CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS JULY 29, 2018 FIRST PREBOARD EXAMINATION SUNDAY, 8:00AM ~ 11:00AM SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED. PROBLEM NO. 1 During May 2017, GUADALUPE, INC. issued 90,000 of its P10 par value ordinary shares for 990,000, Net income through December 31, 2017, was P37,500. On July 3, 2018, Guadalupe issued 150,000 of its ordinary shares for P1,875,000, A 5% share dividend was declared on October 2, 2018, and issued on November 6, 2018, to shareholders of record on October 23, 2018. The market value of the ordinary shares was P11. per share on the dedaration date. Guadalupe’s net income for the year ended December 31, 2018, was P105,000, During 2019, Guadalupe had the following transactions: 1. In February, Guadalupe reacquired 9,000 of its ordinary shares for P9 per share. Guadalupe uses the cost method to account for treasury shares. e 2. In June, Guadalupe sold 4,500 of its treasury shares for P12 per shere. 3. In September, each shareholder was issued (for each share held) one right to purchase two ‘additional ordinary shares for P13 per share, The rights expire on December 31, 2019. 4. In October, 75,000 rights issues were exercised when the market value of the ordinary share was P14 per share, 5, In November, 120,000 rights issues were exercised when the market value of the ordinary share was P15 per share. 6. On December 15, Guadalupe declared its first cash dividend to shareholders of P0.30 per share, payable on January 10, 2020, to shareholders of record on December 31, 2019. 7, On December 21, in accordance with the applicable law, Guadalupe formally retired 3,000 of its treasury shares and had them revert to an unissued basis. The market value of the ‘ordinary share was P16 per share on this date, 8. Net income for 2019 was P240,000. 1. What are the balances of the following equity accounts on December 31, 2017? Ordinary Share Capital ‘Share Premium _Retzined Earnings A 900,000, 190,000 - 37,500 B. P990,000 PO P37,500 c 390,000 37,500 PO D. 900,000 37,500 90,000 Page 1 of 12 Pages(PA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)- MANILA FIRST PREBOARD EXAMINATION 2. What are the balances of the following equity accounts on December 31, 2018? Ordinary Share Capital Share Premium —_—Retained Earnings A 2,520,000 465,000 22,500 a> @ 2,532,000 465,000 10,500 ic 2,520,000 477,000 10,500 Dd. 2,532,000 477,000 22,500 3. What are the balances of the following equity accounts on December 31, 2019? Ordinary ‘Share Capital ‘Share Premium Retained Earnings A, 6,363,000 1,660,500 190,350 B) 6,390,000 1,663,500 59,250 i 6,393,000 P1,657,500 P13,500 D. 6,376,500 1,650,000 P72,750 4. What amount should be charged to Retained eamings for the cash dividend declared on December 15, 2019? A. P191,250 B) P191,700 c. P189,900 D. P120,600 5. What is the treasury shares balance on December, 31, 2019? ‘A. 40,500 B. P54,000 13,500 D. P81,000 onan GIO ID annnnrmennrnneneeenmnennn PROBLEM NO. 2 ‘At December 31, 2017, certain accounts included in the property, plant, and equipment section of the SPEED COMPANY’s statement of financial position had the following balances: Land Buildings Leasehold improvements Machinery and equipment. During 2018 the following transactions occurred: Land site number 621 was acquired for P2,000,000. Additionally to acquire the land, Speed paid 2 P60,000 commission to a real estate agent. Costs of P15,000 were incurred to clear the land for the intended use but not to make room for the construction of a new building. During the course of clearing the land, timber and gravel were recovered and sold for P5,000. A second tract of land (site number 622) with a building was acquired from another entity in ‘exchange for 100,000 Speed ordinary shares. On the acquisition date, the shares had a closing market price of P45 on a stock exchange. Current appraised values for the land and building, Fespectively, are P1,200,000 and P2,400,000. Shortly after acquisition, the building was demolished at a cost of P30,000 to make room for the construction of new building. A new building was constructed for P10,500,000 plus the following costs: Architectural design Building permit fee. Imputed interest on funds used during construction. ‘The building wes completed and occupied on September 30, 2018. A third tract of land (site number 623) was acquired for P6,000,000 and was classified as held for sale. Page 2 of 12 PagesCPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION Extensive work was done to a building occupied by Speed under a lease agreement that expires on December 31, 2025. The total cost of the work was P1,250,000, which consisted of the following: Painting of callings. 