DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
2nd Semester A.Y. 2012-2013
Auditing Problem
AUDIT OF FINANCIAL STATEMENTS
I. Statement of Financial Position

Problem 1. The following elements of Financial Statements are provided from the Trial Balance of Ford Inc. for the year
ended December 31,2011:

Preference Share at par P 100,000

Cash and cash equivalents 1,000,000
Land Held for Sale 2,000,000
Bonds Payable due on December 31,2013 1,500,000
Deferred Tax Liability 300,000
Revaluation Surplus 200,000
Salaries Payable 100,000
Cash surrender value of insurance 50,000
Note payable - payable in four installments semiannually on June 30 and December 31 400,000
Interest Payable 30,000
Inventory – (P200,000 will be realized in 15 months) 600,000
Investment Property 500,000
Biological Assets 200,000
Prepaid Asset and Office Supplies 300,000
Accounts Payable 400,000
Accounts Receivable – (P500,000 will be realized in 15 months) 1,500,000
Contingent Asset 300,000
Contingent Liability 200,000
Provision for lawsuit (payable on December 31,2012 500,000
Unamortized Premium on Bonds Payable 300,000
Investment in Trading Securities 3,000,000
Ordinary Share at par 500,000
Donated Capital 200,000
Deferred tax asset 300,000
Income tax payable 100,000
Allowance for bad debts 200,000
Intangible Assets 2,000,000
Property, Plant and Equipment 5,000,000
Additional Paid In Capital in excess of par – Ordinary Shares 1,000,000
Investment in Available for Sale Securities 2,000,000
Unamortized Discount on Bonds Payable 100,000
Unamortized Discount on Bonds Receivable 400,000
Investment in Preference Shares of SM @ cost method 3,000,000
Investment in Ordinary Shares of BDO @ equity method 4,000,000
Share options 500,000
Treasury Shares 600,000
Accumulated Depreciation – PPE 800,000
Accumulated Amortization – Intangible Assets 200,000
Conversion Option 400,000
Cumulative translation debit – foreign operation 300,000
Subscribed Ordinary Share @ par 200,000
Retained Earnings appropriated for plant expansion – December 31,2011 5,000,000
Bond Sinking Fund for the Bonds Payable 1,500,000
Plant Expansion Fund – to be disbursed on January 30,2012 5,000,000
Cumulative unrealized gain on Available for Sale Securities 200,000
Additional Paid in Capital in excess of par – Preference Shares 2,000,000
Utilities Payable 300,000
Share Dividends Payable @ par (large share dividend) 1,000,000
Cash Dividends Payable on January 10,2012 100,000
Cumulative Unrealized loss on derivative designated in cash flow hedge 300,000

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 Actuarial Loss – Full Recognition Approach 400,000
Dividends Receivable from Investment in Associate 200,000
Interest Receivable from Notes Receivable 300,000
Investment in Joint Venture 2,000,000
Investment in Subsidiary 3,000,000
Notes Receivable – due on December 31,2012 2,000,000
Loan Receivable – realizable in in five equal annual installments every June 30 5,000,000
Investment in Bonds Receivable – Held to Maturity Securities due on December 31,2013 2,400,000
Total Lease Liability (P200,000 principal will be due on September 31,2012) 1,200,000
Retained Earnings unappropriated – January 1,2011 2,000,000

Note: The only transactions that affect the retained earnings unappropriated for the year are the net income for 2011 and
dividends declared.

Required: Based on the result of your audit, determine the following as of December 31,2011:
____________1. Total Current Assets
____________2. Total Noncurrent Assets
____________3. Total Assets
____________4. Total Current Liabilities
____________5. Total Noncurrent Liabilities
____________6. Total Liabilities
____________7. Total Shareholder’s Equity
____________8. Total Retained Earnings – December 31,2011
____________9. Total Retained Earnings – Appropriated - December 31,2011
____________10. Total Retained Earnings – Unappropriated – December 31,2011
____________11. Profit or Loss for the year ended December 31,2011

II. Statement of Changes in Equity

Problem 2. The following data are provided by BMW Inc. for the year ended December 31,2011 regarding its Statement
of Changes in Equity:

