I - AUDIT OF CASH AND CASH EQUIVALENTS
PROBLEM NO. 1 - Composition of Cash and Cash Equivalents
The following data pertain to PRTC Corporation at December 31, 2015:
Current account at Metrobank
P
1,800,000
Current account at Allied Bank
(100,000)
Payroll account
500,000
Foreign bank account (in equivalent pesos)
800,000
Savings deposit in a closed bank
150,000
Postage stamps
1,000
Employee's postdated check
4,000
IOUs from employees
10,000
Credit memo from a vendor for a purchase return
20,000
Traveler's check
50,000
Money order
30,000
Petty cash fund (P4,000 in currency and expense receipts for 10,000
P6,000)
Pension fund
2,000,000
DAIF check of customer
15,000
Customer's check dated 1/1/16
80,000
Time deposit - 30 days
200,000
Money market placement (due 6/30/16)
500,000
Treasury bills, due 3/31/16 (purchased 12/31/15)
200,000
Treasury bills, due 1/31/16 (purchased 2/1/15)
300,000
REQUIRED:
Determine the cash and cash equivalents to be reported on the entity's December 31, 2015
statement of financial position.
SOLUTION:
Items included:
Current account at Metrobank
1,800,000
Payroll account
500,000
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
Treasury bills, due 3/31/13 (purchased
12/31/12)
200,000
3,584,000
1
Items not included:
Current account at Allied Bank
Savings deposit in a closed bank
Postage stamps
Employee’s post dated check
(100,000)
150,000
1,000
4,000
IOU from employees
10,000
Credit memo from a vendor for a purchase
return
20,000
Petty cash fund - expense receipts
6,000
Pension fund
2,000,000
DAIF check of customer
15,000
Customer’s check dated 1/1/13
80,000
Money market placement (due 6/30/13)
500,000
Treasury bills, due 1/31/13 (purchased 2/1/12)
300,000
Short term borrowing
Other noncurrent assets
Unused supplies (Other CA)
Trade and other receivables
Trade and other receivables
Deduction from accounts
payable
Expenses
Noncurrent asset
Trade and other receivables
Trade and other receivables
Short term investment
Short term investment
PROBLEM NO.2 - Computation of adjusted cash and cash equivalents
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:
Cash on hand
P 372,000
Petty cash fund
10,000
BPI current account
950,000
Security Bank current account No.01
1,280,000
Security Bank current account No.02
(40,000)
PNB savings account
500,000
PNB time deposit
300,000
Cash on hand includes the following items:
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.
2
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
SOLUTION:
Requirement No. 1.a
Cash on hand, per trial balance
372,000
3
(a) NSF check
(60,000)
(b) Postdated check received
(30,000)
Cash on hand, as adjusted
282,000
Adjusting journal entries
Accounts receivable
60,000
Cash on hand
Accounts receivable
60,000
30,000
Cash on hand
Requirement No. 1.b
Petty cash fund per total
30,000
10,300
Employees' vales
(1,600)
Currency in envelope marked "collections for charity"
(1,200)
Unreplenished petty cash vouchers
Petty cash fund, as adjusted
(800)
6,700
Alternative computation:
Currency and coins
Replenishment check
Petty cash fund, as adjusted
Adjusting journal entries:
Advances to officers and employees
Expenses
Cash short/over (balancing figure or see computation
below)
Petty cash fund (P10,000 - P6,700)
Computation of shortage:
Currency and coins
Employees' vales
Unreplenished petty cash vouchers
Replenishment check
Cash and cash items counted
Cash accountability
Unaccounted/Shortage
2,100
4,600
6,700
1,600
800
900
3,300
2,100
1,600
800
4,600
9,100
10,000
4
(900)
Requirement No. 1.c
BPI current account, per trial balance
Unreleased check
Post dated check delivered
950,000
50,000
86,000
BPI current account, as adjusted
1,086,000
Adjusting journal entries:
BPI current account
50,000
Accounts payable
Accounts receivable
50,000
86,000
Cash on hand
86,000
Requirement No. 1.d
Cash on hand (see no. 1.a)
Petty cash fund (see no. 1.b)
282,000
6,700
BPI current account (see no. 1.c)
1,086,000
Security Bank current account no. 1
1,280,000
Security Bank current account no. 2
(40,000)
1,240,000
PNB time deposit (cash equivalent)
300,000
Cash and cash equivalents, as adjusted
2,914,700
Note: The P500,000 PNB savings account should be presented separately from
cash and cash equivalents since it has been earmarked for the acquisition
of a noncurrent asset.
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
Coins
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
Dec. 23 Jay
Ar,
sales
manager
Dec. 27 Central Post Office
Dec. 29 Messengers
Dec. 29 PC Express
Description
Amount
Cash advance for trip to Baguio P 14,000
City
Postage stamps
3,240
Transportation
300
Computer repair
1,600
Other items found inside the cash box:
a) Two pay envelopes which had been opened and the contents aggregating P15,000
representing unclaimed salaries had been removed.
b) The sales manager's liquidation report for his Baguio trip:
Cash advance received on Dec. 23
P 14,000
Less: Hotel accomodation
P
9,000
Bus fare for two
800
Cash given to Roy, salesman
600
10,400
Balance
P 3,600
6
Accounted for as follows:
Cash returned by Roy to the sales manager
Personal check of sales manager
Total
P 240
3,360
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
P100.00
10
1,000
50.00
80
4,000
20.00
70
1,400
10.00
54
540
1.00
410
410
0.50
324
162
0.25
64
16
Total
7,528
7
Checks
Date
Dec. 30
Dec. 30
Dec. 31
Dec. 31
Dec. 31
Unreplenished vouchers
Date
Dec. 23
Dec. 27
Dec. 29
Dec. 29
Drawer
Ms. Jessie
Robert
Jay Ar
Francis
Ryan
Amount
2,400
28,000
3,360
35,600
16,600
Account
Advances
Postage
Transportation
Amount
14,000
3,240
300
1,600
85,960
Repairs
Total cash and cash
counted
Less accountabilities:
19,140
AJE
1&2
items
112,628
Petty cash
Undeposited collections - per
OR
20,000
86,600
Undeposited collections - without OR
28,000
AJE 4
Excess travel advance returned
3,360
AJE 3
Unclaimed salaries
15,000
Cash shortage
152,960
AJE 5
(40,332)
AJE 6
Requirement No. 2
Advances
1 employees
to
officers
and
14,000
Postage expense
3,240
Transportation expense
300
Repairs and maintenance
1,600
Petty cash fund
2 Unused postage
Postage expense
19,140
730
730
8
3 Travel expense [P9,000+P800+(P600-P240)]
Petty cash fund (personal check of sales manager)
10,160
3,360
Advances to officers and employees
4 Cash
13,520
28,000
Accounts receivable
5 Cash
28,000
15,000
Salaries payable
6 Cash short/over (Receivable from custodian)
15,000
40,332
Cash
7 Cash
40,332
54,000
Accounts payable
54,000
PROBLEM NO. 4 - Bank reconciliation
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:
a. The company's account was charged on December 26 for a customer's uncollectible
check amounting to P30,000.
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.
9
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).
g. Receipts for December 31 for P24,000 were deposited on January 2.
No. 123 P 3,000 No. 154
P
4,000
143
2,000
157
6,000
144
7,000
159
7,000
147
3,000
169
5,000
*Certified by the bank in December
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.
j. Petty cash of P10,000 was included in the Cash in Bank balance.
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.
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.
10
SOLUTION:
DOLLAR COMPANY
Bank Reconciliation - Bank to Book Method
December 31, 2012
Balance per bank
Add (deduct):
a) Customer's uncollectible check (NSF)
b) Dishonored note receivable
(including P2,000 protest fee)
c) Book error in recording collection (P15,400 - P14,500)
d) Book errors in recording disbursements
Check no. 142 (P12,425 - P12,245) - under
Check no. 156 (P3,290 - P32,900) - over
e) December bank service charges
f) Note collected by bank (including interest income
of P1,000 and net of service charge of P500)
g) Deposits in transit
h) Outstanding checks
I) Bank error in recording deposit
j)
Petty cash fund
k) Stolen cash sales to be recovered from insurance co.
l)
Double counted deposit - NSF
Balance per books
106,000
30,000
62,000
(900)
180
(29,610)
1,830
(25,500)
24,000
(35,000)
(20,000)
10,000
60,000
20,000
203,000
DOLLAR COMPANY
Bank Reconciliation - Book to Bank Method
December 31, 2012
Balance per books
Add (deduct):
a) Customer's uncollectible check (NSF)
b) Dishonored note receivable
(including P2,000 protest fee)
c) Book error in recording collection (P15,400 - P14,500)
d) Book errors in recording disbursements
Check no. 142 (P12,425 - P12,245) - under
Check no. 156 (P3,290 - P32,900) - over
e) December bank service charges
f) Note collected by bank (including interest income
of P1,000 and net of service charge of P500)
g) Deposits in transit
203,000
(30,000)
(62,000)
900
(180)
29,610
(1,830)
25,500
(24,000)
11
h) Outstanding checks
I) Bank error in recording deposit
j)
Petty cash fund
k) Stolen cash sales to be recovered from insurance co.
l)
Double counted deposit - NSF
Balance per bank
35,000
20,000
(10,000)
(60,000)
(20,000)
106,000
DOLLAR COMPANY
Bank Reconciliation - Adjusted Balance Method
December 31, 2012
BANK
Unadjusted balances, December 31
106,000
Add (deduct):
a) Customer's uncollectible check (NSF)
b) Dishonored note receivable
(including P2,000 protest fee)
c) Book error in recording collection (P15,400 - P14,500)
d) Book errors in recording disbursements
Check no. 142 (P12,425 - P12,245) - under
Check no. 156 (P3,290 - P32,900) - over
e) December bank service charges
f)
Note collected by bank (including interest income
of P1,000 and net of service charge of P500)
g) Deposits in transit
24,000
h) Outstanding checks
(35,000)
I)
Bank error in recording deposit
(20,000)
j)
Petty cash fund
k) Stolen cash sales to be recovered from insurance co.
l)
Double counted deposit - NSF
Adjusted balances, December 31
75,000
BOOKS
203,000
(30,000)
AJE No. 1
(62,000)
900
AJE No. 2
AJE No. 3
(180)
29,610
(1,830)
AJE No. 4
AJE No. 5
AJE No. 6
25,500
AJE No. 7
(10,000)
(60,000)
(20,000)
AJE No. 8
AJE No. 9
AJE No. 10
75,000
Adjusting Journal Entries
1)
2)
3)
4)
Accounts receivable
Cash in bank
30,000
Notes receivable - dishonored
Cash in bank
62,000
Notes receivable - discounted
Notes receivable
60,000
30,000
62,000
60,000
Cash in bank
Accounts receivable
900
Accounts payable
180
900
12
Cash in bank
5)
Cash in bank
Accounts payable
6)
Bank service charge
Cash in bank
7)
8)
9)
10)
180
29,610
29,610
1,830
1,830
Cash in bank
Bank service charge
Notes receivable
Interest income
25,500
500
Petty cash fund
Cash in bank
10,000
Claims from insurance co.
Cash in bank
60,000
Accounts receivable
Cash in bank
20,000
25,000
1,000
10,000
60,000
20,000
PROBLEM NO. 5 - Bank reconciliation and shortage computation
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:
Balance per bank statement
Add: Deposit in transit
Note collected by bank
Total
Less: Outstanding checks
Balance per general ledger
P 350,000
P 175,250
15,000
190,250
540,250
246,750
293,500
In the process of your audit, you gathered the following:
•
•
•
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:
13
•
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
1.
2.
Compute for the following as at December 31, 2015:
a.
Adjusted deposit in transit
b.
Adjusted outstanding checks
c.
Adjusted cash in bank
d.
Cash shortage
Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
Unadjusted deposit in transit
175,250
Post dated check received
(50,000)
Adjusted deposit in transit
125,250
Requirement No. 1.b
Unadjusted outstanding checks
246,750
Unreleased check
(14,750)
Post dated check issued
(37,210)
Adjusted outstanding checks
194,790
Requirement No. 1.c&d
Unadjusted balances
Add (deduct) adjustments:
Post dated check received
Deposit in transit (see 1.a)
Bank
Books
350,000
293,500
(50,000)
AJE 1
14
125,250
Unreleased check
14,750
AJE 2
Post dated check issued
37,210
AJE 3
Note collected by bank
15,000
AJE 4
Outstanding checks (see 1.b)
(194,790)
Erroneous bank credit
(30,000)
Balances
250,460
Shortage
Adjusted balances
310,460
(60,000)
250,460
AJE 5
250,460
Requirement No. 2
1 Accounts receivable
50,000
Cash
2 Cash
50,000
14,750
Accounts payable
3 Cash
14,750
37,210
Accounts payable
4 Cash
37,210
15,000
Notes receivable
15,000
Cash short/over (Receivable from
5 cashier)
60,000
Cash
60,000
15
PROBLEM NO. 6 - Cash shortage computation
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.
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:
Determine the cash shortage as of December 31, 2015.
SOLUTION:
16
Unadjusted balance per bank, 12/31
91,500
Outstanding checks , 12/31
Undeposited collections, 12/31
(4,500)
5,000
Adjusted balance per bank, 12/31 (Cash accounted)
92,000
Cash balance per books, 12/31/Cash accountability (see computation
below)
122,000
Cash over (short)
(30,000)
Computation of cash balance per books, 12/31
Cash receipts:
Owners' investment
150,000
Proceeds from loan
98,000
Collections from customers (see computation below)
414,000
Total
Cash disbursements:
Purchases (P250,000 - P15,000)
Store fixtures (P50,000 - P5,000)
Loan payment
Expenses paid
Cash balance per books, 12/31
662,000
235,000
45,000
80,000
180,000
540,000
122,000
Computation of collections from sales
Purchases/TGAS
250,000
Less merchandise inventory, 12/31
30,000
Cost of sales
220,000
Add gross profit (P220,000 x 120%)
264,000
Sales
484,000
Less accounts receivable, 12/31
70,000
Collections from sales
414,000
PROBLEM NO. 7 - Proof of cash
17
You were able to obtain the following information during your audit of Euro Company:
Reconciling Items:
Undeposited collections
Outstanding checks
Customer's notes collected by the bank
Bank service charges
Erroneous bank debits
Erroneous bank credits
NSF checks not redeposited
Customer's check deposited December 10,
returned by bank on December 16
marked
NSF,
and
redeposited
immediately; no entry made on books
for return or redeposit
Unadjusted balances:
Books
Bank
Nov. 30
P 200,000
80,000
100,000
2,000
10,000
40,000
5,000
Dec. 31
P 120,000
60,000
120,000
3,000
20,000
30,000
7,000
10,000
?
230,000
90,000
?
Bank
P 420,000
500,000
Books
P270,000
407,000
December Transactions:
Receipts
Disbursements
REQUIRED:
1.
2.
Prepare a 4-column bank reconciliation for the month of December
a.
Bank to book method;
b.
Book to bank method; and
c.
Adjusted balanced method
Adjusting entries as of December 31, 2015.
18
SOLUTION:
Euro Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
Beginning
Receipts
Unadjusted bank balances
Undeposited collections
230,000
420,000
November
December
Outstanding checks
200,000
(200,000)
120,000
November
(80,000)
December
Customers' note collected by bank
November
(100,000)
December
Bank service charges
November
December
Erroneous bank debits
November
December
Erroneous bank credits
November
December
NSF checks not redeposited
November
December
500,000
60,000
(60,000)
100,000
(120,000)
2,000
3,000)
3,000
20,000)
20,000
(10,000)
(40,000)
40,000)
(30,000)
5,000
(30,000)
5,000
(7,000)
(10,000)
227,000
150,000
(80,000)
2,000
10,000
Ending
120,000
(120,000)
NSF check redeposited
Unadjusted book balances
Disb
270,000
7,000
(10,000)
407,000
90,000
Euro Company
19
Proof of Cash - Book to Bank Method
For the month of December, 2012
Beginning
Unadjusted book balances
Undeposited collections
November
Receipts
227,000
270,000
(200,000)
200,000
December
Outstanding checks
80,000
December
Erroneous bank debits
November
(100,000)
120,000
(2,000)
(10,000)
November
3,000
(3,000)
20,000
(20,000)
40,000
30,000
(5,000)
30,000
(5,000)
December
Unadjusted bank balances
120,000
10,000
40,000
7,000
NSF check redeposited
230,000
60,000
(2,000)
December
Erroneous bank credits
November
December
NSF checks not redeposited
90,000
(120,000)
(60,000)
100,000
Ending
80,000
December
Customers' note collected by bank
November
407,000
(120,000)
November
November
December
Bank service charges
Disb
10,000
10,000
420,000
500,000
(7,000)
150,000
Euro Company
20
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
Beginning
Receipts
Unadjusted bank balances
Undeposited collections
November
December
Outstanding checks
230,000
420,000
200,000
(200,000)
120,000
November
December
Erroneous bank debits
November
(80,000)
10,000
(40,000)
150,000
120,000
(80,000)
60,000
(60,000)
(20,000)
20,000
(40,000)
(30,000)
NSF check redeposited
Adjusted bank balances
500,000
Ending
(10,000)
December
Erroneous bank credits
November
December
Disb
(30,000)
(10,000) (10,000)
320,000
290,000
410,000
200,000
Unadjusted book balances
227,000
Customers' note collected by bank
November
100,000
December
Bank service charges
270,000
407,000
90,000
November
December
NSF checks
(2,000)
November
December
Adjusted book balances
(5,000)
320,000
(100,000)
120,000
290,000
120,000
AJE 1
(2,000)
3,000
(3,000)
AJE 2
(5,000)
7,000
410,000
(7,000)
200,000
AJE 3
Adjusting journal entries:
21
1) Cash in bank
Note receivable
120,000
120,000
2) Bank service charge
Cash in bank
3,000
3) Accounts receivable
Cash in bank
7,000
3,000
7,000
PROBLEM NO. 8 - Proof of cash
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:
22
1.
2.
Prepare a 4-column bank reconciliation for the month of December
a.
Bank to book method;
b.
Book to bank method; and
c.
Adjusted balance method
Adjusting entries as of December 31, 2015.
SOLUTION:
Cebu Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
Balances per bank (a,g)
Deposits in transit (b)
November 30
December 31
Outstanding checks (c,f)
November 30
December 31 (P3,870 - P700)
Bank collections not in books (d)
November 30
December 31
Bank service charges not in books (e)
November 30
December 31
DAIF checks
Returned in Dec., not recorded (h)
Returned in Nov., recorded in Dec. (i)
Returned and recorded in Dec. (j)
Bank error - Check of Cibo Company (k)
Cash receipts used for payment (l)
Book errors (m,n)
Customer check (P465-P165)
Disb check (P3,250-P325)
Balances per books
11/30
14,010
2,740
Receipts
281,070
(2,740)
3,110
(4,260)
(1,200)
1,200
(1,600)
(1,050)
(900)
750
279,540
(3,170)
(1,600)
950
(640)
640
(800)
800
(900)
(2,010)
750
2,010
(300)
13,290
12/31
19,630
3,110
(4,260)
3,170
950
1,050
Disb.
275,450
2,925
274,635
(300)
(2,925)
18,195
Cebu Company
Proof of Cash - Book to Bank Method
For the month of December, 2012
23
11/30
13,290
Balances per books (refer to requirement 1.a)
Deposits in transit (b)
November 30
December 31
Outstanding checks (c,f)
November 30
December 31 (P3,870 - P700)
Bank collections not in books (d)
November 30
December 31
Bank service charges not in books (e)
November 30
December 31
DAIF checks
Returned in Dec., not recorded (h)
Returned in Nov., recorded in Dec. (i)
Returned and recorded in Dec. (j)
Bank error - Check of Cibo Company (k)
Cash receipts used for payment (l)
Book errors (m,n)
Customer check (P465-P165)
Disb check (P3,250-P325)
Balances per bank (a,g)
Receipts
279,540
(2,740)
Disb.
274,635
2,740
(3,110)
4,260
1,200
(3,110)
4,260
(3,170)
(1,200)
1,600
(950)
(1,050)
12/31
18,195
1,050
900
(750)
1,600
(950)
640
(640)
800
(800)
900
2,010
(750)
(2,010)
300
14,010
281,070
3,170
(2,925)
275,450
300
2,925
19,630
Cebu Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
11/30
14,010
Balances per bank (a,g)
Deposits in transit (b)
November 30
2,740
December 31
Outstanding checks (c,f)
November 30
(4,260)
December 31 (P3,870 - P700)
Bank error - Check of Cibo Company (k)
Cash receipts used for payment (l)
Balances per books
Bank collections not in books (d)
November 30
December 31
Bank service charges not in books (e)
Receipts
281,070
Disb.
275,450
(2,740)
3,110
12/31
19,630
3,110
(3,170)
2,010
750
(4,260)
3,170
(2,010)
750
12,490
282,190
273,100
21,580
13,290
279,540
274,635
18,195
1,200
(1,200)
1,600
1,600
AJE 1
24
November 30
December 31
DAIF checks
Returned in Dec., not recorded (h)
Returned in Nov., recorded in Dec.
(i)
Returned and recorded in Dec. (j)
Book errors (m,n)
Customer check (P465-P165)
Disb check (P3,250-P325)
(950)
(1,050)
1,050
900
(950)
640
(640)
AJE 2
800
(800)
AJE 3
(2,925)
300
2,925
AJE 4
AJE 5
273,100
21,580
900
300
12,490
282,190
Adjusting journal entries:
1) Cash in bank
1,600
Note receivable
2) Bank service charge
1,600
640
Cash in bank
3) Accounts receivable
640
800
Cash in bank
4) Cash in bank
800
300
Accounts receivable
5) Cash in bank
Accounts payable
300
2,925
2,925
PROBLEM NO.9 – Proof of cash
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:
25
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
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:
1. Prepare a 4-colunm bank reconciliation for the month of December
a. Bank to book method;
b. Book to bank method; and
c. Adjusted balance method
2. Adjusting entries as of December 31,2015.
SOLUTION:
MQM Company
Proof of Cash - Bank to Book Method
26
For the month of December, 2012
Nov. 30
Unadjusted bank balances
Undeposited receipts:
November
December
Outstanding checks:
November
December
Erroneous bank debit
Payment to creditor in cash
NSF checks:
Returned, recorded in December
Returned, recorded in January
Unrecorded bank collections:
November
December
Bank service charges:
November
December
Book error in December
Unadjusted book balances
215,600
90,600
December
Receipts
Disb.
2,204,500
2,189,700
(90,600)
101,200
(26,750)
14,300
(9,500)
12,100
12,100
(10,400)
165,450
(10,400)
(8,600)
121,500
(116,400)
7,500
2,221,900
230,400
101,200
(26,750)
(121,500)
Dec. 31
(14,300)
9,500
8,600
(116,400)
7,500
(4,200)
(3,600)
2,160,550
4,200
3,600
226,800
MQM Company
Proof of Cash - Book to Bank Method
For the month of December, 2012
Nov. 30
Unadjusted book balances
Undeposited receipts:
November
December
Outstanding checks:
November
December
Erroneous bank debit
Payment to creditor in cash
NSF checks:
Returned, recorded in December
Returned, recorded in January
Unrecorded bank collections:
November
December
Bank service charges:
165,450
(90,600)
December
Receipts
Disb.
2,221,900
2,160,550
90,600
(101,200)
26,750
(12,100)
10,400
121,500
(121,500)
116,400
Dec. 31
226,800
(101,200)
26,750
(14,300)
9,500
(12,100)
10,400
8,600
14,300
(9,500)
(8,600)
116,400
27
November
December
Book error in December
Unadjusted bank balances
(7,500)
215,600
2,204,500
(7,500)
4,200
3,600
2,189,700
(4,200)
(3,600)
230,400
MQM Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
Nov. 30
December
Receipts
Disb.
Dec. 31
Unadjusted bank balances
Undeposited receipts:
November
December
Outstanding checks:
November
December
Erroneous bank debit
Payment to creditor in cash
Adjusted bank balances
215,600
2,204,500
2,189,700
230,400
90,600
(90,600)
101,200
279,450
12,100
2,227,200
(26,750)
14,300
(9,500)
12,100
2,179,850
Unadjusted book balances
NSF checks:
Returned, recorded in December
Returned, recorded in January
Unrecorded bank collections:
165,450
2,221,900
2,160,550
226,800
10,400
10,400
8,600
(8,600)
AJE 1
November
December
Bank service charges:
121,500
116,400
AJE 2
November
December
Book error in December
(7,500)
(7,500)
4,200
3,600
(4,200)
(3,600)
AJE 3
AJE 4
Adjusted book balances
279,450
-
2,179,850
-
326,800
-
(26,750)
101,200
(121,500)
116,400
2,227,200
-
(14,300)
9,500
326,800
Adjusting journal entries:
1) Accounts receivable
Cash in bank
8,600
8,600
28
2) Cash in bank
116,400
Note receivable
3) Bank service charge
116,400
4,200
Cash in bank
4) Accounts payable
4,200
3,600
Cash in bank
3,600
PROBLEM NO.10- Proof of cash
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:
1.
Prepare a 4-column bank reconciliation for the month of December
a. Bank to book method;
29
b. Book to bank method; and
c. Adjusted balance method
2. Adjusting entries as of December 31, 2015.
SOLUTION:
Baht Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
December
Nov. 30 Receipts
Disb.
Dec. 31
Unadjusted bank balances
Add (deduct) adjustments:
Customers' note collected by bank
76,500
104,000
51,000
129,500
November
Bank service charges
(25,000)
25,000
300
(400)
400
November
December
300
Erroneous bank debit-November
Undeposited collections
10,000
(10,000)
-
November
December
Outstanding checks
20,000
(20,000)
54,900
54,900
November
(42,500)
December
NSF checks
December
Book errors in December
Uncollected customer's note treated as receipts 30,000
Error in recording a check (SB P990, AR
P9,900)
(42,500)
90,490
(90,490)
(6,000)
6,000
8,910
(8,910)
Unadjusted book balances
101,800
121,400
39,300
183,900
30,000
Computation of deposits in transit, December 31:
Deposit in transit, Nov. 30
Add collections in December:
20,000
30
December book receipts
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
Total
Less deposits credited by the bank in December:
December bank receipts
Less receipts not representing
deposits:
Erroneous bank debit, Nov.; corrected
Dec.
183,900
55,000
128,900
148,900
104,000
10,000
94,000
54,900
Outstanding checks, December 31:
Outstanding checks, Nov. 30
Add checks issued in December:
December book disbursements
Less disbursements not representing checks for
December:
Book error (SB P990, AR
P9,900)
8,910
Bank service charge, Nov.; recorded Dec. 300
Total
Less checks paid by the bank in
December:
December bank disbursements
Less disbursements not representing checks:
NSF checks, Dec.
6,000
Bank service charge, Dec.
400
42,500
101,800
9,210
92,590
135,090
51,000
6,400
44,600
90,490
Baht Company
Proof of Cash - Book to Bank Method
For the month of December, 2012
Nov. 30
Unadjusted book balances
Add (deduct) adjustments:
Customers' note collected by bank
39,300
November
Bank service charges
November
December
Erroneous bank debit-November
25,000
December
Receipts
183,900
Disb.
101,800
Dec. 31
121,400
(25,000)
(300)
(300)
400
10,000
(400)
31
(10,000)
Undeposited collections
November
December
Outstanding checks
November
December
NSF checks
(20,000)
20,000
(54,900)
42,500
42,500
(90,490)
December
Book errors in December
6,000
Uncollected customer's note treated as receipts
Error in recording a check (SB P990, AR
P9,900)
Unadjusted bank balances
(54,900)
76,500
(30,000)
(6,000)
(30,000)
(8,910)
104,000
90,490
51,000
8,910
129,500
Baht Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
Nov. 30
December
Receipts
Disb.
Dec. 31
Unadjusted bank balances
Add (deduct) adjustments:
76,500
104,000
129,500
Erroneous bank debit-November
Undeposited collections
10,000
(10,000)
November
December
Outstanding checks
20,000
(20,000)
54,900
November
(42,500)
Unadjusted book balances
Add (deduct) adjustments:
Customers' note collected by bank
November
-
54,900
(42,500)
December
Adjusted bank balances
51,000
90,490
64,000
39,300
(90,490)
128,900
98,990
93,910
183,900
101,800
121,400
32
25,000
(25,000)
Bank service charges
November
(300)
(300)
December
NSF checks
400
(400)
AJE 1
(6,000)
AJE 2
(30,000)
AJE 3
AJE 4
December
Book errors in December
Uncollected customer's note treated as
receipts
(30,000)
Error in recording a check (SB P990, AR
P9,900)
6,000
(8,910)
8,910
Adjusted book balances
98,990
93,910
64,000
128,900
-
-
-
-
Adjusting journal entries:
1) Bank service charge
Cash in bank
400
2) Accounts receivable
Cash in bank
6,000
3) Notes receivable
Cash in bank
30,000
4) Accounts payable
Cash in bank
8,910
400
6,000
30,000
8,910
PROBLEM NO.11 – Proof of cash
Hangover Company received the following bank statements on August 1, 2015:
DATE
July 1
2
3
DEBITS
CREDITS
2,502
2,240
1,050
BALANCE
66,405
63,903
62,713
33
5
6
8
9
10
11
12
13
15
16
17
18
19
20
22
23
24
25
26
27
29
30
31
TOTALS
2,106
5,535
5,817
64,819
70,354
76,171
67,990
72,307
65,488
62,989
62,989
66,498
56,721
58,202
51,718
55,136
60,446
66,938
61,392
61,392
52,657
60,903
70,288
63,288
63,228
65,810
8,181
4,317
4,926
6,819
7,425
3,509
9,777
6,221
6,484
7,702
3,418
5,310
6,492
5,546
8,735
8,246
9,385
7,060
6,405
P77,395
8,987
P76,800
Hangover’s cash account shows the following information for the month of July, 2015:
The June 30, 2015 balance was P62, 150.
DATE
July 1
2
3
5
6
8
9
12
13
15
16
17
18
19
20
22
DEBITS
3,729
5,535
CREDITS
165
8,181
5,817
4,317
4,926
3,509
6,819
7,425
9,391
7,702
3,418
5,310
6,492
6,221
6,484
5,074
8,735
34
23
26
29
30
31
TOTALS
8,286
8,913
5,152
2,238
P75,304
6,885
5,913
5,857
P77,150
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 30th
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:
1. Prepare a 4-colunm bank reconciliation for the month of July
a. Bank to book method;
b. Book to bank method: and
c. Adjusted balance method
2. Adjusting entries as of December 31, 2015.
SOLUTION:
35
Hangover Company
Proof of Cash - Bank to Book Method
For the month of July, 2012
July
6/30
Receipts
Disb
7/31
Unadjusted bank balances
66,405
Direct deposits
June
(675)
July
NSF check redeposited - July
Book error - July (SB P1,492, AR P1,000)
Bank error - July
Bank service charges
June
165
July
Interest earned
June
(3,054)
July
Book error - June (SB P9,850, AR
P8,955)
895
Deposits in transit
June
3,156
July
Outstanding checks
June
(4,742)
July
76,800
77,395
65,810
Unadjusted book balances
75,304
62,150
675
(675)
(472)
(675)
(472)
(492)
(386)
492
386
165
(175)
175
3,054
(3,160)
(3,160)
895
(3,156)
2,238
2,238
(4,742)
5,857
(5,857)
77,150
60,304
Receipts
Disb
7/31
75,304
77,150
60,304
Hangover Company
Proof of Cash - Book to Bank Method
For the month of July, 2012
July
6/30
Unadjusted book balances
62,150
Direct deposits
June
675
July
NSF check redeposited - July
Book error - July (SB P1,492, AR P1,000)
(675)
675
472
675
472
492
(492)
36
Bank error - July
Bank service charges
June
(165)
July
Interest earned
June
3,054
July
Book error - June (SB P9,850, AR
P8,955)
(895)
Deposits in transit
June
(3,156)
July
Outstanding checks
June
4,742
July
Unadjusted bank balances
66,405
386
(386)
(165)
175
(175)
(3,054)
3,160
3,160
(895)
3,156
(2,238)
76,800
(2,238)
4,742
(5,857)
5,857
77,395
65,810
Hangover Company
Proof of Cash - Adjusted Balance Method
For the month of July, 2012
July
6/30
Receipts
Disb
7/31
Unadjusted bank balances
Deposits in transit
June
July
Outstanding checks
June
July
NSF check redeposited - July
Bank error - July
66,405
76,800
77,395
65,810
3,156
(3,156)
2,238
Adjusted bank balances
64,819
75,410
77,652
62,577
Unadjusted book balances
Direct deposits
June
July
Bank service charges
June
July
62,150
75,304
77,150
60,304
675
(675)
675
(4,742)
(472)
(165)
2,238
(4,742)
5,857
(472)
(386)
(165)
175
(5,857)
386
675
AJE 1
(175)
AJE 2
37
Interest earned
June
3,054
July
Book errors
June (SB P9,850, AR
P8,955)
(895)
July (SB P1,492, AR P1,000)
Adjusted book balances
(3,054)
3,160
3,160
AJE 3
492
(895)
(492)
AJE 4
AJE 5
64,819
75,410
77,652
62,577
-
-
-
-
Adjusting journal entries:
1) Cash in bank
Rent income
675
2) Bank service charge
175
675
Cash in bank
3) Cash in bank
175
3,160
Interest income
4) Rent expense
3,160
895
Cash in bank
5) Wages expense
895
492
Cash in bank
492
PROBLEM NO.12- Proof of cash
Celtics Company had the following bank reconciliation on June 30, 2015:
Balance per bank statement, June 30, 2015
Add: Deposit in transit
Total
Less: Outstanding checks
Balance per book, June 30
P3,000,000
400,000
3,400,000
900,000
P2,500,000
38
The bank statement for the month of July 2015 showed the following:
Deposits (including P200,000 note collected for Celtics)
P9,000,000
Disbursements (including P140,000 NSF check and P10,000 service 7,000,000
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:
Determine the following:
1.
2.
3.
4.
Cash receipts per books in July
Cash disbursement per books in July
Cash balance per books at July 31
Adjusted cash balance at July 31
SOLUTION:
Requirement No. 1
Total deposits per bank statement in June
9,000,000
Note collected by bank in July
(200,000)
Deposits in transit, June 30
(400,000)
Deposits in transit, July 31
1,000,000
Cash receipts per books in July
9,400,000
Requirement No. 2
Total disbursements per bank statement in June
7,000,000
July NSF check
(140,000)
July service charge
(10,000)
Outstanding checks, June 30
Outstanding checks, July 31
(900,000)
39
600,000
Cash disbursements per books in July
6,550,000
Requirement No. 3
Balance per books, June 30, 2007
2,500,000
July receipts per books (see no. 21)
9,400,000
July disbursements per books (see no. 22)
(6,550,000)
Balance per books, July 31, 2007
5,350,000
Requirement No. 4
Balance per bank statement, July 31 (P3M+P9M-P7M)
5,000,000
Deposits in transit, July 31
1,000,000
Outstanding checks, July 31
(600,000)
Adjusted bank balance, July 31
5,400,000
Balance per books, July 31
5,350,000
Note collected by bank in July
200,000
NSF check
(140,000)
Bank service charges
(10,000)
Adjusted book balance, July 31
5,400,000
PROBLEM NO.13 – Proof of cash
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:
40
November 30
P480,000
244,000
December 31
P420,000
300,000
a. Balance per book
b. Undeposited
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:
• Included in the undeposited collections is cash from the hypothecation of accounts
receivable. Sales were P 180,000 on November 30, and P200,000 at December 31.
