:
Based on the above and the result of your audit, compute for the following:
209
4. Carrying amount of the note receivable from sale of patent as of December 31, 2015
5. The carrying amount of the investment in Pure Corporation as of December 31, 2015
SOLUTION:
Requirement No. 1
3,375,0
Present of note received (P5,000,000 x 0.675) 00
Less carrying amount of patent, 5/1/12:
2,450,0
Carrying amount, 1/1/11 00
(70,0 2,380,0
Amortization up to 5/1/12 (P3,150,000/15x4/12) 00) 00
995,0
Gain on sale of patent 00
Requirement No. 2
315,0
Note receivable from sale of patent (P3,375,000 x 14% x 8/12) 00
Installment contract:
1/1 to 3/31 (P7,200,000 x 13% x 234,0
3/12) 00
4/1 to 12/31 (P5,400,000 x 13% x 526,5 760,5
9/12) 00 00
1,075,5
Total interest income - 2012 00
Requirement No. 3
7,200,0
Installment contract receivable, 12/31/11 00
1,800,0
Less principal payment received, 3/31/12 00
5,400,0
Balance, 12/31/12 00
1,800,0
Less principal payment to be received, 3/31/13 00
3,600,0
Noncurrent portion 00
Requirement No. 4
3,375,0
CA - NR from sale of patent, 5/1/12 00
210
Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 315,0
14% x 8/12) 00
3,690,0
CA - NR from sale of patent, 12/31/12 00
Requirement No. 5
18,800,0
Acquisition cost 00
(1,500,0
Dividends received (750,000 x 2) 00)
1,760,0
Share of profit (P7,040,000 x 25%) 00
19,060,0
CA - Investment in Pure Corp., 12/31/12 00
GDI., Inc, had the following noncurrent asset account balances at December 31, 2014
Patent P1,920,000
Accumulated amortization (240,0000)
Deferred tax asset 360,000
Transactions during 2015 and other information relating to the noncurrent assets of GDL, Inc
were as follows:
a. The patent was purchased from Grey Company for P1,920,000 on January 1, 2013, at
which date the remaining life was sixteen years. On January 1, 2015, GDL determined
that the useful life of the patent was only eight years from the date of acquisition.
211
December 31, 2015, (1) rent collected in advance decreased by P200,000, and (2)product
warranty liability increased by P150,000. GDL’s income tax rate for 2015 was 35%
REQUIRED:
Based on the above and the result of your audit, determine the following:
1. The total amortization of the intangible assets for the year 2015
SOLUTION:
Requirement No. 1
280,0
Patent amortization (P1,680,000/6) 00
Trademark -
Noncompetition agreement 400,0
(P2,000,000/5) 00
680,0
Total amortization 00
Requirement No. 2
1,400,0
Patent (P1,680,000 - P280,000) 00
6,000,0
Trademark (P8,000,000 x 3/4) 00
1,600,0
Noncompetition agreement (P2,000,000 - P400,000) 00
9,000,0
Carrying amount of intangible assets, 12/31/12 00
Requirement No. 3
Deferred tax asset, 360,0
12/31/11 00
Decrease in deferred tax asset:
Decrease in unearned rent (P200,000 x (70,0
35%) 00)
212
Increase in warranty liability 52,5 (17,5
(P150,000 x 35%) 00 00)
Deferred tax asset, 342,5
12/31/12 00
1. In evaluating control risk and effectiveness for intangible assets, controls should be
designed for numerous purposes. Which of the following is not a usual control for
intangible assets?
a. Ensure that decision are appropriately made as to when to capitalize or expense
research and development expenditures.
b. Develop amortization schedules that reflect the remaining useful life of patents or
copyrights associated with the assets.
c. Identify and account for intangible asset impairment.
d. All of the above are usual controls for intangible assets.
2. The most effective means for the auditor to determine whether a recorded intangible asset
possesses the characteristics of an asset is to
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent applications.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze research and development expenditures to determine that only those
expenditures possessing future economic benefit have been capitalized.
4. When an internally generated asset meets the recognition criteria the appropriate
treatment for costs previously expensed is:
a. Reinstatement
b. No adjustment as these amounts may not be reinstated.
c. Include in the cost of the development of the asset.
213
d. Capitalize into the cost of the asset and adjust the opening balance of retained
earnings.
6. Assuming TLL Co. has capitalized all research and development costs associated with
patent. You, CPA, who is examining this account, will probably
a. Confer with management regarding transfer of the amount from the balance sheet
to the income statement.
b. Confirm that the patent is registered and on file with the intellectual property
office.
c. Confer with the management regarding a change in the tite of the account to
“goodwill”
d. Confer with management regarding ownership of the patent.
7. There is goodwill involved in the acquisition of a business if the purchase price paid is in
excess of the normal or usual return for the industry as a whole but such goodwill is not
recorder if it has not been purchased or paid for.
a. False; True.
b. True; False.
c. False; False.
d. True; True.
8. Which of the following comparisons would be the most appropriate audit test for the
amount of recorded goodwill?
a. The purchase price and the book value of assets purchased
b. The purchase price and the fair value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 5% of net assets for the past five years.
ANSWERS:
1. D 5. A
2. C 6. A
3. A 7. D
214
4. B 8. B
215
Arising from 5 year-bank loans, on which marketable
securities valued at P600,000 have been pledged as security,
500,000
P400,000 due on June 30, 2016; P100,000 due on Dec. 31, 2016
Arising from advances by officers, due June 30,2016 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Container’s deposit 50,000
Accounts payable arising from purchase of goods, 170,000
net of debit balances of P30,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Share dividends payable
100,000
Dividends in arrears on preference shares 800,000
Convertible bonds, due January 31, 2107 1,000,000
First mortgage serial bonds, payable in semi-annual installments of P50,000,
due April 1 and October 1 of each year
2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB
390,000
Estimated liability for damages
160,000
Estimated liability on meeting guarantee for service requirements
on merchandise sold 120,000
On March 1, 2016, the P400,000 note payable was replaced by an 18-month note for the same
amount. The entity is considering similar action on the P100,000 note payable due on December
31, 2016. The 2015 financial statements were authorized for issue on March 31, 2016.
216
On December 1, 2105, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. The entity’s attorney believe that the suit is without merit. No court date has been set.
REQUIRED:
Determine the following as of December 31, 2015.
1. Total current liabilities
2. Total noncurrent liabilities
SOLUTION:
Requirement No. 1
304,0 Trade and other
NP - Arising from purchase of goods
00 payables
NP - Arising from 5 year-bank loans, P400,000
500,0
due on June 30, 2013; P100,000 due on Dec. Borrowings
00
31, 2013
NP - Arising from advances by officers, due 50,0 Trade and other
June 30, 2013 00 payables
20,0 Trade and other
Employees’ income tax withheld
00 payables
Trade and other
Advances received from customers on purchase 64,0
payables or Separate
orders 00
item
50,0 Trade and other
Containers’ deposit
00 payables
Accounts payable arising from purchase of 200,0 Trade and other
goods - gross (P170,000+P30,000) 00 payables
40,0 Trade and other
AR with credit balance
00 payables
80,0 Trade and other
Cash dividends payable
00 payables
First mortgage serial bonds - current portion (P50,000 100,0 Borrowings -
x 2) 00 separate item
90,0
Overdraft with Allied Bank Borrowings
00
160,0
Estimated liability for damages Provisions
00
Estimated liability on meeting guarantee for 120,0
Provisions
service requirements on merchandise sold 00
75,0
Estimated liability for premiums Provisions
00
Trade and other
87,0
Deferred revenue payables or Separate
00
item
Accrued interest on bonds payable 360,0 Trade and other
217
00 payables
2,300,0
Current liabilities
00
Requirement No. 2
1,000,0
Convertible bonds, due January 31, 2014 Separate item
00
First mortgage serial bonds - noncurrent portion 1,900,0
Separate item
(P2M - P.1M) 00
2,900,0
Noncurrent liabilities
00
218
Bonds payable 2,000,000
The following additional information pertains to these liabilities.
a. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A P300,000, 8% note issued March 1, 2013, payable on demand. Interest is payable
every six months.
(2) A 1-year, P500,000, 11 ½ % note issued January 2, 2105. On December 30, 2015,
Okey negotiated a written agreement with Allied Bank to replace the note with a 2-
year, P500,000, 10% note to be issued January 2, 2016. The interest was paid on
December 31, 2015.
b. The 10% mortgage note was issued October 1, 2012, with a term of 10 years. Terms of
the note give the holder the right to demand immediate payment if the company fails to
make a monthly interest payment within 10 days of the date the payment is due. As of
December 31, 2015, Okey is three months behind in paying its required interest payment.
c. The 12% mortgage note was issued May 1, 2009, with a term of 20 years. The current
principal amount due is P1,500,000. Principal and interest payable annually on April 30.
A payment of P220,000 is due April 30, 2016. The payment includes interest of
P180,000.
d. The bonds payable is 10-year, 8% bonds, issued June 30, 2006. Interest is payable semi-
annually every June 30 and December 31.
REQUIRED:
Determine the following as of December 31, 2015.
1. Total current liabilities
2. Total noncurrent liabilities
SOLUTION:
Requirement No. 1
650,0 Trade and other
Accounts payable
00 payables
190,0 Trade and other
Notes payable – trade
00 payables
300,0
Notes payable – bank (payable on demand) Borrowings
00
15,0 Trade and other
Wages and salaries payable
00 payables
143,0 Trade and other
Interest payable
00 payables
Mortgage notes payable – 10% (with breach of 600,0
Borrowings
covenant) 00
Mortgage notes payable – 12% (current 40,0 Borrowings -
portion) 00 separate item
219
2,000,0
Bonds payable (due, 6/30/13) Borrowings
00
3,938,0
Current liabilities
00
Requirement No. 2
500,0
Notes payable – bank (refinanced) Separate item
00
Mortgage notes payable – 12% (noncurrent 1,460,0
Separate item
portion) 00
1,960,0
Noncurrent liabilities
00
Notes Payable
Dallas has signed several notes with financial institutions. The maturities of these notes are given
below. The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2015.
Due date Amount
April 31, 2105 P 700,000
July 31, 2105 900,000
February 1, 2016 800,000
April 30, 2016 1,200,000
June 30, 2106 1,500,00
P 1,500,000
Estimated warranties
Dallas has a one-year product warranty on some selected items. The estimated warranty liability
on sales made during the 2013-2104 fiscal year and still outstanding as of March 31, 2014,
amounted to P252,000. The warranty costs on sales made from April 1, 2104, to March 31, 2015,
are estimated at P630,000. The actual warranty costs incurred during 2014-2015 fiscal year are
as follows:
Warranty claims honored on 2013-2014 sales P 252,000
Warranty claims honored on 2014-2105 sales 285,000
Total P 537,000
Trade payables
220
Accounts payable for supplies, goods, and services purchases on open account amount to P
560,000 as of March 31, 2015.
Dividends
On March 10, 2015, Dallas’ board of directors declared a cash dividend of P0.30 per ordinary
share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2015
to ordinary shareholders on record at the close of business on March 31, 2015. As of March 31,
2015. As of March 31, 2015, Dallas has 5 million, P2 par value, ordinary shares issued and
outstanding.
Bonds Payable
Dallas issued P5,000,000, 12% bonds, on October 1, 2009 at 96. The bonds will mature on
October 1, 2019. Interest is paid semi-annually on October 1, 2019. Interest is paid semi-
annually on October 1 and April 1. Dallas uses the straight line method to amortize bond
discount.
REQUIRED:
Determine the following as of March 31, 2015.
1. Total current liabilities
2. Total noncurrent liabilities
SOLUTION:
Requirement No. 1
Notes payable - current (maturing up to
3/31/13) 2,400,000
Requirement No. 2
Bonds payable:
221
Unamortized bond discount (P200,000 x
4.5/10) (90,000) 4,910,000
Nuggets’ Music Emporium carries a wide variety of music promotion techniques – warranties
and premiums – to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement of
parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for
an AM/FM radio.
Nuggets pays P34 for each radio and estimates that 60% of the coupons given to customers will
be redeemed.
Nuggets’ total sales for 2015 were P7,200,000 – P5,400,000 from musical instrument and sound
reproduction equipment and P1,800,000 from recorded and sheet music. Replacement parts and
labor for warranty work totaled P164,000 during 2015. A total of 6,500 AM/FM radio used in
the premium program were purchased during the year and there were 1,200,000 coupons
redeemed in 2015.
The accrual method is used by Nuggets to account for the warranty and premium costs for
financial reporting purposes. The balance in the accounts related to warranties and premiums on
January 1, 2015, were as shown below:
Inventory of Premium AM/FM radio P 39,950
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000
REQUIRED:
Based on the above and the result of your audit, determine the amounts that will be shown on the
2015 financial statements for the following:
1. Warranty expense
2. Estimated liability from warranties
3. Premium expense
222
4. Inventory of AM/FM radio
5. Estimated liability for premiums
SOLUTION:
Requirement No. 1
Requirement No. 2
Estimated liability from warranties,
1/1/12 136,000
Total 244,000
Requirement No. 3
Premium expense [(1,800,000 x .6)/200 x
P14] 75,600
Requirement No. 4
Requirement No. 5
Estimated premium claims outstanding,
1/1/12 44,800
Total 120,400
Less premiums issued (1,200,000/200 x
P14) 84,000
Estimated premium claims outstanding,
223
12/31/12 36,400
The provision for warranties at 31 December 2014 was calculated using the following
assumptions: There was no balance carried forward from the prior year.