100,000 estimated useful life is one year am Electrical work.. 50,000 estimated useful life is ten years Construction of extension to current \ working area 800,000 estimated useful life is 30 years t ‘The lessor paid one-half of the costs incurred in connection with the extension to the current working area. During December 2018, costs of P650,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2020 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 P750,000, freight costs were P20,000, unloading charges were P15,000, and. royalty payments for 2018 were P130,000. Questions: 6. What is the December 31, 2018, balance of the Land account that should be shown as part “of property, plant, and equipment in the statement of financial position? A. P6,270,000 B. P6,470,000 ./P6,570,000 D. P12,570,000 7. What is the total cost of buildings on December 31, 2018? 2 A. 35,000,000 B. P35,030,000 C. P35,040,000 D. P37,430,000 8. Whats the total cost of leasehold improvements on December 31, 2018? A. 4,250,000 8. P4,900,000 C.)P5,000,000 D. P5,300,000 9. What is the total cost of machinery and equipment on December 31, 20187 A. P2,170,000 (BY P2,185,000 C, P2,315,000, D. P2,415,000 10. How much should be reported as part of expenses (excluding depreciation) in the income statement for the year ended December 31, 2018? (A. P130,000 C, P230,000 D. 290,000 PROBLEM NO. 3 The following data pertain to KUKURUKUKU CORPORATION'S property, plant, and equipment for 2018. Audited balances at December 31, 2017: DEBIT CREDIT Land P 7,500,000 Buildings 30,000,000 Accumulated depreciation ~ Buildings 2 6,577,500 Machinery and equipment 22,500,000 ‘Accumulated depreciation ~ Machinery and equipment 6,250,000 Delivery equipment 5,750,000 Accumulated depreciation ~ Delivery equipment 4,230,000 Depreciation data: Depreciation Method Useful Life Buildings 150% declining-balance 25 years Page 3 of 12 Pages ; t dns‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FARST PREBOARD EXAMI! AUDITING PROBLEMS 0 JULY 29, 2018 SUNDAY /#:0080 ~ 1:00AM Machinery and Equipment Straight-line 10 years ! Delivery Equipment Sum-of-the-years’-digits 4 years 1 Leasehold Improverients Straight-line : - Transactions during 2018 and other information are as follows: @) On January 2, 2018, KUKURUKUKU purchased a new truck for P1,000,000 cash and trade-in Of a 2-year-old truck with a cost of P900,000 and a book value of P270,000. The new truck has @ cash price of Pi,200,000; the market value of the trade-in is not known. b) On. April 1, 2018, a machine purchased for P575,000.'on April 1, 2013, was. stolen, KUKURUKUKU recovered P387,500 from its insurance company.” Ie . <) On May 1, 2018,)costs of P8,400,000 were incurred to improve leased office premises. The feasehold improvements have a useful life of 8 years, The related lease terminates on ~; December 31, 2024, ) On July L, 2018, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional costs of P125,000 for freight and P625,000 for installation were incurred. A FO ©) KUKURUKUKU deternined that the delivery equipment comprising the P5,250,000 balance at |" January 1, 2018, would have been depraciated at @ total amount of P900,000 for the year _ ‘ended December 31, 2018. . = ; ‘The salvage values of the depreciable assets are immaterial. The policy of KUKURUKUKU is to compute depreciation to the nearest month. Based on the preceding information, compute the following: 11._Depreciation expense for 2018 on Buildings 3) P1,405,350 8, P929,700 . 