The balance was made up from collections which were entered on the books in the
manner indicated above.
• Collections on accounts receivable deposited in December, other than deposits in
transit, totalled P725,000.
j. Interest on the bank loan for the month of December charged by the bank nut not
recorded in the books, amounted to P38,000.
41
REQUIRED:
Determine the following:
1.
2.
3.
4.
Unadjusted balance per books as of November 30
Unadjusted book receipts for December
Unadjusted book disbursements for December
Unadjusted balance per books as of December 31
SOLUTION:
Syria Company
Proof of Cash - Bank to Book Method
For the month of December, 2012
Nov. 30
December
Receipts
Unadjusted bank balances
480,000
240,000
Undeposited collections:
November 30
100,000
(100,000)
December 31
140,000
Outstanding checks:
November 30
(150,000)
December 31
DAIF checks:
Returned
in
Nov.,
recorded in Dec.
10,000
(10,000)
Returned and recorded
in Dec.
(25,000)
Returned in Dec., recorded in Jan.
Erroneous bank debit
Unrecorded bank collection
in Dec.
(106,000)
Anticipated
loan
proceeds
from
AR
hypothecation
Nov.
30
sales
(P180,000 x 80%)
144,000
(144,000)
Dec. 31 sales (P200,000 x 80%)
160,000
Deposits with loan payment (P725,000 x 80%)
580,000
Anticipated loan payment from undeposited collections
Nov. 30 (P100,000 x
80%)
(80,000)
Dec. 31 (P140,000 x
80%)
Interest charge for bank loan in Dec.
Disb
Dec. 31
300,000
420,000
140,000
(150,000)
120,000
(120,000)
(25,000)
(29,000)
(90,000)
29,000
90,000
(106,000)
160,000
580,000
(80,000)
112,000
(38,000)
(112,000)
38,000
42
Unadjusted book balances
504,000
735,000
700,000
539,000
Syria Company
Proof of Cash - Adjusted Balance Method
For the month of December, 2012
Nov. 30
Unadjusted bank balances
480,000
Undeposited collections:
November 30
100,000
December 31
Outstanding checks:
November 30
(150,000)
December 31
Erroneous bank debit
Deposits with loan payment (P725,000 x
80%)
Adjusted bank balances
430,000
December
Receipts
240,000
Disb
Dec. 31
300,000
(100,000)
140,000
580,000
860,000
420,000
140,000
(150,000)
120,000
(90,000)
(120,000)
90,000
580,000
760,000
530,000
700,000
539,000
25,000
29,000
(29,000)
Unadjusted book balances
504,000
735,000
DAIF checks:
Returned in Nov.,
recorded in Dec.
(10,000)
10,000
Returned
and
recorded in Dec.
25,000
Returned in Dec., recorded in Jan.
Unrecorded
bank
collection in Dec.
106,000
Anticipated loan proceeds from AR
hypothecation
Nov.
30
sales
(P180,000 x 80%)
(144,000)
144,000
Dec. 31 sales (P200,000 x 80%)
(160,000)
Anticipated loan payment from undeposited collections
Nov. 30 (P100,000 x
80%)
80,000
Dec. 31 (P140,000 x
80%)
Interest charge for bank loan in Dec.
(112,000)
38,000
112,000
(38,000)
Adjusted book balances
760,000
530,000
430,000
860,000
106,000
(160,000)
80,000
43
PROBLEM NO.14 –Three-dated bank reconciliation
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.
Balance, bank statement
Balance, company records
Deposits in transits
Outstanding checks
11/30/15
P344,420
271,260
35,000
88,240
12/31/15
P275,020
226,010
?
?
Receipts, cash records
Credits, bank statement
Disbursements, cash records
Charges, bank statement
12/1-31/15
P963,230
941,010
1,008,480
1,010,410
1/1-12/16
P292,500
321,490
177,570
230,180
The following information also was obtained:
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.
Co. A
Co. B
Amount
P3,270
P6,730
Returned
12/6/15
12/27/15
Recorded
No entries
1/3/16
Redeposited
12/8/15
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:
1. Compute for the following:
a. Deposits in transit as of December 31, 2015
44
b. Outstanding checks as of December 31,2015
c. Deposits in transits as of January 12, 2016
d. Outstanding checks as of January 12,2016
2. Prepare a 4-column bank reconciliation for the month of December 2015 and for the
period January 1 to 12, 2016 using the adjusted balance method.
SOLUTION:
Requirement 1.a
Deposits in transit, Nov.
30
Add
collections
in
December:
December
book
receipts
35,000
963,230
Customers' note collected by bank in Nov. (20,000)
943,230
Total
Less deposits credited by the bank in
December:
December
bank
receipts
941,010
978,230
NSF check redeposited (Customer A)
Deposits in transit, Dec.
31
937,740
(3,270)
40,490
Requirement 1.b
Outstanding checks, Nov.
30
Add checks issued in December:
88,240
December book disbursements
1,008,480
Collection fee for note collected in Nov.
(80)
Total
Less checks paid by the bank in December:
1,008,400
1,096,640
December bank disbursements
1,010,410
Bank error in check payment (P1,340 P340)
(1,000)
NSF
check
45
Customer A
NSF
check
Customer B
Outstanding checks, Dec.
31
(3,270)
(6,730)
999,410
97,230
Requirement 1.c
Deposits in transit, Dec. 31 (see Requirement
1.a)
Add collections, Jan. 112:
Jan. 1-12 book
receipts
292,500
NSF
check
Customer B
6,730
Total
Less deposits credited by the bank, Jan. 1-12:
Jan. 1-12 bank
receipts
321,490
Correction of error in check payment in
Dec.
(1,000)
Deposits in transit, Jan.
12
Requirement 1.d
Outstanding checks, Dec. 31 (see Requirement
1.b)
Add checks issued, Jan. 1-12:
40,490
299,230
339,720
320,490
19,230
97,230
Jan. 1-12 book disbursements
177,570
Unrecorded payroll checks
5,500
183,070
Total
280,300
Less checks paid by the bank, Jan. 1-12:
Outstanding checks, Jan.
12
230,180
50,120
December
Unadjusted
balances
January 1-12
Nov.
30
Receipts
Disb
Dec. 31
Receipts
Disb
Jan. 12
344,420
941,010
1,010,410
275,020
321,490
230,180
366,330
bank
46
Deposits in transit:
eginning of period
35,000
End of period
Outstanding checks:
Beginning of period
(35,000)
(40,490)
40,490
(88,240)
40,490 19,230
(88,240)
(97,230)
End of period
Bank error in check
payment
NSF check redeposited (Customer
A)
(3,270)
97,230
(97,230)
(1,000)
1,000
(1,000)
Adjusted bank balances
943,230
1,015,130
219,280
963,230
1,008,480
291,180
Unadjusted
book
balances
271,260
Note collected by bank in
Nov.
19,920
50,120
(50,120)
299,230
183,070
335,440
226,010
292,500
177,570
340,940
(6,730)
6,730
5,500
(5,500)
183,070
335,440
(3,270)
(20,000) (80)
NSF check not redeposited (Customer B)
Unrecorded payroll in
Jan.
6,730
Adjusted book balances
1,015,130
291,180
19,230
943,230
219,280
299,230
PROBLEM NO.15- Theory
Select the best answer for each of the following:
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.
47
c. Cash will be overstated and expenses understated.
d. Expenses will be overstated and cash will be understated.
3. The primary purpose of sending a standard confirmation request to financial institutions
with which the client has done business during the year is to.
a. Detect kiting activities that may otherwise not be discovered.
b. Corroborate information regarding deposit and loan balances.
c. Provide the data necessary to prepare a proof of cash.
d. Request information about contingent liabilities and secured transactions.
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?
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.
7. An auditor who is engaged to examine the financial statements of a business enterprise
will request cut-off bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping.
d. Detect kiting.
48
8. Which of the following cash transfers would appear as a deposit in transit on the
December 31, 2015 bank reconciliation?
Bank Account A
Bank Account B
Disbursing Date (Month/Day
Receiving Date (Month/Day)
Per Bank
Per Books
Per Bank
Per Books
a.
12/31
12/30
12/31
12/30
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
9. Which of the following transfers would not appear as an outstanding check on the
December 31, 2015 bank reconciliation?
Bank Account A
Bank Account B
Disbursing Date (Month/Day)
Receiving Date (Month/Day)
Per Bank
Per Books
Per Bank
Per Books
a.
12/31
12/30
12/31
12/30
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
Use the following information for the next two question.
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.
No.
101
102
103
104
From
Pbcom
UCPB
HSBC
MBank
To
HSBC
MBank
PSBank
PNB
Disbursements
Per Books
Per Bank
12/30
1/4
1/3
1/2
12/31
1/3
1/2
1/2
Receipts
Per Books
12/30
12/30
1/2
1/2
Per Bank
1/3
12/31
1/2
12/31
10. Which of the following checks might indicate kiting?
a. Check No. 101 and 103
b. Check No. 102 and 104
c. Check No. 101 and 104
d. Check No. 102 and 103
49
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?
a.
b.
c.
d.
ANSWERS:
1. C
2. C
3. B
4. A
From
Pbcom
UCPB
HSBC
MBank
5. A
6. B
7. B
8. D
To
HSBC
MB
PBank
PNB
Disbursements
Per Books Per Bank
12/31/15
1/4/16
1/4/16
1/5/16
12/31/15
1/5/16
1/4/16
1/11/16
Receipts
Per Books
12/31/15
12/31/15
12/31/15
1/4/16
Per Bank
12/31/15
1/4/16
1/4/16
1/4/16
9. B
10. B
11. B
12. B
II – AUDIT OF RECEIVABLES
50
PROBLEM NO. 1 – Composition of trade and other 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:
Accounts known to be worthless
P 2,500
Advance payments to creditors on purchase orders
10,000
Advances to affiliated companies
Customers’ accounts reporting credit balance arising from sales
return
25,000
(15,000)
Interest receivable on bonds
10,000
Other trade accounts receivable – unassigned
Subscriptions receivable for ordinary share capital due in 30 days
50,000
55,000
Trade accounts receivable – assigned
Trade installment receivable due 1 – 18 months,
(including unearned finance charges, P2,000)
15,000
Trade receivables from officers, due currently
1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
5,000
Total
P181,000
22,000
REQUIRED:
Determine the trade and other receivables to be reported on the entity’s December 31, 2015
statement of financial position.
SOLUTION:
Items included:
Trade accounts receivable (see computation below)
91,500
Advance payments to creditors on purchase orders
10,000
Interest receivable on bonds
10,000
Subscriptions receivable due in 30 days
55,000
Trade and other receivables
166,500
Composition of trade accounts receivable:
Other trade accounts receivable – unassigned
51
50,000
Trade accounts receivable - assigned
Trade installment receivable due 1 – 18 months,
15,000
net of unearned finance charges of P2,000
20,000
Trade receivables from officers due currently
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
Trade accounts receivable
Items not included:
Accounts known to be worthless
Advances to affiliated companies
Customers' account with credit balance
1,500
5,000
91,500
2,500
25,000
(15,000)
Write off
Noncurrent investment
Trade and other payables
PROBLEM NO. 2 – Computation of adjusted accounts receivable
In the audit of Beatles Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:
Beatles Company
Accounts Receivable Schedule
December 31, 2015
Customer
Love M. Do
Strawberry Fields
This Boy Company
Girl Corporation
Ticket To Ride Transport Corp
Let It Be Corp
Hey Jude
Get Back Company
Yesterday Corp
Totals
Balance
P92,000
420,000
350,000
374,000
160,000
124,000
4,000
256,000
240,000
P2,020,000
Current
P
248,000
92,000
212,000
60,000
4,000
80,000
240,000
P936,000
Past Due
P92,000
172,000
258,000
162,000
160,000
64,000
176,000
P1,084,000
The Accounts Receivable control account balance was determined to be P2,020,000.
The external auditor submitted the following audit comments for possible adjustments:
52
Love M. Do
Merchandise found defective; returned by customer on October 31,
2015 for credit, but the credit memo was issued y Beatles only on
January 15, 2016.
Strawberry Fields
Account is good but usually pays late.
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.
Ticket To Ride Corp.
Collected in full on January 31, 2016.
Let It Be Corp.
Paid in full on December 30, 2015 but not recorded. Collections
were deposited on January 2, 2016.
Hey Jude
Received account confirmation from customer for P44,000.
Investigation revealed an erroneous credit for P40,000. (See Get
Back Company)
Get Back Company
Neglected to post P40,000 credit to customer’s account.
Yesterday Corp.
Customer wants to know reason for receipt of P160,000 credit
memo as their accounts payable balance was P400,000.
REQUIRED:
1. Adjusting entries as of December 31, 2015.
2. Adjusted balance of Accounts Receivable – Trade as of December 31, 2015.
SOLUTION:
Requirement No. 1
1)
2)
Love M. Do
Sales returns
Accounts receivable
92,000
Strawberry Fields
None
3) This Boy Company
None, this is misposting only in the SL. However, the customers' ledger should be
adjusted.
53
4)
5)
6)
Girl Corporation
Sales
Accounts receivable
40,000
Ticket To Ride Corp.
Accounts receivable-Nontrade
Accounts receivable
160,000
Let It Be Corp
Cash
Accounts receivable
124,000
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
Unadjusted balance
Add (Deduct) adjustments:
No. 1
No. 4
No. 5
No. 6
Adjusted balance
2,020,000
(92,000)
(40,000)
(160,000)
(124,000)
1,604,000
PROBLEM NO. 3 – Audit of accounts receivable and related accounts
In connection with the audit of the financial statements of Praktis Corporartion, your audit senior
instructed you to examine the company’s accounts receivable.
Prior to any adjustments you were able t extract the following balances from Praktis’ trial
balance as of December 31, 2015:
Accounts receivable
Allowance for doubtful accounts
P442,500
15,000
54
From the schedule of accounts receivable as of December 31, 2015, you determined that this
account includes the following:
Accounts with debit balances:
60 days old and below
P 238,500
61 to 90 days
117,200
Over 90 days
85,400
P 441,100
Advances to officers
16,400
Accounts with credit balance
(15,000)
Accounts receivable per GL
P 442,500
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:
Customer
Customer’s Comments
Audit Findings
Jessie
The goods sold on December 1 The client failed to record credit
were returned on December 16, memo no. 23 for P12,000. The
2015.
merchandise was included in the
ending inventory at cost.
Robert
We do not owe this amount *%#@ Investigation revealed that goods
(bad word). We did not receive any sold for P16,000 were shipped to
merchandise form your company.
Robert on 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 merchandise.
Anne
I am entitled to a 10% employee Anne is an employee of Praktis.
discount. Your bill should be Starting November 2015, all
reduced by P1,200.
company employees were entitled
to a special discount.
55
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 destinationcollect.
Based on your discussion with Praktis’ Credit Manager, you both agreed that an allowance for
doubtful accounts should be maintained using the following rates:
60 days old and below
1%
61 to 90 days
2%
Over 90 days
5%
REQUIRED:
1. Compute for the adjusted balances of the following:
a. Accounts receivable
P387,400
b. Allowance for doubtful accounts
P 7,622
2. Adjusting entries as of December 31, 2015
SOLUTION:
Per
Books
Accounts receivable
442,500
Adjustments
Per Audit
1
(16,400)
387,400
2
15,000
3
(21,000)
4
(12,000)
5
(1,200)
6
(18,000)
56
60 days old and below
238,500
7
(1,500)
4
(12,000)
5
(1,200)
6
(18,000)
7
(1,500)
205,800
61 to 90 days
117,200
Over 90 days
85,400
3
(21,000)
64,400
15,000
2
15,000
7,622
3
(21,000)
8
(1,378)
Allowance for doubtful accounts
117,200
Adjusting Journal Entries
1 Advances to officers and employees
16,400
Accounts receivable
2 Accounts receivable
16,400
15,000
Allowance for doubtful accounts
Erroneous recording of recovery from written off account
3 Allowance for doubtful accounts
21,000
Accounts receivable (>90 days)
Accounts that should be written off
4 Net sales
Accounts receivable (<60 days)
Unrecorded credit memo
15,000
21,000
12,000
12,000
5 Net sales
57
1,200
Accounts receivable (<60 days)
Unrecorded employee discount
6 Net sales
1,200
18,000
Accounts receivable (<60 days)
Inventory
18,000
13,000
Cost of sales
Goods out on consignment erroneously
billed
7 Freight out
13,000
1,500
Accounts receivable (<60 days)
Unrecorded freight-out
8 Allowance for doubtful accounts
1,500
1,378
Doubtful accounts expense
1,378
60 days old and below
205,800
1% 2,058
61 to 90 days
117,200
2% 2,344
Over 90 days
64,400
5% 3,220
Required allowance
7,622
Balance per books before this adjustment (15,000+15,00021,000)
9,000
Adjustment
1,378
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
58
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 writeoffs 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:
Proportion to total
Age of Accounts
Probability of collection
64%
18%
8%
5%
3%
2%
1-10 days
11-30 days
Past due 31-60 days
Past due 61-120
Past due 121-180
Past due over 180 days
99.0%
97.5%
95.0%
80.0%
65.0%
20.0%
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:
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.
59
SOLUTION:
Requirement
No.1
Category
1 – 10 days
11 – 30 days
31 – 60 days
61 – 120 days
121 – 180
days
over 180 days
Aging ratio AR Balance
64%
960,000
18%
270,000
8%
120,000
5%
75,000
Rate
Allowance
1.00%
9,600
2.50%
6,750
5.00%
6,000
20.00%
15,000
3%
2%
100%
35.00%
80.00%
45,000
30,000
1,500,000
Requirement
No.2
Doubtful accounts expense
Allowance for doubtful accounts
22,300
15,750
24,000
77,100
*
22,300
Allowance for doubtful accounts, 1/1
Add provisions (P8,000,000 x 4%)
Total
Less accounts written-off
Balance before adjustment
Required allowance (see no.
1)
Additional required allowance for doubtful accounts
27,300
320,000
347,300
292,500
54,800
77,100
22,300
PROBLEM NO. 5 – Analysis of accounts receivable and related accounts
The poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and
an allowance for bad debts are maintained separately for each division. On January 1, 2015 the
balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail
customers was a credit of P7,600.
The following summary pertains only to retail sales since 2012:
2012
2013
2014
2015
Credit Sales
P1,110,000
1,225,000
1,465,000
1,500,000
Bad Debts Written Off
P26,000
29,500
30,000
31,000
Bad Debts Recoveries
P2,150
3,750
3,600
4,200
60
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
Accounts receivable, 1/1/12
209,000
Credit sales for 2012
1,500,000
Collections during 2012
(1,380,200)
Accounts written off - 2012
Accounts
receivable,
12/31/12
(31,000)
297,800
Requirement No. 2
Allowance for doubtful accounts, 1/1/12
7,600
Doubtful accounts expense - 2012 (see computation below)
30,000
Accounts written off - 2012
(31,000)
Recovery of accounts written off – 2012
4,200
Allowance for doubtful accounts, 12/31/12
10,800
Computation of doubtful accounts expense - 2012:
Doubtful accounts expense for 2012 (P1,500,000 x 2%)
30,000
Computation of bad debt
rate:
Year Credit sales
AR writen-off
Recoveries
Net
2009
2,150
23,850
1,110,000
26,000
61
2010
1,225,000
2011
1,465,000
3,800,000
29,500
3,750
25,750
30,000
3,600
26,400
85,500
9,500
76,000
Net accounts written off (2009 to 2011)
76,000
Divide by credit sales (2009 to 2011)
Percentage of uncollectible accounts to charge sales
3,800,000
2.00%
PROBLEM NO. 6 – Audit of accounts receivable and related accounts
In connection with your examination of the financial statements of RIngo, Inc. for the year ended
December 31, 2015, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.
•
•
The December 31, 2015 balance in the Accounts Receivable control accounts is
P837,900.
An aging schedule of the accounts receivable as of December 31, 2015 is presented
below:
Age
•
•
Net debit balance
Percentage to be applied after corrections have
been made
60 days & under
P387,800
1 percent
61 to 90 days
307,100
2 percent
91 to 120 days
89,800
5 percent
Over 120 days
53,200
Definitely uncollectible, P9,000; the remainder
P837,900
is estimated to be 25% uncollectible.
The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
Balance
January 1, 2015
P19,700
November 30, 2015
P6,100
13,600
December 31, 2015(P837,900 x 5%)
P41,895
P55,495
Entries made to Doubtful Accounts Expense account were:
1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
2. A credit for P6,100 on November 30, 2015, and a debit to Allowance for Doubtful
Accounts because of a bankruptcy. The related sales took place on October 1, 2015.
62
•
There is a credit balance in one account receivable (61 to 90 days) of P11,000, it
represents an advance on a sales contract.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Accounts receivable
b. Allowance for doubtful accounts
c. Doubtful accounts expense
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
GL/SL
60
61 to 90
91 to 120
over
120
837,900
387,800
307,100
89,800
53,200
Unadjusted balances
Add (deduct) adjustments:
AJE No. 1
(9,000)
(9,000)
AJE No. 2
(6,100)
(6,100)
AJE No. 3
Adjusted balances
Requirement No. 1.b
Age of accounts
60
61 to 90
91 to 120
over 120
11,000
833,800
balance
387,800
318,100
83,700
44,200
833,800
387,800
Rate
1%
2%
5%
25%
11,000
318,100
83,700
44,200
Allowance
3,878
6,362
4,185
11,050
25,475
Requirement No. 1.c
Unadjusted allowance for doubtful accounts
55,495
Add (deduct) adjustments:
AJE no. 1
(9,000)
AJE no. 4 (squeeze)
(21,020)
(30,020)
Required allowance (see no. 1.b)
25,475
Balance per books (P41,895 - P6,100)
63
35,795
Add (deduct) adjustments:
AJE no. 2
6,100
AJE no. 4
(21,020)
Doubtful accounts expense per audit
(14,920)
20,875
Requirement No. 2
Adjusting journal entries:
1)
Allowance for doubtful
accounts
Accounts receivable - over 120 days
9,000
9,000
To write off definitely uncollectible
accounts
2) Doubtful account expense
6,100
Accounts receivable - 91 to 120
days
6,100
To correct entry made in recording accounts written
off
3) Accounts receivable - 61 to 90 days
11,000
Advances
from
customers
To reclassify advances from customers
4)
Allowance for doubtful
accounts
Doubtful
account
expense
To adjust allowance to required balance
11,000
21,020
21,020
PROBLEM NO. 7 – Analysis of notes receivable and related accounts
The balance sheet of Yoko Corporation reported the following long-term receivables as of
December 31, 2014:
Note receivable from sale of plant
Note receivable from officer
P6,000,000
1,600,000
In connection with your audit, you were able to gather the following transactions during 2015
and other information pertaining to the company’s long-term receivables:
64
a. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every
April 1. The initial principal and interest payment was made on April 1, 2015.
b. The note receivable from officer is dated December 31,2014, earns interest at 10% per
annum, and is due on December 31,2017. The 2015 interest was received on December
31,2015.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in exchange for
an P800,000 non-interest bearing note due on April 1,2017. The note had no ready
market, and there was no established exchange price for the equipment. The prevailing
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.
2.
3.
4.
5.
Noncurrent receivables
Current portion of long-term receivables
Accrued interest receivable
Interest income
SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000)
4,000,000
Less installment due on April 1, 2013
2,000,000
2,000,000
Note receivable from officer, due 12/31/14
1,600,000
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797)
Discount amortization-2012 (P637,600 x 12% x 9/12)
637,600
57,384
694,984
Note receivable from sale of
land
65
Balance, 12/31/12
2,800,000
Less principal installment due on 7/1/13
Total amount to be received
Less interest (P2,800,000 x 11%)
902,500
308,000
594,500
2,205,500
Total noncurrent receivables, 12/31/12
6,500,484
Requirement No. 2
Note receivable from sale of plant due on 4/1/13
2,000,000
Note receivable from sale of land (see no. 1)
594,500
Current portion of long-term receivables
2,594,500
Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12)
360,000
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Accrued interest receivable, 12/31/12
514,000
Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12
P4,000,000 x 12% x 9/12
180,000
360,000
540,000
Note receivable from officer (P1,600,000 x
10%)
160,000
Note receivable from sale of equipment (P637,600 x 12% x
57,384
9/12)
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Total interest income for 2012
911,384
PROBLEM NO. 8 – Audit of notes receivable and related accounts
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
66
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.
January 1, 2015
Notes Receivable
Land
Gain on sale of Land
December 31, 2015
Cash
Notes receivable
Interest income
P600,000
P400,000
200,000
P224,000
P200,000
24,000
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:
Requirement No. 1.a
PV of consideration receivable (see computation
below)
503,105
Carrying amount of
land
(400,000)
Correct gain on sale of
land
103,105
67
Present value of cash flows to determine initial CA:
Date
Principal
Interest (4%)
12/31/12
200,000
12/31/13
200,000
12/31/14
200,000
24,000
Total
PVF (14%)
PV, 1/1/12
0.8772
196,493
0.7695
166,212
189,475
0.6750
140,400
160,056
503,105
349,531
224,000
16,000
216,000
8,000
208,000
600,000
Requirement No. 1.b
Amortization schedule
method:
Date
EI (14%)
using
PV,
12/31/12
effective
NI (4%)
interest
Disc.
Amort.
Repayment
AC
1/1/12
503,105
12/31/12
12/31/13
12/31/14
70,435
24,000
46,435
200,000
349,540
16,000
32,936
200,000
182,476
8,000
17,524
200,000
-
48,936
25,524
23
Interest income - 2012 (P503,105 x
.14)
70,435
Requirement No. 1.c
Gain on sale of land - overstated (P200,000 P103,105)
96,895
Interest income for 2012 - understated (P70,435 P24,000)
(46,435)
Net overstatement of 2012 profit
50,460
Requirement No. 1.d
Carrying amount,
schedule)
12/31/12
(see
349,540
Requirement No. 1.e
Amount reported as notes receivable
400,000
Correct current portion of NR (P349,540 - P182,476)
167,064
Overstatement of CA/working capital
68
232,936
Requirement No. 2
Adjusting
entries:
journal
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land
96,895
Discount on notes receivable (FV-PV)
96,895
To record amortization of discount on 12/31/12:
Discount on notes receivable
46,435
Interest income
46,435
PROBLEM NO. 9 – Audit of notes receivable and related accounts
My Love Corporation is a local company engaged in buying and selling of manufacturing
equipment. On 1 January 2014, My Love Corporation sold equipment, with cash price of
P1,500,000, to Silly Love Corporation. The cost of the equipment is P750,000. Silly Love
signed a deferred payment contract that provides for a down payment of P300,000and a 5-year
notes for P1,705,900. The note is to be paid In 5 equal annual payments of P341,180. The
payments include interest and are made on December 31 of each year, beginning on December
31, 2014.
My Love Corporation made the following entries in relation to the sale of the equipment and the
related note receivable:
January 1, 2014
Cash
Notes Receivable
Cost of goods sold
Sales
Inventory
P
300,000
1,705,900
750,000
P2,005,900
750,000
December 31, 2014
69
Cash
P 341,180
Notes Receivable
P 341,180
December 31, 2015
Cash
P 341,180
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:
Determine the following:
1. The effective interest rate
2. Overstatement of profit for 2014
3. Overstatement of retained earnings as of December 31,2015
4. Overstatement of working capital as of December 31,2015
SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180)
Ordinary annuity factor at 13% for 5 periods
3.5172
3.5172
Requirement No. 2
Sales - over
Reported
Should be
Interest income - under
Reported
Should be (refer to amortization schedule)
Net misstatement
Profit
over (under)
2,005,900
1,500,000
0
156,000
Requirement No. 3
2011 profit overstated (see no. 2)
2012 profit understated (interest income under)
Reported
Should be (refer to amortization schedule)
Net misstatement
505,900
(156,000)
349,900
RE, 12/31/12
over (under)
349,900
0
131,927
(131,927)
217,973
70
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)]
Should be (refer to amortization schedule)
Net misstatement of WC, 12/31/12 - over (under)
Amortization schedule:
Date
Payment
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Interest (13%)
341,180
341,180
341,180
341,180
341,180
1,705,900
1,023,540
236,456
787,084
Principal
156,000
131,927
104,724
73,984
39,265
CA
1,200,000
1,014,820
805,567
569,111
301,915
-
185,180
209,253
236,456
267,196
301,915
PROBLEM NO. 10 – Analysis of notes receivable and related accounts
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
Jan. 1
Balance Forwarded
Received P25,000 6% note due
10/29/15 from Anna whose trade
account was past due.
Feb. 28
Discounted Anna note
Mar. 31
Received non-interest-bearing demand
note from Julia, the corporation’s
treasurer for a loan
Aug. 30
Received principal and interest due from
Robinson in accordance with agreement,
Debit
P118,000
Credit
P24,960
6,200
34,200
71
two principal payments in advance.
Sept. 4
Paid protest fee on note dishonored
by Pepper.
Nov. 1
Received check dated 2/1/16 in
settlement of Tripper note. The check
was included in cash on hand 12/31/15
Nov. 4
Paid protest fee and maturity value of
Anna note to bank. Note discounted
2/28/15 was dishonored.
Dec. 27
Accepted equipment with a fair market
value of P24,000 in full settlement
from Anna
24,000
Dec. 31
Received check dated 1/2/16 from
Julia in payment of 3/31/15 note. (The
Cash was included in petty cash until
1/2/16 when it was returned to Julia in
exchange for new demand note for the
same amount.)
6,200
Dec. 31
Received principal and interest on
Pepper note
Dec. 31
Accrued interest on Robinson note
500
8,120
26,031
42,437
1,200
P151,931
P139,917
The following information is available:
(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:
Robinson note of 8/31/08 payable in annual
installments of P10,000 principal plus accrued
interest at 6% each August 31
P70,000
72
Tripper note discounted to Merlyn, Inc. at 6%
11/1/14 due 11/1/15
8,000
Pepper note for P40,000 plus 6% interest dated
12/31/14 due on 9/1/15
40,000
(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
2/28
3/29
8/30
9/4
Notes receivable
Accounts receivable
25,000
Notes receivable
Loss on discounting (P25,250 - P24,960)
Notes receivable - discounted
Interest income (P25,000 x .06 x 2/12)
24,960
290
25,000
25,000
250
Notes receivable - Officers
Notes receivable
6,200
Notes receivable
Interest receivable
Interest income
4,200
Notes receivable dishonored
Notes receivable
6,200
1,400
2,800
500
500
73
Notes receivable dishonored
Notes receivable
11/1
11/4
12/27
12/31
12/31
12/31
12/31
12/31
Notes receivable
Cash
40,000
40,000
8,120
8,120
Notes receivable dishonored
Notes receivable
26,031
Notes receivable discounted
Notes receivable
25,000
Notes receivable
Loss on settlement of NR
Notes receivable dishonored
24,000
2,031
Notes receivable
Petty cash fund
Notes receivable
Notes receivable dishonored
Interest income
26,031
25,000
26,031
6,200
6,200
42,437
40,500
1,937
Interest receivable (P40,000 x 6% x 4/12)
Interest income
Notes receivable
800
400
Interest receivable (P8,000 x 6% x 2/12)
Interest income
80
Unearned interest income
Interest income
1,200
80
400
400
Requirement No. 1.a
Unadjusted trade NR
Add (Deduct) adjustments:
1/1
2/28
3/29
8/30
9/4
11/1
11/4
12/27
12/31
12,014
25,000
24,960
(6,200)
4,200
(40,500)
8,120
(26,031)
(25,000)
24,000
6,200
74
12/31
12/31
Adjusted trade NR, 12/31/12
42,437
(1,200)
48,000
Composition:
Robinson (P70,000 - P30,000)
Tripper (received PDC on 11/1)
Adjusted notes receivable-trade, 12/31/12
40,000
8,000
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
Requirement No. 1.b
Robinson:
Jan. to Aug. (P70,000 x .06 x 8/12)
Sept. to Dec. (P40,000 x .06 x 4/12)
Tripper (P8,000 x .06 x 12/12)
Pepper (P42,437 - P40,500)
Anna (P25,000 x .06 x 2/12)
Julia (non-interest bearing)
Total interest income - 2012
2,800
800
3,600
480
1,937
250
6,267
PROBLEM NO. 11 – Loan impairment
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:
Determine the following:
75
1. Interest income to be recognized in 2014
2. Carrying amount of the loan as of December 31, 2014
3. Loan impairment loss to be recognized in 2015
SOLUTION:
Requirement No.s 1 & 2
Principal
Direct origination cost
Origination fee received from borrower (P10M x .05)
Carrying amount, 1/1/12
Amortization schedule
Date
1/1/11
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
EI (11%)
1,059,399
1,065,933
1,073,186
1,081,236
1,089,346
826
Requirement No. 3
Carrying amount, 12/31/12 (see schedule)
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116)
12/31/16 (P4M x 0.6587)
Loan impairment (bad debt expense)
10,000,000
130,900
(500,000)
9,630,900
NI (10%)
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
Disc. Amort.
59,399
65,933
73,186
81,236
89,346
C.A.
9,630,900
9,690,299
9,756,232
9,829,418
9,910,654
10,000,000
9,756,232
3,246,400
2,634,800
5,881,200
3,875,032
PROBLEM NO. 12 – Theory
Select the best answer for each of the following:
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
2. The purpose of tests of controls over shipping is to determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
76
d. Credit approved before goods are shipped.
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.
77
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
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.
9. Confirmation, which is a specific type of inquiry, is the process of obtaining a
presentation of information or of an existing condition directly from a third party. Two
assertions for which confirmation of accounts receivable balances provides primary
evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligation
d. Existence and completeness
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
2. B
3. A
5. D
6. D
7. C
9. B
10. A
11. D
78
4. D
8. B
12. B
79
III – AUDIT OF INVENTORIES
PROBLEM NO. 1 – Computation of adjusted inventory
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.
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on
December 15 from Standing. This merchandise was shipped F.O.B shipping point on
December 29 and arrived in January. The invoice arrived and was recorded on December
31.
c. Included in inventory is merchandise sold to Oval on December 30, F.O.B destination.
This merchandise was shipped after it was counted. The invoice was prepared and
recorded as a sale on account for P128,000 on December 31. The merchandise cost
P73,500 and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an
invoice price of P156,300. The merchandise was shipped FOB. destination. The invoice,
which has not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries.
The merchandise was received on December 31 after the inventory had been counted.
The invoice was received and recorded on December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from
Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp FOB. shipping point. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as
a sale for P189,000 on December 31. The cost of this merchandise was P105,200 and
Kemp received the merchandise on January 5.
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:
Determine the adjusted balance of Inventory.