224
1. In relation to the warranty provision of P675,000 at 31 December 2014, P300,000 was
paid out of provision. Of the amount paid, P225,000 was for products with minor defects
and P75,000 was for products with major defects, all of which related to amounts that had
been expected to be paid in 2015.
2. In calculating its warranty provision for 31 December 2015, Magic made the following
adjustments to the assumptions used for the prior year:
3. Magic determined that part of its plant and equipment needed an overhaul – the conveyer
belt on one of its machines would need to be replaced in about December 2016 at an
estimated cost of P500, 000. The carrying amount of the conveyer belt at 31 December
2104 was P280,000. Its original cost was P400,000.
4. Magic was unsuccessful in its defense of the peanut allergy case and was ordered to pay
P2,000,000 to the plaintiffs. As at 31 December 2015 Magic had paid P1,500,000.
5. Magic commenced litigation against one of its advisers for negligent advise given on the
original installation of the conveyers belt referred to in (4) above. In October 2015 the
court found in favor of Magic. The hearing for damages had not been scheduled as at the
date of financial statements for 2015 were authorized for issue. Magic estimated that it
would receive but P500,000.
6. Magic signed an agreement with Choko Bank to the effect that Magic would generate a
loan made by Choko Bank to Magic’s subsidiary, UN Ltd. UN‘s Ltd. loan with Choko
Bank was P300,000,000 as at 31 December. UN Ltd. was in strong financial position at
31 December 2015.
REQUIRED:
225
Determine the following as of and for the year ended December 31, 2015.
1. Net amount to be recognized in profit or loss
2. Total current provisions
3. Total noncurrent provisions
SOLUTION:
Requirement No. 1
No defects - 85% -
Requirement No. 2
226
30,000
495,000
Requirement No. 3
Notes:
1. The expected overhaul is not a provision, as the entity has no present
obligation to conduct the overhaul. Rather, it is evidence that the
conveyer belt’s useful life has been shortened.
2 . The unpaid amount of P700,000 owing as a result of the peanut
allergy case
should be included as part of trade and other payables as there is no
uncertainty
regarding timing or amount of settlement and hence it is not a
provision.
3. The entity's guarantee of the loan made by Choko Bank to UN Ltd
would be disclosed as a contingent liability rather than recorded as a
provision
because UN Ltd was in a strong financial position at 31 December
2011
and therefore whilst the entity has a present obligation under the
guarantee,
it is not probable that an outflow of economic benefits will be
required to settle
the obligation.
Treasury Bonds
1/1/2015 CD P
216,000
227
Bond Premium
1/1/2011 CR P 80,000
Interest Expense
1/1/2015 CD P 96,000
7/1/105 CD P 96,000
The bonds were redeemed for permanent cancellation on October 1, 2015 at 105 plus accrued
interest.
REQUIRED:
1. Compute for the adjusted balances of the following
(Use straight-line amortization method)
a. Adjusted balance of bonds payable as of December 31, 2015
b. Unamortized bond premium on December 31, 2015
c. The total bond interest expense for the year 2105
d. The gain or loss on bond redemption
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
Total 186,000
Less premium amortization
228
Bonds retired (P80,000/25 x 2/16 x
9/12) 300
Requirement No. 2
229
96,000
On July 1, 2014, thunder issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at
par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing
market interest rate for similar debt without the conversion option is 12%. On July 1, 2015, an
investor in Thunder’s convertible bonds tendered 1,500 bonds for conversion into 15,000
ordinary shares of Thunder, which had a fair value of P105 and a par value of P1 at the date of
conversion.
REQUIRED:
Based on the above and the result of your audit, determine the following:
(Round off present value factors to four decimal places)
1. Issue price of the 2,000 5 year bonds
2. Carrying amount of the 2,000 5 year bonds at December 31, 2014
3. Gain on early retirement of bonds on December 31, 2015
4. Equity component of the 6-year bonds
5. Increase share premium as a result of the conversion of the 1,500 6-year
SOLUTION:
Requirement No. 1
1,299,80
PV of principal (P2,000,000 x 0.6499) 0
230
2,155,53
Issue price 4
Requirement No. 2
2,155,53
Carrying amount, 1/1/11 (see no. 1) 4
Less premium amortization for 2011:
Nominal interest (P2,000,000 x .
11) 220,000
Effective interest (P2,155,534 x .
09) 193,998 26,002
Alternative computation:
1,416,80
PV of principal (P2,000,000 x 0.7084) 0
Requirement No. 3
2,129,53
Carrying amount, 12/31/11 (see no. 1) 2
Less premium amortization for 2012:
Nominal interest (P2,000,000 x .
11) 220,000
Effective interest (P2,129,532 x .
09) 191,658 28,342 2,101,190
Alternative computation:
1,544,40
PV of principal (P2,000,000 x 0.7722) 0
231
PV of interest [(P2,000,000 x .11) x 2.5313] 556,886
1,980,00
Retirement price 0
Requirement No. 4
Requirement No. 5
1,389,60
Carrying amount, 7/1/12 8
1,374,60
Net increase in share premium 8
232
On January 1, 2015, the convertible bond has a fair value of P 4,400,000. Calauag makes a
tender offer to the holders to repurchase the bonds for P4,400,000. The holders of the P2,000,000
bonds accepted the offer. At the date of repurchase, Calauag could have issued non-convertible
debt with a five-year term being a coupon interest rate of 8 per cent.
On December 31, 2015, to induce the holders of the remaining bonds to convert the bonds
promptly, Calauag reduces the conversion price to P20 if the bonds are converted before March
1, 2016 (ie within 2 months). The market price of Calauag’s ordinary shares on the date the
terms are amended is P32 per share.
REQUIRED:
Based on the above and the result of your audit, determine the following:
(Round off present value factors to four decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the equity component
2. Carrying amountof the bonds at December 31, 2014
3. Amount to be recognized in profit or loss as a result of the repurchase of the bonds on
January 1, 2015
4. Decrease in equity as a result of the repurchase of the bonds on January 1, 2015
5. Amount to be recognized in profit or loss as a result of the amendment of the terms on
December 31, 2015 is
SOLUTION:
Requirement No. 1
3,760,880
Requirement No. 2
233
Requirement No. 3
Requirement No. 4
Requirement No. 5
Ordinary shares to issued - amended terms
(P2,000,000/P20) 100,000
Ordinary shares to issued - original terms
(P2,000,000/P25) 80,000
Incremental ordinary shares to be
issued 20,000
Ebony Ltd is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered
into an agreement on July 1, 2014 to sell its processing plant to Ivory Ltd P467,100. At the date
of sale, the plant had a carrying amount of P400,000 and a future useful life of five years. Ivory
Ltd immediately leased the processing plant back to Ebony Ltd. The terms of the lease
agreement were:
234
• Annual rental payment, in arrears (commencing 30/6/15): P165,000
• Residual value of plant at end of lease term: P90,000
• Residual value guaranteed by Ebony Ltd: P60,000
• Interest rate implicit in the lease: ?
The lease is cancellable, but only with the permission of the lessor. At the end of the lease term,
the plant is to be returned to Ivory Ltd. In setting up the lease agreement, Ivory Ltd incurred
P9,414 in legal fees and stamp duty costs. The annual rental payment includes P15,000 to
reimburse the lessor for maintenance costs incurred on behalf of the lessee.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Round off present
value factors to four decimal places)
SOLUTION:
Requirement No. 1
Computation of net investment in the lease:
476,514
235
PV of GRV 60,000 0.8396 50,376
PV of MLP 451,326
476,514
The interest rate implicit in the lease is the discount rate that, at the inception of
the lease,
causes the aggregate present value of (a) the minimum lease payments and (b) the
URV to be
equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of
the lessor.
7/1/11 476,514
Requirement No. 4
Interest expense (see amortization schedule below)
236
27,080
Requirement No. 5
Amortization schedule (Lessee)
Interest
Date Payment (10%) Principal C.A.
7/1/11 451,326
237
Jackie Corporation has entered into an agreement to lease a machine to a Lessee Corporation.
The lease agreement details are as follows:
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on
cancellation. Lessee Corporation does not intend to buy the machine at the end of the lease term,
Jackie Corporation incurred P1,000 to negotiate and execute the lease agreement. Jackie
Corporation purchased the machine for P34,797 just before the inception of the lease.
REQUIRED:
Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places)
SOLUTION:
Requirement No. 1
238
Computation of net investment in the lease:
35,797
PV of MLP 33,457
35,797
The interest rate implicit in the lease is the discount rate that, at the inception of the
lease,
causes the aggregate present value of (a) the minimum lease payments and (b) the URV
to be
equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of the
lessor.
Requirement No. 2
Profit under operating lease (As recorded)
239
IDC amortization (P1,000/5) (200)
3,700
Profit under finance lease (Should be)
Requirement No. 3
Computation of present value of MLP:
PV of MLP 33,457
The PV of the MLP is 96% (P33,457/P35,797) of the fair value of the leased asset.
1/1/12 33,457
240
8,000 1,539 6,461 10,642
Requirement No. 4
Cost 33,457
/ Lease term 5
Requirement No. 5
Expenses under operating lease (As recorded)
241
Roy Ltd has determined its accounting profit before tax for the year ended June 30, 2015 to be
P256,700. Included in this profit are the items of income and expense shown below.
Assets
Cash P2,500
Inventory 31,600
Land 75,000
Buildings 170,000
Plant 150,000
242
333,600
Liabilities
Loan 140,000
202,270
Additional Information
b. The tax depreciation rate for plant (which cost P150,000 three years ago) is 20%.
Depreciation on buildings is not deductible for taxation purposes.
c. The building sold during the year had cost P100,000 when acquired six years ago. The
company depreciates buildings at 5% p.a., straight-line.
d. During the year, the following cash amounts were paid:
Annual leave P52,000
Insurance 3,700
e. Bad debts of P3,500 were written off against the allowance for doubtful debts during the
year.
f. The P15,000 spent (and expensed) on development during the year is not deductible for
tax purposes until June 30, 2016.
g. Roy Lt has tax losses amounting to P12,500 carried forward from prior years.
h. The company tax rate is 30%.
REQUIRED:
243
Compute for the following as of and for the fiscal period ended June 30, 2015:
SOLUTION:
Requirement No. 1
Accounting profit 256,700
Reversal of accounting items:
Royalty revenue (exempt from taxation) (8,000)
Gain on sale of building (P75,000 - P70,000)* (5,000)
Entertainment expense (non-deductible) 1,700
Depreciation expense - buildings 7,600
Depreciation expense - plant 22,500
Doubtful debts expense 4,100
Annual leave
expense 46,000
Insurance expense 4,200
Development expense 15,000
344,800
Add (deduct) tax amounts:
Depreciation expense - plant (P150,000 x .2) (30,000)
Bad debts written off (item e) (3,500)
Annual leave paid (item d) (52,000)
Insurance paid (item d) (3,700)
Tax losses from prior years (item g) (12,500)
244
Taxable profit 243,100
Tax rate 30%
Requirement No. 2
Current tax expense (see no. 1) 72,930
Less quarterly income tax installments paid 53,500
Requirement No. 3
Total taxable temporary differences (see analysis
below) 27,000
Tax rate 30%
Requirement No. 4
Total deductible temporary differences (see analysis
below) 29,100
Tax rate 30%
245
*
Development
expenditure - 15,000 15,000 Deductible
Annual leave 10,000 - 10,000 Deductible
* P150,000 x 2/5
Requirement No. 5
Beginnin Effect on tax
Ending g Inc(Dec) expense
Deferred tax liability 8,100 27,270 (19,170) Credit
Deferred tax asset 8,730 9,600 (870) Debit
Journal entry:
Deferred tax liability 19,170
Deferred tax asset 870
Income tax expense 18,300
The accounting profit before tax for the year ended December 31, 2015 for Belen Ltd amounted
to P18,500 and included:
246
Entertainment expense (non-deductible) 1,500
The draft statement of financial position at December 31, 2015 contained the following assets
and liabilities:
2015 2016
Assets
P135,200
Liabilities
247
Current tax liability ? 7,600
37,845
Additional information
• The company can claim a deduction of P15,000 (15%) for depreciation on equipment, but
the motor vehicle is fully depreciated for tax purposes.
• The equipment sold during the year had been purchased for P30,000 two years before the
date of sale.
• The company tax rate is 30%.