1,200,000 . P1,800,000 12, Depreciation expense for 2018 on Leasehold improvements &AL)P700,000 B. P4,050,000 C. P640,000 D, 933,333 * 13, Acqumulated depreciation ~ Machinery and cqulament, December 21, 2018 AL P8,644,375— B. PS,556,875 C. 28,500,000 ‘D. PB,844,375 ess 14. -Aecumulated depreciation ~ Delivery equipment, Deceniber 31, 2018 A, 5,430,900 3. P4,629,000 . P4,7320,000 B, 4,800,000 415. Gain (loss) on trade in of truck on January 2, 2038, A. P(200,000) B. 200,000 ( C.)P(76,000) D. 70,000 aera a000N00- _ PROBLEM NO. 4 The following independent situations relate to the audit of intangible essets, Answer the questions at the end of each situation. CABOOM LABORATORIES holds a valuable patent (WNo. 112170) on a device that prevents certain types of air pollution. Caboam does not manufacture or sell the products and processes it develops; it conducts research and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. ‘The history of Patent No. 112476 is as follows: Date Activity Sost 2008-2009 Research conducted te develop device 1,259,100 Page 4 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION AUDITINGPROBLEMS SUL. 29, 2018 / SUNDAY / 8:00AM ~ 11:00AM Jan. 2010 Design and construction of a prototype 262,800 Mar. 2010 Testing of models 126,000 Jan, 2011 Legal and other fees to process patent application; patent granted June 2011 186,150 Nov. 2012 Engineering activity necessary to advance the design of the device to the manufacturing stage 244,500 April 2014 Research aimed at modifying the design of the patented device 129,000 May 2018 Legal fees paid in a successful patent infringement suit against a | ‘competitor 102,000 ‘Caboom assumed a useful life. of 17 years when it recelved the initial device patent. On January 1, 2016, it revised its useful life estimate downward to_5remaining years. Amortizetion is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2018. Compute the carrying value of Patent No. 112170 on each of the following dates: 16, December 31, 2011 A. P180,675 B. 186,150 C. P293,788 D. P175,200 _AT. December 31, 2015 A. P223,200 B. P52,560 C,) P131,400 D. 122,640 18. December 31, 2018 A. P120,560 B. P78,840 C. P52,560 D. P98,550 BARTOLO COMPANY has provided information on intangible assets as follows: ‘+ A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2017. Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting records at a net book value of P4,000,000 when Valenzuela sold it to Bartolo. + During 2018, a franchise was purchased from Deico Company for P960,000. The contract which runs for 10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the franchise for 2618 was P5,000,000. Bartolo takes a full year amortization in the year of purchase. + The following research and development costs were incurred by Bartolo in 2018: Materials and equipment 284,000 i Personnel 378,000 Indirect costs 204,000 ‘866,000 Bartolo estimates that these costs will be recouped by December 31, 2021. ‘The materials and equipment purchased have no alternative uses. * OnJanuary 1, 2018, because of recent events in the field, Bartolo estimates that the remaining life of the patent purchased on January 1, 2017 is only 5 years from January 1, 2018, 19. What is the total carrying value of Bartolo’s intangible assets on December 31, 2018? A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500 20. Asa result of the facts above, compute the total amount of charges against income for the year enced December 31, 2018? A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000 Page 5 of 12 Pages(CPA REVIEW SCHOOL. OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITINGPROBLEMS LY 29, 2038 / SUNDAY / 8:00AM — 11:004M At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon ‘the employees remaining in the entity's employ during the vesting period. The shares will vest at the end of year 1 if the entity's earnings increase by more than 18 percent; at the erid of year 2 if the entity's earnings increase by more than an average of 13 percent par year over the two- year period; and at the end of year 3 if the entity’s earnings increase by more than an average of 10 percent per year over the three-year period. The shares have a fair value of P10 per share at the start of year 1, which equals the share price at grant date. By the end of year 1, the entity’s earnings have increased by 14 percent, and 20 employees have left. “The entity expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares will vest at the end of year 2. The entity expects, on the basis ‘of a weighted average probability, that a further 30 employees will leave during year 2. By the end of year 2, the entity’s earnings have increased by only 10 percent and therefore the shares do net vest at the end of year 2. 