80
SOLUTION:
Unadjusted inventory
2,348,900
Add (deduct) adjustments:
b) Goods in-transit purchased FOB shipping - not
included
134,200
c) Goods in-transit sold FOB destination - included
d) Goods purchased and received already - included
e) Goods purchased and received already - not included
85,400
f) Goods held on consignment - included
(104,380)
g) Goods in-transit sold FOB shipping point - included
(105,200)
e) Goods returned by customers, received already - not
included
15,000
Adjusted inventory
2,373,920
PROBLEM NO. 2 – Computation of adjusted inventory and related accounts
Bulls Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2015:
Inventory at December 31, 2015
(based on physical count on Dec. 31, 2015)
Accounts Payable at December 31, 2015
Net Sales (sales less sales returns)
P
980,000
586,000
10,048,000
Additional information follows:
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.
81
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.
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
2. Adjusting entries as of December 31, 2015
SOLUTION:
82
Requirement No. 1
Inventory
Unadjusted balances
Add (deduct) adjustments:
Accts.
Payable
980,000
586,000
a - Goods held on consignment
(9,000)
(9,000)
b - Goods out on consignment
c - Unshipped goods, erroneously
billed
d - Goods with constructive
delivery
e - Goods purchased FOB shipping
point
50,000
f - WIP sent to outside processor
30,000
-
g - Goods returned by customers
32,000
-
h - Goods sold FOB destination
i - Goods excluded from physical
count
j - Unrecorded purchases
21,000
-
k - Unrecorded freight-in
3,000
Adjusted balances
Sales, net
10,048,000
-
-
-
(15,000)
(40,000)
-
71,000
-
71,000
27,000
-
1,190,000
56,000
(47,000)
-
6,000
710,000
9,961,000
Requirement No. 2
a) Accounts payable
Inventory
9,000
b) Inventory
P/L summary (Cost of sales)
50,000
c) Sales
Acccounts receivable
40,000
d) P/L summary (Cost of sales)
Inventory
15,000
9,000
50,000
40,000
15,000
83
e) Inventory
Accounts payable
71,000
f) Inventory
P/L summary (Cost of sales)
30,000
g) Inventory
P/L summary (Cost of sales)
32,000
Sales returns
Acccounts receivable
71,000
30,000
32,000
47,000
47,000
h) Inventory
P/L summary (Cost of sales)
21,000
i) Inventory
P/L summary (Cost of sales)
27,000
j) P/L summary (Cost of sales)
Accounts payable
56,000
k) Inventory
3,000
P/L summary (Cost of sales)
Accounts payable
21,000
27,000
56,000
3,000
6,000
PROBLEM NO. 3 – Computation of adjusted inventory and related accounts
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.
The following were gathered from the client’s accounting records:
Date
Ref.
Balance forwarded
SALES
Amount
P5,200,000
PURCHASES
Date
Ref.
Amount
Balance forwarded
P2,700,000
84
Dec. 27
Dec. 28
Dec. 28
Dec. 31
Dec. 31
Dec. 31
Dec. 31
SI No. 965
40,000
SI No. 966
150,000
SI No. 967
10,000
SI No. 969
46,000
SI No. 970
68,000
SI No. 971
16,000
Closing entry (5,530,000)
P
-
Note: SI = Sales Invoice
Dec. 27
Dec. 28
Dec. 29
Dec. 30
Dec. 31
Dec. 31
Dec. 31
RR No. 1057
35,000
RR No. 1058
65,000
RR No. 1059
24,000
RR No. 1061
70,000
RR No. 1062
42,000
RR No. 1063
64,000
Closing entry (3,000,000)
P
-
RR = Receiving Report
Inventory
Accounts Receivable
Accounts Payable
P600,000
500,000
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:
85
1. Determine the following as of and for the year ended December 31, 2015:
a. Sales
b. Accounts Receivable
c. Inventory
d. Accounts Payable
e. Purchases
2. Adjusting entries as of December 31, 2015
SOLUTION:
Adjustments
Inc.(Dec.)
Per books
Sales
Accounts receivable
Inventory
5,530,000
500,000
600,000
1
(130,000)
5
(150,000)
1
(130,000)
5
(150,000)
3
64,000
4
80,000
6
120,000
Per audit
5,250,000
220,000
864,000
Accounts payable
400,000
2
18,000
418,000
Purchases
3,000,000
2
18,000
3,018,000
Note : Prepare "T" accounts then post identified adjustments.
Adjusting entries
1 Sales (P46,000+P68,000+P16,000)
130,000
Accounts receivable
130,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and
971)
2 Purchases
Accounts payable
18,000
18,000
86
To take up unrecorded purchases (RR No. 1060)
3 Inventory
P/L summary (Cost of
sales)
To take up goods under RR No. 1063
64,000
4 Inventory (P100,000/1.25)
P/L summary (Cost of
sales)
To take up unshipped goods under SI No.
968
80,000
5 Sales
64,000
80,000
150,000
Accounts receivable
To reverse enrty made to record SI
No. 966
6 Inventory (P150,000/1.25)
P/L summary (Cost of
sales)
To take up goods under SI No. 966
150,000
120,000
120,000
PROBLEM NO. 4 – Effect of inventory errors
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.
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.
87
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.
d. A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB
Destination, was recorded as a sale upon shipment. The goods, costing P400,000 and
delivered to the customer on January 6, 2016, were not included in the 2015 ending
inventory.
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
2. Adjusting entries as of December 31, 2015
SOLUTION:
Sales
over
(under)
Purchases Inventory
over
over
(under)
(under)
COS
over
(under)
Effect on
Profit
over
(under)
Effect on
WC
over
(under)
a
-
-
(180,000) 180,000
(180,000)
(180,000)
b
(300,000)
-
200,000
(200,000)
(100,000)
(100,000)
c
-
150,000
-
d
600,000
150,000
-
-
(400,000) 400,000
200,000
200,000
e
250,000
250,000
250,000
f
(160,000) 160,000
(160,000)
(160,000)
(250,000)
88
300,000
150,000
(140,000) 290,000
10,000
10,000
Requirement No. 2
a) Inventory
180,000
Cost of sales
b) Accounts receivable
Sale
s
180,000
300,000
300,000
Cost of sales
Inve
ntory
200,000
c) Accounts payable
Inve
ntory
150,000
d) Sales
Accounts
receivable
600,000
Inventory
400,000
200,000
150,000
600,000
Cost of sales
400,000
e) Cost of sales
Inve
ntory
250,000
f) Inventory
160,000
Cost of sales
250,000
160,000
89
PROBLEM NO. 5 – Effect of inventory errors
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
a) P150,000
b) 100,000
c)
50,000
d) 200,000
e) 500,000
Sales Invoice Date
Dec. 21
Dec. 31
Dec. 29
Dec. 31
Dec. 30
Cost
P100,000
40,000
30,000
120,000
280,000
Date Shipped
Dec. 31, 2015
Nov. 03, 2015
Dec. 30, 2015
Jan. 03, 2016
Dec. 29, 2015
(shipped
to
consignee)
JANUARY 2016
f) P300,000
g) 200,000
h) 600,000
Dec. 31
Jan. 02
Jan. 03
P200,000
115,000
475,000
Dec. 30, 2015
Jan. 02, 2016
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
2. Adjusting entries as of December 31, 2015
PROBLEM NO. 5 - Oh! Darling
Corporation
Adjusting journal entries
a)
Inventory
over
(under)
Sales
over
(under)
COS
over
(under)
Profit
over
(under)
AR
over
(under)
WC
over
(under)
Cost of sales
90
100,000
Inventory
b)
c)
None
None
d)
Sales
100,000
Sales
200,000
500,000
Accounts receivable
g)
None
h)
Accounts receivable
200,000
200,000
500,000
500,000
500,000
(280,000)
(280,000)
280,000
280,000
(280,000)
300,000
300,000
(300,000)
600,000
(600,000)
475,000
(300,000)
(600,000)
(600,000)
(600,000)
(475,000)
475,000
(300,000)
(300,000)
600,000
Sales
Inventory
500,000
280,000
Sales
Cost of sales
200,000
500,000
Cost of sales
f)
100,000
200,000
Accounts
receivable
Inventory
100,000
100,000
200,000
Accounts
receivable
e)
(100,000)
475,000
475,000
295,000
475,000
(200,000)
(295,000)
95,000
(200,000)
95,000
PROBLEM NO. 6 – Cost flow assumptions
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:
02 Sold 300 bicycles forP1, 200 each.
03 Five bicycles were returned by a customer. They had originally cost P820 each and were
sold for P1, 200 each.
09 Purchase 55 bicycles at P910 each.
13 Purchased 76 bicycles at P960 each.
15 Sold 86 bicycles for P1, 350 each.
16 Returned one damaged bicycles to the supplier. This bicycle had been purchased on 9
December.
91
22 Sold 60 bicycles for P1, 250 each
26 Purchased 72 bicycles at P980 each
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.
1. First in, first out (FIFO) method
2. Moving average method
SOLUTION:
Units
Dec. 1
Dec. 2
Dec. 3
Dec. 9
350
UC
TC
820
287,000
43 850
(300)
5
36,550
55
910
50,050
Dec. 13
Dec. 15
76 960
(86)
72,960
Dec. 16
Dec. 22
(1) 910
(60)
Dec. 26
72
154
980
(910)
70,560
516,210
FIFO
Composition of inventory, 12/31
Date
Units
UC
TC
Dec. 26
Dec. 10
72
76
980
70,560
72,960
92
960
Dec. 9
Total
6
154
910
5,460
148,980
Inventory, 12/1
Net Purchases
Total goods available for
sale
Inventory, 12/31
Cost of sales
323,550
192,660
516,210
(148,980)
367,230
Moving average
Date
Purchased
Units
UC
TC
COS
Units
UC
TC
Dec. 1
Balance
Units
UC
TC
350
820
287,000
43
850
36,550
393
823
323,550
Dec. 2
300
823
246,900
93
823
76,650
Dec. 3
(5)
823
(4,115)
98
823
80,765
98
823
80,765
55
910
50,050
153
855
130,815
153
855
130,815
76
960
72,960
229
890
203,775
143
890
127,235
142
890
126,325
Dec. 9
55 910
Dec.
13
Dec.
15
Dec.
16
Dec.
76 960
50,050
72,960
86
(1)
910
(910)
890
76,540
93
22
Dec.
26
60
72 980
890
53,400
70,560
192,660
372,725
82
890
72,925
82
890
72,925
72
980
70,560
154
932
143,485
PROBLEM NO. 7 – Measurement of inventory and inventory shortage
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.
Unit packaging
Baked beans
Case containing 25 x
410g cans
Plain Flour
Box containing 12 x
4kg bags
Inventory @ 1 June 2015
35,000 cases @P19.60
62,500 boxes @38.40
Purchases
1. 10 June: 20,000 cases @
P19.50 per case
2. 19 June: 47,000 cases
@19.70 per case
1. 3 June: 15,000 boxes
@ P38.45
2. 15 June: 20,000 boxes
@ P38.45
3. 29 June: 24,000 boxes
@ P39
Purchase Items
2/10, n/30, FOB
destination
n/30, FOB destination
June sales
73,000 cases @P28.50
95,000 boxes @ P40
Returns and Allowances
A customer returned 5,000
Cases that had been shipped
in error. Customers account
Credited for P142, 500
As June 15 purchase was
unloaded, 1000 boxes were
discovered damaged. Credit
of P38, 450 was received by
Jay Roy retailing ltd.
Physical count at 30
32,600 cases on hand
1,500 boxes on hand
94
June 2015
Explanation of variance
No explanation found assumed
stolen
Boxes purchased on 29
June still in transit on 30
June
Net Realizable Value at
30 June 2015
REQUIRED:
P29 per case
P38.50 per box
Determine the following:
1. Inventory shortage
2. Inventory to be reported at June 30, 2015 balance sheet
SOLUTION:
Requirement No. 1
Baked beans
Balance, June 1
Purchase 10 June
Purchase 19 June
Sales (73,000 cases)
Sales returns
Perpetual balance
Inventory shortage (squeeze)
Physical count
Plain flour
Quantity
35,000
20,000
47,000
Price
19.60
19.50
19.70
Amount
686,000
390,000
925,900
(35,000)
19.60 (686,000)
(20,000)
19.50 (390,000)
(18,000)
5,000
34,000
19.70 (354,600)
19.70
98,500
19.70
669,800
(1,400)
32,600
Quantity
19.70 (27,580)
19.70
642,220
Price
Amount
Balance, June 1
Purchase 03 June
Purchase 15 June
Purchase 29 June
62,500
15,000
20,000
24,000
38.40 2,400,000
38.45
576,750
38.45
769,000
39.00
936,000
Sales (95,000 boxes)
(62,500)
38.40 (2,400,000)
95
(15,000)
38.45 (576,750)
(17,500)
38.45 (672,875)
Perpetual balance
26,500
38.45 1,032,125
Damaged goods
(1,000)
38.45 (38,450)
Goods in transit
Physical count
(24,000)
1,500
39.00 (936,000)
38.45
57,675
Requirement No. 2
Baked beans
Plain flour
Total
Quantity
32,600
1,500
Cost
642,220
57,675
NRV
945,400
57,750
LCN
642,220
57,675
699,895
PROBLEM NO. 8 - Write down of inventory to net realizable value
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
July 1
Particulars
Inventory
C
50,000 units
at P6
P
30,000 units
at P10
A
65, 000 units
at P.09
July 1-15
Purchases
70, 000 units
At P6.50
45, 000 units
at P10.50
30,000 units
at P1.25
July 16-31
Purchases
30, 000 units at
P8
July 1-31
Sales
105,000 units
50, 000 units
45, 000 units
July 31
Sales price per
P8
P11
P2
96
unit
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
Determine the following:
1. Inventory to be reported at July, 31, 2015 statement of financial position
2. Loss on inventory write down for the month of July 2015
3. Cost of sales including loss on inventory write down for the month of July 2015
97
SOLUTION:
Computation of units on hand, 7/31:
C
Inventory, 7/1
50,000
Purchases, 7/1-15
70,000
Purchases, 7/16-31
30,000
TGAS
150,000
Sales
(105,000)
Inventory, 7/31
45,000
P
A
30,000
45,000
65,000
30,000
75,000
(50,000)
25,000
95,000
(45,000)
50,000
Requirement No. 1
Item
Product C
Units in Ending
Inventory
(FIFO)
Unit cost
30,000
8.00
15,000
6.50
45,000
Total cost
240,000
97,500
337,500
Est. Selling
Price (a)
7.20
7.20
Product P
25,000
10.50
262,500
9.90
Product A
30,000
20,000
50,000
1.25
0.90
37,500
18,000
55,500
1.80
1.80
655,500
98
Est. Cost to
Sell (b)
NRV
0.72
6.48
0.72
6.48
LCN
6.48
6.48
Total NRV
194,400
97,200
291,600
Inventory
LCN
194,400
97,200
291,600
0.99
8.91
8.91
222,750
222,750
0.18
0.18
1.62
1.62
1.25
0.90
48,600
32,400
81,000
37,500
18,000
55,500
595,350
569,850
at
Allowance
45,600
300
45,900
39,750
85,650
(a) Existing selling price x .9
(b) Amount in letter (a) x .1
Requirement No. 2
Item
Product C
Product P
Product A
Total cost
337,500
262,500
55,500
655,500
Inventory
LCN
291,600
222,750
55,500
569,850
at
Allowance (a)
45,900
39,750
85,650
(a) Inventory at cost - Inventory at LCN
Required allowance, 7/31
Recorded allowance, 7/1
Loss on inventory writedown
85,650
(3,000)
82,650
Requirement No.
3
Inventory, 7/1 (at cost)
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units
x P8)
695,000
Product P (45,000 units x P10.50)
Product A (30,000 units x
P1.25)
658,500
472,500
37,500
1,205,000
99
Total goods available for sale
1,863,500
Inventory, 7/31 (at cost)
(655,500)
Cost of sales before loss on inventory writedown
1,208,000
Loss on inventory writedown
82,650
Cost of sales including loss on inventory writedown
1,290,650
Alternative computation:
Inventory, 7/1 (at LCN) (P658,500 P3,000)
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units
x P8)
695,000
Product P (45,000 units x P10.50)
Product A (30,000 units x
P1.25)
655,500
472,500
37,500
1,205,000
Total goods available for sale
1,860,500
Inventory, 7/31 (at LCN)
(569,850)
Cost of sales including loss on inventory writedown
1,290,650
PROBLEM NO. 9 - Inventory estimation
Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is
purchased from several suppliers and is warehoused until sold to customers.
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:
Inventory, January 1, 2015
Physical inventory, November 30, 2015
Sales for 11 months ended Nov. 30, 2015
Sales for the year ended Dec. 31, 2015
Purchases for 11 months ended Nov. 30, 2015
(before audit adjustments)
P1, 312,500
1, 425,000
12,600,000
14,400,000
10,125,000
100
Purchases for the year ended Dec. 31, 2015
(before audit adjustments)
12,000,000
Your audit disclosed the following information:
a.) Shipments received in November and included in the physical inventory but recorded as
December purchases
P112, 500
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 Nov 30, 2015
P15, 000
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:
Computation of adjusted balances:
Inventory
Unadjusted balances
Add (deduct) adjustments:
Nov. 30
Purchases Purchases
Up
to Up to Dec.
Nov. 30
31
1,425,000
10,125,000 12,000,000
a
-
112,500
-
b
-
(15,000)
(22,500)
c
-
(30,000)
(30,000)
101
d
e
(82,500)
(82,500)
-
1,342,500
-
-
10,110,000 11,947,500
Inventory, January 1
1,312,500
Add - Net purchases up to Nov. 30
10,110,000
Total goods available for sale
11,422,500
Less - Inventory, Nov. 30
1,342,500
Cost of sales for 11 months
10,080,000
Sales for 11 months ended Nov. 30
12,600,000
Cost of sales for 11 months ended Nov. 30
(10,080,000)
Gross profit
2,520,000
Divide by sales for 11 months ended Nov. 30
Gross profit rate for 11 months ended Nov. 30
12,600,000
20.00%
Computation of inventory, 12/31
Inventory, January 1
1,312,500
Add - Purchases for the year ended Dec. 31
11,947,500
Total goods available for sale
13,260,000
Less - Cost of sales
Cost of sales with profit [(14,400,000 150,000) x 80%]
11,400,000
Cost of sales without profit
Estimated inventory, December 31
150,000
11,550,000
1,710,000
PROBLEM NO. 10 – Inventory estimation
102
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
Cash
Accounts Receivable
Inventory, Dec 31, 2014
Land
Building
Acc. Dep
Other assets
Accounts payable
Accrued expenses
Share capital, 100 par
Retained earnings
Sales
Purchases
Operating expense
Totals
Debit
180,000
400,000
750,000
350,000
1,100,000
Credit
413,000
56,000
237, 000
180, 000
1,000,000
520, 000
1,350,000
520, 000
344,000
P3, 700,000
__________
P3, 700,000
The following data and information have been gathered:
a.) The company’s year end is December 31
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
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.
103
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
Net Sales
5,300,000
3,900,000
Net Purchases
2,800,000
2,350,000
Beg. Inventory
500,000
660,000
End. Inventory
750,000
500,000
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:
Determine the estimated inventory fire loss.
SOLUTION:
Inventory, December 31, 2011
Add purchases for the period Jan. 1 to April
21
Purchases up to March 31, 2012
Payments for April purchases
Unrecorded obligations for
purchases
750,000
520,000
34,000
April
Purchase returns
106,000
(9,500)
650,500
Total goods available for sale
1,400,500
Less cost of sales (see computation below)
830,500
Estimated inventory on the date of fire
Less:
Proceeds from sale of salvaged
merchandise
35,000
570,000
104
Shipments in transit
23,000
Inventory fire loss
58,000
512,000
Computation of cost of sales:
Sales up to March 31, 2012
Sales for the period April 1 to 21
Accounts receivable, 4.21.12
1,350,000
360,000
Accounts receivable for write-off
80,000
Receipts from customers (P129,500 P9,500)
120,000
Total
560,000
Less Accounts receivable, 3.31.12
400,000
160,000
Total sales
1,510,000
x cost ratio (see computation below)
0.55
Cost of sales
830,500
Computation of cost ratio:
Inventory, 1/1/10
660,000
Net purchases (2010 and 2011)
5,150,000
Inventory, 12/31/11
(750,000)
Cost of sales (2010 and 2011)
5,060,000
/ Net sales (2010 and 2011)
9,200,000
Overall cost ratio
0.55
PROBLEM NO. 11 – Roll forward analysis
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.
105
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:
a. Total debits to the following accounts during December were:
Cost of sales 1,920,800
Direct labor 338, 800
Purchases
691, 600
b. The cost of sales of 1,920,800 included direct labor of 386,000
REQUIRED
Compute for the following:
1. Adjusted amount of physical inventory at November 30, 2015
2. Adjusted amount of inventory at December 31, 2015
3. Breakdown of inventory at December 31, 2015
a. Cost of materials on hand, and materials included in work in process
106
b. Direct labor included in work in process
c. Factory overhead included in work in process
SOLUTION:
Requirement No. 1
Inventory per books, 11/30
Add understatement of
inventory
1,695,960
booked
84,000
Physical inventory,11/30, per client
1,779,960
Add (deduct) adjustments
Overstatement due to pricing
errors
(61,600)
Understatement due to footing and extension
errors
4,200
Obsolete materials
Inventory per physical
adjusted
(7,000)
count,
as
1,715,560
Requirement No. 2
Adjusted balance of inventory, 11/30
1,715,560
Purchases
691,600
Direct labor
Factory overhead (200% of direct
labor)
338,800
Total
Less cost of sales:
3,423,560
Per books
Obsolete materials
through COS
677,600
1,920,800
written
Inventory, 12/31
off
(7,000)
1,913,800
1,509,760
Requirement No. 3
Inventory, 11/30 (see no. 1)
107
1,715,560
Direct labor
Factory overhead (200% of direct
labor)
(280,000)
Raw materials, 11/30
875,560
Purchases
691,600
Total
Less:
sales
1,567,160
(560,000)
Materials included in cost of
Adjusted cost of sales (see no. 2)
1,913,800
Direct labor
(386,400)
Factory overhead
(772,800)
754,600
Cost of materials on hand and materials included in
WIP
812,560
Labor cost in the WIP:
Labor included in 11/30 inventory
280,000
Labor incurred in December
338,800
Total
618,800
Labor included in COS
(386,400)
232,400
Applied factory overhead (200% of direct labor)
464,800
Total, as shown in no.2
1,509,760
108
IV – AUDIT OF INVESTMENTS
SUBSTANTIVE AUDIT PROCEDURES FOR INVESTMENTS
PROBLEM NO. 1 – Analysis of investments in debts instruments (comprehensive)
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:
December 31, 2015
98.0
December 31, 2016
99.0
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;
c) Amortization of premium or discount on December 31, 2015; and
d) Fair value adjustment as of December 31, 2015
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
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;
109
b) The investment is available-for-sale; and
c) The investment is held-to-maturity
SOLUTION:
Requirement A
a. FA@FVTPL
b. Available for Sale (AFS)
1) Purchase of investment:
FA@FVTPL
Commission exp.
Cash
P874,164
50,000
AFS securities
Cash
P924,164
P924,164
P924,164
2) Accrual of interest:
Interest receivable P80,000
Interest income
P80,000
Interest receivable P80,000
Interest income
P80,000
3) Amortization of discount:
No entry
AFS securities
P12,416
Interest income
P12,416
4) FV adjustment:
FA@FVTPL
P105,836*
FV adj. gain (P/L)
P105,836
* (P980,000 - P874,164)
AFS securities
P43,420**
FV adj. G/L (OCI)
P43,420
** (P980,000 - P936,580)
Held to Maturity (HTM)
Purchase of investment:
HTM securities
Cash
P924,164
P924,164
Accrual of interest:
Interest receivable P80,000
Interest income
P80,000
Amortization of discount:
HTM securities
P12,416
110
Interest income
P12,416
FV adjustment:
No entry
Amortization schedule:
Date
1/1/2012
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
EI (10%)
NI (8%)
Disc. Amort.
P92,416
93,658
95,024
96,526
98,212
P80,000
80,000
80,000
80,000
80,000
P12,416
13,658
15,024
16,526
18,212
Amortized cost
P 924,164
936,580
950,238
965,262
981,788
1,000,000
Requirement B
Carrying amount, 12/31/12
FA@FVTPL
Available for Sale (AFS)
Held to Maturity (HTM)
980,000
980,000
936,580
Fair value
Fair value
Amortized cost
Requirement C
FA@FVTPL
Available for Sale (AFS)
To update amortization
To update amortization
No entry
AFS securities
P13,658
Interest income
P13,658
FV adjustment before sale
FV adjustment before sale
No entry
FV adj. G/L (OCI) P3,658*
AFS securities
P3,658
* (P990,000 - P993,658)
Disposal entry
Disposal entry
Cash
Cash
P1,070,000
FV adj. G/L (OCI)
39,762
P1,070,000
FA@FVTPL
P980,000
Interest income
Gain on sale of TS
80,000
10,000
AFS securities
Interest income
P990,000
80,000
Gain on sale of AFS (P/L)
39,762
111
Held to Maturity (HTM)
To update amortization
HTM securities
P13,658
Interest income
P13,658
FV adjustment before sale
No entry
Disposal entry
Cash
P1,070,000
HTM securities
Interest income
Gain on sale of HTMS
P950,238
80,000
39,762
PROBLEM NO. 2 – Audit of investments in equity instruments (held for trading)
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:
Date
Particulars
Debit
Jan. 10
Purchase of 6,000 4WARD Co. shares
P1,440,000
Feb. 20
Purchase of 7,000 BACK Co. shares
1,800,000
Mar. 01
Sale of 2,400 BACK Co. shares
May 31
Receipt of 4WARD share dividendcredited to retained earnings
Credit
540,000
132,000
112
Aug, 15
Dale of 4,800 4WARD shares
1,176,000
Sep, 01
Sale of 1,200 4WARD shares
276,000
From the Philippine Stock Exchange, the 4WARD dividends were analyzed as follows:
Nature
Declared
Record
Payment
Rate
Cash
01/02/15
01/15/15
01/31/15
P20/share
Share
05/02/15
05/15/15
05/31/15
10%
Cash
08/01/15
08/30/15
09/15/15
P30/share
At December 31, 2015, 4WARD and BACK shares were selling at P210 and P240 per share,
respectively.
REQUIRED:
1. Determine the following:
a) Gain or oss on sale of 2,400 BACK shares on March 1
b) Total gain or loss of 4WARD shares in 2015
c) Total dividend income to be recognized in 2015
d) Carrying amount of Trading Securities as of December 31, 2015
2. Adjusting entries
SOLUTION:
Requirement 1
a. (60,000)
Sales proceeds
CA of investment sold (P1,800,000 x 2,400/7,200)
Loss on sale of 2,400 BACK shares on 3/1/12
540,000
600,000
(60,000)
b. 108,000
Total proceeds
Less dividends sold (4,800 shares x P30)
1,176,000
144,000
113
Net proceeds
CA of investment sold (P1,320,000* x
4,800/6,600**)
Gain on sale of 4,800 4WARD shares on 8/15/12
1,032,000
Total cash paid
Less purchased dividend (6,000 x P20)
Adjusted cost
1,440,000
120,000
1,320,000
960,000
72,000
** after 10% share dividend
Sales proceeds
CA of investment sold (P1,320,000* x
1,200/6,600**)
Gain on sale of 800 4WARD shares on
9/1/12
276,000
Total gain on sale of 4WARD shares
108,000
240,000
36,000
c. 198,000
Declared January 2
Declared May 2
Declared August 1 (6,600 shares x P30)
Total dividend income for 2012
198,000
198,000
d. 1,278,000
4WARD Co. [(6,000 x 1.1) - 4,800 - 1,200] = 600 x P210
BACK Co. (7,200 - 2,400) = 4,800 x P240
CA of trading securities (FV), 12/31/12
126,000
1,152,000
1,278,000
Requirement 2
Jan. 10 (See requirement 1.b)
Dividend income
Trading securities - 4WARD
120,000
120,000
Feb. 20
No AJE
Mar. 1 (See requirement 1.a)
Loss on sale of TS - BACK
Trading securities - BACK
60,000
60,000
114
May 31
Retained earnings
Trading securities - 4WARD
Aug. 15 (See requirement 1.b)
Entry made
Cash
Trading securities - 4WARD
Correct entry
Cash
Trading securities - 4WARD
Dividend income
Gain on sale of TS - 4WARD
Adjusting entry
132,000
132,000
1,176,000
1,176,000
1,176,000
960,000
144,000
72,000
Trading securities - 4WARD
Dividend income
Gain on sale of TS - 4WARD
216,000
Trading securities - 4WARD
Gain on sale of TS - 4WARD
36,000
FV adjustment loss (P/L)
Trading securities
42,000
144,000
72,000
36,000
42,000
PROBLEM NO. 3 – Audit of investments in equity instrument (AFS)
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:
Date
Available for Sale Securities
Debit
Credit
Description
01/15
10,000 ordinary shares, par value P50,
SPIKES Co.
390,000
04/30
5,000 shares SPIKES Co. received as share
dividend
250,000
115
05/20
Sold 5,000 shares @ P25
125,000
12/10
Sold 5,000 shares @ P60
120,000
04/30
Share dividend
250,000
11/30
SPIKES Company ordinary
50,000
The following information was obtained during your examination:
Type of
Dividend
Date Declared
Date of Record
Date of
Payment
Rate
Share
03/15/15
04/01/15
04/30/15
50%
Cash
11/01/15
11/15/15
11/28/15
P5/share
Cash
12/01/15
12/15/15
01/02/16
20%
Closing market quotation as at December 31, 2015:
SPIKES Company Ordinary
Bid
Asked
13-4/4
16-1/2
REQUIRED:
1. Determine the following using PAS 39:
a. Net amount to be recognized in 2015 profit or loss
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:
a. Net amount to be recognized in 2015 profit or loss
b. Carrying amount of investment as of December 31, 2015
SOLUTION:
116
Investment ledger
Particulars
Balance, 1/1/2012
Share dividend, 4/30/12
Balance
Sale of 5,000 shares, 5/20/2012
Balance
Sale of 2,000 shares, 12/10/2012
Balance, 12/31/2012
Shares
10,000
5,000
15,000
(5,000)
10,000
(2,000)
8,000
Cost/share
39.00
26.00
26.00
26.00
26.00
Total
390,000
390,000
(130,000)
260,000
(52,000)
208,000
Requirement 1
a. 193,000
Loss on sale 5/20 (see computation below)
Gain on sale 12/10 (see computation below)
Dividend income (see computation below)
Net amount to be recognized in P/L
(5,000)
48,000
150,000
193,000
Loss on sale 5/20:
Sales proceeds (5,000 shares x P25)
Cost of investment sold (see investment ledger)
Loss on sale of investment
125,000
(130,000)
(5,000)
Gain on sale 12/10:
Sales proceeds (2,000 shares x P60)
Dividends sold (2,000 shares x P50 x 20%)
Net sales proceeds
Cost of investment sold (see investment ledger)
Gain on sale of investment
120,000
(20,000)
100,000
(52,000)
48,000
Dividend income:
Cash dividends declared, 11/1/2012 (10,000 shares x P5)
Cash dividends declared, 12/1/2012 (10,000 shares x P50 x 20%)
Total dividend income
50,000
100,000
150,000
FV adjustment:
Fair value
Cost
Unrealized loss (FV adjustment) - OCI
110,000
208,000
(98,000)
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75)
110,000
117
Requirement 2
a. 150,000
Amount to be recognized in P/L - Dividend income
150,000
At initial recognition, an entity may make an irrevocable election to present in other
comprehensive
income subsequent changes in the fair value of an investment in an equity instrument within the
scope of
PFRS 9 that is not held for trading.
If an entity makes the election, it shall recognise in profit or loss dividends from that investment
when
the entity’s right to receive payment of the dividend is established in accordance with PAS
18.
b. 110,000
Carrying amount, 12/31/12 (8,000 shares x P13.75)
110,000
PROBLEM NO. 4 – Analysis of investments in equity instruments (Trading and AFS)
On December 31 2014, L Cost Company’s financial statements showed the following balances
related to its securities accounts:
Trading Securities
P1,477,500
Available-for-sale securities (AFS)
1,180,000
La Cost’s securities portfolio on December 31, 2014, was made up of the following securities:
Security
Classification
Cost
Fair Value
10,000 Yeye Bonel Corp. shares
Trading
P750,000
P762,500
8,000 Totoy Bibo Inc. shares
Trading
550,000
528,250
118
10% Mayniladlad bonds
Traing
250,000
186,750
10,000 Blaklak Inc shares
Available for sale
590,000
630,000
20,000 Jumbo Inc. shares
Available for sale
490,000
550,000
During 2015, the following transactions took place:
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:
Yeye Bonel Corp. shares
P76.60 per share
Totoy Bibo Inc. shares
P68.50 per share
Pasaway Co. shares
P55.25 per share
Mayniladlad water bonds
P205,550
Bulaklak Inc. shares
P61.00 per share
Jumbo Unlimited Inc. shares
P27.00 per share
REQUIRED:
Determine the following:
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:
119
1. 11,875
Selling price (4,000 shares x P69)
CA of shares sold (P528,250 x 4/8)
Gain on sale of Totoy Bibo shares
276,000
(264,125)
11,875
2. 12,000
Selling price (4,000 shares x P62)
Cost of shares sold (P590,000 x 4/10)
Gain on sale of Bulaklak shares
3. 2,304,100 & 906,000
Yeye Bonel [(10,000+ 3,000) x P76.60]
Totoy Bibo [(8,000 - 4,000) x P68.50]
Pasaway (15,000 x P55.25)
Mayniladlad
Total fair value - Trading securities
Bulaklak Inc. [(10,000 - 4,000) x P61]
Jumbo Hotdog (20,000 x P27)
Total fair value - AFS
248,000
(236,000)
12,000
995,800
274,000
828,750
205,550
2,304,100
366,000
540,000
906,000
PROBLEM NO. 5 – Audit of investments in equity instruments (carried at cost)
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:
2013-Jan. 2
Investment in Silver Tab Company
30,000 sh @ 35
P1,050,000
2015-Jul. 15
2014- Jul. 2
90,000 sh @ 60
5,400,000
2015-Mar. 2
30,000 sh @ 70
2,100,000
2015 – Aug. 10
P2,000,000
Investment in Silver Tab Company
P10,000
120
Dividend Income
2015 – Jan. 2
P120,000
Apr. 1
150,000
Aug. 10
10,000
Dec. 20
100,000
The transactions pertaining to the foregoing for 2015 were as follows:
Jan. 2
Received cash dividend (declared on December 1) of P1 per share
May 2
Bought 30,000 shares at P70 per share
Apr. 1
Received cash dividend (declared on March 1 to shareholders of record as of March
10) of P1 per share
July 15
Sold 50,000 shares at P40 per share
Aug. 10
Received an “extra” dividend in shares of one share of Red Tab Company for every
ten shares of Silver Tab Company. The share dividend had a market value of P3 per
share and its book value on the ledger of Silver Tab Company was on P1 per share.
Dec. 20
Received cash dividend of P1 per share, declared December 1, out of Silver Tab
Company’s “Reserve for Depletion”.
29
Sold 10,000 Silver Tab Company shares at P90. Cash was received on January 5,
2016
REQUIRED:
Adjusting entries as of December 31, 2015.