Retained Earnings, January 1,2011 P2,000,000

Ordinary Share Capital, January 1,2011 1,000,000
Preference Share Capital, January 1,2011 500,000
Profit or (Loss) for the year 2011 2,000,000
Dividends Declared during 2011 1,500,000
Prior Period Error – understatement of 2010 Net Income (net of tax) 700,000
Change in Accounting Policy – overstatement of 2010 Ending Inventory (net of tax) 350,000
Treasury Shares @ cost 200,000
Additional Paid In Capital in excess of par – Ordinary Shares 2,000,000
Additional Paid in Capital in excess of par – Preference Shares 1,000,000
Subscribed Ordinary Shares 1,500,000
Subscription Receivable (collectible beyond one year) 500,000
Realization of Revaluation Surplus during 2011 200,000
Excess over cost in Reissuance of Treasury Shares 300,000
Translation Credit Adjustment – Foreign Operation 200,000
Unrealized holding loss – Available for Sale Securities 500,000
Unrealized holding gain – Derivative designated as Cash Flow Hedge 400,000
Actuarial Loss – Full Recognition Approach 600,000

Required: What is the adjusted balance of Retained Earnings on December 31,2011?

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III. Notes to Financial Statements

Problem 3. The financial statements of Benz Inc. are submitted to the external auditor on February 15,2012. The external
auditor issued the unqualified audit opinion on February 28,2012. The board of directors approved and authorized the
issuance of financial statements on March 15,2012. The stockholder’s ratified the issuance on March 31,2012. The
following events after reporting period of Benz Inc. are presented for the year ended December 31,2011:

a. On December 10,2011, Benz was charged by DENR of Environmental Regulation Violation. On December
31,2011, the defense counsel of Benz believed that it is probable that Benz will lose in the law suit and will be
liable in the range of P1,000,000 to P3,000,000. At that time, there is no best estimate of liability. On March
10,2012, the Supreme Court of the Philippines decided against the defendant Benz and award P2,500,000
amount of damages to DENR.
b. On December 15,2011, Benz was charged by the Benz Labor Union for Unfair Labor Practice in the Labor
Arbitrer. On December 31,2011, the defense counsel of Benz believed that it is reasonably possible that Benz will
lose in the labor dispute. The reasonable estimate of the liability is P1,000,000. On March 20,2012, the Supreme
Court decided in favor of the Benz Labor Union and awarded P1,500,000 amount of damages.
c. On January 10,2012, Benz was charged by Ford of Patent Infringement. On such date, the defense counsel of
Benz believed that it is probable that Benz will lose in the case. On March 12,2012, the Supreme Court ruled in
favor of Ford and awarded P500,000 of damages to the plaintiff.
d. On December 25,2011, Benz filed a civil case against Honda. The defense counsel of Benz believed that it is
probable that Benz will prevail in the civil case. The reasonable amount of damages is P3,000,000. The case was
decided by the Supreme Court on April 1,2012 and awarded P4,000,000 amount of damages to Benz.
e. On November 15,2011, Benz filed a civil case against Toyota. The defense counsel of Benz believed that it is
reasonably possible that Benz will prevail in the civil case. The reasonable amount of damages is P1,800,000.
The case was decided by the Supreme Court on April 10,2012 and awarded P2,500,000 amount of damages to
Benz.
f. On September 30,2011, an employee of Benz filed a civil case against Benz. The defense counsel of Benz
believed that it is remote that Benz will lose the case and the reliable estimate of liability is P200,000. The case
was decided by Supreme Court on March 30,2012 and awarded P300,000 amount of damages to the employee
of Benz.
g. On December 31,2011, Benz has an outstanding receivable from Way Inc. in the amount of P5,000,000. On
March 14,2012, Way Inc. declared bankruptcy and the Court placed the company under receivership. On such
date, the receiver declared that only 40% of the payable of Way will be liquidated.
h. On March 10,2012, the Investment Property of Benz Inc. was razed by fire. The carrying value of such property
on December 31,2011 is P10,000,000.
i. On March 16,2012, the warehouse containing the inventory of Benz Inc. was destroyed by earthquake. The total
from such calamity is P25,000,000.
j. On January 20,2012, Benz Inc. acquired 100% interest of Ferrari Inc. for P100,000,000.