42 employees have left during the year. ‘The entity expects that o further 15 employees will leave during year 3, and that the entity's eamings will increase by at least 6 percent, thereby achieving the average 10 percent per year. By the end of year 3, 10 employees have left and the entity’s earnings had increased by 8 percent, resulting in an average of 10.67 percent per year. Based on the foregoing, answer the following: 24. What amount of compensation expense should be recognized in year 1? A. P240,000 B. P225,000 C. P150,000 D. P160,000 22. What amount of compensation expense should be recognized in year 2? A. P57,000 B. P52,000 C. PG7,000 D, P122,000 23. What ammount of compensation expense should be recognized in year 3? A. P151,000 5. P216,000 . P436,000 D, P146,000 24. What amount should the entity report 2s shere options outstanding at the end of year 2? A. P282,000 B. P292,000 S. P27z,005 . P307,000 25. What amount should the entity report as share ontions outstanding at the end of year 3? ‘A. 450,000 D. P500,000 PROBLEM NO. 6 Presented below are unrelated situsations. 1. HARLINGTON COMPANY buys and sells securities expecting w0 earn profits on short-term differences in price. During 2018, Harlington Company purchased the following trading securities: Fair Value ‘Security Cost Dec. 31,2018 A P.583,000 - P 675,000 B 900,090 486,000 c 4,380,000 2,034,000 Before any adjustments related to these trading securities, Harlington Company had net income of P2,700,000, 26. What is Harlington’s net income after making any necessary trading security adjustments? 7 (&.) 2,430,000 8, P2,286,000 C. P2,034,000 D. P2,700,000 Page 6 of 12 Pages(OPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION 27._-What would Harlington’s net income be If the fair value of security B were P855,0007 —~ A. P2,601,000 B. | P2,799,000 . P2,700,000 D. P2,655,000 2. LABADA CO.'s portfolio of trading securities includes the following on December 31, 2017: = Cost Fair Value 15,000 ordinary shares of Camias Co, 1,431,000 1,251,000 30,000 ordinary shares of Ganda Co. 1,638,000 —1.210,000 All of the above securities have been purchased in 2017. In 2018, Labada Co. completed the following securities transactions: Mar. 1 Sold 15,000 shares of Camias Co, ordinary shares for P1,381,500. April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other trafisaction costs of P4,950. ‘The Labada Co, portfolio of ‘trading securities appeared as follows on December 31, 2018: Cost Fair Value 30,000 ordinary shares of Ganda Co. P1,638,000 ~ 1,740,000 + 1,800 ordinary shares of Waston, Inc. © _ 247,950 225,000? PL885.950 —- P1L.965,000 Net of P419,500 estimated transaction costs that would be Incurred on the sale of the securities, * Net of P4500 estimated transaction costs that would be incurred on the sale ofthe secures, 28. What amount of unrealized gain on these securities should be reported in the 2018 income statement? A. P31,050 B. P79,050 C. P84,000 D. P36,000 29. What Is the gain on the sale of Camias Co, ordinary shares on March 1, 2018? A. P144,000 B. P27,000 C, P130,500 D. P13,500 30. “What amount should be reported as trading securities in Labada’s statement of financial —— position on December 31, 2018? A. 1,965,000 B. P1,989,000 C, P1,885,950 D. P1,909,950 ---000000000-- ase PROBLEM NO, 7 j DOMROX CO. reported the following amounts of net income for the years ended December 31, 2016, 2017, and 2018: 2016 190,500 2017 225,000 2018 192,750 ‘You are performing the audit for the year ended December 34, 2018. During your examination, you discover the following errors: a) As a result of errors in the physical count, ending Inventories were misstated as follows: December 31,2017 P21,000 understated December 31,2018 34,500 overstated 5) On December 29, 2018, DOMROX recorded as a purchase, merchandise in transit which cost P22,500. The merchandise was shipped FOB Destination and had not artived by December 31, The merchandise was not included in the ending inventory, Page 7 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION ¢) DOMROX records sales on the accrual basis but failed to record sales on account made near the end of each year as follows: 2015 P6,000 2017 7,500 2018 5,250 d) The company failed to record accrued office salaries as follows: December 31,2015 P15,000 December 31, 2017 21,000 e) On March 1, 2017, a 10% share dividend was deciared and distributed. The par value of the shares amounted to P15,000 and market value was P19,500, The share dividend was recorded as follows: Miscellaneous expense 19,500 Ordinary share capital 15,000 Retained earings 4,509 f) On July 1, 2017, DOMROX acquired a three-year insurance policy. ‘The three-year premium ‘of P9,000 was paid on that date, and the entire premium was recorded as insurance expense. 