SOLUTION:
1/2
Entry made
Cash
120,000
121
3/2
7/15
8/10
12/20
12/29
1/2
3/2
7/15
Dividend income
Investment in Silver Tab
Cash
Cash
Investment in Silver Tab
(50,000 shares x P40)
Investment in Red Tab
Dividend income
(100,000/10 x P1)
Cash
Dividend income
None
120,000
2,100,000
2,100,000
2,000,000
2,000,000
10,000
10,000
100,000
100,000
Should be entry
Note: the entry made can be considered correct if the company accrued the dividend
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.
Investment in Silver Tab
2,070,000
Dividend income
30,000
*
Cash
2,100,000
*(30,000 x P1) - purchased dividend
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)
From 2011 lot (20,000 x P60)
8/10
12/20
12/29
1,050,000
1,200,000
2,250,000
Investment in Red Tab
30,000
Dividend income
(100,000/10 x P3)
Note: Property dividend received is recorded at FV
Cash
100,000
Investment in Silver Tab
Note: the dividend received is a liquidating dividend.
AR - non trade
900,000
Investment in Silver Tab
Gain on sale
* (10,000 x P90)
From 2011 lot:
Shares
30,000
100,000
*
590,000
310,000
Cost
122
Original cost
Sold on 7/15
Balance
Liquidating dividend
(70,000 x P1)
Balance
90,000
(20,000)
70,000
70,000
5,400,000
(1,200,000)
4,200,000
(70,000)
4,130,000
(10,000/70,000 x P4,130,000)
1/2
3/2
7/15
8/10
12/20
12/29
Adjusting journal entry
Dividend income
Retained earnings
Dividend income
Investment in Silver Tab
Loss on sale
Investment in Silver Tab
Investment in Red Tab
Dividend income
120,000
120,000
30,000
30,000
250,000
250,000
20,000
20,000
Dividend income
Investment in Silver Tab
AR - non trade
Investment in Silver Tab
Gain on sale
100,000
100,000
900,000
590,000
310,000
PROBLEM NO. 6 – Analysis of investments in equity and debt instruments
Your audit of the Norte Corp. disclosed that the company owned the following securities on
December 31, 2014:
Trading Securities:
Security
Vigan, Inc.
Laoag, Inc.
10%, P200,000 face value,Santiago bonds
(interest payable every Jan. 1 and Jul. 1)
Total
Available-for-sale Securities:
Security
Shares
Shares
9,600
16,000
Cost
Cost
P144,000
432,000
Fair Value
P184,000
288,000
158,400
163,440
P734,400
P635,440
Fair Value
123
Candon Products
Pagudpud, Inc.
Batac, Inc.
Total
32,000
240,000
80,000
P1,376,000
6,240,000
960,000
8,576,000
P1,440,000
5,840,000
1,280,000
8,560,000
Held to Maturity:
12%, 2,000,000 face value, Ilocos bonds
(interest payable annually every Dec. 31)
Cost
Book Value
P1,900,000
1,926,000
During 2015, the following transactions occurred:
Jan. 1
Receive interest on Santiago bonds
Mar. 1
Sold 8,000 shares of Laoag, Inc. for P152,000.
May 15
Sold 3,200 shares of Batac, Inc. for P15 per share
July 1
Received interest on the Santiago bonds.
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:
Vigan, Inc.
Laoag, Inc.
10% Santiago bonds
Candon Products
Pagudpud, Inc.
Batac, Inc.
P22 per share
P15 per share
P151,200
P42 per share
P28 per share
P18 per share
REQUIRED:
Determine the following:
1. Gain or Loss on sale of 8,000 Laoag, Inc. shares on March 1
2. Gain or Loss on sale of 3,200 Batac, Inc. shares on May 15
3. Total interest income for the year 2015
4. Carrying of trading securities and AFS as of December 31, 2015
SOLUTION:
1.
P 8,000 gain
124
2.
3.
Sales proceeds
CA of shares sold (P288,000 x 8/16)
Gain on sale of 8,000 Laoag, Inc. shares
152,000
(144,000)
8,000
P9,600 gain
Sales proceeds (3,200 shares x P15)
Cost of shares sold (P960,000 x 3.2/80)
Gain on sale of 3,200 Batac, Inc. shares
48,000
(38,400)
9,600
P289,640
Santiago bonds (P200,000 x 10%)
Ilocos bonds (P1,926,000 x 14%*)
Total interest income for 2012
20,000
269,640
289,640
*Computation of effective interest rate:
Carrying amount, 12/31/11
Less carrying amount, 1/2/11 (Cost)
Discount amortization for 2011
Add nominal interest (P2,000,000 x 12%)
Effective interest
Divide by carrying amount, 1/2/11
Effective interest rate
4. Trading Securities: P482,400; AFS: P11,466,400
Trading securities
Vigan, Inc. (9,600 x P22)
Laoag, Inc. [(16,000 - 8,000) x P15]
10% , P200,000 face value , Santiago bonds
Total fair value
Available-for-sale securities
Candon Products (32,000 x P42)
Pagudpud, Inc. (240,000 x P28)
Batac, Inc. [(80,000 - 3,200) x P18]
Ilocos bonds (P2,000,000 x 1.01)
Total fair value
FV adjustment gain on transfer of securities (OCI)
Carrying amount, 12/31/11
Add discount amortization in 2012:
Effective interest (P1,926,000 x 14%)
Nominal interest (P2,000,000 x 12%)
Carrying amount, 12/31/12
Fair value of Ilocos bonds on 12/31/12 (P2M x 1.01)
FV adjustment gain on transfer of securities (OCI)
1,926,000
1,900,000
26,000
240,000
266,000
1,900,000
14.00%
211,200
120,000
151,200
482,400
1,344,000
6,720,000
1,382,400
2,020,000
11,466,400
1,926,000
269,640
240,000
29,640
1,955,640
2,020,000
64,360
125
PROBLEM NO. 7 – Analysis of investments in equity instruments
(Trading and Associate)
The following subsidiary ledger reflects the trading securities of Gateway Company for the year
of 2015:
TEMPLAR CORPORATION
Date
Sep. 05
08
Transactions
Purchased 20,000 shares
Cash dividends to stockholders of record
Sept. 15, declared Aug. 15
Debit
P1,000,000
Oct. 01
05
Purchase 50,000 shares
Sold 20,000 shares at P5
2,600,000
Nov. 30
Dec. 15
P50,000
1,000,000
Cash collected for sale of 20,000 shares
made on Nov. 1 declaration of P5 cash
dividend per share to stockholders on
record as of December 1
Cash dividend received
Total
Credit
3,300,000
150,000
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.
Market values of the securities at December 31, 2015, are as follows:
Templar Corp.
P60 per share
Dark Company
P30 per share
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.
126
Templar
Dark
SOLUTION:
1. Amount in profit or loss
Templar
Dark
P3,000,000
P156,000
2. Carrying amount in SFP
Templar
Dark
P1,800,000
P1,287,000
Amount to be recognized in profit or loss - Investment in Templar
Gain on sale 10/05 (see computation below)
Gain on sale 11/30 (see computation below)
Dividend income (50,000 shares x P5)
FV adjustment gain
Net amount to be recognized in P/L
350,000
2,160,000
250,000
240,000
3,000,000
Gain on sale 10/05:
Sales proceeds (20,000 shares x P65)
Less Cost of investment sold (see below)
Gain on sale
1,300,000
950,000
350,000
Cash paid
Less Purchased dividend
Correct acquisition cost
1,000,000
50,000
950,000
Gain on sale 11/30:
Cash received
Less dividends sold (20,000 shares x P5)
Net sales proceeds
Less Cost of investment sold
Gain on sale
3,300,000
100,000
3,200,000
1,040,000
2,160,000
FV adjustment gain:
Fair value, 12/31/12 (30,000 x P60)
Balance before FV adjustment (see investment ledger)
FV adjustment gain
1,800,000
1,560,000
240,000
127
Investment in Templar ledger
Sept. 5 acquisition
Purchase, Sept. 5
Sale, Oct. 5 (use FIFO)
Balance, Dec. 31, 2012
Shares
20,000
(20,000)
-
Cost/share
47.50
47.50
Oct. 1 acquisition
Purchase, Oct. 1
Sale, Nov. 30
Balance, Dec. 31, 2012
Shares
50,000
(20,000)
30,000
Cost/share
52.00
52.00
52.00
Amount to be recognized in SFP - Investment in Templar
Fair value, 12/31/12 (30,000 x P60)
Amount to be recognized in profit or loss - Investment in Dark
Share of profit (P800,000 x .195)
Amount to be recognized in SFP - Investment in Dark
Acquisition cost
Share of profit (P800,000 x .195)
Dividends received (P200,000 x .195)
Investment in stock balance, 12.31.11
1,800,000
156,000
1,170,000
156,000
(39,000)
1,287,000
* Use equity method since there is a significant influence, i.e. Gateway's President
is represented in the board of directors.
PROBLEM NO. 8 – Analysis of investments in equity instruments (AFS and Associate)
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.
The fair value of JR’s investment in Judi securities is as follows:
December 31, 2013
December 31, 2014
P570,000
P525,000
128
December 31, 2015
P2,200,000
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.
During 2013, 2014, and 2015 the following occurred:
2013
2014
2015
Judi Net Income
P350,000
P400,000
P550,000
Dividends Paid by Judi to JR
P15,000
P20,000
P70,000
REQUIRED:
Answer the following:
1. The net amount to be recognized in 2013 comprehensive income related to this
investment?
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
OCI - FV adjustment (P570,000 - P500,000)
Net amount in comprehensive income - 2010
2. (P25,000)
Profit or loss - Dividend income
OCI - FV adjustment (P525,000 - P570,000)
Net amount in comprehensive income - 2011
15,000
70,000
85,000
20,000
(45,000)
(25,000)
3. Nil
4. P2,195,000
Fair value of original investment
Purchase price of 30% interest
Total cost of 40% interest
Share of profit - 2012
525,000
1,575,000
2,100,000
129
Based on reported amount (P550,000 x .4)
Excess of cost over underlying equity amortization
{[P2.1M - (P4.15M x .4)]/8}
Dividends received
Carrying amount, 12/31/12
220,000
(55,000)
165,000
(70,000)
2,195,000
PROBLEM NO. 9 – Analysis of investments in debt instrument (HTM)
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)
1.
2.
3.
4.
The purchase price of the bonds on June 1, 2014
The carrying amount of the investment in bonds as of December 31, 2014.
The interest income for the year 2015
The gain on sale of investment in bonds on November 1, 2015.
SOLUTION:
1.
P5,467,992
PV of principal (P6,000,000 x 0.5568)
PV of interest [(P6,000,000 x 4%) x 8.8633]
Purchase price
2.
3,340,800
2,127,192
5,467,992
P5,507,237
Date
6/1/11
12/1/11
6/1/12
12/1/12
EI (5%)
273,400
275,070
276,823
NI (4%)
240,000
240,000
240,000
Disc. Amort.
33,400
35,070
36,823
Carrying amount, 12/1/11 (see amortization schedule)
Add discount amortization, 12/1/11 to 12/31/11 (P35,070/6)
Carrying amount, 12/31/11
Amort. Cost
5,467,992
5,501,392
5,536,462
5,573,285
5,501,392
5,845
5,507,237
130
3.
P459,911
Jan. 1 to May 31 (P275,070 x 5/6)
June 1 to Nov. 1 (P276,823 x 5/6)
Total interest income for 2012
4.
229,225
230,686
459,911
P120,352
Total proceeds
Accrued interest (P240,000 x 5/6)
Net proceeds
Less carrying amount, 11/1/12:
Carrying amount, 6/1/12 (see amortization schedule)
Add discount amortization, 6/1/12 to 11/1/12 (P36,823 x
5/6)
Gain on sale on investment in bonds
5,887,500
(200,000)
5,687,500
5,536,462
30,686
5,567,148
120,352
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?
131
2.
How much is the carrying amount of the investment in bonds on December 31,
2012?
How much should be recognized as impairment loss in 2014?
How much is the interest income to be recognized in 2015?
How much should be recognized as reversal of impairment loss in 2015?
3.
4.
5.
SOLUTION:
1.
P11,014,674
Cash flow
Principal
10,000,000
Interest
1,000,000
Purchase price, 1/1/09
Amortization schedule:
EI (8%)
1/1/09
12/31/09
863,896
12/31/10
853,008
12/31/11
841,248
12/31/12
828,548
12/31/13
814,832
PVF@8%
0.6806
3.9927
PV, 1/1/09
6,806,000
3,992,700
10,798,700
NI (10%)
Amort
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
(136,104)
(146,992)
(158,752)
(171,452)
(185,400)
CA
10,798,700
10,662,596
10,515,604
10,356,852
10,185,400
10,000,000
PV, 1/1/09
Premium amortization, 1/1 to 4/1 (P113,456 x 3/12)
PV, 4/1/09
Accrued interest (P10,000,000 x 10% x 3/12)
Total purchase price
2.
P10,662,100
Refer to the amortization schedule
Alternative computation:
Cash flow
Principal
10,000,000
Interest
1,000,000
Carrying amount, 12/31/11
3.
10,798,700
(34,026)
10,764,674
250,000
11,014,674
10,662,596
PVF@8%
0.7350
3.3121
PV, 12/31/09
7,350,000
3,312,100
10,662,100
P3,497,900
Carrying amount, 12/31/11 (see amortization schedule)
PV of expected cash flows (P8,000,000 x 0.7972)
Impairment loss
10,356,852
6,858,400
3,498,452
132
Alternative computation:
Cash flow
Principal
10,000,000
Interest
1,000,000
Carrying amount, 12/31/11
PV of expected cash flows (P8,000,000 x 0.8573)
Impairment loss
EI (8%)
NI (10%)
12/31/11
12/31/12
548,672
12/31/13
592,928
5.
PVF@8%
0.8573
1.7833
PV, 12/31/11
8,573,000
1,783,300
10,356,300
6,858,400
3,497,900
Amort
CA
6,858,400
548,672
7,407,072
592,928
8,000,000
4
.
P548,
672
P2,777,828
Carrying amount, 12/31/12 (without impairment)
Carrying amount, 12/31/12 (with impairment)
Reversal of impairment loss
10,185,400
7,407,072
2,778,328
The limit on the amount of reversal is what the amortized cost of the asset would have been
at the date of reversal had the impairment loss not been recorded.
Alternative computation:
Cash flow
PVF@8%
PV, 12/31/12
Principal
10,000,000
0.9259
9,259,000
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
PROBLEM NO. 11 – Analysis of investments in associates of an SME
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.
133
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:
1.
2.
3.
Cost Model
Fair Value Model
Equity Method
SOLUTION:
1. P/L:P(11.78) million; CA:P39.50 million
SFP amount (Cost Model)
B
Purchase price
10,000,000
Transaction costs
100,000
Total cost
10,100,000
Impairment loss*
CA, 12/31/12
10,100,000
*Impairment loss computation:
Total cost
FV less cost to sell (RA)
10,100,000
12,350,000
-
C
15,000,000
150,000
15,150,000
15,150,000
D
28,000,000
280,000
28,280,000
(14,030,000)
14,250,000
15,150,000
27,550,000
-
28,280,000
14,250,000
14,030,000
Total
53,000,000
530,000
53,530,000
(14,030,000)
39,500,000
134
P/L amount (Cost Model)
Dividend income
Impairment loss
B
250,000
250,000
C
2,000,000
2,000,000
D
(14,030,000)
(14,030,000)
Total
2,250,000
(14,030,000)
(11,780,000)
C
29,000,000
D
15,000,000
Total
57,000,000
C
(150,000)
2,000,000
14,000,000
15,850,000
D
(280,000)
(13,000,000)
(13,280,000)
2. P/L:P5.72 million; CA:P57 million
FP amount (Fair Value Model)
Fair value
P/L amount (Fair Value Model)
Transaction costs
Dividend income
FV adjustment gain (loss)*
*FV adjustment gain (loss)
Fair value
CA before FV adjustment
B
13,000,000
B
(100,000)
250,000
3,000,000
3,150,000
13,000,000
10,000,000
3,000,000
3. P/L:P(8.28) million ; CA:P43.00 million
SFP amount (Equity Method)
B
Purchase price
10,000,000
Transaction costs
100,000
SOPA (SOLA)
1,250,000
Dividends
CA, 12/31/12 - before impairment
Impairment loss*
CA, 12/31/12
15,000,000
28,000,000
(13,000,000)
C
15,000,000
150,000
4,500,000
D
28,000,000
280,000
(5,000,000)
Total
53,000,000
530,000
750,000
(250,000) (2,000,000)
11,100,000
17,650,000
11,100,000
17,650,000
23,280,000
(9,030,000)
14,250,000
(2,250,000)
52,030,000
(9,030,000)
43,000,000
*Impairment loss computation:
CA, 12/31/12 - before impairment
FV less cost to sell (RA)
P/L amount (Equity Method)
SOPA (SOLA)
Impairment loss
29,000,000
15,000,000
14,000,000
Total
(530,000)
2,250,000
4,000,000
5,720,000
11,100,000
12,350,000
B
1,250,000
-
C
4,500,000
-
17,650,000
27,550,000
D
(5,000,000)
(9,030,000)
23,280,000
14,250,000
9,030,000
Total
750,000
(9,030,000)
135
1,250,000
4,500,000
(14,030,000)
(8,280,000)
PROBLEM NO. 12 – Theory
Select the best answer for each of the following:
1. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
a.
b.
c.
d.
To determine whether securities are authentic
To determine whether securities are the property of the client
To determine whether securities actually exist
To determine whether securities are properly classified on the statement of
financial position
2. An auditor who physically examines securities should insist that a client representative be
present in order to
a.
b.
c.
d.
Detect fraudulent securities
Lend authority to the auditor’s directives
Coordinate the return of securities to the proper locations
Acknowledge the receipt of securities returned
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
136
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
5. In establishing the existence and ownership of an investment held by a corporation in the
form of publicly traded shares an auditor should inspect securities or
a. Obtain written representations from management confirming that the securities
are properly classified as trading securities.
b. Inspect the audited financial statements of the investee company.
c. Confirm the number of shares held by an independent custodian.
d. Determine that the investment is carried at the lower of cost or market.
6. Which of the following is the least effective audit procedure regarding the existence
assertion for the securities held by the auditee?
a.
b.
c.
d.
Examination of paid checks issued in payment of securities purchased
Vouching all changes during the year to supporting documents
Simultaneous count of liquid assets
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?
a.
b.
c.
d.
Tracing the deposited dividend checks to the cash receipt book
Reconciling amount received with the published dividend records
Comparing the amounts received with preceding year dividends received
Recomputing selected extensions and footings of dividend schedules and
comparing totals to the general ledger.
8. In performing tests of the carrying amount of trading securities, the auditor would
usually:
a. Ask management to estimate the market value of the securities
b. Refer to the quoted market prices of the securities
c. Value the securities at cost regardless of their market prices
137
d. Count the securities
9. An audit procedure that provides evidence about proper valuation of trading securities
arising from a short term investment of excess cash is
a.
b.
c.
d.
Calculation of premium or discount amortization
Recalculation of investment carrying amount by applying the equity method
Comparison of carrying amount with the current market quotations
Confirmation of securities held by broker
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.
b.
c.
d.
ANSWERS:
1. A
2. D
3. D
4. D
Market quotations of the investee company’s stock
Current fair value of the investee company’s assets
Historical cost of the investee company’s assets
Audited financial statements of the investee company
5. C
6. A
7. B
8. B
9. C
10. D
138
V- AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PROBLEM NO. 1 – Classification of property, plant and equipment
expenditures
White company commenced operations on July 1 2014. During the following
year, the company acquired a tract of land, demolished the building on the land
and built a new factory. Equipment was acquired for the factory and, in March
2015, the plant was ready to commence operation.
During this period, the following inflows and outflows occurred:
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.
Payment of option fees
Receipt of loan from bank
Payment to settlement agent for
title search, stamp duties and
settlement fees
Payment of arrears in rates on
building and land
Payment for land
Payment for demolition of current
building on land
Proceeds from sale of material
from old building
P 3,000
4,000,000
100,000
50,000
1,000,000
120,000
55,000
Payment to architect
230,000
Payment to council for approval of
building construction
120,000
Payment for safety fence around
construction site
34,000
139
Payment to construction contractor
for factory building
2,400,000
Payment for external driveways,
parking bays and safety lighting
540,000
Payment for safety inspection on
building
30,000
Payment for equipment
640,000
Payment of freight and insurance
costs on delivery of equipment
56,000
Payment of installation costs on
equipment
120,000
Payment for safety equipment
surrounding equipment
110,000
Payment for removal of safety
fence
20,000
Payment for new fence
surrounding the factory
80,000
Payment for advertisements in the
local paper about the forthcoming
factor and its benefits to the local
community
5,000
Payment for opening ceremony
60,000
Payments to adjust equipment to
more efficient operating levels
subsequent to initial operation
33,000
REQUIRED:
Compute the cost of the following:
1. Land
140
2. Land improvements
3. Building
4. Equipment
SOLUTION:
Land
Option cost (Exercised)
1,000
Settlement agent
100,000
Rates
50,000
Payment for land
1,000,000
Demolition of old building
120,000
Proceeds on sale of material
(55,000)
1,216,000
Land improvements
Driveway et al
540,000
New fence
80,000
620,000
Building
Architect’s fee
230,000
Building permit fees
120,000
Fence during construction
34,000
Payment to construction contractor
2,400,000
Safety inspection
30,000
Removal of safety fence
20,000
2,834,000
141
Equipment
Payment for equipment
640,000
Freight & Insurance
56,000
Installation
120,000
Safety equipment
Adjustments
110,000
33,000
959,000
PROBLEM NO. 2 – Classification of property, plant and equipment
expenditures
The following expenditures were incurred by Ayos Enterprises Co, in 2015:
Purchase of Land
Land survey
Fees for search of title for land
Building permit
Temporary quarters for
construction crews
Payment to tenants of old
building for vacating premises
P
3,9,000,000
52,000
6,000
35,000
107,500
46,000
Razing old building
470,000
Excavating basement
100,000
Special assessment tax for street
project
20,000
142
Dividends
50,000
Damaged awarded for injuries
sustained in construction (no
insurance was carried)
84,000
Costs of construction
29,000,000
Cost of paving parking lot
adjoining building
400,000
Cost of shrubs, trees, and other
landscaping
330,000
REQUIRED:
Determine the cost of each of the following:
1. Land
2. Land improvements
3. Building
SOLUTION:
Land
Purchase of land
Land survey
Fees for search of title for land
Payment to tenants of old building for vacating
premises
Razing old building
Special assessment tax for street project
3,900,000
52,000
6,000
46,000
470,000
20,000
4,494,000
Land improvements
Cost of paving parking lot adjoining building
Cost of shrubs, trees, and other landscaping
400,000
330,000
730,000
Building
Building permit
Temporary quarters for construction crews
35,000
107,500
143
Excavating basement
Costs of construction
100,000
29,000,000
29,242,500
PROBLEM NO. 3 – Audit of machinery and accumulated depreciation
accounts
You were engaged in making your second annual examination of Indigo
Company. The machinery and Accumulated Depreciation accounts are shown
below:
Machinery
01/01/15
Balance
500,000
09/01/15
Sale of
Machin
e No. 3
06/01/15
Machine
No. 23
150,000
12/31/15
Balance 644,000
09/01/15
Dismantlin
g of
Machine
no. 3
4,000
654,000
01/01/16
Balance
10,000
654,000
644,000
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
144
Your examination disclosed the following information:
a. The following adjusted balances appeared on December 31, 2014 working
papers: machinery – P 500,000; Accumulated Depreciation – P 280,000.
b. The company has depreciated all items of machinery at 10% per annum. The
oldest item owned in seven years old as of December 31, 2015.
c. It is the company’s policy to take full year’s depreciation in the year of
acquisition and none in the year of disposition.
d. Machine No. 3, which was purchased on March 1, 2011, at a cost of P 80,000,
was sold on September 1, 2015 for 10,000 cash.
e. Included in charges to Repairs and Maintenance account was an invoice for
installation of Machine No. 23, in the amount of P 35,000.
REQUIRED:
1.
a.
b.
c.
d.
Compute for the following:
Loss on the sale of Machine No. 3
Adjusted balance of Machinery as of December 31,2015
Depreciation expense for 2015
Adjusted balance of Accumulated Depreciation as of December 31,2015
2. Adjusted entries as of December 31, 2015
SOLUTION:
Requirement No. 1. a
Sales proceeds
10,000
Dismantling cost
(4,000)
Net sales proceeds
Less carrying amount:
6,000
Cost
80,000
Accumulated dep. (80,000 x 10%
x 4)
(32,000)
Gain (Loss) on sale of machine no.
3
48,000
(42,000)
Requirement No. 1. b
Unadjusted machinery, 12/31/12
644,000
Add (deduct) adjustments:
Error in recording disposal of machine no. 3, net (P80,000 145
P6,000)
Installation cost of machine no.
23
Adjusted machinery,
12/31/12
(74,000)
35,000
605,000
Requirement No. 1. c
Depreciation expense (P605,000 x 10%)
60,500
Requirement No. 1. d
Unadjusted accumulated depreciation, 12/31/12
Add (deduct) adjustments:
Accumulated depreciation of machine no. 3 (80,000 x 10%
x 4)
Overstatement of depreciation expense
Should be (605,000 x 10%)
60,500
As recorded
64,400
Adjusted accumulated depreciation, 12/31/12
344,400
(32,000)
(3,900)
308,500
Requirement No. 2
AJE 1 - To correct recording of sale of machine
no. 3
Loss on sale of machine
42,000
Accumulated depreciation
32,000
Machinery
74,000
AJE 2 - To correct recording of installation of machine no. 23
Machinery
Repairs and
maintenance
35,000
35,000
AJE 3 - To correct overstatement of depreciation
Accumulated depreciation
Depreciation
3,900
3,900
146
PROBLEM NO. 4 – Audit of machine and accumulated depreciation accounts
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:
Da
te
Particul
ars
Debi
t
01/
01
Balanc
eMachin
e 1,2,3
and 4
at P
180,00
0 each
P
20,0
00
02/
28
Machin
e5
396,
000
Machin
e1
Cre
dit
P6,0
00
09/
01
Machin
e6
192,
000
12/
01
Machin
e7
432,
000
The Accumulated Depreciation account contained no entries for the year 2015.
The balance on January 1, 2015 per your audit, as as follows:
Machine
1
P
168,750
Machine
2
78,750
Machine
3
67,500
147
45,000
Machine
4
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:
1. Compute for the following:
a. Total depreciation for the year ended December 31, 2015.
b. Carrying amount of production machine as of December 31, 2015
2. Adjusting entries as of December 31,2015
SOLUTION:
Requirement No. 1
Adjusted
bal.
DA
Fraction Depreciation
AD
CA
Machine 1 - sold 2/28
- 180,000
2/12
7,500
-
-
Machine 2 - destroyed 12/1
- 180,000
11/12
41,250
-
-
Machine 3 - traded in 9/01
- 180,000
8/12
30,000
-
-
Machine 4
180,000
180,000
12/12
45,000
90,000
90,000
Machine 5 - acquired 2/28
396,000
396,000
10/12
82,500
82,500
313,500
Machine 6 - acquired 9/01
216,000
216,000
4/12
18,000
18,000
198,000
Machine 7 - acquired 12/1
432,000
432,000
1/12
9,000
9,000
423,000
199,500
1,024,500
(1.b)
Total
1,224,000
233,250
(1.a)
148
Requirement No. 2
AJE 1 - To correct recording of sale of Machine 1
Accumulated depreciation (P180,000 - P3,750)
Production machine (P180,000 - P6,000)
Gain on sale (see computation
below)
Computation of gain on sale of Machine
1:
Sales proceeds
Less carrying amount, 2/28/12
Carrying amount, 1/1/12 (P180,000 P168,750)
Depreciation - 2012 (P180,000 x .25 x 2/12)
Gain (loss) on sale of Machine 1
176,250
174,000
2,250
6,000
11,250
(7,500)
3,750
2,250
AJE 2 - To correct non-recording of destruction of Machine 2
Accumulated depreciation (P180,000 - P60,000)
120,000
Loss on destruction (see computation below)
Production machine
60,000
180,000
Computation of loss on destruction of Machine 2:
Carrying amount, 1/1/12 (P180,000 - P78,750)
101,250
Depreciation - 2012 (P180,000 x .25 x 11/12)
(41,250)
Carrying amount, 12/1/12/Loss on destruction
60,000
AJE 3 - To correct recording of trade-in of
Machine 3
Production machine no. 6
24,000
Accumulated depreciation (P180,000 - P82,500)
Loss on exchange (see computation
below)
Production machine
no. 3
97,500
Computation of loss on exchange (tradein):
Trade-in value
58,500
180,000
24,000
149
Less carrying amount,
9/1/12
Carrying amount, 1/1/12 (P180,000 - P67,500) 112,500
Depreciation - 2012 (P180,000 x .25 x 8/12)
Gain (loss) on trade-in of Machine 3
(30,000)
82,500
(58,500)
AJE 4 - To record depreciation for 2012
Depreciation
233,250
PROBLEM NO. 5 – Roll-forward analysis
At December 31,2014, Arnold Company’s noncurrent operating asset accounts
had the following balances:
Land
P
175,000
Buildings
1,500,000
Machinery
and
equipment
1,125,000
Automobiles
172,000
Leasehold
improvements
216,000
Land
improvements
0
Transactions for 2015 included the following:
Jan.
6
A plant facility consisting of land and a
building was acquired from Jesco Corp.
in exchange for 24,000 ordinary shares
of Arnold. On this date, Arnold’s share
had a market price of P50 a share.
Current assessed values of land and
building for property tax purposes are
150
P187,500 and P562,500, respectively.
Mar.
25
New parking lots, streets, and
sidewalks at the acquired plant facility
were completed at a total cost of
P192,000
July
1
Machinery and equipment were
purchased at an invoice cost of
P325,000, which excluded P39,000 of
input tax. Additional costs of P10,000
for delivery and P50,000 for
installation were incurred.
Aug.
30
Arnold purchased a new automobile for
P22,500.
Nov.
4
Arnold purchased for P350,000 a tract
of land as a potential future building
site.
Dec.
20
A machine with a cost of P17,000 and a
remaining book value of P2,975 at date
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.
2.
3.
4.
Land
Buildings
Machinery and equipment
Property, plant and equipment
SOLUTION:
12/31/11
Addition
Disposal
12/31/12
Cost
Land
175,000
312,500
a)
-
487,500
(1)
151
Land improvements
Buildings
Machinery and
equipment
Automobile and
trucks
Leasehold
improvements
-
192,000
1,500,000 937,500
b)
1,125,000 385,000
c) 17,000
172,000
22,500
-
192,000
-
2,437,500
(2)
1,493,000
(3)
194,500
216,000
216,000
3,188,000 1,849,500
17,000
5,020,500
(4)
a) 25,000 x P50 = 1,250,000 x
187,500/750,000
b) 25,000 x P50 = 1,250,000 x
562,500/750,000
c) P325,000 + P10,000 +
P50,000
PROBLEM NO. 6 – Roll-forward analysis
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
and
equipment
2,380,000
367,500
Automobile
and trucks
210,000
114,326
Leasehold
improvements
432,000
108,000
P
P 1,262,726
Totals
152
5,097,000
Additional information on depreciation methods and useful lives follows:
Asset
Depreciation
method
Useful
life
Buildings
150%decliningbalance
25
years
Machinery
and
equipment
straight-line
10
years
Automobile
and trucks
150%decliningbalance
5
years
Leasehold
improvements
Straight-line
Depreciation is computed to the nearest month.
Salvage values of depreciable assets are immaterial except for automobiles and
trucks which have estimated salvage values equal to 15% of cost.
Other additional information:
•
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 January 6, 2015, olive completed its self-construction of a building on its
own land. Direct costs of construction were P 1,095,000. Construction of the
building required 15,000 direct labor hours. Olive’s construction department has
an overhead allocation system for outside jobs based on an activity denominator
153
of 100,000 direct labor hours, budgeted fixed costs of P2,500,00, and budgeted
variable costs of P27 per direct labor hour.
•
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.
•
On August 30, 2015, Olive purchased a new automobile costing P25,000.
•
On September 30,2015, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2014 was sold for P23,500.
•
On November 4, 2015, Olive purchased a tract of land for investment purposes
for P700,000. Olive thinks it might use the land as a potential future building
site.
•
On December 20,2015, a machine with a cost of P17,000 a carrying amount of
P2,975 on date of disposition, and a market value of P4,000 was sold to a
corporate officer.
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.
2.
3.
4.
5.
Total depreciation
Carrying amount of buildings
Carrying amount of machinery and equipment
Carrying amount of automobiles and trucks
Carrying amount of property, plant and equipment
SOLUTION:
12/31/11
Addition
Disposal
12/31/12
CA,
12/31/12
Cost
Land
Buildings
275,000
-
-
275,000
275,000
154
Machinery and
equipment
Automobile and
trucks
Leasehold
improvements
2,800,000 1,875,000 a)
4,675,000 3,761,974
(2)
1,380,000 369,000
1,732,000 1,222,075
(3)
187,000
68,472
(4)
432,000
288,000
210,000
b) 17,000
25,000
432,000
48,000
-
-
5,097,000 2,269,000
Accumulated
depreciation
Land
Buildings
Machinery and
equipment
Automobile and
trucks
Leasehold
improvements
65,000
7,301,000 5,615,521
-
-
672,900
240,126
c)
367,500
156,450
d) 14,025
g) 509,925
114,326
28,952
e) 24,750
h) 118,528
108,000
36,000
f)
1,262,726 461,528
(1)
-
913,026
144,000
38,775
1,685,479
a) P1,095,000 + (2,500,000 x 15/100) + (15,000 x
P27)
b) P325,000 + P18,000 + P7,000 + P19,000
c) [(P2,800,000 - P672,900) + P1,875,000] 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)
PROBLEM NO. 7 – Audit of Plant Assets and accumulated depreciation
accounts
The following data relate on the Plant Assets account of Survive, Inc. at
December 31, 2014:
155
(5)
Plant Assets
P
R
T
C
Original Cost
P 175,000
P 255,000
P 400,000
P 400,000
Year Purchased
2009
2010
2011
2013
Useful Life
10 years
75,000 hours
15 years
10 years
Salvage value
P 15,500
P 15,000
P 25,000
P 25,000
Depreciation
method
SYD
Activity
Straight
line
Doubledeclining
balance
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.
The following transaction occurred during 2015:
(a) On May 5, asset P was sold for P 65,000 cash.
(b) On December 31, it was determined that asset R had been used 10,500 hours
during 2015.
(c) On December 31, before computing depreciation expense on Asset T, the
management of Survive, Inc. decided the useful life remaining from 1/1/12
was 10 years.