REQUIRED:
Compute for the following as of and for the year ended December 31, 2015:
SOLUTION:
Requirement No. 1
Accounting profit 18,500
Reversal of accounting items:
Depreciation - motor vehicle 4,500
Depreciation - equipment 20,000
Rent revenue (16,000)
Royalty revenue (exempt from taxation) (5,000)
Doubtful debts expense 2,300
Entertainment expense (non-deductible) 1,500
248
Gain on sale of equip. (P19,000 - P18,000) (1,000)
Annual leave expense 5,000
29,800
Add (deduct) tax amounts:
Depreciation - motor vehicle -
Depreciation - equipment (15,000)
Rent revenue collected (P16,000 + P2,400 - P2,800) 15,600
Royalty revenue (exempt from taxation) -
Bad debts written off (P2,500 + P2,300 - P3,000) (1,800)
Entertainment expense (non-deductible) -
Loss on sale of equip. - tax [P19,000 - (P30,000 x .7)] (2,000)
Annual leave paid (P5,000 + P6,000 - P4,500) (6,500)
a - [P100000-(P100000*0.15*3)]
249
b - (P12,000 + P3,000)
Requirement No. 2
Deferred tax liability, 12/31/12 (P5,050 x .3) 1,515
Requirement No. 4
Beginnin Effect on tax
Ending g Inc(Dec) expense
Deferred tax liability 1,515 2,745 (1,230) Credit
Deferred tax asset 6,750 5,550 1,200 Credit
Journal entry:
Deferred tax liability 1,230
Deferred tax asset 1,200
Income tax expense 2,430
In connection with your audit of Celtics Corporation’s financial statements for the year 2015,
you noted the following liability account balances as of December 31, 2014:
250
Transactions during 2015 and other information relating to Celtics’ liabilities were as follows:
a. The principal amount of the note payable is P5,600,000 and bears interest at 12%. The
note is dated April 1, 2014 and is payable in four equal annual installments of P1,400,000
beginning April 1, 2015. The first principal and interest payment was made on April 1,
2015.
b. The finance lease is for a ten-year period beginning December 31, 2012. Equal annual
payments of P100,000 are due on December 31 of each year, and the 14% interest rate
implicit in the lease known by Celtics. The present value at December 31, 2014 of the
seven remaining lease payments (due December 31, 2015 through December 31, 2021)
discounted at 14% was P430,000.
c. Deferred income taxes are provided in recognition of temporary differences between
financial and income tax reporting. For the year ended December 31, 2015, depreciation
per tax return exceeded book depreciation by P312,500. Celtics; effective income tax rate
before 2015 is 32%. Effective January 1, 2015, the tax rate was changed from 325 to
35%.
d. On July 1, 2015, Celtics issued for P1,774,000, P2,000,000 face amount of its 10%,
P1,000 bonds. The bonds were issued to yield 12%. The bonds are dated July 1, 2015 and
will mature on July 1, 2022. Interest is payable annually on July 1.
REQUIRED:
Based on the above and the result of your audit, determine the following:
SOLUTION:
Requirement No. 1
15% Note payable, bank
4,200,00
Balance, 12/31/12 (P5,600,000 - P1,400,000) 0
1,400,00
Less installment due on April 1, 2013 0 2,800,000
251
Liability under finance lease
1,774,00
Carrying amount, 7/1/12 0
Add discount amortization:
252
Total noncurrent liabilities, 12/31/12 5,800,268
Requirement No. 2
Finance lease liability - principal payment due on 12/31/13 (see no. 2) 45,372
Requirement No. 3
Note payable, bank
Requirement No. 4
253
PROBLEM NO. 14 – Audit of employee benefits
The following information pertain to Mavericks Corporation’s, your audit client which started
operations on December 31, 2011, employee benefits.
A 9 P100,000 5%
B 200 P50,000 7%
C 300 P25,000 9%
Annual salary increases are expected to continue at the same rates for the foreseeable future.
At December 31, 2015, the appropriate discount factors (determined using the current market
yield for high quality corporate bonds) are 0.9524 for a 12-month period, 0.9009 for a 24-month
period, 0.8547 for a 36-month period and 0.8 for a 48-month period.
The entity’s employees work a five-day week. The entity’s operations close for the six
mandatory public holidays. Three of the public holidays are before June 30.
Holiday leave
254
The entity’s employees are each entitled to 20 paid days’ holiday leave per year.
Category A employees can carry forward unused holiday leave for one calendar year on a first-
in, first out (FIFO) basis. Holiday leave not taken in the prescribed period is forfeited.
Category B employees cannot carry forward unused holiday leave but are paid for all-holiday
leave not used in the previous calendar year. The payment is made as part of the January payroll
of the following year.
Category C employees cannot carry forward unused holiday leave and are not paid for unused
holiday leave.
At December 31, 2015 the entity’s holiday leave records were as follows:
A 9 10
B 200 6
C 300 8
At December 31, 2015 the entity expects 25 days’ holiday leave accumulated at December 31,
2015 by employees in category A to expire unused on December 31 2016.
The entity expects that holiday leave will on average be taken evenly throughout the year.
Long-service awards
255
The entity’s employees are entitled to receive government mandated long-service payments from
the entity calculated at 5% of salary (as determined for the 12 months before the payment) at the
end of each 5-year period of continuous employment. The payment is made as part of the
December payroll in the fifth year. The entity does not fund this obligation in advance.
Employee turnover is expected to follow average historical patterns. For ease of calculation
assume that staff join and leave on December 31. Furthermore, assume that none of the
employees who joined the entity after January 1 2012 left or are expected to leave the entity in
the foreseeable future (i.e. all leavers were employed on December 31, 2011)
At December 31, 2015 the entity’s long-service award records were as follows:
Employee Category
A B C
Joined 1 9 18
Left 1 8 20
Joined 0 10 11
Left 0 9 16
Joined 0 11 15
Left 0 10 12
256
Employee turnover on 12/31/2015:
Joined 0 10 16
Left 0 9 18
Pension plan
On January 5 2016 the entity paid a contribution of P100,000 to a defined contribution plan in
part exchange for services performed by the entity’s employees in December 2015.
In December 2015, with a view to reducing its workforce, the entity made an irrevocable offer to
its employees of a voluntary redundancy package. In accordance with the offer the entity will
compensate any employee who accepts voluntary redundancy on or before June 30, 2016.
The compensation offered is equal to the employee’s annualized salary for the 12-month period
ending June 30, 2016.
257
A 0 1
B 2 8
C 5 25
REQUIRED:
Based on the above and the result of your audit, calculate the entity’s liability for employee
benefits at December 31, 2015.
SOLUTION:
Requirement No. 1
Category A employees
258
Requirement No. 2
To be paid, 12/31/13 (Joined 12/31/08)
Requirement No. 3
To be paid, 12/31/13 (Joined 12/31/08)
259
4,296
**Estimated payment for a five-year cycle (saving of 23% due to employees leaving before vesting)
Computation of saving: {[36 + (36/4)]/196}
Requirement No. 4
To be paid, 12/31/13 (Joined 12/31/08)
260
To be paid, 12/31/16 (Joined 12/31/11)
**Estimated payment for a five-year cycle (saving of 27% due to employees leaving before vesting)
Computation of saving: {[66 + (66/4)]/306}
Requirement No. 5
261
Post-employment benefits - defined contribution plan (pension) 100,000
Total 2,305,228
1,350,000
262
VIII – AUDIT OF EQUITY
The following data were compiled prior to preparing the statement of financial position of the
Conviction Corporation.
Required:
Compute for the following:
1. Total share premium
2. Contributed capital
3. Appropriated retained earnings
4. Total Equity
5. Legal Capital
263
SOLUTION:
Requirement Nos. 1 to 4
Authorized share capital 4,000,000
Unissued share capital (800,000)
Share premium
Premium on share capital 320,000
Gain on sale of treasury shares 80,000
Donated capital 800,000
(
Stock warrants outstanding 200,000 1,400,000 1)
(
Contributed capital 4,960,000 2)
Retained earnings
Appropriated for sinking fund 400,000
Appropriated for treasury shares 144,000
(
Total appropriated retained earnings 544,000 3)
Unappropriated (P720,000 - P144,000) 576,000 1,120,000
Requirement No. 5
Issued share capital 3,200,000
Subscribed share capital 480,000
264
Legal capital 3,680,000 (5) ¸
The shareholders’ equity accounts of Tenacity Corporation at December 31, 2014, had the
following balances:
January 6 - Issued 22,500 ordinary shares to Weakness Company in exchange for land. On
the date issued, the share had a market price of P16.50 per share. The land had a carrying
amount of P210,000, and an assessed value for property taxes of P245,000.
January 31 - Sold 1,200, P1,000, 12% bonds, at 98 with one detachable share warrant
attached to each bond. Interest is payable annually on January 31. The fair value of the
bonds without the share warrants is 95. The detachable warrants have a fair value of P50
each and expire one year from issuance. Each warrant entitles the holder to purchase 10
ordinary shares at P10 per share.
February 22 - Purchased 7,500 of its own ordinary shares to be held as treasury shares for
P24 per share.
February 28 - Subscriptions for 21,000 ordinary shares were received at P26 per share,
payable 50% down and the balance by March 15.
March 15 - The balance due on 18,000 shares was received and those shares were issued.
The subscriber who defaulted on the 3,000 remaining shares forfeited the down payment in
accordance with the subscription agreement.
September 14 - There were 945 warrants detached from the bonds and exercised.
December 15 - Declared the required annual cash dividends on preference shares 2014. The
dividend was paid on January 15, 2015.
January 8, 2016 - Before closing the accounting records for 2015, Tenacity became aware
that no depreciation had been recorded for 2014 for a machine purchased on July 1, 2014.
The machine was properly capitalized at P480,000 and has an estimated useful life of eight
years when purchased. Tenacity is subject to 35% income tax. The appropriate correcting
entry was recorded on the same day.
Required:
Compute for the following as of December 31, 2015:
1. Share capital - preference shares
2. Share capital - ordinary shares
3. Share premium
4. Unappropriated retained earnings
5. Total equity
SOLUTION:
2012
Transaction
12.31.11 s 12.31.12
266
Subscriptions receivable - 2/28 (273,000) -
3/15 234,000
3/15 39,000
1,200,00 2,158,80
Share premium 0 1/6 348,750 0
1/31 36,000
2/28 525,000
3/15 (75,000)
3/15 39,000
9/14 (28,350)
9/14 113,400
12/3
Retained earnings - appropriated - 1 108,000 108,000
3,300,00 3,451,25
Retained earnings - unappropriated 0 4/30 (950,000) 0
8/30 (12,000)
11/3
0 (1,290,900)
12/1
5 (54,000)
12/3
1 2,585,650
1/8 (19,500)
12/3
1 (108,000)
(108,000
Treasury shares - 2/22 (180,000) )
8/30 72,000
6,000,00 7,160,00
0 0
267
1/31 Cash (1,200 x P1,000 x .98) 1,176,000
Discount on bonds payable (P1,200,000 -
P1,140,000) 60,000
1,200,00
Bonds payable 0
Share premium-warrants 36,000
268
8/30 Cash (3,000 x P20) 60,000
Retained earnings 12,000
Treasury shares (3,000 x
P24) 72,000
269
2,585,65
Retained earnings 0
12/3 Retained earnings -
1 unappropriated 108,000
Retained earnings - appropriated (cost of TS) 108,000
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was engaged
in the audit of the Fortitude Company at the close of the company’s first year of operations on
December 31, 2015. The company closed its books prior to the time you began your year-end
fieldwork.
Your audit and review showed the following shareholders’ equity accounts in the general ledger:
Share Capital
08/30 CD P550,000 01/02 CR P6,000,000
12/29 J 545,000
Retained Earnings
12/29 J P545,000 12/01 CR P287,500
12/31 J 4,000,000
Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the board of directors’ minutes of meetings, the following resolutions were extracted:
12/01 - authorized the re-issuance of 2,500 treasury shares at P115 per share.
270
12/29 - Declared a 10% share dividend, payable January 31, 2016 to shareholders on
record as of January 15, 2016. The market value of the share on December 29, 2015 was
P130 per share.
Required:
1. Prepare adjusting entries as of December 31, 2015.
2. Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2015.
a. Share capital
b. Share premium
c. Total retained earnings
d. Total equity
SOLUTION:
Requirement no. 1
01/0
2 Share capital [50,000 shares (P120-P100)] 1,000,000
Share premium 1,000,000
08/3
0 Treasury shares 550,000
Share capital 550,000
12/0
1 Retained earnings 287,500
Treasury shares (2,500 shares x P110) 275,000
Share premium 12,500
12/2
9 Retained earnings (P617,500 - P545,000) 72,500
Share capital 545,000
Share dividends distributable (4,750 x P100) 475,000
Share premium 142,500
271
Shares to be issued 4,750
Market value per share 130
12/3
1 Retained earnings (2,500 shares x P110) 275,000
Retained earnings appropriated for treasury shares 275,000
Requirement no. 2
5,000,00
Share capital (P5,995,000-P1,000,000+P550,000-P545,000) 0
Share dividends distributable 475,000
1,155,00
Share premium (P1,000,000+P12,500+P142,500) 0
Retained earnings-appropriated 275,000
3,382,50
Retained earnings (P3,742,500-P287,500-P72,500-P275,000) 3,107,500 0
The Retained Earnings account of Endurance Company shows the following debits and credits
for the year 2015:
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
Jan. Balance 726,400
1
(a) Loss from fire 5,250 721,150
(b) Write-off of
52,500 668,650
goodwill
(c) Share 140,000 528,650
dividends
272
distributed
(d) Loss on sale of
48,300 480,350
equipment
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(e) Officers’
compensation
related to
income of 325,500 154,850
prior periods
- accrual
overlooked
(f) Loss on
retirement of
preference
70,000 84,850
shares at
more than
issue price
(g) Paid in
capital in 129,500 214,350
excess of par
(h) Share
issuance
expenses 10,000 204,350
( related to
letter g)
(i) Share
subscription 8,470 212,820
defaults
(j) Gain on
retirement of
preference
25,900 238,720
shares at less
than issue
price
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(k) Gain on 15,050 253,770
early
273
retirement
of bonds
(l) Gain on life
insurance
10,500 264,720
policy
settlement
(m) Correction
of a
50,050 314,320
fundamental
error
(n) Effect of
change in
accounting
principle 100,000 414,320
from FIFO
to weighted
average
(o) Dividends
25,000 389,320
Payable
(p) Loss on sale
of treasury 20,000 369,320
shares
(q) Proceeds
from sale of
40,000 409,320
donated
shares
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(r) Appraisal
increase in 250,000 659,320
land
(s) Gain on life
insurance
100,000 559,320
policy
settlement
Required:
1. Prepare adjusting journal entries to correct the Retained Earnings account.
2. Determine the correct amount of Retained Earnings account before closing the profit or
loss for the period.