9) On January 1, 2018, DOMROX retired bonds with @ book value of 180,000 for P159,000. The gain was incorrectly deferred and is being amortized over 10-years as a reduction of interest expense on ather outstanding obligations. Questions: 31. What is the adjusted net income for the year ended December 31, 2016? A. P 169,500 B. 175,500) ©. \P181,500» D. P199,500 32. What is the adjusted net income for the year ended December 31, 2017? x (4 238,500 B. P267,000 C, P268,500 D, P280,500 33. What is the adjusted net income for the year ended December 31, 20187, ‘A. P155,600 B. P194,400 C, P196,500 D) 209,400 34. What adjusting entry should be mace on December 31, 2016, to oorect the error described An ftem B? ‘Accounts payable 22,500 - Purchases 22,500 B. Purchases 225 ‘Accounts payable 22,500 . Accounts payable 22,300 Cash 22,500 D._ No adjusting journal entry is necessary. 35. The adjusting entry on December 31, 2017, to correct the error described in ttem E should include a A. Ordinary share capital of P15,000 B, Retained earnings of P24,000 €, Share premium of P4,500 D. Miscallansous expenses of P4,5U0 PROBLEM NO. 8 You have been appointed 25 auditor of MARULAS CO. its bookkeeper reports the following statement of financial position ameunts as of june 30, 2018. Page 8 of 12 Pages(OPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION 37. Property, plant, and equipment, net of accumulated depreciation A. P4,662,000 B, P1,663; C. 1,891,800 D. P2,325,000 38. Total current liabilities A. )P517,260 B. P549,200 C. P637,260 D. P642,660 38. Total shareholders’ equity A. 1,317,000 B, P1,479,240 C. P1,485,000 40._ Total liabilities and shareholders’ equity ) A. P1,117,260 B. P1,479,240 C. 2,595,000 D,/ P2,596,500 ceeteeeaees 000000600 =n nen ennnnanen enn PROBLEM NO. 9 ‘The general ledger trial balance of PENTAGON COMPANY includes the following balance sheet accounts at December 31, 2018: Cash 1,584,000 Accounts receivable 1,830,000 Inventory 661,500 Usted investments held for trading purposes at Fair value 300,000 Prepaid insurance 75,000 Additional information: Cash * The sales book was left open up to January 5, 2019, and cash sales totaling P225,000 were considered as sales in December. = Checks of P139,500 in payment of liabilities were prepared before December 31, 2018, recorded in the books, but not mailed or delivered to payees. * Post-dated checks totaling P117,000 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 P22,500 deposited with but returned by bank, “NSF” on December 27, 2018. The retum was recorded in the company’s books. * The Gash account includes P500,000 of compensating balance against a short-term bank foan. The compensating balance is legally restricted as to withdrawal. Accounts receivable ‘The accounts receivable consists of the following: Trade accounts receivable 975,000 Allowance for uncollectible accounts (30,006) Claim against shipper for goods lost in transit 495,000 Selling price of unsold goods sent by PENTAGON on consignment at 130% of cost (Included in PENTAGON'S ‘ending inventory at cost) — 320,000 Total P1.830.000 Inventory A physical count of inventory at December 31, 2016, revealed that PENTAGON had Inventory on hand at that date with a cost of P661,500. The annual audit disclosed that the following items were excluded from this amount and the related transactions were not recorded, ‘* Merchandise of P91,500 is held by PENTAGON on consignment. The consignor is Falcon Company. Page 10 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION Current assets 885,900 ~ Other assets 1,891,800 Current liabilities 502,260 Other labilties 600,000 Shareholders’ equity 1,875,440 A review of account balances reveals