(d) On December 31, it was discovered that a plant asset purchased in 2014 had
been expensed completely in that year. This asset costs P 110,000 and has
useful life of 10 years and no salvage value. Management has decided to use
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:
1. Total depreciation expense for 2015
156
2. Adjusted balance of Plant Assets as of December 31, 2015
SOLUTION:
Requirement No. 1
Asset P [(P175,000-P15,500) x 5/55]
14,500
Asset R [(P255,000 - P15,000)/75,000 x 10,500]
33,600
Asset T (see computation below)
30,000
Asset C (P400,000 x .8 x .2)
64,000
Asset I (P110,000 x .2)
22,000
Total depreciation expense for 2012
164,100
Depreciation of Asset T for 2012:
Cost
Acc. depreciation, 12/31/11 [(P400,000 - P25,000) x
3/15]
400,000
Carrying amount, 12/31/11
325,000
Residual value
(25,000)
Remaining depreciable amount
Divide by remaining
life
300,000
(75,000)
10
30,000
Requirement No. 2
Asset P (Sold)
-
Asset R
255,000
Asset T
400,000
Asset C
400,000
Asset I
110,000
Plant Assets, 12/31/12
1,165,000
157
PROBLEM NO. 8 – Analysis of property, plant and equipment transactions
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:
Land at cost
P 1,000,000
Building at cost
P 4,000,000
Less accumulated depreciation at December
31, 2014
(800,000)
Plant at cost
5,200,000
Less accumulated depreciation at December
31, 2014
(3,130,000)
3,200,000
2,070,000
P 6,270,000
The following matters are relevant
(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:
P 150,000
Purchased materials
Direct labor
800,000
Supervision
65,000
Design and planning costs
20,000
158
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:
1.
2.
3.
4.
The carrying amount of the new warehouse
The carrying amount of plant
The total depreciation
The revaluation surplus is
SOLUTION:
Requirement No. 1
Purchased materials
150,000
Direct labor
800,000
Supervision
65,000
Design and planning costs
20,000
Total
1,035,000
Less costs of inefficiency
35,000
Adjusted cost of new warehouse
Less accumulated depreciation, 12/31/12
(P1,000,000/20)
Carrying amount of warehouse,
1,000,000
50,000
159
12/31/12
950,000
Requirement No. 2
Carrying amount of plant, 12/31/11 (P5,200,000P3,130,000)
2,070,000
Carrying amount of plant sold (P900,000-P630,000)
Carrying amount of remaining plant,
12/31/11
Depreciation for 2012 (P1,800,000 x
.25)
(270,000)
Carrying amount of plant, 12/31/12
1,350,000
1,800,000
(450,000)
Requirement No. 3
Building (P4,800,000/20)
240,000
New warehouse (see no. 1)
50,000
Plant ( see no. 2)
450,000
Total depreciation
740,000
Requirement No. 4
Land
Building
Total
Fair value
1,200,000
4,800,000
Carrying amount
Revaluation surplus,
1/1/12
1,000,000
3,200,000
200,000
1,600,000
1,800,000
(80,000)
(80,000)
1,520,000
1,720,000
Realized in 2012
Revaluation surplus,
12/31/12
200,000
PROBLEM NO. 9 – Property, plant and equipment transaction errors
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 4160
year period 2012 to 2015, inclusive. The Delivery Trucks account consists of the following as of
January 1, 2012:
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
The Delivery Trucks-Accumulated Depreciation account previously adjusted to January 1, 2012,
and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4
trucks from respective date of purchase, based on five-year life, no salvage value). No charges
have been made against the account before January 1, 2012. Transactions between January 1,
2012 and December 31, 2015, and their record in the ledger were as follows:
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:
161
1.
2.
3.
4.
5.
The 2012 profit is overstated by
The 2013 profit is understated by
The 2014 profit is understated by
The 2015 profit is understated by
Adjusted carrying amount of Delivery Trucks as of December 31, 2015
SOLUTION:
Requirement No. 1-4
Profit
over (under)
2009:
Unrecorded loss on trade-in of Truck 3:
Trade-in value (P340,000 - P150,000)
Carrying amount,7/1/09 (P300,000 x 3.5/5)
Overstatement of depreciation expense:
190,000
210,000
Truck No. 1 (P180,000/5)
36,000
Truck No. 2 (P220,000/5)
44,000
Truck No. 3 (P300,000/5 x 6/12)
30,000
Truck No. 4 (P240,000/5)
48,000
Truck No. 5 (P340,000/5 x 6/12)
34,000
Should be depreciation expense
192,000
Depreciation expense per books
2010:
Unrecorded loss on sale of Truck 1:
203,000
Sales proceeds
Carrying amount, 1/1/10 (P180,000 x 1/5)
Overstatement of depreciation expense:
20,000
(11,000)
9,000
(1)
35,000
36,000
Truck No. 2 (P220,000/5)
44,000
Truck No. 4 (P240,000/5)
Truck No. 5 (P340,000/5)
48,000
1,000
162
68,000
Should be depreciation expense
160,000
Depreciation expense per books
211,000
(51,000)
(50,000)
(2)
(23,500)
(3)
(138,000)
(4)
2011:
Unrecorded loss on disposal of Truck 4:
Sales proceeds
7,000
Insurance proceeds
25,000
Total
32,000
Carrying amount, 7/1/11 (P240,000 x 2/5)
96,000
Erroneous credit to Miscellaneous Income
Overstatement of depreciation expense:
7,000
Truck No. 2 (P220,000/5 x 6/12)
22,000
Truck No. 4 (P240,000/5 x 6/12)
24,000
Truck No. 5 (P340,000/5)
68,000
Truck No. 6 (P360,000/5 x 6/12)
36,000
Should be depreciation expense
150,000
Depreciation expense per books
2012:
Overstatement of depreciation expense:
Truck No. 2 (fully depreciated as of 7/1/11)
64,000
244,500
(94,500)
-
Truck No. 5 (P340,000/5)
68,000
Truck No. 6 (P360,000/5)
72,000
Should be depreciation expense
140,000
Depreciation expense per books
278,000
163
Requirement No. 5
Acc.
Dep.
Cost
Truck No. 1 (sold, 1/1/09)
-
-
CA, 12/31/12
-
-
-
Truck No. 2 (acquired, 7/1/06)
Truck No. 3 (traded-in, 7/1/10)
Truck No. 4 (damaged and sold, 7/1/11)
220,000
-
220,000
Truck No. 5 (acquired, 7/1/09)
340,000
238,000
102,000
Truck No. 6 (acquired, 7/1/11)
360,000
108,000
252,000
920,000
566,000
354,000
PROBLEM NO. 10 – Revaluation model
On 1 January 2014, Afternoon Corporation acquires two assets within the same class of plant and
equipment. Information on these assets follows:
Cost
Expected useful life
Machine A
100,000
5 years
Machine B
60,000
3 years
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:
Machine A
Machine B
Fair value
P 84,000
38,000
Expected useful life
4 years
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.
164
At 31 December 2015, information on the machines is as follows:
Fair value
Expected useful life
Machine A
P61,500
3 years
Machine C
68,500
1.5 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
84,000
38,000
Cost
100,000
60,000
Accumulated depreciation
(20,000)
(20,000)
80,000
40,000
Increase (Decrease)
4,000
(2,000)
To be recognized in
OCI
Profit or loss
Fair value
Carrying amount, 12/31/11:
165
Requirement No. 2
Profit or loss
(2,000)
Other comprehensive income (OCI)
4,000
Comprehensive income
2,000
Requirement No. 3
Sales proceeds
Less carrying amount, 7/1/12:
32,000
Carrying amount, 12/31/11
38,000
Depreciation up to 7/1, (P38,000/2 x 6/12)
(9,500)
Gain on sale of Machine B
28,500
3,500
Requirement No. 4
Machine A (P84,000/4)
21,000
Machine B (P38,000/2 x 6/12)
9,500
Machine C (P80,000/4 x 6/12)
10,000
Total depreciation - 2012
40,500
Requirement No. 5
Machine
A
Machine C
61,000
68,500
Previous carrying amount
84,000
80,000
Depreciation - 2012
(21,000)
(10,000)
Fair value
Carrying amount, 12/31/11:
166
Increase (Decrease)
To be recognized in
PROBLEM NO. 11 – Borrowing costs
63,000
70,000
(2,000)
(1,500)
OCI
Profit or loss
Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is
identified as separate discrete job in the accounting records. At the end of 2014, Oceanwide
correctly reported P5,400,00 as Construction in Progress on the following jobs.
Ship
340
341
342
343
Completion Date (end of month)
October 31,2014*
June 30, 2015
September 30, 2015
Accumulated Costs (including 2014 interest)
December 31, 2014
P2,300,000
1,150,000
1,200,000
January 31, 2016
750,000
*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:
Ship
341
342
343
344
345
Date
April 1, 2015
May 1, 2015
July 1, 2015
September 1, 2015
November 1, 2015
Costs
P1,200,000
1,600,000
2,200,000
810,000
360,000
Oceandwide had the following general liabilities at December 31, 2015:
12%, 5-year note (maturity date-2017)
10%, 10-year bonds (maturity date-2020)
P2,000,000
8,000,000
On January 1, 2015, Oceanwide borrowed P2,000,000 specifically for the construction of ship
343. The loand was for 3 years with interest at 13%.
REQUIRED:
167
Based on the above and the result of your audit, calculate the following for the year ended
December 31, 2015.
1.
2.
3.
4.
5.
Weigthed-average interest rate for the general liabilities
Capitalized interest on Ship No. 341
Capitalized interest on Ship No. 342
Capitalized interest on Ship No. 343
Total interest that Oceanwide should capitalize
Answer:
Requirement No. 1
CA
Interest
12%, 5 year note
2,000,000
240,000
10%, 10 year bonds
8,000,000
800,000
Total
10,000,000
1,040,000
Weighted-average
(1,040,000/10,000,000)
interest
rate
10.40%
Requirement No. 2
Date
Ship No. 341
1/1
Amount
CR
Fraction of
the
year Capitalized
outstanding interest
1,150,000
10.4%
6/12
59,800
1,200,000
10.4%
3/12
31,200
4/1
91,000
Requirement No. 3
Date
Ship No. 342
1/1
Amount
CR
Fraction of
the
year Capitalized
outstanding interest
1,200,000
10.4%
9/12
93,600
1,600,000
10.4%
5/12
69,333
5/1
168
162,933
Requirement No. 4
Date
Ship No. 343
1/1
Amount
CR
Fraction of
the
year Capitalized
outstanding interest
750,000
13.0%
12/12
97,500
1,250,000
13.0%
6/12
81,250
950,000
10.4%
6/12
49,400
7/1
7/1
228,150
Requirement No. 5
Ship No. 340 (completed 10/31/11)
Ship No. 341 (see no. 2)
91,000
Ship No. 342 (see no. 3)
162,933
Ship No. 343 (see no. 4)
228,150
Ship No. 344 (P810,000 x 10.4% x 4/12)
28,080
Ship No. 345 (P360,000 x 10.4% x 2/12)
6,240
Total
516,403
PROBLEM NO. 12 – Wasting Asset
On January 2, 2013, Calamba Company purchased land for P450,000, from which it is estimated
that 400,000 tons of ore could be extracted. It estimates that it will cost P80,000 to restore the
land, after which it could be sold for P30,000.
During 2013, the company mined 80,000 tons and sold 50,000 tons. During 2014, the company
mined 100,000 tons and sold 120,000 tons. At the beginning of 2015, the company spent an
169
additional P100,000, which increased the reserves by 60,000 tons. In 2015, the company mined
140,000 tons and sold 130,000 tons. The company uses a FIFO cost flow assumption.
REQUIRED:
Based on the above and the result of your audit, compute for the following: (Round depletion
rate to two decimal places)
1.
2.
3.
4.
Depletion for 2014
Depletion for 2015 is
Depletion included in 2015 cost of sales
Carrying amount of the natural resources as of December 31, 2015
Answer:
Requirement No. 1
Cost of land
450,000
Estimated restoration cost
80,000
Total cost
530,000
Less residual value
30,000
Cost subject to depletion
500,000
Divide by total estimated reserves
400,000
2010 and 2011 depletion per ton
1.25
Depletion for 2011 (100,000 x P1.25)
125,000
Requirement No. 2
Original cost to be depleted
500,000
Less accumulated depletion, 1/1/12 (180,000 x P1.25)
225,000
Remaining DA, 1/1/12
2012 mine improvements
275,000
170
100,000
New cost to deplete
Divide by remaining estimated reserves
375,000
(400,000 - 180,000 + 60,000)
280,000
2012 depletion per ton
1.34
Depletion for 2012 (140,000 x P1.34)
187,600
Requirement No. 3
From 1/1/12 inventory (10,000 x 1.25)
12,500
From 2012 extraction (120,000 x 1.34)
160,800
Depletion included cost of sales for 2012
173,300
Requirement No. 4
Cost (P450T + P80T + P100T)
Less accumulated depletion, 12/31/12
630,000
Accumulated depletion, 1/1/12
225,000
Depletion for 2012
187,600
CA, 12/31/12
412,600
217,400
PROBLEM NO. 13 – Wasting asset
In connection with your audit of the Gold Mining Corporation for the year ended December 31,
2015, you noted that the company purchased for P16,640,000 mining property estimated to
contain 12,800,000 tons of ore. The residual value of the property is P1,280,000.
Building used in mine operations costs P1,280,000 and have estimated life of fifteen years with
no residual value. Mine machinery costs P2,560,000 with an estimated residual value of
P512,000 after its physical life of 4 years.
Following is the summary of the company’s operations for the first year of operations.
Tons mined
Tons sold
1,280,000 tons
1,024,000 tons
171
Unit selling price per ton
Direct labor
Miscellaneous mining overhead
Operating expenses (excluding depreciation
P4.40
1,024,000
204,800
921,600
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.
2.
3.
4.
5.
How much is the depletion for 2015?
Total inventoriable depreciation for 2015?
How much is the Inventory as of December 31,2015?
How much is the cost of sales for the year ended December 31, 2015?
How much is the maximum amount that may be declared as dividends at the end of the
company’s first year of operations?
Answer:
Requirement No. 1
Acquisition cost
16,640,000
Less residual value
1,280,000
Depletable cost
15,360,000
Divide by total estimated reserves
12,800,000
Depletion rate
1.20
Tons mined in 2012
1,280,000
Depletion for 2012
1,536,000
Requirement No. 2
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x
80%]
Depreciation - Machinery [(P2,560,000-P512,000/4]
Total
102,400
512,000
172
614,400
Requirement No. 3
Depletion (see no. 1)
1,536,000
Direct labor
1,024,000
Depreciation (see no. 2)
614,400
Miscellaneous mining overhead
204,800
Total available for sale
3,379,200
Divide by tons mined
1,280,000
Cost per ton
2.64
Tons remaining (1,280,000 - 1,024,000)
256,000
Inventory, 12/31/12
675,840
Requirement No. 4
Cost of sales (1,024,000 tons x P2.64)
2,703,360
Requirement No. 5
Sales (1,024,000 x P4.4)
4,505,600
Cost of sales (see no. 4)
(2,703,360)
Gross profit
1,802,240
Operating expenses
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x
20%]
(921,600)
Net income
855,040
(25,600)
173
Realized depletion (1,024,000 tons x P1.2)
1,228,800
Maximum amount that may be declared as dividends
2,083,840
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:
Date
Amount (in Php)
1-Jan-15
200,000,000
1-Jan-15
20,000,000
1-Jan-15
1,000,000
Additional information
20 per cent of the price is attributable to the land
Non-refundable transfer taxes (not included in the
P200,000,000 purchase price
Legal costs directly attributsble to the acquisition
Reimbursing the previos owner for prepaying the nonrefundable local government property taxes for the sixmonth period ending 30 June 2015
1-Jan-15
10,000
1-Jan-15
500,000
Advertising campaign to attract tenants
2-Jan-15
200,000
Opening function to celebrate new rental business that
attracted extensive coverage by the local press
174
30-Jun-15
Throughout 2015
20,000
Non-refundable annual local government property taxes
for the year ending 30 June 2016
120,000
Day-to-day repairs and maintenance, including the salary
and other costs of the administration and maintenance
staff. These costs are attributable equally to each of the
ten units
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:
•
•
Useful life of the buildings: 50 years from the date of acquisition
The entity will consume the building’s future economic benefits evenly over 50 years
from the date of acquisition
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
175
Non-refundable transfer taxes
Legal costs
Total cost
Cost of owner-occupied property (P221 million x 1/10)
Depreciation - 2012 (P22.1 million x .8 x 1/50)
Carrying amount, 12/31/12
20,000,000
1,000,000
221,000,000
22,100,000
(353,600)
21,746,400
Requirement No. 2
Fair value of investment properties (P25 million x 9)
Cost of investment properties (P221 million x 9/10)
FV adjustment gain
225,000,000
198,900,000
26,100,000
Requirement No. 3
Property taxes for 2012
Advertising
Opening function
Day-to-day repairs and maintenance
Depreciation of owner-occupied property (see no. 1)
Total expense in profit or loss
20,000
500,000
200,000
120,000
353,600
1,193,600
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
Advertising
Opening function
Day-to-day repairs and maintenance
Depreciation of properties (P221 million x .8 x 1/50)
Total expense in profit or loss
20,000
500,000
200,000
120,000
3,536,000
4,376,000
176
PROBLEM NO. 15 – Theory
Select the best answer for each of the following:
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.
5. Analytical estimation of depreciation by the auditor is an important audit test because it
does which of the following?
a. It yields statistical precision in sampling.
b. It signals which additions will be vouched.
c. It gives the auditor an indication of the impaired balances existing in financial
statements.
d. It is a good starting point for determining additional procedures.
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
177
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.
7. Which of the following combinations of procedures is an auditor most likely to perform
to obtain evidence about fixed asset addition?
a. Inspecting documents and physically examining assets
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.
8. If an auditor tours a production facility, which of the following misstatements or
questionable practices is most likely to be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
9. In testing for unrecorded retirements of equipment, an auditor is most likely to
a. Select items of equipment from the accounting records and then locate them during
the plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to
repairs and maintenance expense
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?
178
a.
b.
c.
d.
Existence assertion
Rights assertion
Presentation assertion
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?
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
2. B
3. A
4. D
5. D
6. D
7. A
8. C
9. A
10. A
11. B
12. D
13. D
14. D
15. D
VI – AUDIT OF INTANGIBLE AND OTHER ASSETS
PROBLEM NO. 1 – Audit of recognition and measurement of intangible assets
The accountant of the newly organized Zerg Corporation provided to you the details the
company’s Intangible Assets account as follows:
Date
01/02
01/15
04/01
Intangible
Description
Organization costs
Goodwill
Patent
Assets Amount
P 233,000
15,000
490,000
179
05/01
07/01
12/31
License and trademark
R & D laboratory
Product development costs
300,000
1,310,000
1,750,000
4, 098, 000
Transactions during 2015 included the following:
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.
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.
Apr. 1
Patented a newly developed process with costs as follows:
Legal fees to obtain patent
P429,000
Patent application
licensing fees
Total
490,000
and 61,000
It is estimated that in 5 years other companies will have developed improved
processes, making the Zerg Corporation process obsolete.
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.
Jul.1
Constructed a shed for P1,310,000 to house prototypes of experimental models to
be developed in future research projects.
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:
1. Prepare the necessary adjusting journal entries as of December 31, 2015.
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.
180
SOLUTION:
Requirement No. 1
1/2
Organization expenses
233,000
Intangible assets
1/15
Advertising expense
233,000
15,000
Intangible assets
4/1
Patents
15,000
490,000
Intangible assets
5/1
490,000
Licences (P300,000 x 2/3)
200,000
Trademark
100,000
Intangible assets
7/1
Building
300,000
1,310,000
Intangible assets
Research
12/31 expense
and
1,310,000
development
1,750,000
Intangible assets
Amortization expense
1,750,000
158,000
Patent (P490,000/5)
98,000
Licences (P200,000/5)
40,000
Trademark (P100,000/5)
20,000
Requirement No. 2
Cost
Patent
181
490,000
Licences
Trademark
Less amortization
200,000
100,000
Patent (P490,000/5)
98,000
Licences (P200,000/5)
40,000
Trademark (P100,000/5)
20,000
Carrying amount, 12/31/12
790,000
158,000
632,000
Requirement No. 3
Organization expenses (Jan. 2 transaction)
233,000
Advertising expense (Jan. 15 transaction)
15,000
R and D expense (Dec. 31 transaction)
1,750,000
Total
1,998,000
PROBLEM NO. 2 – Audit of patent
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:
Research and development laboratory expenses
Metal used in the construction of the machine
Blueprints used to design the machine
Legal expenses to obtain patent
Wages paid for the employees’ work on the research,
development, and building of the machine (60% of the time was
spent in actually building the machine)
Expense of drawing required by the patent office to be submitted
P1,500,000
480,000
192,000
720,000
1,800,000
102,000
182
with the patent application
Fees paid to the government patent office to process application
150,000
Duting 2015, Templar paid P225,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.
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.
3. Carrying amount of patent as of December 31, 2015.
SOLUTION:
Requirement No. 1
Metal used in the construction of the machine
480,000
Blueprints used to design the machine
192,000
Wages paid to the employees (P1,800,000 x 60%)
1,080,000
Cost of machine
1,752,000
Requirement No. 2
Research and development laboratory expenses
1,500,000
Wages paid to the employees (P1,800,000 x 40%)
720,000
R & D expense
2,220,000
Requirement No. 3
Legal expenses to obtain patent
720,000
Expense of drawing required by the patent office
Fees paid to the government patent
office
102,000
150,000
183
Cost of patent
972,000
Less amortization up to 12/31/12 (P972,000 x 2/20)
97,200
Carrying amount of patent, 12/31/12
874,800
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.
PROBLEM NO. 3 – Amortization and impairmentof intangible assets
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
Copyright
Tradename
Computer software
Goodwill
P200,000
400,000
350,000
100,000
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.
184
REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for al litems is 5%)
1. Total amortization of intangible assets in 2015
2. Total loss on impairment in 2015
3. Carrying amount of goodwill on December 31, 2015
4. Carrying amount of other intangible assets on December 31, 2015
SOLUTION:
Requirement No. 1
Patent (P200,000/10)
20,000
Computer software [P100,000 x (60/120)]
50,000
Total amortization
70,000
*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:
Carrying amount
Recoverable amount (P8,000/0.05)
Tradename:
Carrying amount
400,000
160,000
240,000
350,000
Recoverable amount (P15,000/0.05)
300,000
50,000
Goodwill:
Carrying amount of Anne Manufacturing
unit
3,000,000
Recoverable amount (P200,000 x 14.0939)
Total impairment loss
2,818,780 181,220
471,220
185
Requirement No. 3
Original amount of Goodwill
900,000
Less impairment loss
181,220
Carrying amount of Goodwill, 12/31/12
718,780
Question No. 4 - A
Patent (P200,000 - P20,000)
180,000
Copyright (recoverable amount)
160,000
Tradename (recoverable amount)
300,000
Computer software (P100,000 - P50,000)
50,000
Carrying amount of other intangible assets,
12/31/12
690,000
PROBLEM NO. 4 – Amortization and impairment of intangible assets
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.
186
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:
Identifiable assets
Goodwill
Liabilities
Book values
P2,700,00
1,500,000
1,800,000
Fair values
P3,000,000
?
1,800,000
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%):
1. Total amortixation for the year 2015
2. Impairment loss for the year 2015
3. Carrying amount of Trademark as of December 31, 2015
4. Carrying amount of Goodwill as of December 31, 2015
5. Carrying amount of Customer list as of December 31, 2015
SOLUTION:
Requirement No. 1
Trademark*
Goodwill*
-
Customer list (P220,000/3)
73,333
Total amortization
73,333
*The useful life is indefinite, so no amortization expense is
recognized.
Requirement No. 2
Impairment
loss
Trademark:
Carrying amount
300,000
187
Recoverable amount (P10,000/0.06)
Goodwill*:
Carrying amount of Manufacturing
unit
166,667
(P2,700,000 + P1,500,000 - P1,800,000)
Recoverable amount (P250,000 x
12.0416)
Customer list
Carrying
amount
(P220,000
P73,333)
Recoverable amount:
2,400,000
2013: (P120,000 x 0.9434)
113,208
2014: (P80,000 x 0.8900)
71,200
133,333
3,010,400
-
146,667
184,408
Total impairment loss
133,333
*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
Cost
300,000
Less impairment loss
133,333
Carrying amount of Trademark, 12/31/12 166,667
Requirement No. 4
Since goodwill is not amortized and is not impaired as of
12/31/12,
the carrying amount is P1,500,000.
Requirement No. 5
Cost
220,000
Less amortization for 2012
73,333
Carrying amount of Customer List,
188
12/31/12
146,667
PROBLEM NO. 5 – Expenses related to intangible assets
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%.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Round off present
value factors to 4 decimal places)
1. Carrying amount of franchise as of December 31, 2015.
2. Carrying amount of patent as of December 31, 2015
189
3. Total expenses related to the intangible assets in 2015
SOLUTION:
Requirement No. 1
Down payment
200,000
Add PV of installment payments (P120,000 x
2.9137)
349,644
Cost of franchise
549,644
2012 amortization (P549,644/10)
(54,964)
Carrying amount of franchise, 12/31/12
494,680
Requirement No. 2
Cash paid
400,000
Fair value of shares issued (10,000 x P20)
200,000
PV of note payable (P500,000 x 0.7118)
355,900
Cost of patent
955,900
2012 amortization (P955,900/10 x 6/12)
(47,795)
Carrying amount of patent, 12/31/12
908,105
Requirement No. 3
Franchise related expenses
Amortization of franchise (see no. 1)
54,964
Periodic franchise fee (P8,000,000 x .05)
400,000
Interest expense (P349,644 x .14)
Patent related expenses:
Amortization (see no. 2)
Interest expense (P355,900 x .12 x 6/12)
Trademark related expense (Impairment loss)
Carrying amount
48,950
503,914
47,795
21,354
69,149
190
1,200,000
Recoverable amount:
Outcome 1 (P40,000/.05 x .7)
560,000
Outcome 2 (P80,000/.05 x .3)
480,000
1,040,000
Total expenses - 2012
160,000
733,063
PROBLEM NO. 6 – Impairment of cash generating unit
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
Operating license
Property-train stations and land
Rail track and coaches
Steam engines (2)
Purchase consideration
P 200,000
1,200,000
300,000
300,000
1,000,000
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.
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:
191
1. Goodwill
2. Operating license
3. Property-trains stations and land
4. Rail track and coaches
5. Steam engines
SOLUTION:
CA after
impairmen
t
reallocatio
n
Assets
Carrying Impairmen
amount
t allocated
Impairmen
CA after t
impairmen reallocatio
t
n
Goodwill
200,000
(200,000)
-
Operating license
1,200,00
0
(333,333)
866,667
33,333
900,000
300,000
(83,333)
216,667
(16,667)
200,000
Rail tracks and coaches
300,000
(83,333)
216,667
(16,667)
200,000
Steam engines (2)
1,000,00
0
(500,000)
500,000
3,000,00
0
(1,200,000
)
1,800,000
1
2
3
Property-train
and land
-
-
stations
4
5
-
500,000
1,800,000
Computation of impairment loss:
Carrying amount of the CGU
3,000,000
Recoverable amount (VIU)
1,800,000
Impairment loss
1,200,000
192
Allocation of impairment loss:
Exploded steam engine
(500,000)
Goodwill
(200,000)
Balance pro rata (Operating license, Train stations and Rail
tracks)
(500,000)
Re-allocation of impairment loss:
Pro rata (Train stations and Rail tracks)
33,333
Alternative solution:
Assets
Carrying Impairmen
amount
t allocated
CA after
impairmen
t
Goodwill
200,000
(200,000)
-
Operating license
1,200,00
0
(300,000)
900,000
300,000
(100,000)
200,000
Rail tracks and coaches
300,000
(100,000)
200,000
Steam engines (2)
1,000,00
0
(500,000)
500,000
3,000,00
0
(1,200,000
)
1,800,000
1
2
3
Property-train
and land
stations
4
5
Allocation of impairment loss:
Exploded steam engine
500,000
Goodwill
200,000
Operating license (P1,200,000 - P900,000)
300,000
Balance pro rata (Train stations and Rail tracks)
200,000
193
1,200,000
PROBLEM NO. 7 - Impairment and reversal of impairment in a cash-generating unit
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:
Buildings, net(Depreciated at P60,000 per annum)
Machinery, net(Depreciated at P45,000 per annum)
Goodwill
Inventory
Receivables, net(Allow. For doubtful debts of P5,000)
Cash
Total
P240,000
180,000
15,000
80,000
35,000
__20,000
P570,000
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,
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:
Requirement No. 1
CA
500,000
I.L.
Allocation
*
CA after
194
Buildings
240,000
(9,600)
230,400
Factory machinery
180,000
(7,200)
172,800
Goodwill
15,000
(15,000)
Inventory
80,000
(3,200)
Receivables
35,000
35,000
Cash
20,000
20,000
570,000
(35,000)
76,800
535,000
* 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
Reversal of impairment loss on impaired assets:
Inventory
- Sold already. No more reversal.
Goodwill
- Not allowed.
- Allowed subject to
Buildings
limit.
- Allowed subject to
Machinery
limit.
Computation of limit on the extent of reversal:
Buildings
Machiner
y
Total
CA, 12/31/12 - without impairment
Buildings (P240,000 - P60,000)
180,000
Machinery (P180,000 - P45,000)
CA, 12/31/12 - with impairment
Buildings (P230,400 - P65,000)
135,000
165,400
Machinery (P172,800 - P50,000)
122,800
14,600
12,200
26,800
Alternative
computation:
Buildings
Total
195
Machiner
y
Allocated impairment
loss
Increase
in
depreciation
9,600 7,200
16,800
5,000 5,000
10,000
14,600
12,200
26,800
*Since the excess of RA over the CA did not exceed the limit, the reversal would be
based on a pro rata allocation based on carrying amounts at time of reversal.
CA
Buildings
165,400
Machinery
122,800
288,200
Allocation
*
CA after
11,478
176,878
8,522 131,322
20,000
308,200
PROBLEM NO. 8 - Impairment, reversal of impairment and revaluation of patent
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:
1. Loss on impairment on January 1, 2013
2. Gain on impairment recovery in 2015
196
3. Revaluation surplus as of December 31, 2015
4. Carrying amount patent as of December 31, 2015
SOLUTION:
Requirement No. 1
Carrying amount, 1/1/10 (P250,000 x 4.5/5)
225,000
Recoverable amount
75,000
Impairment loss
150,000
Requirement No. 2
Fair value, 1/1/12
300,000
Carrying amount, 1/1/12 (P75,000 x 1/3)
25,000
Revaluation increase
275,000
CA without impairment, 1/1/12 (P250,000
x 2.5/5)
125,000
Carrying amount, 1/1/12 (P75,000 x 1/3)
Gain
on
impairment
recovery
25,000
100,000
Requirement No. 3
Revaluation increase
Gain
on
impairment
recovery
275,000
Revaluation surplus, 1/1/12
Realized
2012
(P175,000/5)
Revaluation
surplus,
12/31/12
175,000
(100,000)
(35,000)
140,000
Requirement No. 4
Carrying amount (Fair value), 1/1/12
300,000
197
Amortization - 2012 (P300,000/5)
(60,000)
Carrying amount, 12/31/12
240,000
PROBLEM NO.9 - Audit of intangibles and other assets
Among the account balances of Naga Corporation at December 31, 2014 are the following:
Patent, net
Installment contract receivable
P2,450,000
7,200,000
Relevant transactions and other information for 2015 were as follows:
a.) The patent was purchased from Inventor Company for P3,150,000 on September 1, 2011.
On that date, the remaining legal life was fifteen years, which was also determined to be
the useful life.
b.) The installment contract receivable represents the balance of the consideration received
from the sale of a factory building to Feeble Company on March 31,2013, for
P12,000,000. Feeble ade a P3,000,000 down payment and signed a five year 13% note
for the P9,000,000 balance. The first of equal annual principal payments of P1,800,000
was received on March 31,2014 together with interest to that date. The note is
collateralized by the factory building with a fair value P10,000,000 at December 31,
2015. The 2015 payment was received on time.
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.
198
f.) Pure reported net income and paid dividends of
Net income
Six months ended 6/30/15
P5,760,000
Six months ended 12/31/15 7,040,000
Dividends per share
None
P2.00
Dividend was paid on November 30, 2015
QUESTIONS:
Based on the above and the result of your audit, compute for the following:
1. Gain on sale of patent
2. Total interest income for 2015
3. Noncurrent portion of the installment contract receivable as of December 31, 2015
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
Present of note received (P5,000,000 x 0.675)
Less carrying amount of patent, 5/1/12:
3,375,000
Carrying amount, 1/1/11
2,450,000
Amortization up to 5/1/12 (P3,150,000/15x4/12)
(70,000)
Gain on sale of patent
2,380,000
995,000
Requirement No. 2
Note receivable from sale of patent (P3,375,000 x 14% x 8/12)
Installment contract:
1/1 to 3/31 (P7,200,000 x 13% x 3/12)
4/1 to 12/31 (P5,400,000 x 13% x
9/12)
Total interest income - 2012
315,000
234,000
526,500
760,500
199
1,075,500
Requirement No. 3
Installment contract receivable, 12/31/11
7,200,000
Less principal payment received, 3/31/12
1,800,000
Balance, 12/31/12
5,400,000
Less principal payment to be received, 3/31/13
1,800,000
Noncurrent portion
3,600,000
Requirement No. 4
CA - NR from sale of patent, 5/1/12
3,375,000
Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 14%
x 8/12)
315,000
CA - NR from sale of patent, 12/31/12
3,690,000
Requirement No. 5
Acquisition cost
18,800,000
Dividends received (750,000 x 2)
(1,500,000)
Share of profit (P7,040,000 x 25%)
1,760,000
CA - Investment in Pure Corp., 12/31/12
19,060,000
PROBLEM NO.10 – Audit of intangibles and other assets
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:
200
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.
b. On January 3, 2015, in connection with the purchase of a trademark from Cody
Corporation, the partie entered into a noncompetiton agreement and a consulting contract.
GDL paid Cody P8,000,000, of which three-quarters was for trademark and one-quarter
was for Cody’s agreement not to compete for a five-year period in the line of business
covered by the trademark. GDI considers the life of the trademark to be indefinite. Under
the consulting contract, GDL agreed to pay Cody P500,000 annually on January 3 for
five years. The first payment was made on January 3,2015
c. Deferred tax asset is provided in recognition of temporary differences between
accounting and tax reporting of rent income and warranty liability. For the year ended
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
2. The carrying amount of the intangible assets as of December 31,2015
3. The carrying amount of deferred tax asset as of December 31, 2015
SOLUTION:
Requirement No. 1
Patent amortization (P1,680,000/6)
Trademark
Noncompetition
agreement
(P2,000,000/5)
280,000
Total amortization
680,000
400,000
Requirement No. 2
Patent (P1,680,000 - P280,000)
Trademark (P8,000,000 x 3/4)
1,400,000
201
6,000,000
Noncompetition agreement (P2,000,000 - P400,000)
1,600,000
Carrying amount of intangible assets, 12/31/12
9,000,000
Requirement No. 3
Deferred
tax
asset,
12/31/11
Decrease in deferred tax asset:
Decrease in unearned rent (P200,000 x
35%)
(70,000)
Increase in warranty liability (P150,000
x 35%)
52,500
Deferred
tax
asset,
12/31/12
360,000
(17,500)
342,500
PROBLEM NO. 11 - Theory
Select the best answer for each of the following
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.