SOLUTION:
274
a Profit or loss (Other expense) 5,250
Retained earnings 5,250
275
b 52,500
d 48,300
g (129,500)
h 10,000
i (8,470)
j (25,900)
k (15,050)
l (10,500)
q (40,000)
r (250,000)
Alternative computation:
Jan.
1 Balance 726,400
c Share dividend (140,000)
e Officers’ compensation related to income
of prior periods – accrual overlooked (325,500)
f Loss on retirement of preferred shares
at more than issue price (70,000)
m Correction of prior-period error 50,050
n Effect of change in accounting principle
from FIFO to weighted average 100,000
o Dividends payable (25,000)
p Loss on sale of treasury stock (20,000)
s Appropriated for property acquisition (100,000)
276
PROBLEM NO. 5 - Audit of equity transactions and balances
Resilience Corporation was organized on January 1, 2013, and began operations immediately.
Unfortunately, the company hired an incompetent bookkeeper. For the years 2013 through 2015,
the bookkeeper presented an annual balance sheet that reported only one amount for
shareholders’ equity: 2013, P1,377,000; 2014, P1,566,000 and 2015, P1,850,000. Also, the
condensed income statement reported as follows: 2013, net loss, Pl75,000; 2014, net profit,
P120,000; and 2015, net profit, P409,300 (cumulative earnings of P354,300). Based on the
P354,300, the president has recommended to the board of directors that a cash dividend f
P350,000 be declared and paid during January 2016. The outside director on the board has
objected on the basis that the company’s financial statements contain major errors (there has
never been an audit). You have been engaged to clarify the situation. The single shareholders’
equity account, provided by the bookkeeper, appeared as follows:
Shareholders’ Equity
2013 Share P13,000 2013 Ordinary
issue costs shares,
par P
P1,600,000
5,200,00
0 shares
issued
2013 Net loss 175,000
2014 Bought 2014 Net profit
1,000 (includin
shares g
from an P100,000
unhappy land
7000 220,000
shareholde write-up
r Ekis based on
president
’s
estimate)
Depreciation expense* 2014 Ordinary
shares,
2,000 18,000
shares
issued
(2013, P15,000;
2014, P17,000; 55,000
2015, P23,000)
Miscellaneous expense* 2015 Sold 300
of Ekis 2,700
shares
(2013, P20,000; 50,000
2014, P250,000;
2015, P5,000)
277
2015 Cash loan
to the
company Net
president 100,000 2015 Profit 409,300
P400,000 P2,250,000
Required:
Based on the concerns of the outside director, answer the following:
1. What is the adjusted balance of retained earnings as of December 31, 2015?
2. What entry is necessary (a) to close the above single shareholders’ equity account and (b)
to record the various components of shareholders’ equity in separate accounts?
3. What is the adjusted total equity as of December 31, 2015?
SOLUTION:
Requirement no. 1
RE
2010 2011 2012
12.31.12
Unadjusted profit (loss) (175,000) 220,000 409,300 454,300
Depreciation expense (15,000) (17,000) (23,000) (55,000)
Miscellaneous expense (20,000) (25,000) (5,000) (50,000)
Land write-up (100,000) (100,000)
Adjusted profit (loss) (210,000) 78,000 381,300 249,300
Requirement no. 2
Shareholders equity 1,850,000
Treasury shares 4,900
Loans receivable 100,000
Share capital 1,010,000
Share premium – EOP 595,000
Share premium – TS 600
Land 100,000
Retained earnings 249,300
278
Requirement no. 3
Share capital 1,010,000
Share premium – EOP 595,000
Share premium – TS 600
Retained earnings 249,300
Treasury shares (4,900)
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in
the sales department. The share options will vest at the end of year 3, provided that the
employees remain in the entity’s employ, and provided that the volume of sales of a particular
product increases by at least an average of 5 per cent per year. If the volume of sales of the
product increases by an average of between 10 per cent and 15 per cent each year, each
employee will receive 200 share options. If the volume of sales increases by an average of 15 per
cent or more, each employee will receive 300 share options.
On grant date, Entity A estimates that the share options have a fair value of P20 per option.
Entity A also estimates that the volume of sales of the product will increase by an average of
between 10 per cent and 15 per cent per year, and therefore expects that, for each employee who
remains in service until the end of year 3, 200 share options will vest. The entity also estimates,
on the basis of a weighted average probability, that 20 per cent of employees will leave before
the end of year3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will
remain in service for the three-year period. Product sales have increased by 12 per cent and the
entity expects this rate of increase to continue over the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The
entity now expects only three more employees will leave during year 3, and therefore expects a
total of 15 employees will have left during the three-year period, and hence 85 employees are
expected to remain. Product sales have increased by 18 per cent, resulting in an average of 15 per
cent over the two years to date. The entity now expects that sales will average 15 per cent or
more over the three-year period, and hence expects each sales employee to receive 300 share
options at the end of year 3.
279
By the end of year 3, a further two employees have left. Hence, 14 employees have left during
the three-year period, and 86 employees remain. The entity’s sales have increased by an average
of 16 per cent over the three years. Therefore, each of the 86 employees received 300 share
options.
Required:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.
SOLUTION:
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on
condition that the employees remain in its employ for the next three years.
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years
2 and 3. During year 2, 40 employees leave and the entity estimates that a further 25 will leave
during year 3. During year 3, 22 employees leave. At the end of year 3, 150 employees exercise
their SARs, another 140 employees exercise their SARs at the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists
as shown below. At the end of year 3, all SARs held by the remaining employees vest. The
intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of
years 3, 4 and 5 are also shown below.
Year Fair value Intrinsic value
1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00
Required:
Compute for the amounts to be recognized as compensation expense and liability in year 1 to 5.
SOLUTION:
280
Yea
r Computation Expense Liability
1 405 × 100 SARs × P14.40 × 1/3 194,400 194,400
2 400 × 100 SARs × P15.50 × 2/3 - P194,400 218,933 413,333
3 253 × 100 SARs × P18.20 × 3/3 - P413,333 47,127 460,460
150 × 100 SARs × P15.00 225,000 272,127
5 0 - P241,820 (241,820) -
113 × 100 SARs × P25.00 282,500 40,680
An entity grants to an employee the right to choose either 1,000 phantom shares, ie. a right to a
cash payment equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon
the completion of three years’ service. If the employee chooses the share alternative, the shares
must be held for three years after vesting date.
At grant date, the entity’s share price is P50 per share. At the end of years 1, 2 and 3, the share
price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next
three years. After taking into account the effects of the post-vesting transfer restrictions, the
entity estimates that the grant date fair value of the share alternative is P48 per share.
Required:
Compute for the amounts to be recognized as expense, equity and liability in year 1 to 3, if at the
end of year 3 the employee chooses:
SOLUTION:
The fair value of the equity alternative is P57,600 (1,200 shares × P48). The fair value of the cash
alternative is P50,000 (1,000 phantom shares × P50). Therefore, the fair value of the equity
component of the compound instrument is P7,600 (P57,600 – P50,000).
281
Yea
r Computation Expense Equity Liability
1 Equity component (P7,600 × 1/3) 2,533 2,533
Liability component (1,000 × P52 × 1/3) 17,333 17,333
The equity section of the balance sheet of the Guts Company on December 31, 2015 shows the
following items:
282
Total P2,209,600
Required:
2. Book value per share of ordinary, assuming the preference share is participating
SOLUTION:
Requirement No. 1
Excess
Preferenc
over par e Ordinary
*
Balances 1,069,600 340,000 800,000
PS dividend (P340,000 x 6%) (20,400) 20,400
PS liquidation premium (3,400 x
P15) (51,000) 51,000
1,069,600
283
Retained earnings, appropiated - bond
retirement 320,000
Retained earnings, unappropiated 458,600
Excess of cost of TS over par (P84,000 -
P60,000) (24,000)
Shares Amount
*
PS issued 4,000 400,000
Treasury PS, at par (600 x P100) (600) (60,000)
Requirement No. 2
Excess
Preferenc
over par e Ordinary
*
Balances 1,069,600 340,000 800,000
PS dividend (P340,000 x 6%) (20,400) 20,400
PS liquidation premium (3,400 x
P15) (51,000) 51,000
OS dividend (P800,000 x 6%) (48,000) 48,000
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PROBLEM NO. 10 - Earnings per share
There were no changes during 2015 in the number of ordinary shares, preference shares, or
convertible bonds outstanding. There is no treasury share.
Required:
Notes:
285
a
) Profit for the year 1,200,000
PS dividend (P3M x .06) (180,000)
1,020,000
b
) Shares to be issued on exercise 50,000
Assumed TS acquired [(50,000 x
P20)/P25] (40,000)
10,000
d
) PS dividend (P3M x .06) 180,000
e
) Shares to issued on PS conversion
(P3M/P100 x
3) 90,000
Edmund Halvor of the controller’s office of East Aurora Corporation was given the assignment
of determining the basic and diluted earnings per share values for the year ending December 31,
2015.
Additional information:
a. The company is authorized to issue 8,000,000, P10 par value, ordinary shares. As of
December 31, 2014, 3,000,000 shares had been issued and were outstanding.
b. The per share market prices of the ordinary shares on selected dates were as follows.
Price per Share
July 1, 2014 P20.00
January 1, 2015 21.00
April 1, 2015 25.00
286
July 1, 2015 11.00
August 1, 2015 10.50
November 1, 2015 9.00
December 31, 2015 10.00
e. The after-tax profit for the year ended December 31, 2015 was P13,550,000.
1. January 1 - A 5% ordinary share dividend was issued. The dividend had been declared on
December 1, 2014, to all shareholders of record on December 29, 2014.
2. April 1 - A total of 200,000 preference shares was converted into ordinary shares. The
company issued new ordinary shares and retired the preference shares.
3. July 1 - A 2-for-1 ordinary share split became effective on this date. The board of
directors had authorized the split on June 1.
4. August 1 - A total of 300,000 ordinary shares were issued to acquire a factory building.
5. November 1 - A total of 24,000 ordinary shares were purchased on the open market at P9
per share. These shares were to be held as treasury shares and were still in the treasury as
of December 31, 2015.
6. Ordinary shares cash dividends - Cash dividends to ordinary shareholders were declared
and paid as follows.
April 15 - P0.30 per share
October 15 - P0.20 per share
Required:
287
SOLUTION:
288
Computation of basic EPS:
Profit for 2012 13,550,000
Less PS dividends:
March 31 (700,000 shares x P.75) 525,000
6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3) 1,125,000 1,650,000
Profit to OS 11,900,000
/WA outstanding OS (see below) 6,736,000
6,736,000
Profit to OS 13,550,000
/WA outstanding OS (see below) 7,891,000
289
Convertible PS still outstanding (500,000 x 1.05 x 2) 1,050,000
Convertible PS converted (200,000 x 1.05 x 2 x 3/12) 105,000
Hawks Corporation was incorporated in 2014. During 2014, the company issued 100,000 shares
of P1 par value ordinary shares for P27 per share. During 2015, the company had the following
transactions.
During 2014, Hawks Corporation had a profit of P250,000 and paid dividends of P28,000.
During 2015 Hawks Corporation had a profit of P380,000.
Required:
Based on the above and the result of your audit, determine the following:
290
5. Diluted earnings per share for the year 2015
SOLUTION:
Profit to OS 320,000
Divide by the WA outstanding OS (see
below) 118,750
291
Basic EPS for 2012 2.69
118,750
Requirement No. 5
Profit to OS (see no. 4) 320,000
Add PS dividend for 2012 60,000
The shareholders’ equity section of the Jerely Corporation’s statement of financial position as of
December 31, 2014 is presented below:
292
Jerely had 65,000 ordinary shares as December 31, 2013.
The following shareholders’ equity transactions were recorded in 2014 and 2015:
2014
May 1 - Sold 9,000 ordinary shares for P24, par value P20.
July 1 - Sold 700 preference shares for P124, par value P100.
Jul. 31 - Issued an 8% share dividend on ordinary shares. The market value of ordinary share was
P30 per share.
Aug. 30 - Declared cash dividends of 12% on preference shares and P3 per share on ordinary
shares.
2015
Feb. 1 - Sold 2,200 ordinary shares for P30.
May 31 - Issued 2-for-1 split of ordinary shares. The par value of the ordinary share was reduced
to P10 per share.
Sep. 1 - Purchased 1,000 ordinary shares for P18 to be held as treasury shares.
Oct. 1 - Declared and paid cash dividends of 12% on preference shares and P4 per share on
ordinary shares.
Required:
SOLUTION:
293
Requirement No. 1
Ordinary shares outstanding, 12/31/11 (P1,598,400/P20) 79,920
Shares issued 2/1/12 2,200
82,120
Share split, 5/31/12 x 2
164,240
Treasury shares acquired, 9/1/12 (1,000)
Requirement No. 2
Retained earnings, 12/31/11 1,585,840
Profit for 2012 991,520
Dividends - ordinary (see no. 36) (652,960)
Dividends - preference [(P270,000 + P60,000) x .12] (39,600)
Requirement No. 3
Total equity, 12/31/11 3,729,440
Add (deduct) 2012 transactions:
2/1 - Issuance of OS (2,200 x P30) 66,000
5/1 - Issuance of PS (600 x P128) 76,800
5/31 - share split -
9/1 - Acquisition of TS (1,000 x P18) (18,000)
10/1 - PS dividend (see no. 37) (39,600)
- OS dividend (see no. 37) (652,960)
294
11/1 - Re-issuance of TS (1,000 x P22) 22,000
Profit for 2012 991,520
Requirement No. 4
Profit for 2011 1,345,040
Less PS dividend (270,000 x 12%) 32,400
Profit to OS 1,312,640
Divide by weighted average number of OS (see below) 153,360
Total 153,360
Requirement No. 5
Profit for 2012 991,520
Less PS dividend (P330,000 x 12%) 39,600
Profit to OS 951,920
Divide by weighted average number of OS (see below) 163,707
295
Jan. 1 (79,920 x 2*) 159,840 12/12 159,840
Feb. 1 (2,200 x 2*) 4,400 11/12 4,033
Sept. 1 (1,000) 4/12 (333)
Nov. 1 1,000 2/12 167
Total 163,707
2. In audit of a medium-sized manufacturing concern, which one of the following areas can
be expected to require the least amount of audit time?
a. Owner’s equity
b. Assets
c. Revenue
d. Liabilities
3. When corporate client maintains its own stock records, the auditor primarily will rely
upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate
state official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.