the following: a) An analysis of current assets discloses the following: Cash 178,500 Investment securities — trading 120,000 ‘Accounts receivable 204,900 Thventories, including advertising supplies of P10,500 382,500 ‘P885,900 b) Other assets include the following: Property, plant, and equipment: Depraciated book value (cost, P2,325,000) 1,663,500 Deposit with a supplier for merchandise ordered for August delivery 32,100 * Goodwill recorded on the books to cancel losses incurred by the company in prior years 196,200 1,891,800 ©) Current liabilities include the following: Selaries payable 37,650 Taxes payable 26,610 Rent payable 23,100 ‘Accounts payable Total owed to suppliers on account 333,900 Less: 6-month note received from a supplier ‘Who purchased some used equipment on june 29, 2018 15,000 318,900 Notes payable 96,000 (502,260 ) Other liabilities indude the following: 10% mortgage note on property, plant, and equipment, payable in semiannual instaliments of P60,000 through June 30, 2023 600.000 * €) Shareholders’ equity includes the following: Preference shares, 45,000 shares issued and outstanding, P20 par value 900,000 Ordinary shares, 525,000 shares issued and outstanding, PA par value 525,000 Share premium 250,440 P1.875.440 f). Ordinary shares were originally issued for P1,485,000 but the losses of the company for the past years were charged against share premium. Based on the preceding information, compute the June 30, 2018, adjusted balances of the following: 36, Total current assets AL 918,000 B. P922,500 C, P930,000 D, P933,000 Page 9 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITING PROBLEMS * Merchandise casting P57,000 was shipped by PENTAGON, FOB destination, to a customer Sore ember 31, 2018. The customer was expected to recsive the goods on January 6 2019. * Merchandise costing P63,000 was shipped by PENTAGON, FOB shipping point, to a customer on December 29, 2018, ‘The customer was scheduled to receive the goods on January 2, 2019. + Merchandise costing P124,500 shipped by a vendor, FOB destination, on December 31, 2018, was received by PENTAGON on January 4, 2019, * Merchandise costing P76,500 purchased under FOB shipping point term was shipped by the supplier on December 31, 2017 and received by PENTAGON on January 5, 2019. Based on the above and the result of your audlt, Getermine the adjusted amounts of the following: 41. Cash A. P876,000 B. P759,000 C. P1,381,500 D. P761,500 42. Net accounts receivable A. P1,151,700 B. P945,000 C. P1,174,200 D. P1,131,000 43. Trade and other receivables, net A, P990,000 B. P1,219,200 . P1,646,700 D. P4,176,000 44. Inventory ‘A. 510,000 B. P1,095,000 C. 676,500 D. P795,000 45. Current assets A. 3,598,200 B. P3,703,200 C. Padi D. P4,198,200 PROBLEM NO. 10 You are a senior accountant responsible for the annual aucit of JERSAMTAN CO. for the year ended December 31, 2018. The information available to you is presented below. You may assume that any pertinent information not presented below has already been checked and found satisfactory. Excerpts from trial balance, December 31, 2018: Debit Credit Retained Eamings 93,000 Allowance for Decline in Value of Inventory 36,500 ‘Share Capital (5,000 shares) 500,000 The books have not been closed, but all adjusting entries which the company expects to make have been posted. Their trial balance shows 2 P60,000 net income for the year. | Ledger details of Retained Eamings: Retained Earnings 08/06/18 CD 2,000 | 12/31/17 Balance 134,500 1/10/18. 10,000 | 04/29/18 CR 500 12/31/18 1 30,000 Note: The balance at 12/31/17 agrees with last year’s working papers, Page 11 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION Analysis of selected cash receipts: Date Account Credited Amount Explanation 04/29/18. Share Capital P 10,000 Sold P100 par stock at 105. Retained eamings 500 10/10/18 Building 530,000 See corollary entry dated 10/10/18. Analysis of selected cash disbursements: Date Account Debited Amount: Explanation 08/06/18 Retained Earnings 2,000 Freak accident to company ‘truck not covered by insurance, repairs by D) Repairs. Selected entries in the general journal: Date Entry and Explanation Debit Credit. 10/10/18 Accumulated Depreciation 370,000 Retained Earnings 40,000 Buitding 380,000 ‘Sale of main office buiiding. 