Auditing Problems
Midterm Examination
Mastery + Accuracy = Speed
Instructions: Write the letter that best corresponds to your answer in the booklet that was
given to you. Do not write on the test questions and return it after use. Thank you and
GODBLESS!
1.
Dakak Company issued bonds with a face value of P4, 000,000 and with a stated interest
rate of 10% on Jan. 01, 2008. The interest is payable semiannually on June 30 and December
31. The bonds mature on every December 31 at a rate of P2, 000,000 per year for 2 years.
The prevailing rate for the bonds is 8%. The present value of 1 at 4% is as follows:
One period
0.9615
Two periods
0.9246
Three periods
0.8990
Four periods
0.8548
What is the present value of the bonds on January 1, 2008?
a.
4,111,400
c.4,099,600
b.
4,263,400
d.4,252,580
Answer: a
Solution:
(4,000,000 x 10%)/2 = 200,000 x 0.9615 = 192,300
2,000,000 + (4,000,000 x 10%)/2 = 2,200,000 x 0.9246=2,043,120
(2,000,000 x 10%)/2 = 100,000 x 0.8990 =
89,900
2,000,000 + (2,000,000 x 10%)/2 = 2,100,000 x 0.8548 =1,795,080
4,111,400
2.
On January 1, 2004, Loyal Company purchased an equipment for P8, 000,000. The
equipment is depreciated using straight line method based on a useful life of 8 years with no
residual value. On January 1, 2007, after 3 years, the equipment was revalued at a
replacement cost of 12,000,000 with no change in residual value. On June 30, 2007, the
equipment was sold for 10,000,000. What is the effect of the June 30, 2007 transaction to the
retained earnings?
a.2, 500,000 increase
c. 5,000,000 increase
b.3,250,000 increase
d. 5,750,000 increase
========
Answer: c
Solution:
Cost
8,000,000
8,000,000 x 3/8 = (300,000)
5,000,000
Replacement cost
12,000,000
12,000,000 x 3/8 = (4,500,000)
Revaluation Surplus
7,500,000
2,500,000
Depreciation
2,500,000
:
7,500,000/5 x 6/12 = 750,000
10,000,000 – 6,750,000 = 3,250,000
5,750,000
(750,000)
= 5,000,000
========
3. A natural resources property was purchased by Nge Wang Company for
6,000,000. The output was estimated to be 1,500,000 tons. Nge Wang Company
purchased a mining equipment at a cost of 8,000,000 and has a useful life of 10
years but is capable of exhausting the resource in8 years. Production is as
follows:
1st Year
150,000 tons
nd
2 Year
225,000 tons
rd
3 Year
None
th
4 Year
225,000 tons
What is the carrying amount of the mining equipment at the end of four years?
a. 4,800,000
c. 4,200,000
b. 4,000,000
d. 4,500,000
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Answer: c
Solution: 1st year (8,000,000 x 150,000)/1,500,000 =
800,000
2nd year (8,000,000 x 225,000)/1,500,000 =
1,200,000
3rd year
( 8,000,000-800,000-1,200,000)/8 =
750,000
4th year
(8,00,000-800,000-1,200,000-750,000 x 225,000)/1,050,00 = 1,050,000
3,800,000
8,000,000-3,800,000 =
4,200,000
========
The following accounts were included in the unadjusted trial balance of Charlotte
Company as of December 31, 2003:
Cash
P 240,800
Accounts receivable
563,500
Merchandise inventory
1,512,500
Accounts payable
1,050,250
Accrued expenses
107,750
During your audit, you noted that Charlotte Company held its cash books open after year-end.
In addition, your audit revealed the following:
1. Receipts for January 2004 of P163,650 were recorded in the December 2003 cash receipts
book. The receipts of P90,025 represents cash sales and P73,625 represents collections
from customers, net of 5% cash discounts.
2. Payments to suppliers made on January 2004 of P93,100, on which discounts of P3,100
were taken, were included in the December 2003 check register.
3. Merchandise inventory is valued at P1,512,500 prior to any adjustments. The following
information has been found relating to certain inventory transactions.
a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.
b. Goods costing P54,375 were received from a vendor on January 4, 2004. The related
invoice was received and recorded on January 6, 2004. The goods were shipped on
December 31, 2003, terms FOB shipping point.
c. Goods costing P159,375 were shipped on December 31, 2003, and were delivered to the
customer on January 3, 2004. The terms of the invoice were FOB shipping point. The
goods were included in the 2003 ending inventory even though the sale was recorded in
2003.
d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination are
not included in the year-end inventory. The goods cost P32,500 and were delivered to
the customer on January 3, 2004. The sale was properly recorded in 2004.
e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2003. The related goods, shipped FOB destination were received on
January 4, 2004, and thus were not included in the physical inventory.
f. Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2003.