4. When a client company does not maintain its own share records, the auditor should
obtain written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends.
296
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreement to repurchase.
5. The auditor is concerned with establishing that dividends are paid to client corporation
shareholders owning shares of the
a. Issue date
b. Record date
c. Declaration date
d. Payment date
6. An audit program for the retained earnings account should include a step that requires
verification of the
a. Fair value used to charge retained earnings to account for a two-for-one share split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable.
c. Authorization for both cash and share dividends.
d. Gain or loss resulting from disposition of treasury shares.
8. If the auditee has a material amount of treasury shares on hand at year-end, the auditor
should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury share transactions during the
year.
c. Not count the certificates if treasury share is a deduction from shareholders’ equity
d. Count the certificates only if the company classifies treasury shares with other assets.
10. The auditor would not expect the client to debit retained earnings for which of the
following transactions?
a. A 4-for-1 share split.
b. “Loss” resulting from disposition of treasury shares.
c. A 1-for-10 share dividend.
297
d. Correction of error affecting prior year’s earnings.
ANSWER:
1. A 5. B 9. D
2. A 6. C 10. A
3. D 7. D
4. B 8. A
The general ledger summarized trial balance of Heat Corporation, a manufacturing company,
includes the following accounts at December 31, 2015:
Debit Credit
Accumulated depreciation - buildings P 120,000
Accumulated depreciation – leased assets 310,000
Accumulated depreciation – plant and 3,726,000
equipment
Allowance for doubtful debts 80,000
Bank loans 2,215,000
Bank overdrafts 350,000
Buildings, at cost P 1,030,000
Cash 175,000
Current tax payable 152,000
Debentures 675,000
Deferred tax 420,000
Deposits, at call 36,000
Finished goods 1,042,000
Goodwill 2,530,000
Investments in listed (AFS) 52,000
Investments revaluation reserve 25,000
Land, at valuation 250,000
298
Land revaluation reserve 81,000
Lease liabilities 350,000
Leased assets 775,000
Others 575,000
Patents 110,000
Plant and equipment 8,275,000
Prepayments 141,000
Provision for employments benefits 275,000
Provision for restructuring 412,000
Provision for warranty 42,000
Raw materials 490,000
Retained earnings 1,481,000
Share capital 3,500,000
Sundry creditors and accruals 715,000
Sundry debtors 320,000
Trade creditors 1,617,000
Trade debtors 1,744,000
Work in progress 151,000
P17,121,000 P17,121,000
Additional information:
a) Bank loans and other loans are all repayable beyond one year.
d) Provision for employment benefits includes P 192,000 payable within one year.
f) Provision for warranty includes P 20,000 estimated to be incurred beyond one year.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
299
a. P8,814,000 c. P8,891,000
b. P8,839,000 d. P8,866,000
Answer: D
Answer: B
Answer: A
5. Which of the following events after the reporting period will be at least likely to result in
an adjustment to the financial statement?
a. Culmination of events affecting the realization of accounts receivable owned as of the
end of the reporting period.
b. Culmination of events affecting the realization of inventories owned as of the end of
the reporting period.
c. Making changes in the settlement of liabilities which were estimated as of the end of
the reporting period.
d. Material changes in the quoted market prices of listed investment securities since the
end of the reporting period.
Answer: D
PROBLEM NO. 2 – Statement of financial position (Small and Medium sized Entity)
The accounts were taken from the unadjusted trial balance of VECO Co., a small and medium
sized entity, as at December 31, 2015:
Cash P 124,000
Trading Securities, at cost 87,000
Notes Receivable 92,000
Trade accounts Receivable 122,000
Allowance for doubtful accounts 6,000
Merchandise Inventory 136,000
Notes Payable 150,000
Trade accounts payable 75,000
Employee’s’ income tax withheld 4,000
Bonds payable 250,000
300
Share dividends payable 15,000
Income tax payable 28,000
Merchandise worth P 15,000 received December 30, 2015 was included in the inventory
but was not recorded as purchase.
A bank loan of P30,000due December 31, 2017 was included in the notes payable
balance
Bonds payable which was issued in 2015 will mature in five annual installments
beginning June 1, 2016
Trading securities are investment in 10,000 ordinary shares with publish price quotation
at December 31, 2015 of P9 per share.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much total current assets should be reported on the statement of financial position as
at December 31, 2015?
a. P590,000
b. P598,000
c. P605,000
d. P587,000
Answer: A
2. How much total current liabilities should be reported on the statement of financial
position as at December 31, 2015?
a. P590,000
b. P598,000
c. P605,000
d. P587,000
Answer: C
301
PROBLEM NO. 3 – Statement of financial position
The following statement of financial position was prepared by the accountant for Excel
Corporation.
Excel Corporation
Statement of Financial Position
December 31, 2015
Assets
Cash P 25,500
Investment securities – Trading (includes long 312,000
term investment of P250,000 in shares of
Professional Developers)
Inventories (net amount still due of P10,000 624,600
made on inventories to be delivered in 18
months)
Prepaid expenses 33,000
Property, plant and equipment (excluding 220,000
P60,000 of equipment still in use, but fully
depreciated)
Goodwill (based on estimate by the president
of Excel Corporation) 70,000
Total Assets P 1,285,100
Liabilities and Equity
Notes payable (P75,000 due in 2017) P 135,000
Accounts payable (not including amount due 142,000
to suppliers of inventory – see above)
Long term liability under pension plan 60,000
Retained earnings restricted for buildings 105,000
expansion
Accumulated depreciation 73,000
Taxes payable 44,500
Bonds payable (net of discount of P10,000) 290,000
Deferred income tax liability 68,000
Share capital (10,000 shares, P1 par) 10,000
Share premium 240,500
Unrestricted retained earnings 117,100
Total Liabilities and Owner’s Equity P 1, 285,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
302
Answer: B
Answer: D
Answer: A
Answer: A
5. Which statement is correct regarding the presentation and disclosure of the entity’s
financial position?
a. When an entity presents current and non-current liabilities, as separate classifications
in its statement of financial position, it may classify deferred tax liabilities as current
liabilities.
b. An entity may not present assets and liabilities in order of liquidity.
c. An entity is required to disclose the maturity dates of financial assets and financial
liabilities.
d. Current assets include assets that are sold, consumed, or realized as part of the normal
operating cycle only when they are expected to be realized within twelve months after
the reporting period.
Answer: C
In connection with your audit of the Manning Corporation, the company’s bookkeeper prepared
a statement of financial position at December 31, 2015 which was presented with the total assets
aggregating P 1,965,500 and total liabilities and equity for the same amount.
303
Assets
Cash (including paid expenses of p100 and P 80,000
P4,000 contribution to a special fund for the
acquisition of fixed assets)
Advances by employees 1,000
Certificate of PLDT preference shares (not 2,000
held for trading)
Petty cash fund 1,000
Marketable equity securities intended for long 52,000
term income earnings
Promissory note from a corporate 14,000
officer(renewed for the past two years)
Merchandise inventory (including P1,000 489,500
worth of obsolete items and P4,000
merchandise received on consignment which
was included in accounts payable)
Accounts receivable (including P3,000 188,000
ascertained to be uncollectible. Of the amount
collectible, a provision for bad debts 1%
should be set up)
Manning Corporation shares, at cost 10,000
Prepaid insurance (including P800 cash 2,000
surrender value of life insurance on the
president; the company is the beneficiary)
Prepaid rental (covering the period January 1, 6,000
2015 to December 31, 2016)
Building (net of P60,000 allowance for 1,000,000
depreciation; current year’s depreciation of
P5,000 not yet entered)
Equipment, at cost (prior and current years’
depreciation amounted to P10,000) 120,000
Total Assets P1,965,000
304
Share capital, at par value 1,000,000
Retained earnings 500,000
Total liabilities and Equity P 1,965,000
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following as
of December 31, 2015:
Answer: D
Answer: A
Answer: A
4. Total liabilities
a. P407,500 c. P433,500
b. P403,500 d. P404,500
Answer: B
5. Total equity
a. P1,521,050 c. P1,526,050
b. P1,529,150 d. P1,496,050
Answer: C
305
EPSI Manufacturing Corporation
Statement of Financial Position
For the year ended December 31, 2015
Assets
Cash P 225,000
Accounts Receivable, net 345,700
Inventories 560,000
Prepaid income taxes 40,000
Investments 57,700
Land 450,000
Building 1,750,000
Machinery and Equipment 1,964,000
Goodwill 37,000
Total Assets P 5,429,400
Your firm has been engaged to perform an audit, during which time the following data are found:
Checks totaling P14,000 in payment of accounts payable were mailed on December 30, 2015
but were not recorded until 2016. Late in December 2015, the bank returned a customer’s
P2000 check, marked DAIF, but no entry was made. Cash includes P100,000 restricted for
building purposes.
Included in accounts receivable is a Р30,000 note due on December 31, 2018, from the
company's president.
During 2015, the company purchased 500 ordinary shares of a corporation that supplies the
company with raw materials. Total cost of these shares was P51,300, and the fair value on
December 31, 2015 was Р47‚000. The company plans to hold the shares indefinitely.
306
Treasury shares were recorded at cost when the company purchased 200 of its own shares for
P32 per share in May 2015. This amount is 1 included in investments.
On December 30, 2015, the company borrowed P500,000 from a bank in exchange for a 10%
note payable, maturing on December 30, 2020. Equal principal payments are due December
30 of each year, beginning in 2016. This note is collateralized by a P250,000 tract of land
acquired as a potential future building site, which is included.
The mortgage payable requires Р50,000 principal payments, plus f interest, at the end of each
month. Payments were made on January 31 and February 28, 2016. The balance of this
mortgage is due on 1 June 30, 2016. On March 1, 2016, prior to issuance of the audited
financial statements, the company consummated a noncancellable agreement with the lender
to refinance this mortgage. The new terms require P100,000 annual principal payments, plus
interest, on February 28 beginning in 2017. The final payment is due on February 28, 2021
The following is an analysis of the deferred tax liability at December 31, 2015:
Deferred taxes related to depreciation P48,000
Deferred taxes related to lawsuit liability (20,000)
Net deferred tax liability P28,000
The current income tax expense reported in company’s 2015 income statement was P61,200.
The company is authorized to issue 100,000 shares of P50 par value ordinary shares.
QUESTIONS:
Based on the result of your audit, compute the adjusted amount of the following as of December
31, 2015:
1. Current assets
a. P 984,700
b. P 1,012,700
c. P 986,700
d. P 1,026,700
Answer: C
307
d. P 3,494,000
Answer: D
3. Total assets
a. P 4,994,700
b. P 4,964,700
c. P 4,984,700
d. P 5,004,700
Answer: D
4. Current assets
a. P 1,221,000
b. P 1,261,000
c. P 421,000
d. P 426,000
Answer: B
5. Current liabilities
a. P 1,221,000
b. P 1,261,000
c. P 421,000
d. P 426,000
Answer: A
6. Noncurrent liabilities
a. P 1,223,000
b. P 1,200,000
c. P 428,000
d. P 448,000
Answer: D
7. Equity
a. P 3,295,700
b. P 3,306,400
c. P 3,300,000
d. P 3,302,100
Answer: A
The following data were taken from Jun Company for the year 2015:
308
Sales P 5,590,000
Sales returns 55,000
Inventories, January 1:
Raw materials 131,000
Work in process 238,350
Finished goods 442,000
Inventories, January 1:
Raw materials 145,500
Work in process 175,720
Finished goods 412,000
Direct labor 1,050,300
Purchases 2,051,500
Purchase returns 17,150
Purchase discounts 12,550
Freight in 8,250
Freight out 200,000
Allowance for doubtful accounts 25,000
Sales salaries 445,000
Office salaries 155,000
Depreciation – factory building 44,000
Depreciation – office equipment 44,000
Depreciation – store equipment 77,000
Depreciation – machinery and equipment 25,500
Amortization – patents 33,000
Bad debts expense 20,000
Factory supplies expense 75,550
Accrued manufacturing expense payable 34,500
Indirect labor 35,300
Interest income 116,240
Interest income 34,250
Factory light and power 65,000
Property taxes and insurance – factory 13,200
building
Prepaid insurance expense 18,750
Royalties on production 13,200
Supervision expense 65,000
Tools expense 10,500
Miscellaneous factory expense 50,250
Dividends paid 70,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
309
a. P 3,450,050
b. P 3,496,250
c. P 3,420,750
d. P 3,431,250
Answer: B
Answer: A
Answer: D
Answer: C
The B corporation presented the following multiple-step income statement and statement of
retained earnings for the year ended December 31, 2015, as developed by its bookkeeper who
has completed 12 units of accounting:
B Corporation
Revenue Statement
31 December 2015
310
Net sales P 390,000
Less: Dividends declared P3.50 per ordinary 15,000
share
Revenues
Less: Selling expenses P 375,000
Gross profit 41,600
Less: Operating expenses
Interest expense P 8,200
Cost of goods sold 227,400
Provision for income tax 23,920
Net operating income P 73,880
Add: Dividend revenue 3,600
Less: General and administrative expenses 48,600
Net Profit P 28,880
B Corporation
Retained Earnings Statement
31 December 2015
QUESTIONS:
Answer: A
Tawi2 Company’s income statement fot the year ended December 31, 2015 reported net profit of
P 10,000,000. The auditor raised questions about the following amounts that had been included
in the net profit:
311
Exchange differences gain on translating 4,500,000
foreign operations
Revaluation surplus realization 1,000,000
QUESTIONS:
Answer: C
Answer: B
Bulls, Inc., a nonpublic enterprise, is negotiating a loan for expansion purposes and the bank
requires audited financial statements. Before closing the accounting records for the year ended
December 31, 2015, Bulls’ controller prepared the following comparative financial statements
for 2015 and 2014.