12/31/18 Retained Eamings 30,000 ‘Allowance for Decline in Value of Inventory 30,000 Provision to valse materials inventory. at loner of cost and net realizable value. Based on the praceding information, determine ihe following: 46. Loss on sale of bullding ‘A. P10,006 B. PO C, 220,000 D_ P150,000 47. The loss on decline in value of inventories should be charged to A. Retained earings B. Loss on decline in value of tnvertories C. Share premium D. Share capital ‘48. Shere capital balance at December 31, 2548 A. P595,000 B. P610,000 c. P500,000 D. 605,000 49. Share premium balance at December 32, 20:8 A. 9,500 B. Pi0,600 ©. ps00 D. P10,500 50. 0. Serfiome meania 22,000 B. P20,000 <. P 50,000 D, P18,000 -~END OF EXAMINATION— of 12 Pages| CPA REVIEW SCHOOL OF THE PHILIPPINES | Manila AUDITING PROBLEMS | FIRST PRE-BOARD EXAMINATION | | PROBLEM 1 — GUADALUPE, INC. Share Gapital Share Retained ‘Shares Amount Bremium Eaminas 4. May 2017 issuance 90,000 900,000 90,000 Dec, 31 net income ee —— 37,500 Balances, Dec. 31, 2017 20.000 900.000 Pa.000 — P37.500 ‘Share Capital Share Retained Shares Amount Premium — Earinos 2 Balances, Jon 1, 2018 90,000 P 900,000 90,000 P37,500 July 32 issuance 150,000 4,500,000 375,000 Oct. 2 share dividend (240,000 x 5%) 12,000 120,000 32,000 (132,000) Dec, 31 net income ie 105,000 Belances, Dec, 31, 2018 252.002 2.520.000 P477.000 10.500 ‘Shore Capital Share Retained ‘Treasury Shares. Snares ParValue Premium Eamings Shares Cost 3. Balances, Jen. 4, 2015 252,000 2520.00 P477.000 10.500 sie a Feo, accuiston of traasury shares r i sine sale of reasury eharee (4.500) (40500) (Oct exercise of stock rigs (75.000.x2) 150,000 4,600,090 460,000 Nov. exarise of stock ghia (2x 12,000) 240,000 2,400,000 720,000 ‘Des, 15 share cvidend (PO:30 x 637/500) (181,250) @,000) (0,000) 3,000 (8,000) (27,000) Des. natincams en Oo, ee Balances, Dec. 31, 2019 S200) P3000 Pisea500 Peezeo 861 EI PROBLEM 2~ SPEED COMPANY | 6. Land, Jan. 4, 2018 3,000,000 Land site number 621: ‘Acquisition cost 2,000,000 Commission 60,000 leering costs 15,000 Sale of timber and gravel —5.000) 2,070,000 Land site number 622: ‘Acquisition cost (P45 x 100,000 shares = P4,500,000 x 12/36) 1.500.000 Balance, Dec. 31, 2018 P6.570,000 7. Buildings, Jan. 1, 2018 24,000,000 Cost of demolition 30,000 New building: Construction cost 10,500,000 Excavation fee 110,000 ‘Architectural design 380,000 Buliding permit eu Balance, Dec. 31, 2018 8. Leasehold improvements, Jan. 1, 2018 3,500,000 Electrical work 350,000 Construction of extension (P800,000 x V2) 400,000 ‘Improvements on office space 650.000 Balance, Dec. 31, 2018 4.900.000 9. Machinery and equipment, Jan. 1, 2018 1,400,000 New machine: Invoice price 750,000 Freight costs 20,000 Page 1 of 4 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, Unloading charges Balance, Dec. 31, 2018 10, Painting of ceilings Royalty payments Total expenses PROBLEM 3— KUKURUKUKU CORPORATION 11, 2018 DEPRECIATION EXPENSE ON BUILDINGS: Book value, Jan. 1, 2018 (P30,000,000 — P6,577,500) 150% deciining balance rate (x 150%) Depreciation expense ‘or 2018 12. 2018 DEPRECIATION EXPENSE ON LEASEHOLD IMPROVEMENTS: Cost of leasehold improvements Depreciation period, May 1, 2018 — Dec. 34, 2024 Depreciation per month Depreciation, May 1, 2018 — Dec. 31, 2018 (P105,000 x 8 months) 13, ACCUMULATED DEPRECIATION ~ MACHINERY & EQUIPMENT: Balance, Jan. 1, 2018 Depreciation for 2018 Machine stolen (P575,000/10 x 5) Balance, Dec. 31, 2018 2018 DEPRECIATION EXPENSE ON MACHINERY & BOUIPMENT: Machinery and equipment, Jan, 1, 2018 22,500,000 Less: Machine stolen —_575,000 Balance 21,925,000 Depreciation rate 10% Machine stolen (P575,000 x 10% x. Machine purchased July 1 (P7,750,000 x 10% x 3) Depreciation for 2018. ‘ 14. ACCUMULATED DEPRECIATION — DELIVERY EQUIPMENTS Balance, Jan. 5, 2018 Depreciation for 2018 Track traded in ((P900,000 cost ~ P270,000 book value) Balance, Dec. 31, 2013 2028 DEPRECIATION EXPENSE ON DELIVERY EQUIPMENT. Depreciation on Jan. 1, 2018, bala 300,000, Less: Depreciation on truck traded in, Jan. 3, 2018 (800,00 x2*) _1180,000 Depreciation on truck purchased Jan. 2, 2046 (Pa,200,000 x *) Depreciation for 2018 sy =4 (44) = 10 15. LOSS ON TRADE IN OF TRUCK ON JANUARY 2.2018 Trade in value (P2,200,000 ~ P3,000,000) Book value