Required: Based on the result of your audit, provide the treatment of the preceding events after reporting period:

________________________1. Event A
________________________2. Event B
________________________3. Event C
________________________4. Event D
________________________5. Event E
________________________6. Event F
________________________7. Event G
________________________8. Event H
________________________9. Event I
________________________10. Event J

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IV. Statement of Comprehensive Income

Problem 4. The income tax rate for the year is 30%. The following income and expense accounts are obtained from the
Trial Balance of Ferrari Inc., which is a diversified company, for the year ended December 31,2011:

Deferred Tax Expense P1,200,000

Impairment loss on Non-current Asset Held for Sale, before tax 300,000
Gain on sale of Non-current Asset Held for sale, before tax 400,000
Sales 40,000,000
Purchases of Raw Materials 10,000,000
Bad debts expense 100,000
Impairment loss on Loans Receivable 200,000
Gain on factoring of Accounts Receivable 400,000
Loss on Notes Receivable Discounting 100,000
Purchase discount and allowance on Raw Materials 300,000
Sales discount and allowance 400,000
Purchase return on Raw Materials 500,000
Sales return 200,000
Freight In on Raw Materials 300,000
Direct Labor 1,000,000
Factory Overhead – 50% of Direct Labor ?
Raw Materials, January 1 2,000,000
Raw Materials, December 31 3,000,000
WIP, January 1 1,500,000
WIP, December 31 2,500,000
Finished Goods, January 1 5,000,000
Finished Goods, December 31 3,000,000
Gain on changes in Fair Value less cost to sell of Biological Assets 1,000,000
Unrealized holding gain on Trading Securities 2,000,000
Realized loss on sale of Trading Securities 500,000
Unrealized holding loss on Available for Sale Securities 3,000,000
Realized gain on sale of Available for Sale Securities 1,000,000
Share dividend received from Investment in SMC @ cost method(fair value of OS) 500,000
Cash and property dividend received from Investment in SMC @ cost method 300,000
Cash and property dividend received from Investment in BDO @ equity method 200,000
Share in net loss from Investment in BDO @ equity method 500,000
Interest received from Investment in Held to Maturity Securities 300,000
Amortization of Premium on Held to Maturity Securities 20,000
Realized loss on sale of Investment in Held to Maturity Securities 400,000
Loss on changes in far value of Investment Property 500,000
Realized gain on sale of Investment Property 100,000
Unrealized holding loss on derivative – designated as fair value hedge 500,000
Unrealized holding gain on derivative – designated as cash flow hedge 1,000,000
Translation adjustment debit – Foreign Operation 2,000,000
Transaction gain from foreign exchange transaction 500,000
Realized deferred income from government grant 400,000
Depreciation on Property, Plant and Equipment 3,000,000
Depletion of Wasting Asset 2,000,000
Loss on sale of an item of Property, Plant and Equipment 1,000,000
Increase in Revaluation Surplus during 2011 2,000,000
Realized Revaluation Surplus during 2011 200,000
Impairment loss of Property, Plant and Equipment 500,000
Amortization of Intangible Asset 400,000
Pre-organization cost 200,000
Research and development cost 300,000
Stock issuance cost of Ordinary Shares 200,000
Warranty Expense 500,000
Premium Expense 200,000

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 Current Tax Expense 2,000,000
Interest Paid on Bonds Payable 200,000
Amortization of Discount on Bonds Payable 50,000
Amortization of Bonds Payable Issue cost 50,000
Actuarial Gain – Full Recognition Approach 100,000
Employee Benefit Expense 200,000
Gain on debt restructuring – asset swap 200,000
Gain on debt restructuring – equity swap 300,000
Gain on debt restructuring – modification of terms (5% of original liability) 100,000
Interest Expense on Finance Lease 200,000
Gain on sale and leaseback – operating lease 300,000
Loss on sale and leaseback – finance lease 400,000
Compensation Expense – Share Options 100,000
Compensation Expense – Share appreciation rights 200,000
Revenue from discontinued operation, before tax 1,000,000
Expenses from discontinued operation, before tax 500,000
Impairment loss of assets of discontinued operation, before tax 300,000
Realized gain on sale of assets of discontinued operation, before tax 400,000
Expense from Law Suit 500,000
Freight Out 200,000
Sales Commission 100,000
Salary of Marketing Department’s employees 100,000
Advertising Expense 500,000
Salary of legal counsel 500,000
Salary of directors and executives 900,000
Salary of accounting department 200,000
Office Supplies used 100,000
Rental Expense on Main building 1,000,000
Utilities Expense 100,000
Extraordinary loss from calamity 300,000

Additional notes during 2011 are also provided as follows:

1. The depreciation of Property, Plant and Equipment is 60% administrative and 40% selling.
2. The depletion of Wasting Asset is considered part of Other Expenses.
3. The employee benefit expense is 80% administrative and 20% selling.
4. The compensation expense from share option is for administrative department employees while that from share
appreciation rights is for selling department employees.
5. The rental, utilities and office supplies expense is equally divided between administrative and selling departments.
6. Finance cost is separated from other expenses.
7. Ferrari uses the functional or cost of sale format in preparing its Statement of Comprehensive Income.