202
3. In auditing intangible assets, an auditor most likely review or recomputed amortization
and determine whether the amortization period is reasonable in support of management’s
financial statement assertion of
a. Valuation
b. Completeness
c. Existence or occurrence
d. Rights and obligations
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.
d. Capitalize into the cost of the asset and adjust the opening balance of retained
earnings.
5. Which
costs?
a.
b.
c.
statement is correct regarding initial recognition of research and development
All research costs should be charged to expense.
All development costs should be capitalized.
If an entity cannot distinguish the research phase of an internal project to create an
intangible asset from the development phase, the enterprise treats the expenditure
for that project as if it were incurred in the development phase only.
d. A research and development project acquired in a business combination is not
recognized as an asset.
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.
203
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
2. C
3. A
4. B
5. A
6. A
7. D
8. B
204
V11 – AUDIT OF LIABILITIES
PROBLEM NO. 1 – Recognition and classification of liabilities
The Comprehensive Entity’s chief accountant provided the following information:
Notes payable:
Arising from purchase of goods
304,000
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
205
on merchandise sold
Estimated liability for premiums
Deferred revenue
Accrued interest on bonds payable
Share warrants outstanding
Share options outstanding
Unused letters of credit
400,000
Notes receivable discounted
120,000
75,000
87,000
360,000
120,000
210,000
20,000
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.
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
NP - Arising from purchase of goods
NP - Arising from 5 year-bank loans, P400,000
due on June 30, 2013; P100,000 due on Dec. 31,
2013
NP - Arising from advances by officers, due
June 30, 2013
Employees’ income tax withheld
Advances received from customers on purchase
orders
Containers’ deposit
Accounts payable arising from purchase of
goods - gross (P170,000+P30,000)
AR with credit balance
Trade and other
304,000 payables
500,000
Borrowings
Trade and other
50,000 payables
Trade and other
20,000 payables
Trade and other
payables or Separate
64,000
item
Trade and other
50,000 payables
Trade and other
200,000 payables
Trade and other
40,000 payables
206
Trade and other
80,000 payables
Borrowings - separate
100,000 item
Cash dividends payable
First mortgage serial bonds - current portion (P50,000
x 2)
Overdraft with Allied Bank
90,000
Estimated liability for damages
160,000
Estimated liability on meeting guarantee for
service requirements on merchandise sold
120,000
Estimated liability for premiums
75,000
Provisions
Provisions
Provisions
Trade and other
payables or Separate
87,000
item
Trade and other
360,000 payables
Deferred revenue
Accrued interest on bonds payable
Current liabilities
Borrowings
2,300,000
Requirement No. 2
Convertible bonds, due January 31, 2014
First mortgage serial bonds - noncurrent portion (P2M
- P.1M)
Noncurrent liabilities
1,000,000
1,900,000
Separate item
Separate item
2,900,000
Items not included:
Reserve for general contingencies - Equity
AP with debit balances - Trade and other
receivables
Accounts receivable gross - Trade and other
receivables
Share dividends payable - Equity
Dividends in arrears on preference shares - Disclose
only
Cash in bank balance with PNB - Cash and cash equivalents
Share warrants outstanding - Equity (share
premium)
Share options outstanding - Equity (share
premium)
Unused letters of credit - Contingent liability
Notes receivable discounted - Contingent
liability
207
Treatment of additional information:
Note refinancing - disclose
Lawsuit filed by former employee - ignore
PROBLEM NO. 2 – Classification of liabilities
You were able to obtain the following from the accountant for Okey Corp. related to the
company’s liabilities as of December 31, 2015
Accounts Payable
P 650,000
Notes payable – trade
190,000
Notes payable – bank
800,000
Wages and Salaries payable
15,000
Interest payable
143,000
Mortgage notes payable – 10%
600,000
Mortgage notes payable - 12%
1,500,000
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 2year, 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 semiannually every June 30 and December 31.
REQUIRED:
Determine the following as of December 31, 2015.
1. Total current liabilities
2. Total noncurrent liabilities
SOLUTION:
208
Requirement No. 1
Accounts payable
Notes payable – trade
Notes payable – bank (payable on demand)
Wages and salaries payable
Interest payable
Mortgage notes payable – 10% (with breach of
covenant)
Mortgage notes payable – 12% (current
portion)
Bonds payable (due, 6/30/13)
Current liabilities
Trade and other
650,000 payables
Trade and other
190,000 payables
300,000
Borrowings
Trade and other
15,000 payables
Trade and other
143,000 payables
600,000
Borrowings
Borrowings - separate
40,000 item
2,000,000
Borrowings
3,938,000
Requirement No. 2
Notes payable – bank (refinanced)
Mortgage notes payable – 12% (noncurrent
portion)
Noncurrent liabilities
500,000
1,460,000
Separate item
Separate item
1,960,000
PROBLEM NO. 3 – Classification of liabilities
Dallas Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates to the obligation of the company as of March 31,
2015:
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
209
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
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 semiannually 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)
Accrued interest - notes payable
2,400,000
210
340,000
Estimated warranty payable (P252,000 + P630,000 P537,000)
345,000
Accounts payable
Cash dividends payable (5 million shares x
P0.30)
560,000
Accrued interest - bonds payable (P5,000,000 x .12 x 6/12)
300,000
Total current liabilities
5,445,000
1,500,000
Requirement No. 2
Bonds payable:
Face value
Unamortized bond discount (P200,000 x
4.5/10)
5,000,000
(90,000)
4,910,000
Notes payable - non current
2,700,000
Total non current liabilities
7,610,000
PROBLEM NO. 4 – Audit of liability for premiums and warranties
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.
211
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
4. Inventory of AM/FM radio
5. Estimated liability for premiums
SOLUTION:
Requirement No. 1
Warranty expense (P5,400,000 x .02)
108,000
Requirement No. 2
Estimated liability from warranties, 1/1/12
136,000
Add warranty expense for 2012
108,000
Total
244,000
Less actual expenditures for 2012
Estimated liability from warranties,
12/31/12
164,000
Requirement No. 3
Premium expense [(1,800,000 x .6)/200 x
P14]
80,000
75,600
Requirement No. 4
Inventory of premium, 1/1/12
39,950
Add premium purchases (6,500 x P34)
221,000
212
Total premiums available
Less premiums issued (1,200,000/200 x
P34)
260,950
Inventory of premiums, 12/31/12
56,950
Requirement No. 5
Estimated premium claims outstanding,
1/1/12
204,000
44,800
Add premium expense for 2012
75,600
Total
Less premiums issued (1,200,000/200 x
P14)
Estimated premium claims outstanding,
12/31/12
120,400
84,000
36,400
PROBLEM NO. 5 – Audit of provisions and contingencies
Relevant extracts from Magic Corporation’s financial statements at 31 December 2014 are as
follows:
Current Liabilities
Provisions for warranties
P405,000
Non-current liabilities
Provisions for warranties
270,00
Note 10 – Contingent liabilities
Magic is engaged in litigation with various parties in relation to allergic reactions to
traces of peanuts alleged to have been found in packets of fruit gums. Magic strenuously
denies the allegations and, as at the date of authorizing the financial statements for issue,
is unable to estimate the financial effect, if any, of any costs or damages that may be
payable to the plaintiffs.
The provision for warranties at 31 December 2014 was calculated using the following
assumptions: There was no balance carried forward from the prior year.
Estimated costs of repairs – products with minor defects
P1,500,000
Estimated cost of repairs – products with major defects
P9,000,000
213
Expected % of products sold during 2014
having no defects in 2105
80%
Expected % of products sold during 2014
having minor defects in 2105
Expected % of products sold during 2014
having major defects in 2105
Expected timing of settlement of warranty payments
-those with minor defects
2015
Expected timing of settlement of warranty payments
-those with major defects
15%
5%
All
in
40% in 2015, 60% in
2016
During the year ended 31 December 2015 the following occurred:
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:
Estimated costs of repairs – products with minor defects
change
Estimated cost of repairs – products with major defects
P7,500,000
Expected % of products sold during 2014
having no defects in 2105
85%
Expected % of products sold during 2014
having minor defects in 2105
Expected % of products sold during 2014
having major defects in 2105
Expected timing of settlement of warranty payments
-those with minor defects
2016
Expected timing of settlement of warranty payments
-those with major defects
2017
No
35%
2%
All
in
20% in 2016, 80% in
214
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:
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%
Minor defects (P1,500,000 x .13)
Major defects (P5,000,000 x .02)
Increase in provision in 2012
Unused amounts reversed in 2012 (P180,000 - P75,000)
Warranty expense in 2012
Requirement No. 2
Balance, 1/1/12 (P405,000+270,000)
195,000
150,000
345,000
(105,000)
240,000
675,000
Amounts used in 2012
Increase in provision in 2012
(300,000)
345,000
Unused amounts reversed in 2012
Balance, 12/31/12
(105,000)
615,000
Alternative computation:
New provision
Balance of provision from 2010 payable in 2012
345,000
270,000
215
Balance, 12/31/12
615,000
Current portion of Provision for warranties
Balance of provision from 2011 payable in 2013
2012 provision:
Minor defects
Major defects (P100,000 x .2)
Requirement No. 3
Provision for warranties, 12/31/12
Less current provision for warranties
Noncurrrent provision for warranties
270,000
195,000
30,000
495,000
615,000
495,000
120,000
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.
PROBLEM NO. 6 – Audit of bonds payable
In your initial audit of Bulls Co., you find the following ledger account balance.
12%, 25-year Bonds Payable, 2011 issue
1/1/2011 CR
P 1,600,000
Treasury Bonds
216
1/1/2015
216,000
CD
P
Bond Premium
1/1/2011
1/1/2015
CD
Interest Expense
P 96,000
7/1/105
CD
P 96,000
CR
P 80,000
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 bonds issued
Face value of bonds retired {P216,000/[1.05 + (.12 x
3/12)]}
Adjusted balance of bonds payable,
12/31/12
Requirement No. 1.b
Unamortized bond premium, 12/31/12 (P80,000 x 14/16 x
20/25)
1,600,000
200,000
1,400,000
56,000
Requirement No. 1.c
Nominal interest
Remaining bonds (P1,400,000 x .12)
Bonds retired (P200,000 x .12 x 9/12)
168,000
217
18,000
Total
Less premium amortization
186,000
Bonds retired (P80,000/25 x 2/16 x 9/12)
300
Remaining bonds (P80,000/25 x 14/16)
2,800
Bond interest expense
3,100
182,900
Requirement No. 1.d
Carrying amount of bonds
retired
Face value
Unamortized bond premium
(P80,000 x 2/16 x 20.25/25)
200,000
8,100
Redemption price (P200,000 x 1.05)
Gain (Loss) on bond
redemption
208,100
210,000
(1,900)
Requirement No. 2
AJE 1 - To correct recording of bond retirement (see requirement 1.d)
Bonds payable
200,000
Premium on bonds payable
8,100
Interest expense (P200,000 x .12 x 3/12)
6,000
Loss on bond retirement
1,900
Treasury bonds
216,000
AJE 2 - To correct non-recording of premium
amortization
Premium on bonds payable
15,900
Retained earnings (P80,000 x 4/25)
12,800
Interest expense (see requirement 1.c)
3,100
218
AJE 3 - To correct entry made on 1/1/12 on Interest
expense
Retained earnings
96,000
Interest expense
96,000
AJE 4 - To correct non-accrual of interest expense at
12/31/12
Interest expense (P1.4M x .12 x 6/12)
Interest payable
84,000
84,000
PROBLEM NO. 7 – Audit of bonds payable
On January 1, 2014, Thunder Corporation issued 2,000 of its 5-year, P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate(yield) of 9%. Interest is payable each
December 31. Thunder uses the effective interest method of amortization. On December 31,
2015, the 2,000 bonds were extinguished early through acquisition in the open market by
Thunder for P 1,980,000 plus accrued interest.
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
PV of principal (P2,000,000 x 0.6499)
219
1,299,800
PV of interest [(P2,000,000 x .11) x 3.8897]
855,734
Issue price
2,155,534
Requirement No. 2
Carrying amount, 1/1/11 (see no. 1)
Less premium amortization for 2011:
2,155,534
Nominal interest (P2,000,000 x .11)
220,000
Effective interest (P2,155,534 x .09)
193,998
Carrying amount, 12/31/11
26,002
2,129,532
Alternative computation:
PV of principal (P2,000,000 x 0.7084)
1,416,800
PV of interest [(P2,000,000 x .11) x 3.2397]
712,734
Carrying amount, 12/31/11
2,129,534
Requirement No. 3
Retirement price
Carrying amount,
12/31/12:
1,980,000
Carrying amount, 12/31/11 (see no. 1)
Less premium amortization for 2012:
2,129,532
Nominal interest (P2,000,000 x .11)
220,000
Effective interest (P2,129,532 x .09)
191,658
28,342
Gain early retirement of bonds
2,101,190
121,190
Alternative computation:
PV of principal (P2,000,000 x 0.7722)
1,544,400
PV of interest [(P2,000,000 x .11) x 2.5313]
Carrying amount, 12/31/10
556,886
220
2,101,286
Retirement price
1,980,000
Gain early retirement of bonds
121,286
Requirement No. 4
Total proceeds
Less liability component:
Present value of the principal (P5,000,000 x 0.4970)
Present value of the interest [(P5,000,000 x .05 x
8.3838)
5,000,000
2,485,000
2,095,950
Equity component
4,580,950
419,050
Requirement No. 5
PV of principal (P1,500,000 x 0.5584)
837,600
PV of interest [(P1,500,000 x .05) x 7.3601]
552,008
Carrying amount, 7/1/12
1,389,608
Par value of shares issued (15,000 shares x P1)
15,000
Net increase in share premium
1,374,608
PROBLEM NO. 8 – Convertible bonds payable
On January 1, 2011, Calauag Corporation issued a 10 per cent convertible bonds with face value
of P 4,000,000 maturing on December 31, 2019. Each P1,000 bond is convertible into ordinary
shares of Calauag at a conversion price of P25 per share. Interest is payable half-yearly in cash.
At the date of issue, Calauag could have issued nonconvertible debt with a ten-year term bearing
a coupon interest rate of 11 per cent.
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
221
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
Issue price
Less liability
component:
4,000,000
PV of principal (P4,000,000 x 0.3427)
1,370,800
PV of interest [(P4,000,000 x .05) x 11.9504]
2,390,080
3,760,880
Equity component
239,120
Requirement No. 2
PV of principal (P4,000,000 x 0.5854)
PV of interest [(P4,000,000 x .05) x
7.5376]
Carrying amount,
12/31/11
2,341,600
1,507,520
3,849,120
Requirement No. 3
Carrying amount of bonds retired (P3,849,120 x 1/2)
1,924,560
PV of principal (P2,000,000 x 0.6756)
PV of interest [(P2,000,000 x .05) x
8.1109]
1,351,200
811,090
222
Retirement price - liability (Fair value of bonds retired,
1/1/12)
Loss on retirement of bonds - profir or
loss
2,162,290
(237,730)
Requirement No. 4
Retirement price (P4,400,000 x 1/2)
2,200,000
Less payment applied to liability component (see no. 3)
Retirement price - equity (residual
amount)
2,162,290
37,710
Requirement No. 5
Ordinary shares to issued - amended terms
(P2,000,000/P20)
Ordinary shares to issued - original terms
(P2,000,000/P25)
100,000
Incremental ordinary shares to be issued
20,000
Fair value of incremental shares to be issued (20,000 x
P32)
640,000
80,000
PROBLEM NO. 9 - Audit of Leases
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:
•
•
•
•
•
•
Lease term: 3 years
Economic life of plant: 5 years
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: ?
223
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)
1.
2.
3.
4.
Interest rate implicit in the lease
Interest income to be recognized by the lessor for the fiscal period ended June 30, 2015
Carrying amount of the finance lease receivable to be reported by the lessor at June 30, 2015
Total lease-related expenses to be recognized by the lessee during the fiscal period ended
June 30, 2015
5. Amount to be reported by the lessee under current liabilities as liability under finance lease
as of June 30, 2015
SOLUTION:
Requirement No. 1
Computation of net investment in the lease:
Fair value of asset
467,100
Initial direct cost (IDC)
9,414
476,514
Using 6%:
Cash flow
PVF at 6%
PV of rental payments
150,000
2.6730 400,950
PV of GRV
60,000
0.8396 50,376
PV
224
PV of MLP
PV of URV
451,326
30,000
0.8396 25,188
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.
Requirement Nos. 2&3
Refer to the amortization schedule
below.
Amortization schedule (Lessor)
Date
Payment
Interest
(10%)
Principal
7/1/11
C.A.
476,514
6/30/12
150,000
28,591
121,409
355,105
6/30/13
150,000
21,306
128,694
226,411
6/30/14
240,000
13,589
226,411
-
Requirement No. 4
Interest expense (see amortization schedule below)
225
27,080
Executory costs
15,000
Depreciation [(P451,326 - P60,000) /
3]
130,442
Lease related expenses
172,522
Requirement No. 5
Amortization schedule (Lessee)
Date
Payment
Interest
(10%)
Principal
7/1/11
C.A.
451,326
6/30/12
150,000
27,080
122,920
328,406
6/30/13
150,000
19,704
130,296
198,110
6/30/14
210,000
11,890
198,110
-
226
PROBLEM NO. 10 - Audit of Leases
Jackie Corporation has entered into an agreement to lease a machine to a Lessee Corporation.
The lease agreement details are as follows:
• Length of lease: 5 years
• Commencement date: January 1, 2015
• Annual lease payment payable December 31 each year commencing December 31, 2015:
P8000
• Fair value of the machine at January 1, 2015: P34,797
• Estimated economic life of the machine: 8 years
• Estimated economic residual value of the asset at the end of its economic life: P2000
• Residual value at the end of the lease term, of which 50% is guaranteed by Lessee Corporation:
P7,200
• Interest rate implicit in the lease: ?
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)
1. The interest rate implicit in the lease is
2. Ignoring income taxes, if Jackie Corporation erroneously accounted for the transaction as an
operating lease, its profit for 2015 will be overstated by
3. The amount to be reported by Lessee Corporation under current liabilities as liability under
finance lease as of December 31, 2015
4. The depreciation7 amount to be recognized by Lessee Corporation for the year ended
December 31, 2015
5. Ignoring income taxes, if Lessee Corporation erroneously accounted for the transaction as an
operating lease, its profit for 2015 will be overstated by
227
SOLUTION:
Requirement No. 1
Computation of net investment in the lease:
Fair value of asset
34,797
Initial direct cost (IDC)
1,000
35,797
Using 9%:
Cash flow
PVF at 9%
PV
PV of rental payments
8,000
3.8897 31,118
PV of GRV
3,600
0.6499 2,340
PV of MLP
PV of URV
33,457
3,600
0.6499 2,340
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
228
Profit under operating lease (As recorded)
Rent income
8,000
Depreciation [(P34,797 - P2,000)/8]
(4,100)
IDC amortization (P1,000/5)
(200)
3,700
Profit under finance lease (Should be)
Interest income (P35,797 x .09)
3,222
Over (Under)
478
Requirement No. 3
Computation of present value of MLP:
PV of rental payments
8,000
3.8897 31,118
PV of GRV
3,600
0.6499 2,340
PV of MLP
33,457
The PV of the MLP is 96% (P33,457/P35,797) of the fair value of the leased asset.
Amortization schedule (Lessee)
Date
Payment
Interest (9%)
1/1/12
12/31/12
Principal
C.A.
33,457
3,011
28,468
229
8,000
4,989
12/31/13
8,000
2,562 5,438
23,030
12/31/13
8,000
2,073 5,927
17,103
12/31/14
8,000
1,539 6,461
10,642
12/31/15
11,600
958 10,642
-
Requirement No. 4
Cost
Guaranteed residual value
33,457
(3,600)
Depreciable amount
/ Lease term
Annual depreciation
29,857
5
5,971
Requirement No. 5
Expenses under operating lease (As recorded)
Rent expense
8,000
Expenses under finance lease (Should be)
Interest expense
3,011
Depreciation
5,971 8,982
Over (Under)
(982)
230
Therefore, profit is overstated.
PROBLEM NO. 11 - Audit of Income Taxes
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.
• Royalty revenue (exempt from taxation): P8,000
• Proceeds on sale of building: P75,000
• Carrying amount of building sold: P70,000
• Entertainment expense (non deductible): P1,700
• Depreciation expense - Buildings: P7,600
• Depreciation expense - Plant: P22,500
• Doubtful debts expense: P4,100
• Annual leave expense: P46,000
• Insurance expense: P4,200
• Development expense: P15,000
The company's draft balance sheet at June 30, 2015 showed the following assets and liabilities:
Assets
Cash
P2,500
Accounts receivable
21,500
Allowance for doubtful debts
(4,100)
Inventory
P17,400
31,600
Prepaid insurance
4,500
Land
75,000
Buildings
170,000
Accumulated depreciation
(59,500) 110,500
231
Plant
150,000
Accumulated Depreciation
(67,500)
Deferred Tax Asset, 9opening balance)
82,500
9,600
333,600
Liabilities
Accounts Payable
25,000
Provision for annual leave
10,000
Deferred tax liability (opening balance)
27,270
Loan
140,000
202,270
Additional Information
a. Quarterly income tax installments paid during the year were:
October 28, 2014
P18,000
January 28, 2015
17,500
April 28, 2015
18,000
with the final balance due on July 28, 2015
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
232
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:
Compute for the following as of and for the fiscal period ended June 30, 2015:
1.
2.
3.
4.
5.
Current tax expense
Current tax payable
Deferred tax liability
Deferred tax asset
Deferred tax expense (benefit)
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
Doubtful debts expense
Annual leave expense
Insurance expense
Development expense
22,500
4,100
46,000
4,200
15,000
344,800
233
Add (deduct) tax amounts:
Depreciation expense - plant (P150,000 x .2)
Bad debts written off (item e)
Annual leave paid (item d)
Insurance paid (item d)
Tax losses from prior years (item g)
Taxable profit
Tax rate
Current tax expense
(30,000)
(3,500)
(52,000)
(3,700)
(12,500)
243,100
30%
72,930
* Non assessable since depreciation is not deductible for tax purposes
Requirement No. 2
Current tax expense (see no. 1)
72,930
Less quarterly income tax installments paid
53,500
Current tax payable
19,430
Requirement No. 3
Total taxable temporary differences (see analysis below)
Tax rate
Deferred tax liability, 6/30/12
27,000
30%
8,100
Requirement No. 4
Total deductible temporary differences (see analysis
below)
Tax rate
29,100
30%
234
Deferred tax asset, 6/30/12
8,730
Comparison of carrying amount of asssets/liabilities and tax base
Accounts receivable
Prepaid insurance
Buildings
Plant
Development
expenditure
Annual leave
Carrying
amount
Tax base
17,400
21,500
4,500
-
110,500
110,500
82,500
60,000
10,000
Difference
4,100
Deductible
4,500
Taxable
-
Permanent
22,500
Taxable
15,000
Deductible
10,000
Deductible
Beginning
Inc(Dec)
Effect on tax
expense
15,000
-
*
Remarks
* P150,000 x 2/5
Requirement No. 5
Ending
Deferred tax liability
8,100
27,270
(19,170)
Credit
Deferred tax asset
8,730
9,600
(870)
Debit
Journal entry:
Deferred tax liability
Deferred tax asset
Income tax expense
19,170
870
18,300
235
PROBLEM NO. 12 – Audit of Income Taxes
The accounting profit before tax for the year ended December 31, 2015 for Belen Ltd amounted
to P18,500 and included:
Depreciation – motor vehicle (25%)
P4,500
Depreciation – equipment (20%)
20,000
Rent revenue
16,000
Royalty revenue (exempt from tax)
5,000
Doubtful debts expense
2,300
Entertainment expense (non-deductible)
1,500
Proceeds on sale of equipment
19,000
Carrying amount of equipment sold
18,000
Annual leave expense
5,000
The draft statement of financial position at December 31, 2015 contained the following assets
and liabilities:
2015
2016
Assets
Cash
P11,500
P9,500
Receivables
12,000
14,000
Allowance for doubtful debts
(3,000)
(2,500)
Inventory
19,000
21,500
2,800
2,400
18,000
18,000
Rent receivable
Motor vehicle
236
Acc. Dep – motor vehicle
(15,750)
(11,250)
Equipment
100,000
130,000
Acc. Dep – equipment
(60,000)
(52,000)
Deferred tax asset
?
5,550
P135,200
Liabilities
Accounts payable
Provision for annual leave
15,655
21,500
4,500
6,000
Current tax liability
?
7,600
Deferred tax liability
?
2,745
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:
1.
2.
3.
4.
Current tax expense
Deferred tax liability
Deferred tax asset
Deferred tax expense (benefit)
SOLUTION:
237
Requirement No. 1
Accounting profit
18,500
Reversal of accounting items:
Depreciation - motor vehicle
Depreciation - equipment
Rent revenue
Royalty revenue (exempt from taxation)
4,500
20,000
(16,000)
(5,000)
Doubtful debts expense
2,300
Entertainment expense (non-deductible)
1,500
Gain on sale of equip. (P19,000 - P18,000)
Annual leave expense
(1,000)
5,000
29,800
Add (deduct) tax amounts:
Depreciation - motor vehicle
Depreciation - equipment
Rent revenue collected (P16,000 + P2,400 - P2,800)
Royalty revenue (exempt from taxation)
Bad debts written off (P2,500 + P2,300 - P3,000)
Entertainment expense (non-deductible)
(15,000)
15,600
(1,800)
-
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)
Taxable profit
Tax rate
Current tax expense
20,100
30%
6,030
238
Requirement Nos. 2-4
Comparison of carrying amount of asssets/liabilities and tax base
Receivables
Carrying
amount
Tax base
12,000
15,000
Difference
a
Remarks
3,000
Deductible
Rent receivable
2,800
-
2,800
Taxable
Motor vehicle
2,250
-
2,250
Taxable
Equipment
Provision for annual leave
40,000
4,500
55,000
-
b
15,000
Deductible
4,500
Deductible
a - [P100000-(P100000*0.15*3)]
b - (P12,000 + P3,000)
Requirement No. 2
Deferred tax liability, 12/31/12 (P5,050 x .3)
1,515
Requirement No. 3
6,750
Deferred tax asset, 12/31/12 (P22,500 x .3)
Requirement No. 4
Ending
Beginning
Inc(Dec)
Effect on tax
expense
Deferred tax liability
1,515
2,745
(1,230)
Credit
Deferred tax asset
6,750
5,550
1,200
Credit
Journal entry:
239
Deferred tax liability
1,230
Deferred tax asset
1,200
Income tax expense
2,430
PROBLEM NO. 13 – Audit of long term liabilities
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:
Note payable, bank
P5,600,000
Liability under finance lease
430,000
Deferred tax liability
700,000
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.
240
REQUIRED:
Based on the above and the result of your audit, determine the following:
1.
2.
3.
4.
Total noncurrent liabilities as of December 31, 2015
Current portion of long-term liabilities as of December 31, 2015
Total interest expense for the year 2015
Accrued interest payable as of December 31, 2015
SOLUTION:
Requirement No. 1
15% Note payable, bank
Balance, 12/31/12 (P5,600,000 - P1,400,000)
4,200,000
Less installment due on April 1, 2013
1,400,000 2,800,000
Liability under finance lease
Balance, 12/31/11
430,000
Less principal payment on 12/31/12:
Total payment
100,000
Applicable to interest (P430,000 x .14)
60,200
Balance, 12/31/12 (see no. 1)
39,800
390,200
Less principal payment due on 12/31/13:
Total payment
100,000
Applicable to interest (P390,200 x .14)
54,628
45,372
344,828
241
10% bonds payable
Carrying amount, 7/1/12
1,774,000
Add discount amortization:
Effective interest (1,774,000 x .12 x 6/12)
106,440
Nominal interest (2,000,000 x .10 x 6/12)
100,000
6,440
1,780,440
Deferred income tax liability
Balance, 12/31/11
Effect of change in tax rate [(P700,000/.32 x .35) P700,000]
Provision for deferred income tax (P312,500 x .35)
700,000
65,625
109,375
Total noncurrent liabilities, 12/31/12
875,000
5,800,268
Requirement No. 2
Note payable, bank - due 4/1/13
1,400,000
Finance lease liability - principal payment due on 12/31/13 (see no. 2)
45,372
Current portion of long-term liabilities, 12/31/12
1,445,372
Requirement No. 3
Note payable, bank
1/1 to 3/31 (P5,600,000 x .12 x 3/12)
242
168,000
4/1 to 12/31 (P4,200,000 x .12 x 9/12)
378,000
546,000
Liability under finance lease (see no. 1)
60,200
Bonds payable (1,774,000 x .12 x 6/12)
106,440
Total interest expense for 2012
712,640
Requirement No. 4
Note payable, bank (P4,200,000 x .12 x 9/12)
378,000
Bonds payable (P2,000,000 x .10 x 6/12)
100,000
Accrued interest payable, 12/31/12
478,000
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.
Summarized information about its employees at December 31, 2015 includes:
Employee
Number of
Salary level for the
Percentage wage
243
Category
employees
the 12-month period increase effective
in category
ending 6/30/16
from 7/1/16
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
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 firstin, 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.
244
At December 31, 2015 the entity’s holiday leave records were as follows:
Employee
Number of employees
Average days’ holiday
Category
in category
January 1, 2015
leave per employee unused on
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
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:
245
Employee Category
A
B
C
9
196
306
Joined
1
9
18
Left
1
8
20
Joined
0
10
11
Left
0
9
16
Joined
0
11
15
Left
0
10
12
Joined
0
10
16
Left
0
9
18
Employed on 12/31/2011
Employee turnover on 12/31/2012:
Employee turnover on 12/31/2013:
Employee turnover on 12/31/2014:
Employee turnover on 12/31/2015:
Pension plan
246
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.
Voluntary redundancy offer
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.
At December 31, 2015 the entity’s voluntary redundancy records include:
Employee
Category
Number of employees Number of employees
who accepted voluntary
expected to accept
redundancy by 12/31/15 voluntary redundancy
in 2016
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.
1. Short-term employee benefits
2. Other long term employee benefits – category A employees
3. Other long term employee benefits – category B employees
247
4. Other long term employee benefits – category C employees
5. Total provision for employee benefits
SOLUTION:
Requirement No. 1
Category A employees
[(32.5* days x P392.16**) + (32.5 days x P411.76***)]
Category B employees [(200 x 6 days x P50,000/255]
26,127
235,294
Category C employees (non-accumulating and non-vesting)
Short-term employee benefits (holiday leave)
261,421
working days for the year (255) = [(365/7 x 5) - 6]
* {[(9 x 10) - 25]/2}
** P100,000/255
*** [(P100,000 x 1.05)/255]
Requirement No. 2
To be paid, 12/31/13 (Joined 12/31/08)
(P102,500* x .05 x 8 x 4/5 x 0.9524)
31,239
To be paid, 12/31/14 (Joined 12/31/09)
(P107,625* x .05 x 1 x 3/5 x 0.9009)
Other long term benefits - Category A employees
2,909
34,148
248
*Computation of expected salary:
For 2013: Jan - Jun (P100,000/2)
Jul - Dec (P100,000/2 x 1.05)
For 2014: Jan - Jun (P100,000/2 x 1.05)
Jul - Dec (P52,500 x 1.05)
50,000
52,500
102,500
52,500
55,125
107,625
Requirement No. 3
To be paid, 12/31/13 (Joined 12/31/08)
(P51,750* x .05 x .77** x 196 x 4/5 x 0.9524)
297,534
To be paid, 12/31/14 (Joined 12/31/09)
(P55,373* x .05 x .77 x 9 x 3/5 x 0.9009)
10,371
To be paid, 12/31/15 (Joined 12/31/10)
(P59,250* x .05 x .77 x 10 x 2/5 x 0.8547)
7,799
To be paid, 12/31/16 (Joined 12/31/11)
(P63,398* x .05 x .77 x 11 x 1/5 x 0.8)
4,296
Other long term benefits - Category B employees
320,000
*Computation of expected salary:
For 2013: Jan - Jun (P50,000/2)
Jul - Dec (P50,000/2 x 1.07)
For 2014: Jan - Jun (P50,000/2 x 1.07)
25,000
26,750
51,750
26,750
249
Jul - Dec (P26,750 x 1.07)
For 2015: Jan - Jun (P26,750 x 1.07)
Jul - Dec (P28,623 x 1.07)
For 2016: Jan - Jun (P28,623 x 1.07)
Jul - Dec (P30,627 x 1.07)
28,623
55,373
28,623
30,627
59,250
30,627
32,771
63,398
**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)
(P26,125* x .05 x .73** x 306 x 4/5 x 0.9524)
222,321
To be paid, 12/31/14 (Joined 12/31/09)
(P28,476* x .05 x .73 x 18 x 3/5 x 0.9009)
10,113
To be paid, 12/31/15 (Joined 12/31/10)
(P31,039* x .05 x .73 x 11 x 2/5 x 0.8547)
4,261
To be paid, 12/31/16 (Joined 12/31/11)
(P33,833* x .05 x .73 x 15 x 1/5 x 0.8)
Other long term benefits - Category C employees
2,964
239,659
*Computation of expected salary:
250
For 2013: Jan - Jun (P25,000/2)
Jul - Dec (P25,000/2 x 1.09)
For 2014: Jan - Jun (P25,000/2 x 1.09)
Jul - Dec (P13,625 x 1.09)
For 2015: Jan - Jun (P13,625 x 1.09)
Jul - Dec (P14,851 x 1.09)
For 2016: Jan - Jun (P14,851 x 1.09)
Jul - Dec (P16,188 x 1.09)
12,500
13,625
26,125
13,625
14,851
28,476
14,851
16,188
31,039
16,188
17,645
33,833
**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
Short-term employee benefits (see no. 1)
261,421
Other long term employee benefits (long service awards)
Category A employees (see no. 2)
34,148
Category B employees (see no. 3)
320,000
Category C employees (see no. 4)
239,659
593,807
Post-employment benefits - defined contribution plan (pension)
100,000
Termination benefits (see computation below)
1,350,000
Total
251
2,305,228
*Computation of termination benefits:
Category A employees (P100,000 x 1)
100,000
Category B employees (P50,000 x 10)
500,000
Category C employees (P25,000 x 30)
750,000
1,350,000
252
VIII – AUDIT OF EQUITY
PROBLEM NO. 1 - Equity components
The following data were compiled prior to preparing the statement of financial position of the
Conviction Corporation.