Bulls, Inc.
Statement of Financial Position
December 31, 2015 and 2014
2015 2014
Assets
Cash P 275,000 P 150,000
Trading Secutities 78.000 78,000
Accounts Receivable 487,000 392,000
Allow. For doubtful accounts (50,000) (32,000)
Inventories 425,000 307,000
Property, plant, and equipment 310,000 217,000
Accumulated depreciation (150,000) (121,000)
Total assets P 1,375,000 P991,000
312
Share capital, P10 par 260,000 260,000
Share premium 130,000 130,000
Retained earnings 465,000 254,000
Total liabilities and equity P 1,375,000 P 991,000
Bulls, Inc.
Statement of Profit or Loss
For the Years Ended December 31, 2015 and 2014
2015 2014
Net Sales P1580,000 P1,250,000
Operating expenses:
Cost of Sales P755,000 P690,000
Selling and admin. 485,000 365,000
Depreciation 29,000 18,000
Estimated loss form lawsuit 100,000 _________
P1,369,000 P1,073,000
Profit P 211,000 P 177,000
During the course of the audit, the following additional information was obtained:
a. The trading securities were acquired on December 31, 2014. The securities have a fair
value of P67, 000 at December 31, 2015.
b. In discussion with the company officials, it was determined that the doubtful accounts
expense rate based on net sales should be reduced to 2% from 3%, effective January 1,
2015
c. As a result of errors in the physical count, inventories were overstated by P12,000 at
December 31, 2014 and by P17,500 at December 31, 2015
d. On January 1, 2014, the cost of equipment purchased for P30, 000 was debited to repairs
and maintenance. Bulls depreciates equipment of this type by straight-line method over
five-year life with no residual value.
e. On July 1, 2015, fully depreciated equipment purchased for P21, 000 was sold as scrap
for P2,500. The only entry Bulls made was to debit cash and credit property and
equipment for the scrap proceeds. The property and equipment (net) had a current cost of
P250, 000 at December 31, 2015.
f. Advertising and promotion expense for the year ended December 31, 2014 includes the
P25,000 cost of printing sales catalogs for a special promotional campaign held in
January 2015
g. Bulls was named as defendant in a lawsuit in October 2015. Bulls’ counsel is of the
opinion that Bulls has good defense, and does not anticipate any impairment of Bulls
‘management wished liability will be incurred. Nevertheless, Bulls’ management wished
to be conservative and, therefore established a loss contingency of P100,000
313
QUESTIONS:
Based on the above and the result of your audit, compute for the following: (Disregard
income taxes)
314
PROBLEM NO. 10 – Statement of financial position of profit or loss
Reproduced below is the draft statement of financial position of Spurs, a public listed company,
as at 31 March 2015
P’00 P’00
Non-current assets (note(i))
Freehold property 126,000
Plant 110,000
Investment property at 1 April 2014 (note(iii)) 15,000
251,000
Current Assets
Inventory (note(iii)) 60,400
Trade receivables and prepayments 31,200
Cash 13,800 105,400
Total Assets 356,400
Current Liabilities
Trade payables (note(iii)) 47,400
Provision for plant overhaul (note(iv)) 12,000
Income tax payable 4,200 63,600
Suspense account (note(vi)) 14,100
Total equity and liabilities 356,400
(i) The profit or loss has been charged with P32 million being the first of four equal
annual rental payments for an item of excavating plant. This first payment was made
on 1 April 2014. Spurs has been advised that this is a finance lease with an implicit
interest rate of 10% per annum. The plant had a fair value of 1311.2 million at the
inception of the lease. None of the non-current assets have been depreciated for the
current year. The freehold property should be depreciated at 2% on its cost of P130
million, the leased plant 18 depreciated at 25% per annum on a straight-line basis and
the non-leased plant 15 depreciated at 20% on the reducing balance basis.
315
(ii) Spurs adopts the fair value model for its investment property. Its value at 31 March
2015 has been assessed by a qualified surveyor at P12 .4 million.
(iii) During an inventory count on 31 March 2015 items that had cost P6 million were
identified as being either damaged or slow moving. It ' is estimated that they will only
realize P4 million in total, on which sales commission of 10% will be payable. An
invoice for materials » delivered on 12 March 2015 for P500, 000 has been
discovered. It has not been recorded in Spurs‘ bookkeeping system, although the
materials were included in the inventory count.
(iv) Spurs operates some heavy excavating plant which requires a major overhaul every
three years. The overhaul is estimated to cost P18 million and is due to be carried out
in April 2016. The provision of P12 million represents two annual amounts of P6
million made in the years to 31 March 2014 and 2015.
(v) The deferred tax liability required at 31 March 2015 has been calculated at P225
million
(vi) The suspense account contains the credit entry relating to the issue on 1 October 2014
of a P 15 million 8% loan note. It was issued at a discount of 5% and incurred direct
issue costs or P150, 000. It is redeemable after four years at a premium of 10%.
Interest is payable six months in arrears. The first payment of interest has not been
accrued and is due on 1 April 2015. Appointment of issue costs, discounts and
premiums can be made on straight-line basis.
QUESTIONS:
Based on the above and the result of your audit, compute for the following:
(Disregard effect of the adjustments on current income tax)
Answer: B
Answer: A
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3. Total current liabilities as of 31 March 2105
a. P55,400,000 c. P55,900,000
b. P55,100,000 d. P54,500,000
Answer: C
Answer: A
Answer: D
Pol Company
Comparative Statements of Financial Postion
December 31, 2015 and 2014
Assets 2015 2014
Cash P 400 P 3,400
Accounts Receivable 25,000 18,000
Inventory 30,000 34,000
Prepaid general expenses 5,700 5,000
Property, plant, and equipment 305,000 320,000
Accumulated depreciation (103,500) (128,900)
Patent 36,000 40,000
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Wages Payable 12,000 10,300
Interest Payable 2,800 4,300
Dividends Payable 14,000 _
Income taxes Payable 1,600 1,200
Bonds Payable 100,000 120,000
Share Capital 50,000 50,000
Retained Earnings 96,800 84,000
Pol Company
Statement of Cash Flows
For the Year Ended December 31, 2015
(b) Property, plant, and equipment sold had an original cost of P75,000 and a carrying
amount of P22,000.
QUESTIONS:
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Based on the foregoing, compute the following for the year ended December 31, 2015:
Answer: A
2. Depreciation expense
a. P27,600
b. P25,400
c. P53,000
d. P78,400
Answer: A
Answer: A
5. Net Income
a. P12,800
b. P54,800
c. P40,800
d. P68,800
Answer: D
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PROBLEM NO. 12 – Computation of statement of cash flow items from statement of financial
position and statement of profit or loss items
Al Corp. uses the direct method to prepare its statement of cash flows. Al’s trial balances at
December 31, 2015 and 2014 are as follows:
12/31/15 12/31/14
Debits P 35,000 P 32,000
Cash 33,000 30,000
Accounts Receivable 31,000 47,000
Inventory 100,000 95,000
Unamortized bond discount 4,500 5,000
Cost of goods sold 250,000 380,000
Selling expenses 141,500 172,000
General and Administrative expenses 137,000 151,300
Interest expense 4,300 2,600
Income tax expense 20,400 61,200
P 756,700 P 976,100
Credits
Allowance for uncollectible accounts P 1,300 P 1,100
Accumulated depreciation 16,500 15,000
Trade accounts payable 25,000 17,500
Income taxes Payable 21,000 27,100
Deferred tax liability 5,300 4,600
8% callable bonds payable 45,000 20,000
Share capital 50,000 40,000
Share Premium 9,100 7,500
Retained earnings 44,700 64,600
Sales 538,800 778,600
P 756,700 P 976,100
QUESTIONS:
Based on the foregoing, what amounts should Al report in its statement of cash flows for the year
ended December 31, 2015 for:
Answer: D
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2. Cash paid for goods to be sold?
a. P258,500 c. P242,500
b. P257,500 d. P226,500
Answer: D
Answer: C
Answer: A
Answer: C
The following is a list of the items to be included in the preparation of the 2015 statement of cash
flows for the Norhan Company:
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l. Amortization of discount on bonds payable, P1,900
m. Proceeds from issuance of note, P18,000
n. Increase in deferred taxes payable, P5,000
o. Equipment acquired by finance lease, P19,500
p. Decrease in salaries payable, P2,300
q. Beginning cash balance, P20,300
QUESTIONS:
Answer: D
Answer: C
Answer: A
Answer: D
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5. Cash balance, ending
a. P13,700
b. P10,700
c. P700
d. P6,900
Answer: B
The statement of financial position of Davao Company at the end of 2015 and 2014 follow:
Increase
2015 2014 Decrease
Cash P 125,000 P 175,000 P (50,000)
Accounts receivable (net) 300,000 225,000 75,000
Inventory 350,000 225,000 125,000
Prepaid expenses 50,000 125,000 (75,000)
Buildings and equipment 450,000 375,000 75,000
Accumulated depreciation – buildings and (90,000) (40,000) 50,000
equipment
Land 450,000 200,000 250,000
P 1,635,000 P P 350,000
1,285,000
Accounts payable P 340,000 P 275,000 P 65,000
Accrued expenses 60,000 90,000 (30,000)
Notes payable – bank, long-term _ 200,000 (200,000)
Mortgage payable 150,000 150,000
Share capital, P10 par 1,045,000 795,000 250,000
Retained earnings (deficit) 40,000 (75,000) 115,000
P 1,635,000 P P 350,000
1,285,000
Land was acquired for P250, 000 in exchange for ordinary shares, par P250, 000, during the
year; all equipment purchased was for cash. Equipment costing P25, 000 was sold for P10, 000;
book value of the equipment was P20, 000 and the loss was reported as an ordinary item in net
income. Cash dividends of P50, 000 were charged to retained earnings and paid during the year;
the transfer of net income to retained earnings was the only other entry in the Retained Earnings
account.
QUESTIONS:
Based on the foregoing information, compute for the following
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a. P120,000
b. P130,000
c. P140,000
d. P165,000
Answer: C
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X – SIMULATED BOARD EXAMINATIONS 1
PROBLEM NO. 1
Your audit of Nine Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in the bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this copy was given to the customer when he paid his account.
Additional Information
a. On January 2, 2015 Nine Company started business and issued share capital, 72,000
shares with P100 par, for the following considerations:
Cash P 600,000
Building (useful life, 15 years) 5,400,000
Land 1,800,000
P 7,800,000
b. An analysis of the bank statements showed total deposits, including the original cash
investment, of P4,200,000. The balance in the bank statement on December 31, 2015,
was P300,000, but there were checks amounting to P60,000 dated in December but not
paid by the bank until January 2016. Cash on hand on December 31, 2015 was P150,000
including customers’ deposit of P90,000.
c. During the year, Nine borrowed P600,000 from the bank and repaid P150,000 and
P30,000 interest.
d. Disbursements paid in cash during the year were as follows:
Utilities P 120,000
Salaries 120,000
Supplies 240,000
Dividends 180,000
P 660,000
e. An inventory of merchandise taken on December 31, 2015 showed P906,000 of
merchandise.
f. Tickets for accounts receivable totaled P1,080,000 but P60,000 of that amount may prove
uncollectible.
g. Unpaid suppliers invoices for merchandise amounted to P420,000.
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h. Equipment with a cash price of P480,000 was purchased in early January on a one-year
installment basis. During the year, checks for the down payment and all maturing
investments totaled P534,000. The equipment has a useful life of 5 years.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value
(NRV). The inventory accounts at December 31, 2014, had the following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company
during 2015.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a
trade discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the
net invoice price.
Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in
making payment. The unpaid balance on the sale is P15,200. The repossessed
merchandise is to be refinished and placed on sale. It is expected that the item can
be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit
for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made on finished goods that have a list price of P59,200
and a cost P38,400. A reduction of P8,000 off the list price was granted as a trade-
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in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal
profit on this type of inventory is 25% of the sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Assume the client is using perpetual inventorysystem)
PROBLEM NO. 3
In connection with your examination of the financial statements of the Anne Corporation for the
year 2015, the company presented to you the Property, Plant and Equipment section of its
statement of financial position as of December 31, 2014 which consists of the following:
Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000
The following transactions occurred during 2015:
Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land
Anne paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred
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to clear the land. During the course of clearing the land, timber and gravel were
recovered and sold for P20,000.
A second tract of land (site number 103) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. A new building was constructed for P600,000 plus the following costs:
Excavation fees P 44,000
Architectural design fees 32,000
Building permit fee 4,000
The building was completed and occupied on September 1, 2015.
A third tract of land (site number 104) was acquired for P2,400,000. The entity is
undecided regarding its future use.