A
B
C
D
4. Cash
240,800
170,250
167,150
173,350
5. Accounts receivable
641,000
727,150
637,125
563,500
6. Merchandise inventory
1,252,500
1,508,750
1,520,000
1,465,000
7. Accounts payable
1,143,250
1,197,725
1,150,875
1,153,975
8. Working capital
1,055,175
1,158,800
1,058,275
1,000,800
9. Current ratio
2.00
2.01
1.84
1.83
3
1
C
Unadjusted per gl
#1
#2
3
A
Accounts receivable
Auditing Problems- Preliminary Examination Page 2
240,800.00
-163,650.00
90,000.00
167,150.00
563,500.00
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2
#1
3
3
B
Mdse. Inventory
#3 a
b
c
d
3
4
3
5
D
A
Accounts payable
#2
#3
b
e
Cash
Accounts receivable
167,150.00
641,000.00
1,508,750.0
0
2,316,900.0
0
1,153,975.0
0
-107,750.00
1,261,725.0
0
1,055,175.0
0
Mdse. Inventory
Accounts payable
Accrued expenses
3
6
C
77,500.00
641,000.00
1,512,500.0
0
68,750.00
54,375.00
-159,375.00
32,500.00
1,508,750.0
0
1,050,250.0
0
93,100.00
54,375.00
-43,750.00
1,153,975.0
0
2,316,900 / 1,261,725
1.84
You obtain the following information pertaining to Red Co.’s property, plant, and equipment
for 2005 in connection with your audit of the company’s financial statements.
Audited balances at December 31, 2004:
Debit
Credit
Land
P 3,750,000
Buildings
30,000,000
Accumulated depreciation – buildings
P 6,577,500
Machinery and equipment
22,500,000
Accumulated depreciation –Machinery and Equipment
6,250,000
Delivery Equipment
2,875,000
Accumulated Depreciation –Delivery Equipment
2,115,000
Depreciation Data:
Buildings
Machinery and Equipment
Depreciation Method
150% declining – balance
Straight-line
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Useful Life
25 years
10 years
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Delivery Equipment
Leasehold Improvements
Sum-of-the-years’-digits
Straight-line
4 years
-
Transaction during 2005 and other information are as follows:
a. On January 2, 2005, Red purchased a new truck for P500,000 cash and traded-in a
2-year-old truck with a cost of P450,000 and a book value of P135,000. The new
truck has a cash price of P600,000; the market value of the old truck is not known.
b. On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was
destroyed by fire. Red recovered P387,500 from its insurance company.
c. On May 1, 2005, cost of P4,200,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related
lease terminates on December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost
of P7,000,000; additional cost of P125,000 for freight and P625,000 for installation
were incurred.
e. Red determined that the delivery equipment comprising the P2,875,000 balance at
January 1, 2005, would have been depreciated at a total amount of P450,000 for
the year ended December 31, 2005. The salvage values of the depreciable assets
are immaterial. The policy of the Red Co. is to compute depreciation to the nearest
month.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
10. How much is the Accumulated depreciation – Buildings as of December 31, 2005?
a. P7,777,500
b. P7,982,850
c. P8,377,500
d. P7,103,700
11. How much is the Accumulated depreciation – Machinery and Equipment as of
December 31, 2005?
a. P8,844,375
b. P8,614,375
c. P8,830,000
d. P8,556,875
12. How much is the Accumulated depreciation – Delivery Equipment as of December 31,
2005?
a. P2,715,000
b. P2,400,000
c. P2,490,000
d. P2,805,000
13. How much is the Accumulated depreciation – Leasehold Improvements as of
December 31, 2005?
a. P420,000
b. P525,000
c. P350,000
d. P630,000
14. How much is the net gain (loss) from disposal of assets for the year ended December
31, 2005?
a. P100,000
b. (P35,000)
c. P65,000
d. (P65,000)
On January 1, 2012, Peer Company acquired as a long-term investment a 20% interest in another entity.
Peer Company paid P7,000,000 for this investment when the fair value of the net assets was P35,000,000.
Peer Company can exercise significant influence over the investee’s operating and financial policies. For
the year ended December 31, 2012, the investee reported net income of P6,000,000 and paid cash
dividend of P4,000,000.