Authorized share capital, P100 par value P4,000,000
Unissued share capital
800,000
Subscribe share capital
480,000
Subscriptions receivable
120,000
Premium on share capital
320,000
Premium on bonds payable
240,000
Gain on sale of treasury shares
80,000
Donated capital
800,000
Share warrants outstanding
200,000
Reserve for bond sinking fund
400,000
Reserve for depreciation
600,000
Treasury shares, at cost
144,000
Retained earnings, unappropriated
720,000
Cash dividends payable
160,000
Revaluation increment on property
800,000
Net unrealized loss on available for sale
96,000
securities
Required:
Compute for the following:
1. Total share premium
2. Contributed capital
3. Appropriated retained earnings
4. Total Equity
5. Legal Capital
SOLUTION:
Requirement Nos. 1 to 4
Authorized share capital
Unissued share capital
4,000,000
(800,000)
253
Issued share capital
Subscribed share capital
Subscriptions receivable
Share premium
Premium on share capital
Gain on sale of treasury shares
Donated capital
Stock warrants outstanding
Contributed capital
Retained earnings
Appropriated for sinking fund
Appropriated for treasury shares
3,200,000
480,000
(120,000)
360,000
320,000
80,000
800,000
200,000
1,400,000
(1)
4,960,000
(2)
400,000
144,000
Total appropriated retained earnings
544,000
Unappropriated (P720,000 - P144,000)
576,000
Revaluation surplus
Net unrealized loss on available for sale securities
Treasury shares
1,120,000
800,000
(96,000)
(144,000)
Total equity
6,640,000
(4)
(5)
¸
Requirement No. 5
Issued share capital
Subscribed share capital
Legal capital
3,200,000
480,000
3,680,000
(3)
PROBLEM NO. 2 - Analysis of transactions affecting equity components
The shareholders’ equity accounts of Tenacity Corporation at December 31, 2014, had the
following balances:
Share capital - preference shares,
P100 par value, 6% cumulative;
15,000 shares authorized; 9,000
shares issued and outstanding
Share capital - ordinary, P1 par value,
900,000 shares authorized;
600,000 shares issued and
outstanding
Share premium
Retained earnings
Total shareholder’s equity
P900,000
600,000
1,200,000
3,300,000
P6,000,000
254
The following transactions occurred during 2015:
•
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.
•
April 30 - Distributed property dividend to ordinary shareholders. The property had a
carrying amount of P910,000 and fair value of P950,000.
•
August 30 - Reissued 3,000 treasury shares for P20 per share.
•
September 14 - There were 945 warrants detached from the bonds and exercised.
•
November 30 - Declared a cash dividend of P2 per share to all ordinary shareholders of
record December 15, 2015. The dividend was paid on December30, 2015.
•
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.
•
Adjusted net income after tax for 2015 was P2,585,650.
255
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
12.31.11
Share capital - PS
Share capital - OS
900,000
600,000
Subscribed share capital-OS
-
Subscriptions receivable
-
Share premium
Transactions
12.31.12
900,000
649,950
1/6
3/15
9/14
2/28
3/15
3/15
2/28
3/15
3/15
22,500
18,000
9,450
21,000
(18,000)
(3,000)
(273,000)
234,000
39,000
1,200,000
1/6
1/31
2/28
3/15
3/15
9/14
9/14
348,750
36,000
525,000
(75,000)
39,000
(28,350)
113,400
2,158,800
Retained earnings - appropriated
-
12/31
108,000
108,000
Retained earnings - unappropriated
3,300,000
4/30
8/30
(950,000)
(12,000)
3,451,250
11/30
(1,290,900)
12/15
(54,000)
12/31
1/8
2,585,650
(19,500)
12/31
(108,000)
2/22
(180,000)
Treasury shares
-
-
(108,000)
256
8/30
72,000
6,000,000
7,160,000
Journal entries for 2012
1/6
1/31
Land (22,500 shares x P16.50)
Share capital-OS (22,500 shares x P1)
Share premium-EOP
371,250
Cash (1,200 x P1,000 x .98)
Discount on bonds payable (P1,200,000 - P1,140,000)
1,176,000
60,000
22,500
348,750
Bonds payable
Share premium-warrants
2/22
2/28
3/15
Issue price with
Issue price without (1,200 x P1,000,000 x
.95)
Equity component
1,176,000
Treasury shares (7,500 x P24)
Cash
180,000
Cash (21,000 x P26 x 50%)
Subscriptions receivable (21,000 x P26 x
50%)
Subscribed share capital-OS (21,000 shares x P1)
Share premium-EOP
273,000
Cash (18,000 x P26 x 50%)
Subscriptions receivable
234,000
Subscribed share capital-OS (18,000 shares x P1)
Share capital-OS
18,000
Subscribed share capital-OS (3,000 shares x
P1)
Share premium-EOP [3,000 shares x (P26 P1)]
Subscriptions receivable (3,000 x P26 x 50%)
Share premium - forfeited subscriptions
4/30
8/30
1,200,000
36,000
(1,140,000)
36,000
180,000
273,000
21,000
525,000
234,000
18,000
3,000
75,000
39,000
39,000
Retained earnings (at fair value)
Property dividends payable
950,000
Cash (3,000 x P20)
Retained earnings
Treasury shares (3,000 x
P24)
60,000
12,000
950,000
72,000
257
9/14
Cash (945 x 10 x P10)
Share premium-warrants (945/1,200
P36,000)
Share capital-OS (945 x 10 x P1)
Share premium-EOP
94,500
x
11/30 Retained earnings
28,350
9,450
113,400
1,290,900
Dividends payable - OS
Ordinary shares issued and outstanding, 1/1
Shares issued, 1/6
Shares issued, 3/15
Shares issued, 9/14
Number of shares issued, 12/31
Treasury shares (7,500 - 3,000)
Number of shares issued and outstanding
Dividends per share
Total dividends
Retained earnings (900,000 x
12/15 6%)
Dividends payable - PS
1/8
Retained earnings
Income tax payable (480,000/8 x 1/2 x 35%)
Accumulated depreciation (480,000/8 x 1/2 )
12/31 P/L summary
1,290,900
600,000
22,500
18,000
9,450
649,950
(4,500)
645,450
2.00
1,290,900
54,000
54,000
19,500
10,500
30,000
2,585,650
Retained earnings
Retained
earnings
12/31 unappropriated
Retained earnings - appropriated (cost of TS)
2,585,650
108,000
108,000
PROBLEM NO. 3 - Audit of equity transactions and balances
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:
258
Share Capital
08/30
Retained Earnings
12/29
CD
P550,000 01/02
12/29
CR
J
P6,000,000
545,000
J
P545,000 12/01
12/31
CR
J
P287,500
4,000,000
Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the Articles of Incorporation Fortitude Company:
•
•
Authorized share capital - 150,000 shares
Par value per share - P100
From the board of directors’ minutes of meetings, the following resolutions were extracted:
•
01/02 - authorized the issuance of 50,000 shares at P120 per share.
•
08/30 - authorized the acquisition of 5,000 shares at P110 per share.
•
12/01 - authorized the re-issuance of 2,500 treasury shares at P115 per share.
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
01/02 Share capital [50,000 shares (P120-P100)]
Share premium
08/30 Treasury shares
Share capital
1,000,000
1,000,000
550,000
550,000
259
12/01 Retained earnings
Treasury shares (2,500 shares x P110)
Share premium
287,500
12/29 Retained earnings (P617,500 - P545,000)
Share capital
Share dividends distributable (4,750 x P100)
Share premium
72,500
545,000
275,000
12,500
475,000
142,500
Shares issued
Treasury shares (5,000 -2, 500)
Shares outstanding
Dividend rate (small share dividend)
Shares to be issued
Market value per share
Total amount to be charged to RE
Total par value of stock dividend payable
Share premium
50,000
(2,500)
47,500
10%
4,750
130
617,500
475,000
142,500
12/31 Retained earnings (2,500 shares x P110)
Retained earnings appropriated for treasury shares
275,000
Requirement no. 2
Share capital (P5,995,000-P1,000,000+P550,000-P545,000)
Share dividends distributable
Share premium (P1,000,000+P12,500+P142,500)
Retained earnings-appropriated
Retained earnings (P3,742,500-P287,500-P72,500-P275,000)
Treasury shares (P550,000-P275,000)
Total equity
275,000
5,000,000
475,000
1,155,000
275,000
3,107,500
3,382,500
(275,000)
9,737,500
PROBLEM NO. 4 - Audit of retained earnings
The Retained Earnings account of Endurance Company shows the following debits and credits
for the year 2015:
RETAINED EARNINGS
Date
Jan.
1
(a)
(b)
(c)
Debit
Balance
Loss from fire 5,250
Write-off
of
52,500
goodwill
Share
140,000
Credit
Balance
Debit Credit
726,400
721,150
668,650
528,650
260
(d)
dividends
distributed
Loss on sale of
48,300
equipment
480,350
RETAINED EARNINGS
Date
(e)
Debit
Officers’
compensation
related
to
income
of 325,500
prior periods
accrual
overlooked
(f)
Loss
on
retirement of
preference
70,000
shares
at
more
than
issue price
(g)
Paid
in
capital
in
excess of par
(h)
Share
issuance
expenses
( 10,000
related
to
letter g)
(i)
Share
subscription
defaults
(j)
Gain
on
retirement of
preference
shares at less
than
issue
price
RETAINED EARNINGS
Date
(k)
Debit
Gain
on
Credit
Balance
Debit Credit
154,850
84,850
129,500
214,350
204,350
8,470
212,820
25,900
238,720
Credit
15,050
Balance
Debit
Credit
253,770
261
(l)
(m)
(n)
(o)
(p)
(q)
early
retirement
of bonds
Gain on life
insurance
policy
settlement
Correction
of
a
fundamental
error
Effect
of
change in
accounting
principle
from FIFO
to weighted
average
Dividends
25,000
Payable
Loss on sale
of treasury 20,000
shares
Proceeds
from sale of
donated
shares
10,500
264,720
50,050
314,320
100,000
414,320
389,320
369,320
40,000
409,320
RETAINED EARNINGS
Date
(r)
(s)
Debit
Credit
Appraisal
increase in
250,000
land
Gain on life
insurance
100,000
policy
settlement
Balance
Debit
Credit
659,320
559,320
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:
262
a
b
d
g
h
i
j
k
l
q
r
Profit or loss (Other expense)
Retained earnings
Profit or loss (Other expense)
Retained earnings
Profit or loss (Other expense)
Retained earnings
Retained earnings
Share premium
Share premium
Retained earnings
Retained earnings
Share premium
Retained earnings
Share premium
Retained earnings
Profit or loss (Other income)
Retained earnings
Profit or loss (Other income)
Retained earnings
Share premium
5,250
Retained earnings
Revaluation surplus
250,000
5,250
52,500
52,500
48,300
48,300
129,500
129,500
10,000
10,000
8,470
8,470
25,900
25,900
15,050
15,050
10,500
10,500
40,000
40,000
Unadjusted retained earnings balance
a
b
d
g
h
i
j
k
l
q
r
Correct amount of RE before closing profit or loss
250,000
559,320
5,250
52,500
48,300
(129,500)
10,000
(8,470)
(25,900)
(15,050)
(10,500)
(40,000)
(250,000)
195,950
Alternative computation:
Jan.
1
c
e
Balance
Share dividend
Officers’ compensation related to income
726,400
(140,000)
263
f
m
n
o
p
s
of prior periods – accrual overlooked
Loss on retirement of preferred shares
at more than issue price
Correction of prior-period error
Effect of change in accounting principle
from FIFO to weighted average
Dividends payable
Loss on sale of treasury stock
Appropriated for property acquisition
Correct amount of RE before closing profit or loss
(325,500)
(70,000)
50,050
100,000
(25,000)
(20,000)
(100,000)
195,950
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
2013
2014
Share
issue costs
P13,000
Net loss
175,000
Bought
1,000
shares
from an
unhappy
7000
shareholde
r Ekis
Depreciation expense*
2013
Ordinary
shares,
par
P
P1,600,000
5,200,00
0 shares
issued
2014
Net profit
(includin
g
P100,000
land
220,000
write-up
based on
president
’s
estimate)
Ordinary
18,000
shares,
2014
264
2,000
shares
issued
(2013, P15,000;
2014, P17,000;
55,000
2015, P23,000)
Miscellaneous expense*
(2013, P20,000;
50,000
2014, P250,000;
2015, P5,000)
2015 Cash
loan to
the
company
president 100,000
P400,000
2015
2015
Sold 300
of Ekis 2,700
shares
Net
Profit
409,300
P2,250,000
* Recorded as expense but not shown on the income statement.
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
Unadjusted profit (loss)
Depreciation expense
Miscellaneous expense
Land write-up
Adjusted profit (loss)
Requirement no. 2
Shareholders equity
Treasury shares
Loans receivable
Share capital
Share premium – EOP
Share premium – TS
2010
2011
2012
(175,000)
(15,000)
(20,000)
220,000
(17,000)
(25,000)
(100,000)
78,000
409,300
(23,000)
(5,000)
(210,000)
381,300
RE
12.31.12
454,300
(55,000)
(50,000)
(100,000)
249,300
1,850,000
4,900
100,000
1,010,000
595,000
600
265
Land
Retained earnings
100,000
249,300
Requirement no. 3
Share capital
Share premium – EOP
Share premium – TS
Retained earnings
Treasury shares
Total equity
1,010,000
595,000
600
249,300
(4,900)
1,850,000
PROBLEM NO. 6 - Audit of equity-settled share-based payment
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.
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
266
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:
Year
1
2
3
Computation
80 × 200 options ×P20 × 1/3
(85 × 300 options ×P20 × 2/3) – P106,667
(86 × 300 options ×P20 × 3/3) – P233,333
Comp. Exp.
106,667
233,333
176,000
Cumulative
106,667
340,000
516,000
PROBLEM NO. 7 - Audit of cash-settled share-based payment
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:
Year
1
2
3
4
Computation
405 × 100 SARs × P14.40 × 1/3
400 × 100 SARs × P15.50 × 2/3 - P194,400
253 × 100 SARs × P18.20 × 3/3 - P413,333
150 × 100 SARs × P15.00
Expense
194,400
218,933
47,127
225,000
113 × 100 SARs × P21.40 - P460,460
(218,640)
Liability
194,400
413,333
460,460
272,127
241,820
267
5
140 × 100 SARs × P20.00
280,000
61,360
0 - P241,820
113 × 100 SARs × P25.00
(241,820)
282,500
40,680
-
PROBLEM NO. 8 - Audit of cash or equity settled share-based payment
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:
1. The cash alternative
2. The equity alternative
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).
Year Computation
1
Equity component (P7,600 × 1/3)
Liability component (1,000 × P52 × 1/3)
Total
Expense
2,533
17,333
19,866
Equity
2,533
2
Equity component (P7,600 × 1/3)
Liability component [(1,000 × P55 × 2/3)-P17,333]
Total
2,533
19,334
21,867
2,533
Equity component (P7,600 - P5,066)
Liability component [(1,000 × P60 × 3/3)-P36,667]
Total
2,534
23,333
25,867
2,534
7,600
23,333
60,000
Scenario 1: cash of P60,000 paid
Scenario 1 totals
67,600
7,600
(60,000)
-
3
2,533
5,066
Liability
17,333
17,333
19,334
36,667
268
Scenario 2: 1,200 shares issued
Scenario 2 totals
67,600
60,000
67,600
(60,000)
-
PROBLEM NO. 9 - Book value per share
The equity section of the balance sheet of the Guts Company on December 31, 2015 shows the
following items:
6% Cumulative preference share capital,
P100 par value (liquidation value,
P115 per share); Authorized, 6,000 shares,
issued, 4,000 shares; in treasury, 600 shares P400,000
Ordinary share capital, P100 par value,
authorized, 20,000 shares; issued and
outstanding, 8,000 shares
800,000
Share premium - preference shares
150,000
Share premium - ordinary shares
165,000
Retained earnings
458,600
Reserve for bond retirement
320,000
Treasury shares - preference, at cost
(84,000)
Total
P2,209,600
Required:
1. Book value per share of ordinary
2. Book value per share of ordinary, assuming the preference share is participating
SOLUTION:
Requirement No. 1
Balances
PS dividend (P340,000 x 6%)
PS liquidation premium (3,400 x
P15)
Balance to OS
Total
Excess
over par
Preference
1,069,600
(20,400)
340,000
20,400
(51,000)
998,200
51,000
Ordinary
* 800,000
998,200
411,400
1,798,200
269
Divide by outstanding shares
Book value per share
3,400
121.00
Computation of "excess over par"
Total equity
Outstanding par value of PS*
Outstanding par value of OS
8,000
224.78
2,209,600
(340,000)
(800,000)
1,069,600
Details of "excess over par"
Premium on PS
Premium on OS
Retained earnings, appropiated - bond
retirement
Retained earnings, unappropiated
Excess of cost of TS over par (P84,000 P60,000)
Excess over par
150,000
165,000
320,000
458,600
(24,000)
1,069,600
Note: For computation of BV/share purposes, TS is treated as a retired
stock.
Shares
Amount
4,000
(600)
3,400
400,000
(60,000)
340,000
Excess
over par
Preference
Ordinary
1,069,600
(20,400)
340,000
20,400
(51,000)
(48,000)
950,200
51,000
* PS issued
Treasury PS, at par (600 x P100)
Outstanding PS
Requirement No. 2
Balances
PS dividend (P340,000 x 6%)
PS liquidation premium (3,400 x
P15)
OS dividend (P800,000 x 6%)
Balance for participation
* 800,000
48,000
Preference (340/1,140 x P950,200)
Ordinary (800/1,140 x P950,200)
283,393
Total
Divide by outstanding shares
Book value per share
694,793
3,400
204.35
666,807
1,514,807
8,000
189.35
270
PROBLEM NO. 10 - Earnings per share
The information below pertains to Prancer Company for 2015.
Profit for the year
8% convertible bonds issued at par (P1,000
per bond). Each bond is convertible into
40 ordinary shares
6% convertible, cumulative preference shares,
P100 par value. Each share is convertible
into 3 ordinary shares.
Ordinary shares, P10 par value
Share options (granted in a prior year) to
purchase 50,000 ordinary shares at P20
per share
Tax rate
Average market price of ordinary shares
P1,200,000
2,000,000
3,000,000
6,000,000
500,000
40%
P25 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:
Compute basic and diluted earnings per share for 2015
SOLUTION:
Profit to OS
Basic
Exercise
options
1,020,000
of
Bond conversion
a)
EPS
600,000
1.70
-
10,000
1,020,000
610,000
96,000
c)
1,116,000
PS conversion
WA Outs. OS
180,000
1,296,000
b)
1.67
80,000
690,000
d)
90,000
780,000
1.62
e)
1.66
Notes:
a) Profit for the year
PS dividend (P3M x .06)
1,200,000
(180,000)
1,020,000
271
b) Shares to be issued on exercise
Assumed TS acquired [(50,000 x
P20)/P25]
Net interest savings
c) conversion
(P2M x .08 x .6)
on
50,000
(40,000)
10,000
bond
96,000
d) PS dividend (P3M x .06)
180,000
e) Shares to issued on PS conversion
(P3M/P100 x
3)
90,000
PROBLEM NO. 11 - Earnings per share
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
July 1, 2015
11.00
August 1, 2015
10.50
November 1, 2015
9.00
December 31, 2015
10.00
c. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred
shares had been issued on July 1, 2014. The share was issued at its par value of P25, and
it has a cumulative dividend of P3 per share. The share is convertible into ordinary shares
at the rate of one share of convertible preference for one share of ordinary. The rate of
272
conversion is to be automatically adjusted for share splits and share dividends. Dividends
are paid quarterly on September 30, December 31, March 31, and June 30.
d. East Aurora Corporation is Subject to a 40% income tax rate.
e. The after-tax profit for the year ended December 31, 2015 was P13,550,000.
The following specific activities took place during 2015.
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
7. Preference shares cash dividends - Cash dividends to preference shareholders were
declared and paid as scheduled.
Required:
Compute Basic and diluted earnings per share for 2015.
SOLUTION:
Computation of basic EPS:
Profit for 2012
Less PS dividends:
March 31 (700,000 shares x P.75)
6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3)
Profit to OS
/WA outstanding OS (see below)
Basic EPS
13,550,000
525,000
1,125,000
1,650,000
11,900,000
6,736,000
1.77
273
Computation of WA outstanding OS:
Date
1/1/12
(3,000,000 x 1.05 x 2)
4/1/12
(200,000 x 1.05 x 2)
8/1/12
11/1/12
Adj. shares
6,300,000
420,000
300,000
(24,000)
Computation of diluted EPS:
Profit to OS
Add PS dividends:
March 31 (700,000 shares x P.75)
6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3)
Profit to OS
/WA outstanding OS (see below)
Diluted EPS
Computation of WA outstanding OS:
Number of shares to compute basic EPS
Convertible PS still outstanding (500,000 x 1.05 x 2)
Convertible PS converted (200,000 x 1.05 x 2 x 3/12)
Number of shares to compute diluted EPS
Mos. O/S
12/12
9/12
5/12
2/12
W.A
6,300,000
315,000
125,000
(4,000)
6,736,000
11,900,000
525,000
1,125,000
1,650,000
13,550,000
7,891,000
1.72
6,736,000
1,050,000
105,000
7,891,000
PROBLEM NO. 12 - Analysis equity transactions including EPS computation
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.
1/2/15
Issued 10,000 shares of P100 par value cumulative
preference shares at par. The preference shares are
convertible into five ordinary shares and had a
dividend rate of 6%.
3/1/15
Issued 3,000 ordinary shares for legal service
performed. The value of the legal services was
P100,000. The shares are actively traded on a stock
exchange and valued on 3/1/12 at P32 per share.
7/1/15
10/1/15
Issued 40,000 ordinary shares for P42 per share.
Repurchased 16,000 treasury shares for P34 per
share
12/1/15
Sold 3,000 treasury shares for P29 per share.
274
12/30/15
Declared and paid a dividend of P0.20 per share on
ordinary shares and a 6% dividend on the
preference shares.
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:
1. Total share premium as of December 31,2015
2. Total retained earnings as of December 31, 2015
3. Total equity as of December 31, 2015
4. Basic earnings per share for the year 2015
5. Diluted earnings per share for the year 2015
SOLUTION:
Requirement No. 1-3
Share
premium
2011
Issued 100,000 ordinary shares at P27
Profit
Dividends
Balances, 12/31/11
2012
1/2/12 - Issued 10,000 PS at par
3/1/12 - Issued 3,000 OS for legal services
7/1/12 - Issued 40,000 OS at P42
10/1/12 - Repurchased 16,000 TS at P34
12/1/12 - Reissuance of 3,000 TS at P29
12/30/12 - PS dividend (P1M x .06)
'- OS dividend (130T x P.20)
Profit
Balances, 12/31/12
Requirement No. 4
Profit for 2012
Less PS dividend for 2012
Profit to OS
RE
Total equity
250,000
(28,000)
222,000
2,700,000
250,000
(28,000)
2,922,000
(15,000)
(60,000)
(26,000)
380,000
501,000
(2)
1,000,000
96,000
1,680,000
(544,000)
87,000
(60,000)
(26,000)
380,000
5,535,000
(3)
2,600,000
2,600,000
93,000
1,640,000
4,333,000
(1)
380,000
60,000
320,000
275
Divide by the WA outstanding OS (see
below)
Basic EPS for 2012
Computation of WA outstanding OS:
Shares
1/1/12
100,000
3/1/12
3,000
7/1/12
40,000
10/1/12
(16,000)
12/1/12
3,000
Requirement No. 5
Profit to OS (see no. 4)
Add PS dividend for 2012
Adjusted profit to OS
Divide by the WA outstanding OS:
Actual (see no. 4)
Potential (10,000 x 5)
Diluted EPS for 2012
118,750
2.69
Time O/S
12/12
10/12
6/12
3/12
1/12
WA
100,000
2,500
20,000
(4,000)
250
118,750
320,000
60,000
380,000
118,750
50,000
168,750
2.25
PROBLEM NO. 13 - Analysis equity transactions including EPS computation
The shareholders’ equity section of the Jerely Corporation’s statement of financial position as of
December 31, 2014 is presented below:
12% Preference share capital, P100 par
Ordinary share capital, P20 par
Share premium - preference
Share premium - ordinary
Share premium - treasury shares
Retained earnings
Total shareholders’ equity
P 270,000
1,598,400
36,800
235,200
3,200
1,585,840
P3,729,440
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.
276
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.
Dec. 31 - Profit for the year amounted to P1,345,040
2015
Feb. 1 - Sold 2,200 ordinary shares for P30.
May 1 - Sold 600 preference shares for P128.
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.
Nov. 1 - Sold 1,000 shares of treasury shares for P22.
Dec. 31 - Profit for the year amounted to P991,520.
Required:
Determine the amounts, as required, in Jerely Corporation’s comparative financial statements as
of and for the years ended December 31,2014 and 2015.
1.
2.
3.
4.
5.
Dividends paid to ordinary shareholders in 2015
Retained earnings as of December 31, 2015
Total equity as of December 31, 2015
Basic earnings per share for 2014
Basic earnings per share for 2015
SOLUTION:
Requirement No. 1
Ordinary shares outstanding, 12/31/11 (P1,598,400/P20)
Shares issued 2/1/12
Share split, 5/31/12
Treasury shares acquired, 9/1/12
Ordinary shares outstanding, 10/1/12
x
79,920
2,200
82,120
2
164,240
(1,000)
163,240
277
x Dividend per share
Dividends paid to ordinary shareholders
4
652,960
Requirement No. 2
Retained earnings, 12/31/11
Profit for 2012
Dividends - ordinary (see no. 36)
Dividends - preference [(P270,000 + P60,000) x .12]
Retained earnings, 12/31/12
Requirement No. 3
Total equity, 12/31/11
Add (deduct) 2012 transactions:
2/1 - Issuance of OS (2,200 x P30)
5/1 - Issuance of PS (600 x P128)
5/31 - share split
9/1 - Acquisition of TS (1,000 x P18)
10/1 - PS dividend (see no. 37)
- OS dividend (see no. 37)
11/1 - Re-issuance of TS (1,000 x P22)
Profit for 2012
Total equity, 12/31/12
1,585,840
991,520
(652,960)
(39,600)
1,884,800
3,729,440
66,000
76,800
(18,000)
(39,600)
(652,960)
22,000
991,520
4,175,200
Requirement No. 4
Profit for 2011
Less PS dividend (270,000 x 12%)
Profit to OS
Divide by weighted average number of OS (see below)
Basic earnings per share - 2011
1,345,040
32,400
1,312,640
153,360
8.56
Computation of weighted average number of OS
Jan. 1 (65,000 x 1.08* x 2**)
May 1 (9,000 x 1.08* x 2**)
Total
*Share dividend, 7.31.11
**2-for-1 share split, 5.31.12
Adjusted
shares
140,400
19,440
Requirement No. 5
Profit for 2012
Less PS dividend (P330,000 x 12%)
Profit to OS
Divide by weighted average number of OS (see below)
Basic earnings per share - 2012
Fraction
12/12
8/12
Total
140,400
12,960
153,360
991,520
39,600
951,920
163,707
5.81
278
Computation of weighted average number of OS
Jan. 1 (79,920 x 2*)
Feb. 1 (2,200 x 2*)
Sept. 1
Nov. 1
Total
Adjusted
shares
159,840
4,400
(1,000)
1,000
Fraction
12/12
11/12
4/12
2/12
Total
159,840
4,033
(333)
167
163,707
PROBLEM NO. 14 - Theory
Select the best answer for each of the following:
1. In an examination of shareholder’s equity, an auditor is most concerned that
a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declarations date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.
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.
279
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.
7. During an audit of an entity’s shareholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or
law. This audit procedure most likely is intended to verify management’s assertion of
a. Existence
b. Valuation
c. Completeness
d. Presentation and disclosure
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.
9. In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.
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.
280
d. Correction of error affecting prior year’s earnings.
ANSWER:
1. A
2. A
3. D
4. B
5. B
6. C
7. D
8. A
9. D
10. A
IX – COMPLETING THE AUDIT AND
AUDIT OF FINANCIAL STATEMENTS PRESENTATION
PROBLEM NO. 1 – Statement of financial position
The general ledger summarized trial balance of Heat Corporation, a manufacturing company,
includes the following accounts at December 31, 2015:
Debit
Accumulated depreciation - buildings
Accumulated depreciation – leased assets
Accumulated depreciation – plant and
equipment
Allowance for doubtful debts
Bank loans
Bank overdrafts
Buildings, at cost
Cash
Current tax payable
Debentures
Deferred tax
Deposits, at call
Finished goods
Goodwill
Investments in listed (AFS)
Investments revaluation reserve
Land, at valuation
Credit
P 120,000
310,000
3,726,000
80,000
2,215,000
350,000
P 1,030,000
175,000
152,000
675,000
420,000
36,000
1,042,000
2,530,000
52,000
25,000
250,000
281
Land revaluation reserve
Lease liabilities
Leased assets
Others
Patents
Plant and equipment
Prepayments
Provision for employments benefits
Provision for restructuring
Provision for warranty
Raw materials
Retained earnings
Share capital
Sundry creditors and accruals
Sundry debtors
Trade creditors
Trade debtors
Work in progress
81,000
350,000
775,000
575,000
110,000
8,275,000
141,000
275,000
412,000
42,000
490,000
1,481,000
3,500,000
715,000
320,000
1,617,000
1,744,000
151,000
P17,121,000
P17,121,000
Additional information:
a) Bank loans and other loans are all repayable beyond one year.
b) P 300,000 of the debentures is repayable within one year.
c) Lease liabilities include P 125,000 repayable within one year.
d) Provision for employment benefits includes P 192,000 payable within one year.
e) The planned restructuring is intended to be completed 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:
1. Total current assets is
a. P4,019,000
b. P3,983,000
c. P4,071,000
d. P4,035,000
e.
Answer: A
2. Total noncurrent assets is
282
a. P8,814,000
b. P8,839,000
c. P8,891,000
d. P8,866,000
Answer: D
3. Total current liabilities is
a. P3,883,000
b. P3,885,000
c. P3,921,000
d. P3,693,000
Answer: B
4. Total noncurrent liabilities is
a. P3,913,000
b. P4,105,000
c. P3,810,000
d. P3,915,000
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
Trading Securities, at cost
Notes Receivable
Trade accounts Receivable
Allowance for doubtful accounts
Merchandise Inventory
Notes Payable
Trade accounts payable
Employee’s’ income tax withheld
Bonds payable
P 124,000
87,000
92,000
122,000
6,000
136,000
150,000
75,000
4,000
250,000
283
Share dividends payable
Income tax payable
15,000
28,000
Analysis of the above accounts disclosed in the following:
•
Bank overdraft of P 13,000 was deducted from cash balance
•
Trade accounts receivable was net of customers’ deposit of P 7,000
•
Merchandise worth P 15,000 received December 30, 2015 was included in the inventory
but was not recorded as purchase.
•
Accounts payable was net of accounts with debit balance of P 12,000
•
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
284
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
Investment securities – Trading (includes long
term investment of P250,000 in shares of
Professional Developers)
Inventories (net amount still due of P10,000
made on inventories to be delivered in 18
months)
Prepaid expenses
Property, plant and equipment (excluding
P60,000 of equipment still in use, but fully
depreciated)
Goodwill (based on estimate by the president
of Excel Corporation)
Total Assets
Liabilities and Equity
Notes payable (P75,000 due in 2017)
Accounts payable (not including amount due to
suppliers of inventory – see above)
Long term liability under pension plan
Retained earnings restricted for buildings
expansion
Accumulated depreciation
Taxes payable
Bonds payable (net of discount of P10,000)
Deferred income tax liability
Share capital (10,000 shares, P1 par)
Share premium
Unrestricted retained earnings
Total Liabilities and Owner’s Equity
P 25,500
312,000
624,600
33,000
220,000
70,000
P 1,285,100
P 135,000
142,000
60,000
105,000
73,000
44,500
290,000
68,000
10,000
240,500
117,100
P 1, 285,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The total current assets as of December 31, 2015 is
a. P735,100
c. P830,100
b. P820,100
d. P745,100
285
Answer: B
2. The total assets as of December 31, 2015 is
a. P1,142,100
b. P1,215,100
c. P1,057,100
d. P1,227,100
Answer: D
3. The total current liabilities as of December 31, 2015 is
a. P331,500
c. P406,500
b. P321,500
d. P246,500
Answer: A
4. The total equity as of December 31, 2015 is
a. P402,600
c. P367,600
b. P472,600
d. P297,600
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
PROBLEM NO. 4 – Statement of financial position
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.
Your verification disclosed the following:
286
Assets
Cash (including paid expenses of p100 and
P4,000 contribution to a special fund for the
acquisition of fixed assets)
Advances by employees
Certificate of PLDT preference shares (not
held for trading)
Petty cash fund
Marketable equity securities intended for long
term income earnings
Promissory note from a corporate
officer(renewed for the past two years)
Merchandise inventory (including P1,000
worth of obsolete items and P4,000
merchandise received on consignment which
was included in accounts payable)
Accounts receivable (including P3,000
ascertained to be uncollectible. Of the amount
collectible, a provision for bad debts 1%
should be set up)
Manning Corporation shares, at cost
Prepaid insurance (including P800 cash
surrender value of life insurance on the
president; the company is the beneficiary)
Prepaid rental (covering the period January 1,
2015 to December 31, 2016)
Building (net of P60,000 allowance for
depreciation; current year’s depreciation of
P5,000 not yet entered)
Equipment, at cost (prior and current years’
depreciation amounted to P10,000)
Total Assets
Liabilities and Equity
Serial bonds (ten year bonds issued on 1/1/13
maturing on 12/31/22 at P25,000 a year)
Accounts payable (of this total, P2,000 pertains
to creditors with debit balances deducted therefrom)
Notes payable (due 7/7/17)
Accrued taxes
Premium on share capital
Appropriated retained earnings for plant
expansion
Cash dividends payable
Share dividends payable
P 80,000
1,000
2,000
1,000
52,000
14,000
489,500
188,000
10,000
2,000
6,000
1,000,000
120,000
P1,965,000
P 150,000
210,000
10,000
5,500
10,000
20,000
30,000
30,000
287
Share capital, at par value
Retained earnings
Total liabilities and Equity
1,000,000
500,000
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:
1. Total current assets
a. P749,750
b. P746,750
c. P753,750
d. P751,750
Answer: D
2. Total noncurrent assets
a. P1,777,800
b. P1,175,800
c. P1,117,800
d. P1,180,800
Answer: A
3. Total current liabilities
a. P268,500
b. P298,500
c. P269,500
d. P272,750
Answer: A
4. Total liabilities
a. P407,500
b. P403,500
c. P433,500
d. P404,500
Answer: B
5. Total equity
a. P1,521,050
b. P1,529,150
c. P1,526,050
d. P1,496,050
Answer: C
PROBLEM NO. 5 – Statement of the financial position
Presented below is the unaudited statement of financial position of EPSI Manufacturing
Corporation as of December 31, 2015, prepared by the bookkeeper.
288
EPSI Manufacturing Corporation
Statement of Financial Position
For the year ended December 31, 2015
Assets
Cash
Accounts Receivable, net
Inventories
Prepaid income taxes
Investments
Land
Building
Machinery and Equipment
Goodwill
Total Assets
P 225,000
345,700
560,000
40,000
57,700
450,000
1,750,000
1,964,000
37,000
P 5,429,400
Liabilities and Equity
Accounts payable
Mortgage payable
Notes payable
Lawsuit liability
Income taxes payable
Deferred tax liability
Accumulated depreciation
Total liabilities
P 133,800
900,000
500,000
80,000
61,200
28,000
420,000
P 2,123,000
Share capital, P50 par, 40,000 shares issued
Retained earnings
Total equity
Total liabilities and equity
2, 231,000
1,075,400
3,036,400
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.