Extensive work was done to a building occupied by Anne under a lease agreement. The
total cost of the work was P500,000, which consisted of the following:
The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.
During December 2015, costs of P260,000 were incurred to improve leased office space.
The related lease will terminate on December 31, 2017, and is not expected to be
renewed.
A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2015 were P52,000.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balance of the following
as of December 31, 2015:
11. Land
a. P8,400,000 c. P5,480,000
b. P6,000,000 d. P5,900,000
12. Buildings
a. P3,800,000 c. P4,200,000
b. P4,280,000 d. P3,880,000
13. Leasehold improvements
a. P2,600,000 b. P2,300,000
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c. P2,560,000 d. P2,720,000
14. Machinery and equipment
a. P3,114,000 c. P3,166,000
b. P3,100,000 d. P3,108,000
15. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Documentary support obtained by vouching entries to subsidiary records and
invoices.
b. Oral evidence obtained by discussions with operating management.
c. Physical examination of a sample of newly recorded fixed assets.
d. Documentary support obtained by reviewing titles and tax returns.
PROBLEM NO. 4
DELIVERY EQUIPMENT
Date Particulars Debit Credit
01/01/13 Trucks 1,2,3, and 4 P3,200,000
03/15/14 Replacement of Truck 3 tires 25,000
07/01/14 Truck 5 800,000
07/10/14 Reconditioning of Truck 4, which was damaged in a 35,000
collision
09/01/14 Insurance recovery on Truck 4 accident P33,000
10/01/14 Sale of Truck 2 600,000
04/01/15 Truck 6 1,000,000 150,000
05/02/15 Repainting of Truck 4 27,000
06/30/15 Truck 7 720,000
a. On July 1, 2014, Truck 3 was traded in for a new truck, Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
b. On April 1, 2015, Truck 6 was purchased for P1,000,000; truck 1 and cash of P850,000
being given for the new truck.
c. The depreciation rate is 20% by unit basis.
d. Unit costs of trucks 1 to 4 is at P800,000 each.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
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16. How much is the net loss on disposal of trucks in 2014?
a. P510,000 c. P590,000
b. P430,000 d. P230,000
17. What is the loss on trade-in of Truck 1?
a. P410,000 c. P250,000
b. P290,000 d. P150,000
18. What is the adjusted balance of the Delivery Equipment account as of December 31,
2015?
a. P4,170,000 c. P3,170,000
b. P2,650,000 d. P3,370,000
19. The 2015 depreciation expense in understated by:
a. P372,000 c. P92,000
b. P252,000 d. P292,000
20. Which of the following procedures would least likely lead the auditor to detect
unrecorded fixed asset disposals?
a. Examine insurance policies.
b. Review repairs and maintenance expense.
c. Review property tax files.
d. Scan invoices for fixed asset additions.
PROBLEM NO. 5
Maybe company is constructing a building. Construction began on January 1 and was completed
on December 31. Expenditures were P2,400,000 on March 1, P1,980,000 on June 1, and
P3,000,000 on December 31. Maybe Company borrowed P1,200,000 on January 1 on a 5-year,
12% note to help finance construction of the building. In addition, the company had outstanding
all year a 10%, 3-year, P2,400,000 note payable and an 11%, 4-year, P4,500,000 note payable.
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PROBLEM NO.6
The following information relates to the obligations of Lakers Corporation as of December 31,
2015.
Accounts payable for goods and services purchased on open account amounted to
P35,000 at December 31, 2015.
On December 15, 2015, Lakers declared a cash dividend of P.05 per share, payable on
January 12, 2016, to shareholders of record as of December 31, 2015. Lakers had 1
million ordinary shares issued and outstanding.
On December 31, 2015, Lakers entered into a six-year finance lease on a warehouse and
made the first annual lease payment of P100,000. The incremental borrowing rate was
12%, and the interest rate implicit in the lease, which was known to Lakers, was 10%.
The rounded present value factors for an annuity due for six years are 4.6 at 12% and 4.8
at 10%.
On July 1, 2015, Lakers issued P500,000, 8% bonds for P440,000 to yield 10%. The
bonds pay interest annually every June 30. At December31, 2015, the bonds were trading
on the open market at 86 to yield 12%. Lakers uses the effective interest method.
Lakers’ 2015 accounting profit was P850,000 and its taxable profit was P600,000. The
difference is due to P100,000 permanent differences and P150,000 of temporary
differences related to noncurrent assets. At December 31, 2015, Lakers had cumulative
taxable differences of P300,000 related to noncurrent assets. Lakers’ effective tax rate is
30%. Lakers made no estimated tax payments during the year.
Questions:
Based on the above and the result of your audit, determine the following as of and for the year
ended Dec. 31, 2015:
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29. Noncurrent liabilities
a. P850,000 c. P895,000
b. P854,400 d. P902,800
PROBLEM NO.7
In connection with your audit of the Get Back Company, you were asked to prepare comparative
data from the company’s inception to the present. The following were gathered during your
audit:
a. Get Back Company’s charter became effective on January 2, 2011, when 80,000, P10 par
value, ordinary shares and 40,000, 5% cumulative, nonparticipating, preference shares
were issued. The ordinary share was sold at P12 per share and the preference share was
sold at its par value of P100 per share.
b. Get Back was unable to pay preference dividends at the end of its first year. The owners
of the preference shares agreed to accept 2 ordinary shares for every 5 shares of
preference shares owned in discharge of the preference share dividends due on December
31, 2011. The shares were issued on January 2, 2012. The fair value was P30 per share
for ordinary on the date of issue.
c. Get Back Company acquired all outstanding shares of Day Tripper Corporation on May
1, 2013, in exchange for 40,000 ordinary shares of Get Back.
d. Get Back split its ordinary shares 3 for 2 on January 1, 2014, and 2 for 1 on January 1,
2015.
e. Get Back offered to convert 20% of the preference shares to ordinary on the basis of 2
ordinary share for 1 preference share. The offer was accepted, and the conversion was
made on July 1, 2015.
f. No cash dividends were declared on ordinary shares until December 31, 2013. Cash
dividends per ordinary share were declared and paid as follows:
December 31 June 30
2013 P4.00 -
2014 P5.00 P3.00
2015 P2.00 P2.50
Questions:
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Based on the above and the result of your audit, determine the following:
33. Amount of cash dividends declared and paid to ordinary shareholders for the year 2014
a. P972,800 c. P1,459,200
b. P608,000 d. P1,981,440
34. Amount of cash dividends declared and paid to ordinary shareholders for the year 2015
a. P3,911,040 c. P1,713,600
b. P3,041,600 d. P1,673,600
35. Where no independent stock transfer agent are employed and the corporation issues its own
stocks and maintains stock records, cancelled stock certificates should
a. Be destroyed to prevent reissuance.
b. Be defaced and sent to the secretary of state.
c. Be defaced to prevent reissuance and attached to their corresponding stubs.
d. Not be defaced but segregated from other stock certificates and retained in a
cancelled certificates file.
PROBLEM NO.8
Bryant Corporation, a non-public entity, was incorporated on December 1, 2014, and began
operations one week late closing the books for the fiscal year ended November 30, 2015, the
controller prepared the following financial statements:
Bryant Corporation
Statement of Financial Position
November 30, 2015
Assets
Current assets:
Cash P150,000
Marketable securities, at cost 60,000
Accounts receivable 450,000
Allowance for doubtful accounts (59,000)
Inventories 430,000
Prepaid insurance 15,000
Total current assets 1,046,000
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Property, plant and equipment 426,000
Less accumulated depreciation (40,000)
Property, plant and equipment, net 386,000
Research and development costs 120,000
Total assets P1,552,000
Bryant Corporation
Statement of Income
For the Fiscal Year Ended November 30, 2015
Operating expenses:
Cost of Sales 1,670,000
Selling and administrative 650,000
Depreciation 40,000
Research and development 30,000
2,390,000
Income before income taxes 560,000
Provision for income taxes 224,000
Net income P336,000
Bryant is in the process of negotiating a loan for expansion purposes, and the bank has requested
audited financial statements. During the course of the audit, the following additional information
was obtained:
b. Based on an aging of the accounts receivable as of November 30, 2015, it was estimated
that P36,000 of the receivables will be uncollectible.
c. Inventories at November 30, 2015 did not include work in process inventory costing
P12,000, sent to an outside processor on November 29, 2015.
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d. A P3,000 insurance paid on November 30, 2015 on a policy expiring one year later was
charged to insurance expense.
e. Bryant adopted a pension plan on June 1, 2015 for eligible employees to be administered
by a trustee. Based upon actuarial computations, the first twelve months’ normal pension
was estimated at P45,000.
f. On June 1, 2015, a production machine purchased for P24,000 was charged to repairs and
maintenance. Bryant depreciates machines of this type on the straight-line method over a
five-year life with no salvage value, for financial and tax purposes.
g. Research and development costsof P150,000 were incurred the development of a patent,
which Bryant expects to be granted during the fiscal year ending November 30, 2016.
Bryant initiated a five-year amortization of the P150,000 total cost during the fiscal year
ended November 30, 2015.
h. During December 2015, a competitor company filed suit against Bryant for patent
infringement claiming P200,000 damages. Bryant’s legal counsel believes that an
unfavourable outcome is probable. A reasonable estimate of the court’s award to the
plaintiff is P50,000.
i. The 40% effective tax rate was determined to be appropriate for calculating the provision
for income taxes for the fiscal year ended November 30, 2015. Ignore computation of the
deferred portion of income taxes.
QUESTIONS:
Based on the above and the result of your audit, determine the following as of and for the fiscal
period ended November 30, 2015:
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40. Total equity
a. P683,260 c. P639,760
b. P635,260 d. 653,260
PROBLEM NO.9
Hot Company was started by Chika Babes early in 2015. Initial capital was acquired by issuing
ordinary shares to various investors and by obtaining a bank loan. The company operates a retail
store that sells records, tapes, and compact discs. Business was so good during the first year of
operations that June is considering operating a second store on the other side of town. The funds
necessary for expansion will come from a new bank loan. In order to approve the loan, the bank
requires financial statements.
Chika asks for your help in preparing the balance sheet and presents you with the following
information for the year ending December 31, 2015.
c. The bank loan was made on March 31, 2015. A note was signed requiring payment of
interest and principal on March31, 2016. The interest rate is 12%.
d. The equipment and furniture was purchased on January 3, 2015, and have an estimated
useful life of 10 years with no anticipated salvage value. Depreciation per year is
P40,000.
g. Rent on the store building is P10,000 per month. On December 1, 2015, four months’
rent was paid in advance.
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h. Net income for the year was P760,000. Assume that the company is not subject to the
income tax.
i. One million shares of no par ordinary shares are authorized, of which 200,000 shares
were issued and are outstanding.
QUESTIONS:
After preparing all the necessary adjustments based on the above audit findings, determine the
best choice for the following:
PROBLEM NO. 10
Presented below is the statement of financial position of Simple Corporation prepared by the
chief accountant for the current year, 2015.
Simple Corporation
Statement of Financial Position
December 31, 2015
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Current liabilities P 330,000
Long-term liabilities 1,000,000
Shareholders’ equity 1,770,000
P3,100,000
1. The current assets section includes: cash P100,000, accounts receivable P170,000 less
P10,000 for allowance for doubtful accounts, inventories P180,000, and unearned
revenue P5,000. The cash balance is composed of P114,000, less a bank overdraft of
P14,000. Inventories are stated on the lower of FIFO cost or market.
2. The investments section includes: the cash surrender value of a life insurance contract
P40,000; investment in ordinary shares, short-term (trading) P80,000 and long-term
(available-for-sale) P270,000; and bond sinking fund P250,000. The cost and fair value
of investments in ordinary shares are the same.
5. Current liabilities include: accounts payable P90,000; notes payable-short term P80,000
and long-term P120,000; and taxes payable P40,000.
6. Long-term liabilities are compose solely of 10% bonds payable due 2022.
7. Shareholders’ equity has: preference shares, no par value, authorized 200,000 shares,
issued 70,000 shares for P450,000; and ordinary shares, P1.00 par value, authorized
400,000 shares, issued 100,000 shares at an average price of P10. In addition, the
corporation has retained earnings of P320,000.
8. The company’s management does not elect to use the fair value option for any of its
financial assets or liabilities.
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following to
be reported on the company’s statement of financial position as of December 31, 2015:
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47. Noncurrent investments
a. P830,000 c. P560,000
b. P520,000 d. P790,000
ANSWERS:
1. D 11. B 21. B 31. D 41. A
2. A 12. D 22. D 32. C 42. A
3. D 13. C 23. D 33. C 43. B
4. D 14. A 24. A 34. D 44. C
5. B 15. C 25. C 35. C 45. A
6. C 16. B 26. C 36. A 46. D
7. A 17. B 27. C 37. C 47. A
8. D 18. D 28. D 38. B 48. D
9. B 19. D 29. A 39. A 49. C
10. B 20. B 30. D 40. D 50. B
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X – SIMULATED BOARD EXAMINATION II
PROBLEM NO. 1
You were asked by Something Corporation to audit its financial statements for the years ended
December 31, 2014 and 2015. While reviewing the entity’s records for 2014 and 2015, you
discover that no adjustments have yet been made for the items below.
Item no. 1
Insurance premiums of P300,000 for the three-year period beginning January 1, 2014, had been
paid and fully expensed in 2014.
Item no. 2
The merchandise inventories at the end of 2014 and 2015 did not include merchandise that was
then in transit and to which the company had title. These shipments of P50,000 and P30,000
were recorded as purchases in January 2015 and 2016, respectively.