15. What is the amount of revenue from the investment should be reported for 2012?
a. 800,000
b. 1,400,000
c. 6,000,000
d. 1,200,000
16. What is the ending balance of the investment at December 31, 2012?
a. 7,400,000
b. 7,000,000
c. 8,600,000
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d. 8,200,000
On January 1, 2012, Charisma Company purchased bonds with face value of P2,000,000 for P 1,900,500
including transaction costs of P100,500 to be held as financial assets at amortized cost.
The bonds mature on December 31, 2014 and pay interest of 8% annually every December 31 with a 10%
effective yield.
17. How much is the investment income to be recognized in 2012?
a. 30,050
b. 33,055
c. 36,361
d. 30,000
Accessible Company purchased for a lump sum of P3,075,000 the following long-term investments: A
Corporation share capital 8,000 share; B Corporation share capital 16,000 shares; C Corporation bond
P1,000,000 face value. At the time of purchase, the securities were quoted at the following prices: A
share, 100; B share, 150; and C bond, 90.
18. What is the cost allocated for A Corporation?
a. 600,000
b. 1,800,000
c. 675,000
d. 3,125,000
19. What is the cost allocated for C Corporation?
a. 600,000
b. 1,800,000
c. 675,000
d. 3,125,000
Acclaim Company holds shares of another entity as permanent investment as follows:
January 2, 2012
2,000 shares at 50
100,000
December 20, 2012
3,000 shares at 66
198,000
Transactions for 2013 follow:
July 15 Received cash dividend of P5 per share
Dec 15 Received 20% stock dividend
Dec 28 Sold 3,000 shares at P60 per share using FIFO method.
20. How much is the gain/loss from the sale of the investment?
a. 47,000
b. 165,000
c. 180,000
d. 25,000
21. How much is the ending balance of the investment on December 31, 2013?
a. 47,000
b. 165,000
c. 180,000
d. 25,000
Vidal company issued rights to subscribe to new stock at P150 per share in the ratio of one new share for
every five right held. The share has market value of P190 and the right has a market value of P10. An
investor held 10,000 shares acquired at a total cost of P1,800,000. The stock rights are accounted for
separately.
22. How much is the amount of stock rights to be capitalized?
a. 150,000
b. 10,000
c. 100,000
d. 190,000
23. How much cash to be credited if the stock rights are used to acquire new shares?
a. 380,000
b. 300,000
c. 100,000
d. 480,000
Justine Company purchased 50,000 shares on January 15, 2012 representing 5% ownership interest. The
entity received a stock dividend of 20% on March 31, 2012 when the market price of the share is P40. The
investee paid a cash dividend of P5 per share on December 15, 2012.
24. What amount should be reported as dividend income for 2012?
a. 300,000
b. 250,000
c. 2,000,000
d. 2,400,000
On January 1, 2013, an entity purchased 200 cows which are 5 years old for P15,000 each for the purpose
of producing milk for the local community. On July 1, 2013, the cows gave birth to 40 calves.
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The active market provided the fair value less cost to sell of the biological assets as follows:
Newborn calf on July 1
4,000
Newborn calf on December 31
5,000
½ year old calf on December 31
7,000
5 years old cow on December 31
18,000
a. years old cow on December 31
24,000
25. How much is the total gain realized from the Biological Assets?
a. P4,280,000
b. P2,080,000
c. P7,160,000
d. P3,580,000
26. How much is the gain realized through physical change?
a. P4,280,000
b. P2,880,000
c. P2,140,000
d. P1,440,000
27. How much is the gain realized through price change?
a. P4,280,000
b. P2,880,000
c. P640,000
d. P1,440,000
28. The following information is available for Kerr Company for 2012:
Freight-in
Purchase returns
Selling expenses
Ending inventory
P 30,000
75,000
150,000
260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of goods available
for sale?
a. P600,000.
b. P890,000.
c. P815,000.
d. P860,000.
Kiner Co. has the following data related to an item of inventory:
Inventory, March 1
Purchase, March 7
Purchase, March 16
Inventory, March 31
29. The value assigned to cost of goods sold if Kiner uses FIFO
a. P579.
b. P552.
c. P1,723.
d. P1,696.
100
350
70
130
is
units @ P4.20
units @ P4.40
units @ P4.50
units
Use the following information for questions 25 and 26.
Sloan Company, a wholesaler, budgeted the following sales for the indicated months:
Sales on account
Cash sales
Total sales
June
P1,800,000
180,000
P1,980,000
July
P1,840,000
200,000
P2,040,000
August
P1,900,000
260,000
P2,160,000
All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at
the beginning of each month are at 30% of that month's projected cost of goods sold.
30. The cost of goods sold for the month of June is anticipated to be
a. P1,440,000.
b. P1,500,000.
c. P1,520,000.
d. P1,650,000.