289
•
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 lawsuit liability will be paid in 2016.
•
The following is an analysis of the deferred tax liability at December 31, 2015:
Deferred taxes related to depreciation
Deferred taxes related to lawsuit liability
Net deferred tax liability
P48,000
(20,000)
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
2. Carrying amount of the property, plant and equipment
a. P 3,914,000
b. P 3,774,000
c. P 4,164,000
290
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
PROBLEM NO. 6 – Statement of financial position
The following data were taken from Jun Company for the year 2015:
291
Sales
Sales returns
Inventories, January 1:
Raw materials
Work in process
Finished goods
Inventories, January 1:
Raw materials
Work in process
Finished goods
Direct labor
Purchases
Purchase returns
Purchase discounts
Freight in
Freight out
Allowance for doubtful accounts
Sales salaries
Office salaries
Depreciation – factory building
Depreciation – office equipment
Depreciation – store equipment
Depreciation – machinery and equipment
Amortization – patents
Bad debts expense
Factory supplies expense
Accrued manufacturing expense payable
Indirect labor
Interest income
Interest income
Factory light and power
Property taxes and insurance – factory building
Prepaid insurance expense
Royalties on production
Supervision expense
Tools expense
Miscellaneous factory expense
Dividends paid
P 5,590,000
55,000
131,000
238,350
442,000
145,500
175,720
412,000
1,050,300
2,051,500
17,150
12,550
8,250
200,000
25,000
445,000
155,000
44,000
44,000
77,000
25,500
33,000
20,000
75,550
34,500
35,300
116,240
34,250
65,000
13,200
18,750
13,200
65,000
10,500
50,250
70,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The total manufacturing costs is
a. P 3,450,050
292
b. P 3,496,250
c. P 3,420,750
d. P 3,431,250
Answer: B
2. Cost of goods sold is
a. P 3,588,880
b. P 3,513,380
c. P 3,523,880
d. P 3,542,680
Answer: A
3. Total selling expense is
a. P 522,000
b. P 735,200
c. P 800,200
d. P 722,000
Answer: D
4. The income before income taxes is
a. P 1,005,120
b. P 1,114,860
c. P 1,121,360
d. P 1,051,360
Answer: C
PROBLEM NO. 7 – Statement of profit and loss
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
Net sales
P 390,000
293
Less: Dividends declared P3.50 per ordinary
share
Revenues
Less: Selling expenses
Gross profit
Less: Operating expenses
Interest expense
Cost of goods sold
Provision for income tax
Net operating income
Add: Dividend revenue
Less: General and administrative expenses
Net Profit
15,000
P 375,000
41,600
P 8,200
227,400
23,920
P 73,880
3,600
48,600
P 28,880
B Corporation
Retained Earnings Statement
31 December 2015
Beginning retained earnings
Add: net profit
Adjusted retained earnings
Less: Loss on sale of land
Ending retained earnings
P 116,000
28,880
P144,880
8,000
P 136,880
QUESTIONS:
The correct net profit is
a. P43,880
b. P39,000
c. 34,000
d. 35,880
Answer: A
PROBLEM NO. 8 – Statement of profit or loss and other comprehensive income
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:
Unrealized loss on decline in value of available
for sale securities
Loss onj write off of inventory due to a
government ban net of tax
Adjustment of profit of prior year net-debit
Loss from expropriation of property , net of tax
Exchange differences gain on translating
foreign operations
P 500,000
1,500,000
2,000,000
3,500,000
4,500,000
294
Revaluation surplus realization
1,000,000
QUESTIONS:
1. Tawi2 Company’s 2015 statement of comprehensive income should report profit at
a. P 9,000,000
c. P7,000,000
b. P 6,500,000
d. P 8,500,000
Answer: C
2. Tawi2 Company’s 2015 statement of comprehensive income should total comprehensive
income at
a. P12,000,000
c. P 5,000,000
b. P11,000,000
d. P 4,000,000
Answer: B
PROBLEM NO. 9 – Statement of financial postion and statement of profit or loss
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.
Assets
Cash
Trading Secutities
Accounts Receivable
Allow. For doubtful accounts
Inventories
Property, plant, and equipment
Accumulated depreciation
Total assets
Liabilities and Equity
Accounts payable and accrued
liabilities
Estimated liability from lawsuit
Share capital, P10 par
Share premium
Bulls, Inc.
Statement of Financial Position
December 31, 2015 and 2014
2015
2014
P 275,000
78.000
487,000
(50,000)
425,000
310,000
(150,000)
P 1,375,000
P 150,000
78,000
392,000
(32,000)
307,000
217,000
(121,000)
P991,000
P 420,000
P 347,000
100,000
260,000
130,000
_
260,000
130,000
295
Retained earnings
Total liabilities and equity
465,000
P 1,375,000
Bulls, Inc.
Statement of Profit or Loss
For the Years Ended December 31, 2015 and 2014
2015
P1580,000
Net Sales
Operating expenses:
Cost of Sales
Selling and admin.
Depreciation
Estimated loss form lawsuit
Profit
P755,000
485,000
29,000
100,000
P1,369,000
P 211,000
254,000
P 991,000
2014
P1,250,000
P690,000
365,000
18,000
_________
P1,073,000
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
QUESTIONS:
296
Based on the above and the result of your audit, compute for the following: (Disregard
income taxes)
1. Adjusted retained Earnings as of January 1, 2015
a. P266,000
b. P297,000
c. P285,000
d. P291,000
Answer: D
2. Adjusted profit for the year ended December 31, 2015
a. P281,800
b. P181,800
c. P287,800
d. P306,800
Answer: A
3. Adjusted current assets as of December 31, 2015
a. P1,266,760
b. P1,190,300
c. P1,154,900
d. P1,202,300
Answer: D
4. Adjusted carrying amount of property and equipment as of December 31, 2015
a. P168,500
b. P180,500
c. P178,000
d. P192,500
Answer: B
5. Adjusted Shareholders’ equity as of December 31, 2015
a. P962,800
b. P950,800
c. P974,800
d. P862,800
Answer: A
297
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
Non-current assets (note(i))
Freehold property
Plant
Investment property at 1 April 2014 (note(iii))
Current Assets
Inventory (note(iii))
Trade receivables and prepayments
Cash
Total Assets
Equity and liabilities
Capital Reserves:
Ordinary shares of P0.25 each
Reserves:
Share Premium
Accumulated profits – 1 April 2014
: Year 31 March 2015
126,000
110,000
15,000
251,000
60,400
31,200
13,800
(i)
105,400
356,400
150,000
10,000
52,500
47,500
Non-Current liabilities
Deferred tax – at 1 April 2014 (note (v))
Current Liabilities
Trade payables (note(iii))
Provision for plant overhaul (note(iv))
Income tax payable
Suspense account (note(vi))
Total equity and liabilities
P’00
110,000
260,000
18,700
47,400
12,000
4,200
63,600
14,100
356,400
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.
298
(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)
1. Adjusted profit for the fiscal year ended 31 March 2015
a. P18,487,500
c. P12,487,500
b. P18,300,000
d. P18,675,000
Answer: B
2. Total noncurrent assets as of 31 March 2015
a. P232,200,000
c. P223,800,000
b. P236,200,000
d. P219,800,000
Answer: A
299
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
4. Total non-current liabilities as of 31 March 2015
a. P42,500,000
c. P42,125,000
b. P44,000,000
d. P42,312,500
Answer: A
5. Total equity as of 31 March 2015
a. P237,175,000
c. P224,800,000
b. P236,987,500
d. P236,800,000
Answer: D
PROBLEM NO. 11 – Computation of statement of profit or loss items from statement of
financial position and statement of cash flows
The following financial statements are for Pol Company.
Pol Company
Comparative Statements of Financial Postion
December 31, 2015 and 2014
Assets
2015
Cash
P 400
Accounts Receivable
25,000
Inventory
30,000
Prepaid general expenses
5,700
Property, plant, and equipment
305,000
Accumulated depreciation
(103,500)
Patent
36,000
2014
P 3,400
18,000
34,000
5,000
320,000
(128,900)
40,000
Total Assets
P302,200
P291,500
Liabilities and Equity
Accounts Payables
Wages Payable
P 25,000
12,000
P 22,000
10,300
300
Interest Payable
Dividends Payable
Income taxes Payable
Bonds Payable
Share Capital
Retained Earnings
Total Liabilities and Shareholders’ Equity
2,800
14,000
1,600
100,000
50,000
96,800
4,300
_
1,200
120,000
50,000
84,000
P302,200
P291,500
Pol Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating acitivites
Cash collected from customers
Cash payments for:
Inventory purchases
General expenses
Wages expenses
Interest expenses
Income tax expenses
Net cash provided by operating activities
Cash flows from investing activities
Sale of property, plant, and equipment
Purchase of property, plant, and equipment
Net cash used in investing activities
Cash flows from financing activities:
Retirement of bonds payable
Payment of Dividends
Net cash used in financing activities
Net increase in cash
Cash at the beginning of the year
Cash at the end of the year
P 685,300
P 300,000
102,000
150,000
11,000
23,900
586,900
P 98,400
P 27,200
(60,000)
(32,800)
P (23,000)
(42,000)
(65,000)
P 600
3,400
P 4,000
Consider the following additional information:
(a) All accounts payable relate to inventory purchases.
(b) Property, plant, and equipment sold had an original cost of P75,000 and a carrying
amount of P22,000.
QUESTIONS:
Based on the foregoing, compute the following for the year ended December 31, 2015:
301
1. Cost of goods sold
a. P307,000
b. P300,000
c. P299,000
d. P293,000
Answer: A
2. Depreciation expense
a. P27,600
b. P25,400
c. P53,000
d. P78,400
Answer: A
3. Total operating expense
a. P282,400
b. P284,600
c. P310,000
d. P335,400
Answer: B
4. Loss on retirement of bonds payable
a. P3,000
b. P20,000
c. P23,000
d. P0
Answer: A
5. Net Income
a. P12,800
b. P54,800
c. P40,800
d. P68,800
Answer: D
PROBLEM NO. 12 – Computation of statement of cash flow items from statement of financial
position and statement of profit or loss items
302
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
•
•
Al purchased P5,000 equipment during 2015
Al allocated one-third of its depreciation expense to selling expense and the remainder to
general and administrative expenses
QUESTIONS:
Based on the foregoing, what amounts should Al report in its statement of cash flows for the year
ended December 31, 2015 for:
1. Cash collected form customers?
a. P258,500
b. P541,600
c. P536,000
d. P535,800
Answer: D
2. Cash paid for goods to be sold?
303
a. P258,500
b. P257,500
c. P242,500
d. P226,500
Answer: D
3. Cash paid for interest?
a. P4,800
b. P4,300
c. P3,800
d. P1,700
Answer: C
4. Cash paid for income taxes?
a. P25,800
b. P20,400
c. P19,700
d. P15,000
Answer: A
5. Cash paid for selling expenses?
a. P142,000
b. P141,500
c. P141,000
d. P140,000
Answer: C
PROBLEM NO. 13 – Statement of cash flows
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:
a. Net income, P59,200
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Payment for purchase of building, P98,000
Increase in accounts receivable, P7,400
Proceeds from issuance of ordinary shares, P37,100 ’
Increase-in accounts payable, P4,500
Proceeds from' sale of land, P7,000
Depreciation expense, P12,600
Payment of dividends, P36,000
Gain on sale of land, P5,300
Decrease in inventory, P3,700
Payment for purchase of long-term investments, P9,600
Amortization of discount on bonds payable, P1,900
Proceeds from issuance of note, P18,000
304
n.
o.
p.
q.
Increase in deferred taxes payable, P5,000
Equipment acquired by finance lease, P19,500
Decrease in salaries payable, P2,300
Beginning cash balance, P20,300
QUESTIONS:
Based on the foregoing information, compute for the following.
1. Cash provided by operating activities
a. P68,100
b. P89,900
c. P74,900
d. P71,900
Answer: D
2. Cash used in investing activities
a. P120,010
b. P107,600
c. P100,600
d. P9,600
Answer: C
3. Cash provided by financing activities
a. P19,100
b. P38,600
c. P20,600
d. P1,100
Answer: A
4. Net decrease in cash
a. P19,600
b. P6,600
c. P13,400
d. P9,600
Answer: D
5. Cash balance, ending
305
a.
b.
c.
d.
P13,700
P10,700
P700
P6,900
Answer: B
PROBLEM NO. 14 – Statement of cash flows
The statement of financial position of Davao Company at the end of 2015 and 2014 follow:
Cash
Accounts receivable (net)
Inventory
Prepaid expenses
Buildings and equipment
Accumulated depreciation – buildings and
equipment
Land
Accounts payable
Accrued expenses
Notes payable – bank, long-term
Mortgage payable
Share capital, P10 par
Retained earnings (deficit)
2015
P 125,000
300,000
350,000
50,000
450,000
(90,000)
2014
P 175,000
225,000
225,000
125,000
375,000
(40,000)
450,000
P 1,635,000
200,000
P
1,285,000
P 275,000
90,000
200,000
P 340,000
60,000
_
150,000
1,045,000
40,000
P 1,635,000
795,000
(75,000)
P
1,285,000
Increase
Decrease
P (50,000)
75,000
125,000
(75,000)
75,000
50,000
250,000
P 350,000
P 65,000
(30,000)
(200,000)
150,000
250,000
115,000
P 350,000
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
1. Net cash provided by operating activities.
a. P120,000
306
b. P130,000
c. P140,000
d. P165,000
Answer: C
2. Net cash provided by (used in) investing activities.
a. P10,000
b. (P100,000)
c. (P90,000)
d. (P340,000)
Answer C
3. Net cash provided by (used in) financing activities.
a. P150,000
b. P350,000
c. (P100,000)
d. (P250,000)
Answer: C
307
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.
308
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:
(Disregard income taxes)
1. Payments for merchandise purchases in 2015
a. P2,586,000
b. P2,436,000
2. Collections from sales in 2015
a. P3,720,000
b. P4,320,000
3. Net income for the year ended December 31, 2015
a. P1,770,000
b. P1,620,000
4. Shareholders’ equity as of December 31, 2015
a. P9,390,000
b. P9,240,000
5. Total assets as of December 31, 2015
a. P9,583,200
b. P9,540,000
c. P2,646,000
d. P3,246,000
c. P3,000,000
d. P4,920,000
c. P1,560,000
d. P 960,000
c. P9,180,000
d. P8,580,000
c. P9,390,000
d. P9,450,000
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
Feb. 14
Mar. 1
Apr. 3
Aug. 30
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.
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.
Refinishing costs of P6,400 were incurred on the repossessed item.
The repossessed item was resold for P24,000 on account, 20% down.
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 trade309
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)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000
b. P144,000
c. P141,120
d. P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000
b. P24,000
c. P17,200
d. P14,400
8. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
9. The trade-in inventory on Aug. 30 is most likely to be valued at
a. P8,000
b. P4,800
c. P6,000
d. P6,400
10. How much will be recorded as Sales on Aug. 30?
a. P51,200
b. P56,000
c. P57,200
d. P57,600
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
310
•
•
•
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:
Particulars
Amount
Useful Life
Painting of the ceilings
P
40,000
One year
Ten years
Electrical work
140,000
Construction of extension to current working
area
320,000
•
•
Thirty years
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
b. P6,000,000
12. Buildings
a. P3,800,000
b. P4,280,000
c. P5,480,000
d. P5,900,000
c. P4,200,000
d. P3,880,000
311
13. Leasehold improvements
a. P2,600,000
c. P2,560,000
b. P2,300,000
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
The following information pertain to Teal Company’s delivery trucks:
DELIVERY EQUIPMENT
Date
Particulars
Debit
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
05/02/15
Repainting of Truck 4
27,000
06/30/15
Truck 7
720,000
ACCUMULATED DEPRECIATION-DELIVERY EQUIPMENT
Date
Particulars
12/31/13
Depreciation expense
Debit
Credit
150,000
Credit
P300,000
312
12/31/14
Depreciation expense
300,000
12/31/15
Depreciation expense
300,000
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:
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.
21. What are the weighted-average accumulated expenditures?
a. P4,380,000
c. P7,380,000
b. P3,155,000
d. P3,690,000
22. What is the weighted-average interest rate used for interest capitalization purposes?
313
a. 11%
c.
b. 10.85%
d.
23. What is the avoidable interest for Maybe Company?
a. P144,000
c.
b. P463,808
d.
24. What is the actual interest for Maybe Company?
a. P879,000
c.
b. P891,000
d.
25. What amount of interest should be charged to expense?
a. P382,000
b. P735,000
c. P526,792
d. P415,192
10.5%
10.65%
P164,281
P352,208
P735,000
P352,208
314
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:
26. Carrying amount of finance lease liability
a. P480,000
c. P380,000
b. P428,000
d. P360,000
27. Carrying amount of bonds payable
a. P446,400
c. P442,000
b. P444,000
d. P430,000
28. Current liabilities
a. P342,200
b. P327,000
c. P367,000
d. P347,000
315
29. Noncurrent liabilities
a. P850,000
b. P854,400
c. P895,000
d. P902,800
30. Interest expense
a. P92,000
b. P70,000
c. P44,000
d. P22,000
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:
2013
2014
2015
December 31
P4.00
P5.00
P2.00
June 30
P3.00
P2.50
Questions:
316
Based on the above and the result of your audit, determine the following:
31. Outstanding number of ordinary shares as of December 31, 2015
a. 364,800
c. 372,800
b. 684,800
d. 380, 800
32. Outstanding number of preference shares as of December 31, 2015
a. 40,000
c. 32,000
b. 24,000
d. 96,000
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
Marketable securities, at cost
Accounts receivable
Allowance for doubtful accounts
Inventories
Prepaid insurance
Total current assets
P150,000
60,000
450,000
(59,000)
430,000
15,000
1,046,000
317
Property, plant and equipment
Less accumulated depreciation
Property, plant and equipment, net
Research and development costs
Total assets
Liabilities and Shareholder’s equity
Current liabilities:
Accounts payable and accrued expenses
Income taxes payable
Total current liabilities
Shareholders’ equity
Share capital, P10 par value
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
426,000
(40,000)
386,000
120,000
P1,552,000
P592,000
224,000
816,000
400,000
336,000
736,000
P1,552,000
Bryant Corporation
Statement of Income
For the Fiscal Year Ended November 30, 2015
Net Sales
Operating expenses:
Cost of Sales
Selling and administrative
Depreciation
Research and development
Income before income taxes
Provision for income taxes
Net income
P2,950,000
1,670,000
650,000
40,000
30,000
2,390,000
560,000
224,000
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:
a. The investment portfolio consists of short-term investments in marketable equity
securities with a total market valuation of P55,000 as of November 30,2015.
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.
318
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:
36. Net income
a. P253,260
b. P283,260
c. P235,260
d. P239,760
37. Current assets
a. P1,084,000
b. P1,061,000
c. P1,079,000
d. P1,073,000
38. Total assets
a. P1,484,200
b. P1,486,600
c. P1,489,200
d. P1,491,600
39. Total liabilities
a. P833,340
b. P783,340
c. P855,840
d. P805,840
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40. Total equity
a. P683,260
b. P635,260
c. P639,760
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.
a. Cash receipts consisted of the following:
From customers
From issue of ordinary shares
From bank loan
P3,600,000
1,000,000
1,000,000
b. Cash disbursements were as follows:
Purchase inventory
P3,000,000
Rent
150,000
Salaries
300,000
Utilities
50,000
Insurance
30,000
Purchase of equipment and furniture 400,000
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.
e. Inventories on hand at the end of the year cost P1,000,000.
f. Amounts owed at December 31, 2015, were as follows:
To suppliers of inventory
P200,000
To the utility company
10,000
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:
41. The correct cash balance as of December 31, 2015 is
a. P1,670,000
b. P1,760,000
c. P1,690,000
d. P1,696,000
42. Net income (loss) for the year is
a. P760,000
b. P780,000
c. P750,000
d. P(760,000)
43. Total accounts payable as of December 31, 2015 is
a. P200,000
b. P210,000
c. P250,000
d. P201,000
44. Total liabilities as of December 31, 2015 would amount to
a. P300,000
c. P1,300,000
b. P1,000,000
d. P1,210,000
45. Total current assets as of December 31, 2015 would amount to
a. P2,700,000
c. P1,030,000
b. P2,670,000
d. P1,670,000
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
Current assets
Investments
Property, plant and equipment
Intangible assets
P 435,000
640,000
1,720,000
305,000
P3,100,000
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Current liabilities
Long-term liabilities
Shareholders’ equity
P 330,000
1,000,000
1,770,000
P3,100,000
Consider the following information:
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.
3. Property, plant and equipment includes: buildings P1,040,000 less accumulated
depreciation P360,000; equipment P450,000 less accumulated depreciation P180,000;
land P500,000; and land held for future use P270,000.
4. Intangible assets include: a franchise P165,000; goodwill P100,000; and discount on
bonds payable P40,000.
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:
46. Current assets
a. P548,000
b. P574,000
c. P588,000
d. P534,000
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47. Noncurrent investments
a. P830,000
b. P520,000
c. P560,000
d. P790,000
48. Property, plant and equipment
a. P1,720,000
b. P1,885,000
c. P1,615,000
d. P1,450,000
49. Total assets
a. P2,814,000
b. P2,979,000
c. P3,079,000
d. P3,093,000
50. Current liabilities
a. P224,000
b. P229,000
c. P210,000
d. P215,000
XI – SIMULATED BOARD EXAMINATIONS 1
LETTER ANSWERS
ANSWERS:
1. D
2. A
3. D
4. D
5. B
6. C
7. A
8. D
9. B
10. B
11. B
12. D
13. C
14. A
15. C
16. B
17. B
18. D
19. D
20. B
21. B
22. D
23. D
24. A
25. C
26. C
27. C
28. D
29. A
30. D
31. D
32. C
33. C
34. D
35. C
36. A
37. C
38. B
39. A
40. D
41. A
42. A
43. B
44. C
45. A
46. D
47. A
48. D
49. C
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
2. In relation to Item no. 2, which of the following is incorrect?
a. The 2014 profit is understated
b. The 2015 profit 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
3. In relation to Item no. 3, which of the following is correct?
a. The 2014 profit is overstated by P60,000.
b. The 2015 profit is understated by P60,000.
c. The 2015 profit is understated by P40,000.
d. The December 31, 2014 retained earnings is correctly stated.
4. In relation to Item no. 4, which of the following is correct?
a. Retained earnings at December 31, 2015, was understated by P30,000 and 2015
income was overstated by P6,000
b. Retained earnings at December 31, 2015, was understated by P38,000 and 2015
income was overstated by P6,000
c. Retained earnings at December 31, 2015, was understated by P30,000 and 2015
income was overstated by P10,000
d. 2014 income was understated by P50,000
5. In relation to Item no. 5, which of the following is incorrect?
a. The 2014 profit is overstated by P240,000
b. The 2015 profit is understated by P120,000
c. The December 31, 2014 retained earnings is overstated by P240,000
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
Accounts Receivable
Inventory
Trading securities
Available for sale investments
Prepaid insurance
Deferred tax asset
Bank overdraft
P1,056,000
1,220,000
441,000
200,000
500,000
50,000
150,000
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
Allowance for uncollectible accounts
Claim against shipper for goods lost in transit
Selling price of unsold goods sent by Calamba on
consignment at 130% of cost (included in Calamba’s
ending inventory at cost)
Security deposit on lease of warehouse used for storing
some inventories
Total
P650,000
(20,000)
30,000
260,000
300,000
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:
•
•
•
•
•
Merchandise of P61,000 is held by Calamba on consignment. The consignor is Laguna
Company.
Merchandise costing P38,000 was shipped by Calamba FOB destination to a customer on
December 31, 2015. The customer was expected to receive the goods on January 6, 2016.
Merchandise costing P46,000 was shipped by Calamba FOB shipping point to a customer
on December 29, 2015. The customer was scheduled to receive the goods on January 2,
2016
Merchandise costing P83,000 shipped by a vendor FOB destination on December 31,
2015 was received by Calamba on January 4, 2016.
Merchandise costing P51,000 purchased FOB shipping point was shipped by the supplier
on December 31, 2015 and received by Calamba on January 5, 2016.
Questions:
Based on the above and the result of the audit, determine the adjusted amount of the following as
of December 31, 2015
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6. Cash
a. P921,000
b. P521,000
c. P584,000
d. P506,000
7. Net accounts receivable
a. P630,000
b. P782,800
c. P767,800
d. P754,000
8. Trade and other receivables, net
a. P797,800
b. P812,800
c. P660,000
d. P784,000
9. Inventory
a. P730,000
b. P340,000
c. P451,000
d. P530,000
10. Current assets
a. P2,361,000
b. P2,498,800
c. P2,485,000
d. P2,513,800
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
Security Bank checking account
Allied Bank current account
P25,000
(37,500)
344,250
P331,750
327
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:
Bank Balance
Add: Deposit in transit
Bank services charges
P310,500
P61,250
1,250
Total
62,500
373,000
Less: Outstanding checks
Check no.
Amount
214
P 2,500
219
20,750
225
6,000
228
8500
Book balance
28,750
P344,250
*Check certified by the bank in December 2015
All reconciling items were traced to the bank statement. Further investigation indicated that the
deposits in transits include a customer’s post-dated check amounting to P40,000. The check
represents a collection from account customer for sales made in the middle of October 2015.
Questions:
Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:
11. How much is the adjusted balance of petty cash fund as of December 31, 2015?
a. P12,000
b. P 9,000
c. P13,000
d. P16,000
328
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
13. How much is the cash shortage as of December 31, 2015
a. P46,500
b. P 9,000
c. P 6,500
d. P
0
14. How much is the adjusted cash as of December 31, 2015?
a. P355,500
b. P367,500
c. P398,500
d. P358,500
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 writeoffs 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:
Customer
Customer’s Comments
Audit Findings
James
The goods sold on December 1 were The client failed to record credit memo
returned on December 16, 2015
no. 23 for P12,000. The merchandise was
included in the ending inventory at cost.
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
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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.
Bosh
I am entitled to a 10% employee Bosh is an employee of Seven. Starting
discount. Your bill should be reduced November 2015, all company employees
by P1,200
were entitled to a special discount
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,
goods are sold
2015. The goods cost P13,000. The
inventory was determined by physical
count at the client’s warehouse.
Lewis
We do not owe you P20,000. We The sale of merchandise on December
already paid our accounts as 18, 2015 was paid by Lewis on January
evidenced by OR #1234
6, 2016.
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
330
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
19. Accounts receivable as of December 31, 2015 is overstated by
a. P32,700
b. P47,500
c. P48,700
d. P68,700
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.
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:
Dec 31, 2015
Dec 31, 2014
P706,600
P200,000
Notes receivable
0
50,000
Inventory
?
399,750
Accounts payable
?
150,000
Cash
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.
331
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
22. Accounts payable balance at December 31, 2015
a. P400,000
b. P380,200
c. P150,000
d. P383,500
23. Inventory amount at December 31, 2015
a. P 385,900
b. P1,055,183
c. P 352,500
d. P1,022,483
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
d. Analytical review of inventory balances compared to purchasing and sales activities
25. An auditor generally tests physical security controls over inventory by
a. Test counts and cutoff procedures
b. Examination and reconciliation
c. Inquiry and observation
d. Inspection and recomputation
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
332
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
27. Depletion for 2014
a. P1,300,000
b. P780,000
c. P1,820,000
d. P870,000
28. Depreciation for 2014
a. P250,000
b. P180,000
c. P490,000
d. P210,000
29. Depletion for 2015
a. P1,950,000
b. P2,425,000
c. P2,150,000
d. P2,275,000
30. Depreciation for 2015
a. P525,000
b. P1,225,000
c. P625,000
d. P450,000
PROBLEM NO. 7
333
Perseverance Corporation was authorized at ehe beginning of 2013 with 300,000 authorized
shares of P100, par value ordinary shares. At December 31, 2013, the shareholder’s equity
section of Perseverance was as follows:
Share capital, par value P100 per share;
authorized 300,000 shares; issued 30,000
shares
P3,000,000
Share premium
300,000
Retained earnings
_450,000
Total shareholders’ equity
P3,750,000
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
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.
334
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
32. Share premium
a. P4,627,500
b. P3,007,500
c. P4,632,500
d. P4,592,500
33. Total retained earnings
a. P600,000
b. P565,000
c. P557,000
d. P560,000
34. Total equity
a. P26,397,500
b. P25,932,500
c. P26,492,500
d. P26,445,000
35. An auditor usually obtains evidence of shareholder’s equity transactions by reviewing
the entity’s
a. Canceled stock ceertificates.
b. Transfer agent’s records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
PROBLEM NO. 8
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
335
Assets
Current assets
Other assets
•
December 31, 2015
Liabilities
P1,881,100
Current liabililities
5,171,400
Long-term liabilities
________
Capital
P7,052,500
P 962,400
1,439,500
4,650,600
P7,052,500
An analysis of current assets discloses the following:
Cash (restristed in the amount of
P400,000 for plant expansion)
P 571,000
Investment if land
185,000
Accounts receivable less allowance of
P30,000
480,000
Inventories
645,100
P1,881,100
•
Other assets include:
Prepaid expenses
Plant and equipment less accumulated
depreciation of P1,430,000
Cash surrender value of life insurance
policy
P
47,400
4,130,000
84,000
Unamortized bond discount
49,500
Notes receivable (short term)
162,300
Goodwill
252,000
Land
446,200
P5,171,400
336
•
Current liabilities include:
Accounts payable
P510,000
Notes payable (due 2017)
157,400
Income tax payable
145,000
Share premium reserve
150,000
P962,400
•
Long-term liabilities include:
Unearned revenue
P 489,500
Dividends payable
200,000
8% bonds payable (due May 1,
2017)
750,000
P1,439,500
•
Capital includes:
Retained earnings
Share capital, par value P10,
authorized 200,000 shares, 184,000
shares issued
P2,810,600
1,840,000
P4,650,600
The supplementary information below is also provided:
a. On May 1, 2015, the company issued at 93.4, P750,000 of bonds to finance plant
expansion. The long term bond agreement provided for the annual payment of the interest
every May 1. The existing plant was pledged as security for the loan. Use straight-line
method for discount amortization.
b. The bookkeeper made the following mistakes:
1. In 2013, the ending inventory was overstated by P183,000. The ending inventories for
2014 and 2015 were correctly computed.
2. In 2015, accrued wages in the amount of P275,000 were omitted from the balance
sheet and these expenses were not charged on the income statement.
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3. In 2015, a gain of P175,000 (net of tax) on the sale of certain plant assets was
credited directly to retained earnings.
c. You learned on January 28, 2016, prior to completion of the audit, of heavy damage
because recent fire to one of the entity’s two plants; the loss will not be reimbursed by
insurance. The plant has a carrying amount of P1,200,000 on the date of fire.
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
37. The adjusted current liabilities as of Decemeber 31, 2015 is
a. P1,619,500
b. P1,130,000
c. P1,659,500
d. P1,419,500
38. The adjusted noncurrent liabilities as of Decemeber 31, 2015 is
a. P907,400
b. P864,500
c. P857,900
d. P1,554,00
39. The adjusted equity as of December 31, 2015 is
a. P4,525,600
b. P4,519,000
c. P4,329,000
d. P4,479,000
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
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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
30,240
Accumulated depreciation 1 April 2014 – plant
and equipment
Investment property – valuation 1 April 2014
(note (iii))
28,800
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
Revaluation reserve (note (iii)
37,800
Retained earnings – 1 April 2014
31,500
Profit or loss summary
_______
88,200
264,600
264,600
The following notes are relevant:
(i)
(ii)
At 31 march 2015, an inventory list based on a physical count had a total cost of
P18.9 million. Some damaged goods that had cost P1.44 million were included in
there. The realizable value of these goods is expected to be P1.71 million, provided a
remedial work costing P0.81 million is done before they could be sold.
Included in the computation of profit or loss are finance costs consisting of interest on
overdraft, the full year’s preference dividend and an ordinary dividend of P0.04 per
share that was paid in September 2014.
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(iii)
Non-current assets:
Land and building
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.
Charge depreciation on a straight-line basis. Imagine does not make a transfer to
retained earnings in respect of excess depreciation.
Plant
All plant is depreciated at 12.5% on the reducing balance basis.
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
a. P117,180,000
b. P79,380,000
c. P118,440,000
d. P116,640,000
43. The total assets as of 31 March 2015 is
a. P219,240,000
b. P219,780,000
c. P217,620,000
d. P218,160,000
44. The total liabilities as of 31 March 2015 is
a. P22,860,000
b. P40,860,000
c. P39,240,000
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d. P21,240,000
45. The retained earnings balance as of 31 March 2015 is
a. P107,100,000
b. P98,820,000
c. P104,580,000
d. P105,120,000
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
Assets
Cash
Parts inventory
Equipment
P 49,600
24,000
Liabilities and equity
Accounts payable
Share capital, P100
par
P 28,000
265,600
220,000
Total assets
P293,600
Total liabilities and
equity
P293,600
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:
Transactions for 2015
Cash sales
Collections from credit customers
80,000
Payments on account for parts
80,800
Wages paid to employees
Payments to the utility company
•
•
•
P232,000
124,000
22,000
Uncollected customers’ bills totaled P69,800 at December 31, 2015.
On March 1, 2015, a supplier advanced the company P40,000 on a 1-year, 12% note
payable with semiannual interest payments to be made on September 1, 2015 and at
maturity on March 1, 2016.
Unpaid bills to suppliers totaled P11,200 at December 31, 2015.
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•
•
•
•
•
•
•
Parts costing P8,000 were on hand at year-end.
Wages owed at year-end were P5,600.
Utility expense of P1,950 was unpaid at year-end.
The P18,000 insurance premium was paid for a 1-year policy effective February 1, 2015.
The rent of P3,000 was paid on the first day of every month.
The company’s equipment, purchased at the time the company was founded, should be
depreciated over its useful life of 10 years using straight-line depreciation with no
residual value.
The effective tax rate is 40%. No taxes have been paid.
Questions:
Baseed on the above and the result of your engagement, you are asked to provide the following
information under the accrual basis:
46. The net income for 2015 was
a. P69,750
b. P55,050
c. P46,380
d. P41,850
47. The total current assets at year-end equaled
a. P220,000
b. P198,000
c. P197,700
d. P196,200
48. The total assets at year-end equaled
a. P417,700
b. P395,700
c. P307,450
d. P197,700
49. The total equity at year-end was
a. P395,700
b. P335,350
c. P307,450
d. P265,600
50. The total current liabilities at year-end equaled
a. P90,650
b. P88,250
c. P60,350
d. P48,250
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XI – SIMULATED BOARD EXAMINATIONS 2
LETTER ANSWERS
ANSWERS:
1. B
2. A
3. C
4. C
5. D
6. B
7. C
8. A
9. D
10. B
11. A
12. B
13. B
14. D
15. A
16. D
17. D
18. D
19. A
20. C
21. B
22. A
23. A
24. D
25. C
26. C
27. B
28. D
29. B
30. A
31. B
32. C
33. D
34. D
35. D
36. B
37. C
38. B
39. D
40. D
41. A
42. D
43. A
44. B
45. C
46. D
47. C
48. B
49. C
50. B
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