Required: Based on the result of your audit, determine the following for the year ended December 31,2011:

____________1. Cost of Sales

____________2. Gross Profit
____________3. Total Other Income
____________4. Administrative Expense
____________5. Selling Expense
____________6. Total Other Expense
____________7. Total Income Tax Expense
____________8. Income from Continued Operation
____________9. Income or (loss) from discontinued operation
____________10. Profit or Loss
____________11. Net Other Comprehensive Income
____________12. Total Comprehensive Income

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V. Statement of Cash Flows

Problem 5. The net changes in the statement of financial position of ACER Corporation for the year 2008 are shown
below:
Accounts Debit Credit
Cash 82,000
Available for sale securities 121,000
Accounts receivable 83,200
Allowance for bad debts 13,300
Inventory 74,200
Prepaid expenses 17,800
Investment in wholly owned subsidiary at equity 20,000
Plant and equipment 210,000
Accumulated depreciation 130,000
Accounts payable 80,700
Accrued liabilities 21,500
Deferred tax liability 15,500
8% Serial Bonds 80,000
Ordinary share capital, P10 par 90,000
Share premium 150,000
Retained earnings – Appropriation for bonds 60,000
Retained earnings – Unappropriated 38,000
643,600 643,600

An analysis of the Retained earnings account follows:

Retained earnings – unappropriated, 12/31/2007 1,300,000
Add: Net Income for 2006 327,000
Transfer from appropriation for bonds 60,000
Total 1,687,000
Deduct: Cash dividends 185,000
Share dividends 240,000 425,000
Retained earnings – unappropriated – 12/31/2008 1,262,000

The following notes are also provided by the company:

1. On January 2,2008, marketable securities (classified as available for sale) costing P121,000
were sold for P155,000.
2. The company paid a cash dividend on February 1,2008.
3. Accounts receivable of P16,200 and P19,400 were considered uncollectible and written off in
2008 and 2007, respectively.
4. Major repairs of P33,000 to the equipment were debited to the Accumulated Depreciation
account during the year. No assets were retired during 2008.
5. The wholly owned subsidiary reported a net loss for the year of P20,000. The parent recorded
the loss.
6. At January 1,2008, the cash balance was P166,000.

1. How much should be the amount of net cash flows from operating activities?
a. 295,000 c. 285,000
b. 275,000 d. 265,000

2. Assuming the same data provided in number 56, how much should be the amount of net cash flow from
investing activities?
a. (88,000) c. (108,000)
b. (121,000) d. (68,000)

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3. Assuming the same data provided in number 56, how much should be the amount of cash flow from
financing activities?
a. (135,000) c. (105,000)
b. (85,000) d. (185,000)
Problem 6. ASUS Corporation has recently decided to go public and has hired you as an independent CPA. One
statement that the entity is anxious to have prepared is a statement of cash flows. Financial statements of ASUS for
2010 and 2009 are provided below.
Statement of Financial Position
12/31/2010 12/31/2009
Cash 153,000 72,000
Accounts Receivable 135,000 81,000
Merchandise Inventory 144,000 180,000
PPE (net of Acc. Dep. of P120,000 and P114,000 as
of 12/31/2010 and 12/31/2009, respectively) 108,000 246,000
540,000 579,000

Accounts payable 66,000 36,000

Income taxes payable 132,000 147,000
Bonds payable 135,000 225,000
Share capital 81,000 81,000
Retained earnings 126,000 90,000
540,000 579,000

Income Statement
For the Year Ended December 31,2010

Sales 3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses 225,000
Administrative expenses 72,000 297,000
Income from operations 171,000
Interest expense 27,000
Profit before taxes 144,000
Income taxes 36,000
Profit or loss 108,000

The following additional data were provided:

1. Dividends for the year 2010 were P72,000.

2. During the year, equipment was sold for P90,000. This equipment cost P132,000 originally and had a book
value of P108,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.
3. All depreciation expense is in the selling expense category.

1. What is the net cash provided by operating activities?

a. 153,000 c. 108,000
b. 90,000 d. 75,000

2. Assuming the same data provided in number 59, what is the net cash provided (used) by investing
activities?
a. (132,000) c. 18,000
b. 90,000 d. (108,000)

3. Assuming the same data provided in number 59, what is the net cash provided (used) by financing
activities?
a. (90,000) c. 18,000
b. (162,000) d. 72,000

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