Item no. 3
Rental of P60,000 on an equipment, applicable for six months, was received on November 1,
2014. The entire amount was reported as income upon receipt.
Item no. 4
The entity purchased a machine on January 2, 2014 at a cost of P120,000. An additional of
P50,000 was spent for installation, but this amount was charged erroneously to repairs expense.
The machine has a useful life o five years and residual amount of P20,000.
Item no. 5
The entity received P360,000 from a customer at the beginning of 2014 for services that it is to
perform evenly over three-year period beginning in 2014. None of the amount received was
reported as unearned revenue at the end of 2014.
Questions:
Based on the above and the result of your audit, answer the following:
1. In relation to Item no. 1, which of the following is correct?
a. The 2014 profit is overstated
b. The 2015 profit is overstated
c. The December 31, 2014 retained earnings is correctly stated
d. The December 31, 2015 retained earnings is correctly stated
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c. The December 31, 2014 retained earnings is correctly stated
d. The December 31, 2015 retained earnings is correctly stated
PROBLEM NO. 2
The general ledger trial balance of Calamba Corporation includes the following balance sheet
accounts at December 31, 2015:
Cash P1,056,000
Accounts Receivable 1,220,000
Inventory 441,000
Trading securities 200,000
Available for sale investments 500,000
Prepaid insurance 50,000
Deferred tax asset 150,000
Bank overdraft 100,000
Additional information:
Cash
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The sales book was left open up to January 5, 2016, and cash sales totaling P150,000
were considered as sales in December.
Checks of P93,000 in payment of liabilities were prepared before December 31, 2015,
recorded in the books, but not mailed or delivered to payees.
Post-dated checks totaling P78,000 are being held by the cashier as part of cash. The
company’s experience shows that post-dated checks are eventually realized.
Customer’s check for P15,000 deposited with but returned by Bank, “NSF” on December
27, 2015. Return was recorded in the books.
The cash account includes P400,000 of compensating balance against a short-term bank
loan. The compensating balance is legally restricted as to withdrawal.
Accounts receivable
The accounts receivable consists of the following:
Trade accounts receivable P650,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Calamba on
consignment at 130% of cost (included in Calamba’s
ending inventory at cost) 260,000
Security deposit on lease of warehouse used for storing
some inventories 300,000
Total P1,220, 000
Inventory
A physical count of inventory at December 31, 2015 revealed that Calamba had inventory on
hand at that date with a cost of P441,000. The annual audit identified that the following items
were excluded from this amount and the related transactions were not recorded:
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6. Cash
a. P921,000
b. P521,000
c. P584,000
d. P506,000
9. Inventory
a. P730,000
b. P340,000
c. P451,000
d. P530,000
PROBLEM NO. 3
The following data were taken from your current working papers in connection with your audit
of the Pacers Company’s financial statements for the year ended December 31, 2015
Cash account consists of the following items:
Petty cash fund P25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
P331,750
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a. The count of the cashier’s accountability on January 2, 2016, revealed total bills and
coins of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which
P3,000 pertains to January 2016.
b. On December 29,2015 a check for P87,500 was drawn against Security Bank current
account resulting in bank overdraft of P37,500. The check was picked up by the supplier
on January 3, 2016.
c. Bank reconciliation statement prepared by the cashier for the Allied Bank account
follows:
12. How much is the adjusted Allied Bank current account as of December 31, 2015?
a. P336,500
b. P296,500
c. P305,500
d. P330,250
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c. P 6,500
d. P 0
15. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal
use by lapping customer checks received in the mail. In attempting to uncover this
embezzlement scheme, the auditor most likely would compare the
a. Date checks are deposited per bank statements with dates remittance credits are
recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-
offs are actually recorded.
PROBLEM NO. 4
In connection with your examination of the financial statements of Seven, Inc for the year ended
December 31, 2015, you were able to obtain the following information from the results of your
confirmation of the entity’s accounts receivable:
Wade We do not owe this amount, we did Investigation revealed that goods sold for
not receive any merchandise from P16,000 were shipped to Wade on
your company. December 29, 2015, terms FOB shipping
point. The goods were lost in transit and
the shipping company has acknowledged
its responsibility for the loss of the
merchandise.
Allen We have not yet sold the goods. We Merchandise billed for P18,000 were
will remit the proceeds as soon as the consigned to Allen on December 30,
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goods are sold 2015. The goods cost P13,000. The
inventory was determined by physical
count at the client’s warehouse.
Chalmers Reduce your bill by P1,500 The amount represents freight paid by
the customer for the merchandise
shipped on December 17, 2015, terms,
FOB destination-collect.
Questions:
Based on the above and the result of your audit, answer the following:
16. In relation to customer Wade, the necessary adjusting entry includes
a. A debit to Sales of P16,000
b. A credit to Accounts receivable of P16,000
c. Both a and b
d. Neither a nor b
17. In relation to customer Allen, the necessary adjusting entry does not include
a. A debit to Sales of P18,000
b. A debit to inventory of P13,000
c. A credit to Accounts receivable of P18,000
d. None of the above
18. In relation to customer Lewis, the necessary adjusting entry includes a debit to
a. A debit to Cash of P20,000
b. A credit to Accounts receivable of P20,000
c. Both a and b
d. Neither a nor b
20. Completeness of revenues may be tested by the auditor through the selection of a sample
of which of the following?
a. Accounts receivable and tracing them to cash receipts.
b. Recorded sales transactions and tracing them to the general ledger
c. Shipping documents and tracing them to the sales journal.
d. Inventory records and tracing them to the shipping documents.
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PROBLEM NO. 5
You obtained the following information from the balance sheet of Caloocan Company in
connection with your audit of the Company’s financial statements for the year 2015:
All operating expenses are paid by Caloocan with cash and all purchases of inventory are made
on account. Caloocan sells only on product. All sales are cash sales which are made for P100 per
unit. Caloocan purchases 1,500 units of inventory per month and values its inventory using
periodic FIFO. The unit cost of inventory during January 2015 was P65.20 and increase P0.20
per month during the year. During 2015, payments to suppliers totaled P943,400 and operating
expenses totaled P440,000. The ending inventory for 2014 was valued at P65.00 per unit.
Questions:
Based on the above and the result of your audit, determine the following:
21. Number of units sold during 2015
a. 18,900
b. 18,400
c. 8,268
d. 8,768
24. Which of the following audit procedures would provide the least reliable evidence that
the client has legal title to inventories?
a. Confirmation of inventories at locations outside the client’s facilities
b. Observation of physical inventory counts
c. Examination of paid vendor’s invoices
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d. Analytical review of inventory balances compared to purchasing and sales activities
PROBLEM NO. 6
In 2010, Hawks Corporation acquired a silver mine in bengue. Because the mine is located deep
in the Benguet mountains, Hawks was able to acquire the mine for the low price of P50,000. In
2011, Hawks constructed a road to the silver mine costing P5,000,000. Improvement to the mine
made in 2011 cost P750,000. Because of the improvents to the mine surrounding land, it is
estimated that the mine can be sold for P600,000 when the mining activities are complete.
During 2012, five buildings were constructed near the mine site to house the mine workers and
their families. The total cost of the five buildings was P1,500,000. Estimated residual value is
P250,000. In 2010, geologists estimated 4 million tons of silver ore could be removed from the
mine for refining. During 2013, the first year of operations, only 5,000 tons of silver ore were
removed from the mine. However, in 2014, workers mined 1 million tons of silver. During the
same yeaer, geologists discovered that the mine contained 3 millio tons of silver ore in addition
to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2014 to
facilitate the removal of the additional silver. Early in 2014, an additional building was
constructed at a cost of P225,000 to the house the additional workers needed to excavate the
added silver. This building is not expected to have any residual value.
In 2015, 2.5 million tons of silver were mined and costs of P1,100,000 wew incurred at the
beginning of the year for improvements to the mine.
Questions:
Based on the above and the result of your audit, determine the following: (Round off depletion
and depreciation rates to two decimal places)
26. Depletion for 2013
a. P6,300
b. P7,250
c. P6,500
d. P5,550
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28. Depreciation for 2014
a. P250,000
b. P180,000
c. P490,000
d. P210,000
On June 15, 2014, Perseverance issued 50,000 ordinary shares for P6,000,000. A 5% share
dividend was declared on September 30, 2014 and issued on November 10, 2014 to shareholders
of record on October 31, 2014. Market value of ordinary share was p110 per share on declaration
date. The profit of Perseverance for the year ended December 31, 2014 was P475,000.
During 2015, Perseverance had the following transactions;
Mar. 1 Perseverance reacquired 3,000 shares of it ordinary shares for P95 per
share.
May 31 Perseverance sold 1,500 treasury shares for P120 per share.
Aug. 10 Issued to shareholders one right for each share held to purchase two
additional ordinary shares for P125 per share. The rights expire on
December 31, 2015.
Sep. 15 25,000 rights were exercised when the marker value of ordinary share was
P130 per share.
Oct. 31 40,000 rights were excercised when the market value of the ordinary share
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was P140 per share.
Dec. 10 Perseverance declared a cas dividend of P2 per share payable on January
5, 2016 to shareholders of record on December 31, 2015.
Dec. 20 Perseverance retired 1,000 treasury shares and reverted them to an
unissued basis. On this date, the market value of the ordinary share was
P150 per share.
Dec. 31 Profit for 2015 was P500,000.
Questions:
Based on the above and the result of your audit, determine the following as of December 31,
2015:
31. Share capital
a. P21,400,000
b. P21,300,000
c. P14,800,000
d. P21,250,000
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Your firm has been engaged to examine the financial statements of Ten Corporation for the year
2015. The bookkeeper who maintains the financial records has prepared all the unaudited
financial statements for the corporation. The client provides you with the information below.
Ten Corporation
Statement of Financial Position
December 31, 2015
Assets Liabilities
Current assets P1,881,100 Current liabililities P 962,400
Other assets 5,171,400 Long-term liabilities 1,439,500
________ Capital 4,650,600
P7,052,500 P7,052,500
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Long-term liabilities include:
Capital includes:
Questions:
Based on the above and the result of the audit, answer the following:
36. The adjusted current assets as of December 31, 2015 is
a. P1,296,100
b. P1,505,800
c. P1,690,800
d. P1,553,200
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a. P1,619,500
b. P1,130,000
c. P1,659,500
d. P1,419,500
40. An auditor passes on several errors discovered during the audit. Which of the following
represents the best reason for the auditor not requesting that the adjustments be made by
management?
a. Management has properly disclosed the extent of the errors in the fottnotes to the
consolidated financial statements of the year under audit.
b. The attorney’s response to audit inquiry includes the statement that counsel is
unaware of any errors and can make no such estimates.
c. The auditor is not required to discover all material errors in the financial statements
under the concept of reasonable assurance.
d. The errors are not material in aggregate after considering the reversing, effects of
passed entries from previous periods.
PROBLEM NO. 9
The following trial balance related to Imagine Corporation at 31 March 2015:
P’000 P’000
Debit Credit
Closing inventories – 31 March 20 (note (i)) 18,900
Land and building – at valuation (note (iii)) 113, 400
Plant and equipment – cost (note (iii)) 64,800
Accumulated depreciation 1 April 2014 – plant 30,240
and equipment
Investment property – valuation 1 April 2014 28,800
(note (iii))
Trade receivables 38,700
Cash in Bank 1,620
Trade payables 21,240
Ordinary shares of P0.25 each 36,000
10% Redeemable preference shares of P1 each 18,000
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Revaluation reserve (note (iii) 37,800
Retained earnings – 1 April 2014 31,500
Profit or loss summary _______
88,200
264,600 264,600
A professional valuer submitter a report on 1 April 2014, revaluing the land at P27
million and building at P86.4 million. The directors decided to incorporate these
values in the accounts. On that date the land and building had a carrying value of
P75.6 million and the building had a remaining life of 15 years.
Plant
Investment property
On 31 March 2015 the investment property was revalued at P24.3 million. Imagine
uses the fair value model.
Questions:
Based on the above and the result of your audit, answer the following: (Ignore income taxes).
41. The adjusted profit or loss for the year ended 31 March 2015 is
a. P78,840,000
b. P79,380,000
c. P73,080,000
d. P80,640,000
42. The comprehensive income for the year ended 31 March 2015 is
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a. P117,180,000
b. P79,380,000
c. P118,440,000
d. P116,640,000
PROBLEM NO. 10
Snow White Company began operations on January 1, 2015. The accountant prepared the
following:
Statement of Financial Position (Cash Basis)
January 1, 2015
The company has developed plans to expand its business is in the process of negotiationg a bank
loan to finance the expansion. The bank is requesting of negotiating 2015 financial statements
prepared on the accrual basis of accounting. As the company’s external auditor, you were called
upon to assist in preparing the financial statements. During the course of your engagement, you
obtained the following information:
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Cash sales P232,000
Collections from credit customers 80,000
Payments on account for parts 80,800
Wages paid to employees 124,000
Payments to the utility company 22,000
Questions:
Baseed on the above and the result of your engagement, you are asked to provide the following
information under the accrual basis:
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b. P335,350
c. P307,450
d. P265,600
ANSWERS:
1. B 11. A 21. B 31. B 41. A
2. A 12. B 22. A 32. C 42. D
3. C 13. B 23. A 33. D 43. A
4. C 14. D 24. D 34. D 44. B
5. D 15. A 25. C 35. D 45. C
6. B 16. D 26. C 36. B 46. D
7. C 17. D 27. B 37. C 47. C
8. A 18. D 28. D 38. B 48. B
9. D 19. A 29. B 39. D 49. C
10. B 20. C 30. A 40. D 50. B
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