31. Merchandise purchases for July are anticipated to be
a. P1,632,000.
b. P2,126,000.
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c. P1,700,000.
d. P1,730,000.
32. The following transactions pertain to the general borrowings made during 2010 by Victory
Company in connection with the construction of the company’s new warehouse:
Principal
Borrowing Costs
8% bank loan
2,400,000
192,000
6% short-term note
1,600,000
96,000
8% long-term note
2,000,000
160,000
The construction started on January 1, 2010 and the warehouse was completed on December
31, 2010. Expenditures on the warehouse were as follows:
1-Jan
31-Mar
30-Jun
400,000
1,000,000
1,200,000
30-Sep
31-Dec
1,000,000
400,000
How
much is the capitalizable borrowing cost of Victory Company?
a. None
b. P149,400
c. P298,600
d. P448,000
33. During 2010, Torch Company had the following transactions pertaining to its new office
building:
Purchase price – Land
Legal fees for contracts to purchase land
Architect’s Fee
Demolition of old building on site
Sale on scrap from old building
Construction cost of new building (fully completed)
P420,000
14,000
56,000
35,000
21,000
2,450,000
What amounts should the cost of land and cost of building be shown in Torch December
31, 2010 statement of financial position?
a.
b.
c.
d.
Land
P420,000
P434,000
P448,000
P455,000
Building
P2,520,000
P2,520,000
P2,506,000
P2,534,000
34. On May 9, 2008, Lamb Company purchased for P6,000,000 a warehouse building and the
land on which it is located. The following data were available concerning the property:
Land
Warehouse/Building
Total
Current Appraised Value
P2,200,000
3,300,000
P5,500,000
At what amount should the land be recorded?
a. P1,800,000
b. P2,200,000
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Seller’s Original Cost
P1,800,000
3,000,000
P4,800,000
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c. P2,250,000
d. P2,400,000
35. On January 2, 2008, Protein Company purchased a transportation equipment costing
P2,400,000. The new asset has an estimated useful life of 8 years with no salvage value.
Protein Company depreciates this type of asset using the straight-line method. On January
2, 2010, Protein determined that the machine had a useful life of 6 years from the date of
acquisition with no salvage value.
As a result of the change in the estimated useful life of the asset, what is the carrying
value of the transportation equipment as of December 31, 2010?
a. P1,200,000
b. P1,350,000
c. P1,500,000
d. P1,800,000
36. A schedule of equipment owned by Vitamin Company is presented below:
Equipment – 1
Equipment – 2
Equipment – 3
Total
Cost
P825,000
300,000
60,000
Estimated
Salvage Value
P75,000
30,000
-0-
Estimated Life
In Years
20
15
5
Vitamin Company computes depreciation on the straight-line method.
Based on the information presented, what is the composite life of the assets?
a. 13.3 years
b. 16.0 years
c. 18.0 years
d. 19.8 years
37. Calories Company purchased an equipment for P540,000 on January 2, 2009. The
equipment has an estimated salvage value of P60,000 and an estimated useful life of 5
years. The equipment is being depreciated using the sum-of-years digit method.
What is the carrying value of the equipment of December 31, 2010?
a. P156,000
b. P252,000
c. P380,000
d. P412,000
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38. Light Company has recently purchased a computer system for its office. The following
information was gathered in relation to the acquisition of the unit:
List price
Trade discount and rebates taken
Installation and assembly cost
Initial delivery and handling cost
Purchase discount
What is the acquisition cost of the new computer?
a. P94,080
152,000
56,000
3,200
6,400
2%
b. P103,680
c. P105,680
d. P160,600
39. On august 1, 2011, Bright Company purchased a new machine on a deferred payment
basis. A down payment of P100,000 was made and 4 monthly instalments of P250,000 each
are to be made beginning on august 1, 2011. The terms of the agreement is not considered
normal. The cash equivalent price of the machine was P950,000. Bright incurred and paid
installation costs amounting to P30,000. How much should be capitalized as cost of the
machine?
a. P950,000
b. P980,000
c. P1,100,000
d. P1,130,000
40. Night Company bought a new machine and agreed to pay for it in equal annual instalments
of P500,000 at the end of the next five years. Assume that the present value of a prevailing
interest rate at 15% for five periods is 3.35. The future amount of an ordinary annuity of 1
at 15% for five periods is 6.74. The present value of 1 at 15% for five periods is 0.5. How
much should Night record as the cost of the machine?
a. P1,250,000
b. P1,675,000
c. P2,500,000
d. P3,370,000
END OF THE EXAMINATION!
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