Loss on trade tn PROBLEM 4 ~ CABOOR LABORATORIES 16. Cost to obtain patent (January 2011) 2011 amortization (P186, 150/17) Carrying value, Dec. 31, 2011 17. Carrying value, Jan, 1, 2012 ‘Amortization, 2012-2045 (°0,950 x ¢ years) Camying value, Dec. 3i, 2015 Page? of 4 Pages 2,192,500 14,375 h 14,230,000 1,200,000 186,150 (20,950) PAZa200 175,200 (43,800) ‘131.400CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA 38 Canying value, Jan. 1, 2016 131,400 Amortization, 2016-2018 (P131,400 x 3/5) (78.840) Carrying value, Dec. 31, 2018 B52.560 BARTOLO COMPANY 19. Cost of patent purchased on Jan. 1, 2017 2017 amortization (P4,000,000/ 0) (400,000) Carrying value, Dec. 31, 2017 3,500,000 2018 amortization (P3,600,000/5) (720,000) 2,880,000 ost of franchise 960,000 2018 amortization (P960,000/10) 196.000) __8¢4,000 Total carrying value of intangibles ‘3.744.009 20. Amortization of patent ~ 2018 720,000 Amortization of franchise ~ 2018 ‘96,000 Payment to Deico (P5,000,000 x 5%) 250,000 Research and development costs 866,000 Total charges against 2018 income £L.332,000 PROBLEM 6 — HARLINGTON COMPANY 26. Net income before trading security adjustment 2,700,000 Unrealized loss (P3,465,000 cost ~ 3,195,000 fair value) (270,000) Net income, as adjusted ‘2.430.000 27. Net income before trading security adjustment 2,700,000 Unrealized gain (P3,465,000 cost ~ P3,564,000 fair value) 99,000 Net income, as aqjusted P2.798,009 LABADA Co. 28. Unrealized gain (P1,989,000 ~ 1,953,000) P36.000 29. Sales price 4,381,500 Carrying value (2.251.000) Gain on sale ‘P.130,500 PROBLEM 7 — DOMROX CO. 2017 2018 Reported niet income 225,000 P192,750 a. 2047 ending inventory understated = 21,000 (21,000) 2018 ending in overstated = (34,500) b. 2019 purchase recorded in 2018 - - 2,500 Unrecorded sales on account: 2016 6,000 (6,000) A 2017 = 7,500 (7,500) 2018 - 5,250 . Unrecorded accrued salaries: 2016 (15,000) 15,000 ~ 2017 - (21,000) 21,000 Share dividend charged to expense - 19,500 = f. Insurance premium expensed - 7,500 G,000) Deferred gain on bond retirement ~ = 21,000 Amortization of deferred gain = = — (2.100) Adjusted net income PL81.500 (P268.500 2194.400 35. Retained earnings 24,000 Share premium 4,500 Miscellaneous expenses : 19,500 PROBLEM 8 — MARULAS Co, 36. Cash 178,500 Investment securities — trading 120,000 Notes receivable 415,000 Page 3 of 4 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AMRATING PROBLEM ‘Accounts receivable 204,900 Inventory (P382,500 — P10,500) 372,000 Deposit with supplier 32,300 ‘Advertising supplies 10,500 Toial current assets p933.000 37. PPE, net of accumulated depreciation (given) 1.663.500 38, Notes payable P.96,000 ‘Accounts payable 333,900 Mortgage payable — current portion 120,000 Salaries payable 37,650 Taxes payable 26,610 Rent payable 23,400 Total current liabilities 532.260 39. Preference shares 900,000 ‘Ordinary shares 525,000 Share premium (P1,485,000 — P525,000) 960,000 Retained earnings (Defict)* (905,760) ‘Total shareholders’ equity Bi.d79.240 + p960,000 - P250,440 = P709,560 + P196,200 = P905,760 40. Current liablites 637,260 Mortgage payable — noncurrent (P600,000 ~ P120,000) 480,000 Shareholders’ equity 1.479.240 Total liabilities and shareholders’ equity 2,596,500 PROBLEM 9— PENTAGON COMPANY 44, Unadjusted cash balance 1,584,000 Cash sales in January 2019 (225,000) Undelivered checks 339,500 Post-dated checks (437,000) Compensating balance ~ restricted (600,000) ‘Adjusted cash balance 2781500 42. Unadjusted accounts receivable 1,830,000 Claim against shipper for goods lost in transit (495,000) Selling price of unsold goods out on consignment (290,000) Post-dated checks 117,000 Unrecorded sale — goods sold FOB shipping point (P6000 x 130%) __99,700 ‘Adjusted accounts receivable PLASLZ00 43, Accounts receivable — net P1,151,700 Calm against shipper for goods lost in transit 495.000 Trade and other receivables — net P1.646.200 44. Unadjusted inventory 661,500 Goods in transit ~ Sold FOB Destination 57,000 Goods in transit — purchased FOB shipping point 76,500 ‘Adjusted inventory 795,000 45. Cash 781,500 “Trade and other receivables 1,646,700 Inventories 795,000 Trading securties 300,000 Prepaid insurance 75,000 Cash held as compensating balance FE Total current assets 4.198.200 END Page 4 of 4 Pages